Challenging Nike and Adidas in China: ANTA, Li Ning🏃⚽️🏀 (June 2022)

I take a longer-term perspective by looking at their years of financial performance and accompanying financial metrics. There is a lot of information publicly available about these companies, detailed quarter-to-quarter analysis and strategies discussion that I do not want to replicate.

Nothing in this article is intended to be financial advice and should not be taken as such, please do your own research before investing.

The China sports brand companies have certainly come a long way to challenge Nike and Adidas. The exhibits below show the financial performance (revenue, gross margins and net income) of the last 15 years of leading local sports brand companies (Xtep, Li Ning, ANTA and 361 Degrees) and global brands (Nike and Adidas).

I divide the development into 3 distinctive periods and measure the annual revenue increase/decrease during the period.

FoundedOlympics rally
2007 to 2010
3 years
Reset
2011 to 2014
3 years
Overtaking
2015 to 2021
6 years
Xtep2001226.5%(13.7%)89.1%
ANTA1991132.79%0.2%343.3%
Li Ning198917.9%(24.6%)218.3%
361 Degrees20031,198%(29.8%)33.8%
Nike Greater China1964n/a26.31%170.3%
Adidas Greater China1949n/a45.32%86.19%

ANTA and Li Ning are two leading sports brand companies in China.

ANTA (安踏) was established in 1991 and listed on the Main Board of HKEx in 2007 (Stock code: 2020.HK). It has been principally engaging in the design, development, manufacturing and marketing of branded sportswear including shoes, apparel and accessories to consumers. By embracing an all-round brand portfolio including ANTA, FILA, DESCENTE and KOLON SPORT, and successfully acquired Amer Sports in 2019 with an investor consortium, a global sportswear group that has internationally recognized brands including Salomon, Arc’teryx, Wilson, Peak Performance, Atomic, etc. ANTA Sports aims to unlock the potential of both the mass and high-end sportswear markets.

Li Ning (李宁), founded in 1989, is one of the leading sports brand companies in China, mainly operating professional and leisure footwear, apparel, equipment and accessories under the LI-NING brand.
The company is founded by former Olympic gymnast Li Ning. In 1982, he won six of the seven medals awarded at the Sixth World Cup Gymnastic Competition, earning him the title “Prince of Gymnastics”. He is most famous for being the most decorated Chinese athlete by winning six medals (3 gold, 2 silver and 1 bronze) at the 1984 Summer Olympics, which was the first Olympics in which China participated after the founding of the People’s Republic in October 1949. At the 2008 Summer Olympics, Li Ning ignited the cauldron at the opening ceremony after being hoisted high into the air with cables and miming running around the rim of the Beijing National Stadium (Bird’s Nest). The company is listed on the Main Board of HKEx in 2004 (Stock code: 2331.HK).


Olympics rally: 2007 to 2010

The local sports brands were enjoying brisk sales and strong sales growth leading to the 2008 Beijing Summer Olympics. 361 Degrees, the youngest company among them, enjoyed the strongest growth with sales increasing 11x within 3 years.

It was a much tighter race among the companies. In 2010, Li Ning was leading. Its revenue was 1.9x over 361 Degrees and only 12% more in net income.

Reset: 2011 to 2014

The industry became bloated with excesses. Around 2010, the industry slowed and start to consolidate. The local brands went into negative revenue growth or flat (ANTA) during the period leading to more negative growth in profits.

Li Ning stumbled and went through restructuring. It had bad losses for 3 years with as much as -29% net loss margin in 2012. As it fell behind, this allowed ANTA to overtake.

Unlike the local brands, Nike and Adidas grew strongly during the period. Adidas also overtook Li Ning.

Overtaking: 2015 to present (2021)

Best among the locals emerging

Revenue started to grow. ANTA and Li Ning have clearly broken off from the rest of the local sports brands and catching up with Nike and Adidas with ANTA overtaking Adidas in sales.

ANTA’s acquisition of FILA’s China business in 2009 began to reap rewards. In 2018, ANTA began to show the contributions from FILA. For the year ended 2021, FILA contributed 44.2% of ANTA’s total revenue and 48.5%of its operating profits. It is embracing a multi-brand portfolio strategy further with its acquisition of Amer Sports in 2019 with an investor consortium that has internationally recognized brands including Salomon, Arc’teryx, Wilson, Peak Performance, Atomic, etc.

The local sports brands have been improving their price-quality proposition and branding to appeal to the population, especially the young. Their strategies, branding and marketing take a more differentiated approach. With intensifying competition where Li Ning and ANTA lead the local sports brands, companies like Xtep begin to focus on specific sports segments such as running and avoid those that will be competing with Li Ning and ANTA more directly.

