China’s Li Ning risks running too far off trail

HONG KONG, Oct 29 (Reuters Breakingviews) - Li Ning (2331.HK), opens new tab is experiencing a runner's high. The Chinese sportswear maker will raise, opens new tab $1.3 billion to capitalise on a stock rally partly fuelled by nationalistic Gen Z. International expansion and brand-building are among the targeted uses for the money, but the company might get more bang for its buck by investing more internally.

The 8% discount on the share sale is modest next to the 60% gain this year. Li Ning and other domestic companies have benefited from a political and consumer backlash against Western brands including H&M (HMb.ST), opens new tab and Nike (NKE.N), opens new tab after they raised concerns about the alleged use of forced labour in China’s cotton production. In the third quarter, Li Ning's sales, opens new tab at stores open for at least a year increased by more than 20%. Potential boycotts to the upcoming Beijing Winter Olympics will only deepen that buy-local sentiment.

While $28 billion Li Ning had cash reserves that Daiwa analysts reckon was sufficient to cover working capital and investment needs under its existing strategy, the decision to raise more signals an appetite for acquisitions. It generated only 1% of revenue abroad last year. The sting of earlier failed efforts in Spain and the United States has probably worn off by now, and it may be getting envious of larger rival Anta Sports Products (2020.HK), opens new tab, which led a deal to buy, opens new tab Finland’s Amer Sports in 2018 and succeeded with the Fila brand in China.

There are more pressing concerns, however, than building a bigger empire. In September, for example, China's Olympic gold medallist in badminton, Chen Yufei, was wearing Li Ning shoes during a national match when one of them busted open. Her bloodied sock circulated widely on social media, suggesting greater attention to quality is warranted.

While Li Ning has aspired to elevate itself at international fashion shows, it slashed its R&D budget last year to just 2.2% of total revenue, compared to 5% on average at Nike, according to Morgan Stanley analysts. Even amid Anta’s shopping spree, it devoted 2.5% of 2020 revenue to developing new products and fine-tuning existing ones. Li Ning's patent count is also dwarfed by rivals. The high from building a durable brand lasts longer than an M&A endorphin rush.

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CONTEXT NEWS

- Chinese sportswear maker Li Ning said on Oct. 28 that it's planning to sell HK$10.5 billion ($1.3 billion) of new shares to raise capital for international expansion, brand building and other reasons.

- It intends to sell 120 million new shares, or about 4.6% of the enlarged share base, to existing shareholder Viva China at HK$87.50 apiece, or about an 8.1% discount to the closing price on Oct. 27.

- Viva will buy its shares after the same amount is sold at the same price to other investors, Li Ning said.

- Li Ning shares closed down 8.2% at HK$87.40 on Oct. 28.