Shares of Chinese sportswear maker Li Ning Co Ltd. experienced a sharp decline on Monday following investor resistance to the company’s proposed acquisition of a commercial building in Hong Kong. Analysts expressed concerns, stating that the move might not be the most strategic use of capital, leading to a significant sell-off. The stock plummeted by as much as 16%, marking a year-to-date decline of over 70% and making it the poorest performer on Hong Kong’s Hang Seng China Enterprises Index in 2023.
Li Ning disclosed in a Sunday filing that it had entered into an agreement to purchase a commercial building in Hong Kong from local developer Henderson Land Development Co. for HK$2.2 billion ($282 million). The property, located in North Point, includes a 22-story commercial space and two floors designated for retail areas. Li Ning plans to utilize this space as its Hong Kong headquarters to bolster international business development.
Analysts from Morgan Stanley, including Dustin Wei, expressed reservations about the property transaction. In a note, they stated, “While we think Li Ning’s commitment to overseas markets is important, we don’t think this property transaction will be favored by investors.” The analysts highlighted that, given uncertainties in sales and earnings, investors are placing greater emphasis on shareholder returns and capital allocation.
The sportswear sector in China has faced challenges in 2023 due to the nation’s slow consumption recovery. Li Ning reported lackluster earnings in the first half, experiencing margin compressions and a decline in same-store sales in the third quarter. Additionally, the company announced an interim dividend of 0.362 yuan per share for the first half, compared to a final dividend of 0.463 yuan for the year 2022.
The property acquisition led UOB Kay Hian Hong Kong Ltd. analysts to downgrade Li Ning, assigning the stock its only sell rating and reducing the target price by over 60% to HK$18.80. The downgrade was based on concerns about weak corporate governance.
Citigroup analysts, including Xiaopo Wei, echoed similar sentiments, noting that the property investment might not be the optimal capital deployment for shareholder value. They suggested that special dividends or share buybacks would be more favorable, especially considering the ongoing channel de-stocking in the Chinese sports brands industry. Citigroup anticipates short-term negative sentiments on Li Ning and other Chinese sports brands.
The repercussions of Li Ning’s stock decline extended to its peers, with ANTA Sports Products Ltd. and Xtep International Holdings Ltd. also witnessing more than a 3% decrease in their stock values on Monday.
The market’s response reflects heightened investor scrutiny over corporate decisions and capital allocation strategies, particularly in an environment where shareholder returns are prioritized amidst industry challenges.
Note: The article includes insights from Morgan Stanley, UOB Kay Hian Hong Kong Ltd., and Citigroup, providing a comprehensive overview of Li Ning’s market performance and investor sentiment.