Source: Xtep 2021 Annual Results Presentation, 16 March 2022

The quality of the companies can be seen in their financial performance in terms of revenue growth, (gross, operating and net) margins, operating cash flow and free cash flow to sales as well as ROE and ROIC.

Refer to their financial performances at the end of the post.

In hot pursuit with Nike and Adidas

Growing nationalism especially among the young has become a major battleground in recent years. It benefits the local brands in two ways.

The local companies’ ability to catch up with the global brands was partly circumstantial. In early 2021, Adidas and Nike boycotted Xinjiang cotton and saw their sales from China plummet. The backlash against the western brands also saw a number of brand ambassadors in China cut ties with western companies including Nike and Adidas. In contrast, local sports brands Li Ning and Anta saw a jump in revenue as China’s consumers turned to the domestic sports brands’ manufacturers who back the use of materials sourced from the controversial region. Many foreign brands face backlashes and this allows the local sports brands companies to capture their lost ground. After Nike, H&M and other foreign apparel companies announced their positions on Xinjiang cotton, Chinese consumers found that Li Ning’s products had been branded with the words “Xinjiang cotton is used in our products”. 

Growing nationalism has bought about “Guochao” (国潮) literally “national trend”. It has driven demand for domestic brands and products that often incorporate Chinese traditional culture and style. This helped Li Ning to ride on the wave. In July 2018, Li-Ning impressed China and the world with its brand-new “中国李宁” (China Li-Ning) logo print and fashion sense. Blending traditional Chinese characters and modern fashion styles into its design, Li-Ning’s comeback show built just enough hype for the reborn of the brand and lead China’s sports brands market into a fashion revolution.

China Li-Ning in traditional Chinese characters

Unlike their parents, China’s Gen Z tends to be less impressed with products simply because they are foreign. Born between the late 1990s and the early 2010s, Gen Z accounts for 15 per cent of China’s population with more than 210 million people, according to McKinsey. The quality of Chinese products has been improving significantly vis-a-vis their pricing in recent years compared to foreign brands. A growing sense of cultural pride has developed alongside the maturation of Chinese brands. This develops a favourable positive perception, especially with the leading Chinese brands.

China’s Gen Z can make or break Western brands

The Chinese government is also encouraging its population to participate in athletic activities. China’s State Council issued a circular in August 2021 to push forward an extensive new five-year national fitness program. It proposes that by 2025, the proportion of people who regularly take part in physical exercise will reach 38.5% from 37.2%, and the sports industry should see a value of 5 trillion yuan ($773.6 billion) accordingly.

China’s economy matters

China has been enjoying very strong economic growth. From 2012 to 2020, China’s GDP grew at a CAGR of 7.06% (Source: World Bank). We can see that the growth of the companies does correlate with the economic growth. The slowing economic growth in 2009 created a cascading effect on financial performance.

With a fast-growing economy and a huge population of 1.4 billion people, China has the largest middle-class consumption market segment in the world. It has grown to be an important market for global brands. Nike’s revenue from Greater China as a percentage of its total has increased to 18.6% in 2021 from 9.09% in 2009. Similarly, revenue from Greater China for Adidas has grown to 21.6% in 2021 from 9.32% in 2009. It is the third-largest market after North America and Europe, the Middle East and Africa (EMEA).

The competition has been intense. It is not a situation of easy money. Market leadership position does flip; it is not guaranteed. Nothing is status quo.

What is next?

We should see leading local brands (ANTA, Li Ning and perhaps Xtep) continue to chip market share off the foreign global brands (i.e. the growth rates of the local brands are faster than that of the global brands).

Some local brands (ANTA and Xtep) are acquiring foreign brands to pursue a multi-brand strategy. Xtep has acquired brands such as Saucony, Merrell, K-Swiss, and Palladium.

Will they go global beyond China? Time will tell. There is still a lot of potential in China. They may want to consolidate their market position before expanding overseas aggressively.


A typical evolving competitive landscape in China

The development of the local sports brands against the backdrop of strong economic growth over the years is quite similar at play with other industries in China:

  1. Local companies compete aggressively among themselves to become the best among their equals.
    Examples: EV startups (Nio, XPeng and Li Auto) now competing aggressively now
  2. Over time, clear battle-tested local market leaders emerge and the rest begin to falter.
  3. Thereafter, with time, these local market leaders become more capable (product quality, differentiated strategy, financial and human resources) that they challenge global foreign brands to the extent that the latter’s market share begins to chip off.
    Examples: Alibaba and Tencent in the e-commerce and gaming industries.
  4. With their China market secured and giving them market position and good cash flow, they may start to expand overseas.
    Examples: Alibaba, Xiaomi and Huawei

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