A Li Ning flagship store in Beijing. The company's profit margin is expected to decline. Nelson Ching / Bloomberg

Shares fall to 2-yr low on H1 profit preview

Shares of Chinese sports brand Li Ning Co Ltd fell to their lowest in more than two years on Thursday after the company said it expected a fall in first-half sales and profit margin due to rising costs and a revamp in its distribution channels.

Li Ning, which sells everything from running shoes to sports bags, also said margins for the rest of the year could narrow.

The stock, which has lost 29.1 percent so far this year, fell 15.8 percent to close at HK$11.54, its lowest since March 2009.

"The figures were a disappointment and that its lower profit margin worried investors the most," said Alex Wong, a director at fund-management firm Ample Finance Group. "Its a type of company (that we are concerned about) nothing but marketing," Wong said, adding the firm needs to further strengthen marketing and branding to boost margins.

In a filing to the Hong Kong bourse, Li Ning said it expected revenue to decline 5 percent in the first half of 2011 from a year ago as it moves to revamp distribution channels.

The company, founded by a famous Chinese athlete with the same name who is known as the Prince of Gymnastics in China, said its gross profit margin was expected to decline by 1 percentage point due to a new wholesale discount policy and increases in raw material costs.

Profit margin attributable to shareholders is expected to decline to 6-7 percent in the first half from 12.9 percent a year ago.

Due to expected significant increases in raw material costs in the second half of 2011, Li Ning also forecast gross profit margin for the period to decrease from last year.

Profit margin attributable to shareholders for full-year 2011 is expected to decline by about 1-2 percentage points compared with the first half, it added.

Same-store sales growth maintained a low single-digit pace from January to June, with the total number of Li Ning brand stores at the end of June at 8,163. It did not give comparative figures.

Li Ning is facing growing competition from foreign companies including Nike and Adidas and local rivals such as ANTA Sports Products Ltd and Peak Sport Products Co Ltd.

"Competition within the industry is intensifying and the overall competitive landscape is presently shifting," Chairman Li Ning said in the statement, adding the firm's financial performance would be affected in the near term. "The group believes that the transformation of the industry, the shifts in the competitive landscape, and the adjustments it has made in its strategies will become clearer in the next two to three years."

Last week, Nike raised its sales forecast for its namesake brand, betting that strong Chinese and Brazilian demand and a price increase in the coming year will help it outpace rising costs.

Li Ning said order value for the fourth quarter of 2011 rose more than 5 percent year on year, though order volumes declined at a high single-digit rate.

Its growth in fourth-quarter order value was slower than rivals such as ANTA Sports' 25 percent rise and Xtep's 24 percent growth.

Reuters

(HK Edition 07/08/2011 page2)