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The backstory: China, home to around 1.4 billion people, is dealing with a sluggish economic recovery post-COVID, a shrinking population and a spectrum of issues, including a property crisis, local government debt risks, slow global growth and geopolitical tensions. Against this backdrop, Chinese sportswear stocks, including the well-known brand Li Ning, are facing a downturn amid the nation's slow consumption revival. Li Ning was started by an Olympic gymnast in 1990, and it’s having a bit of a rough year. Its earnings for the first half weren't great, margins got tight, and to top it off, sales in the company's stocks took a dip after a disappointing third quarter.
The development: Li Ning revealed its plan on Sunday to buy a commercial building in Hong Kong for HK$2.2 billion (US$282 million) from Henderson Land Development. This property, named Harbour East, covers 9,600 square feet and includes 144,000 square feet of space across 22 stories for commercial and office use, along with two retail floors. The deal is expected to be finalized by January 28 next year. The company saw this move as strategic to establish a Hong Kong base and push for international expansion. But it didn't sit well with investors. Li Ning's stock took a 14% tumble on Monday, making the company the year's worst performer on Hong Kong's Hang Seng China Enterprises Index. It took its total share decline to more than 70% this year. Then, on Tuesday, Li Ning reassured investors of its confidence in its business prospects, pledging a share buyback of as much as HK$3 billion (US$384 million). Its HK-listed shares gained as much as 4.7% on Tuesday after the news.
"While we think Li Ning's commitment to overseas markets is important, we don't think this property transaction will be favored by investors," said Morgan Stanley analysts, including Dustin Wei, in a note. "As sales and earnings uncertainties have been higher for Li Ning and the industry, we think investors are much more focused on shareholder returns and capital allocation than before."
"This property investment is a less optimal capital deployment than special dividends or share buybacks for shareholders' value, especially when Chinese sports brands are in the process of channel de-stocking," said Citigroup analysts, including Xiaopo Wei in a note. "We expect more negative sentiments on Li Ning and Chinese sports brands in the short term."
“The purchase of the Property for use as Hong Kong headquarters of the Group via the Acquisition demonstrates the Group’s confidence in its business prospects in Hong Kong and marks the implementation of its plan to strengthen its business development internationally,” said Li Ning in the filing announcing its commercial property purchase.
“We welcome Li Ning’s new efforts to enhance shareholders’ value via share repurchase,” wrote Citigroup analysts including Xiaopo Wei in a note. “This is Li Ning’s first share repurchase plan in its corporate history, in our understanding.”