Chinese Footwear/Apparel Brands Would Benefit from Escalation of NBA-China Tiff

The Chinese government’s reaction to Daryl Morey’s tweet (and the NBA’s response to it) sparked conversations about the billions of dollars that the National Basketball Association has at risk in Asia and the “ripple effects” that a prolonged boycott of the league would have on U.S. footwear and apparel companies. As Matt Powell (NPD Group) explained, “all of the western brands are leaning heavily on China for their growth. If the growth in China slows, then the overall growth of those brands will slow dramatically; and there’s no place to make it up.” However, little attention has been paid to how the controversy effects the Chinese footwear and apparel providers; namely Anta and Li-Ning, the two with ties to the NBA.

Howie Long-Short: While tensions have seemed to cool in recent days (or at least they had until LeBron decided to speak last night), Powell isn’t sure “the situation has ended.” But even if it gets worse, don’t look for a significant drop in basketball shoe sales on the Chinese mainland. Even in a worst-case scenario, “if the Chinese government decided it would no longer show NBA games, [it’s unlikely they would order] the population to stop playing basketball. The Chinese are committed to sport and elevating the health of their people.” Blacking-out all NBA games on an extended basis (currently just Rockets games are unavailable) would certainly dampen viewership and perhaps result in lower basketball participation rates, but any loss in domestic shoe sales would likely be offset by an uptick in ‘patriotic spending’.

Wall Street analysts have suggested that should the NBA-China situation escalate it would be to the benefit of brands like Anta and Li-Ning. Powell laid out a scenario where “the government encourages its people to buy Chinese as opposed to Western products” (i.e. patriotic spending). Should that happen, the Chinese people would be likely to comply; remember, the Chinese consumer is “Chinese first and a fan of the NBA second.” Of course, Anta and Li-Ning products are also immune to the headwinds that western competitors like Nike and Adidas face from the greater U.S.-China trade war.

It was reported that 11 of 13 Chinese sponsors listed on the NBA China website – including Anta Sports – have suspended or ended their partnerships with the NBA. Anta has said it would be “suspending contract renewal negotiations” with the league, though it’s unclear what that means; the company is not believed to be an official sponsor. As for the players Anta sponsors, it appears as if those deals are safe. Gordon Hayward said that “[the company] reassured him that his contract was fine, that there is no issue.” FYI: Klay Thompson is also signed to the brand. Li-Ning has C.J. McCollum.

Speaking of Anta (OTC: ANPDY), shares of the company are +90% YTD. Competitor Li-Ning (OTC: LNNGF) is having an even better 2019, up +216% YTD; the best among all footwear/apparel companies. The rising popularity of branded sportswear in China and a growing Chinese middle class are driving both companies.

Anta and Li-Ning have also “elevated their game” of late, introducing high-end products (as opposed to playing in the mid-market where they established their niche) and working to enhance their retail presentation. The growing popularity of the game of basketball certainly hasn’t hurt, either, but Powell says, “the biggest delta seems to be their willingness to fight back.” He explained that the Chinese brands “appear to be suddenly responsive to the market share losses they’ve experienced. For years, they stood by as the Western brands [took business from the Chinese consumer]. It appears they’re now working to gain some of that share back.

To be clear, Nike isn’t nearly as dominant in China as it is here in the U.S. where it maintains +/- 75% of the basketball shoe market. Phil Knight’s company and Adidas each control +/- 20% of the Chinese market.

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Fila Sales Rebound with Rerelease of Disrupter II


Fila, Inc. has returned to prominence with the updated rerelease of the Disruptor II, a bulky sneaker that first debuted in 1996. With the rerelease, Fila has successfully capitalized on two current fashion trends, retro apparel and the stereotypical “dad shoe”; particularly popular amongst women. The Disruptor II’s affordable price point ($65-$70) and widespread availability (think: Urban Outfitters, Journeys) has also contributed to its success. Foot Locker CEO Dick Johnson labeled the Disruptor II one of his chain’s most popular styles.

Howie Long-Short: Fila U.S. (KRX: 081660) sales rose +21% during Q2 ‘18, with the Disruptor II heavily contributing to the record earnings period. The company’s “conversion from wholesale to retail” and a revised sales strategy (see: targeting younger demo) has also been effective. Fila grew sales +10.9% (to $687 million) and operating profit rose +24.1% (to $90.6 million) during the most recent quarter.

Fila, Inc. owns 53% of Acushnet (GOLF), the maker of Titleist golf equipment. For those who missed Monday’s piece on rising golf equipment salesGOLF grew Q2 sales +11.7% YoY (on a consolidated basis); Titleist clubs (718 Irons, Vokey SM7 Wedges) and Titleist golf ball sales were credited for driving the top line growth. GOLF shares are up +60% over the last 12 months; they’ll open at $27.51 on Wednesday.

Interestingly, Anta Sports (ANPDY) owns the rights to use the Fila brand in China (Fila controls 15% of the JV). Anta, China’s largest sportswear maker, reported H1 revenue increased +44% (to $1.5 billion); strong sales of the Fila brand contributed to the growth.

Fan Marino: For those old enough to remember the 90s, Fila was a major player in the footwear and apparel space; in 1997, the company generated $687 in U.S. sales. Grant Hill even signed an $80 million endorsement deal to serve as the brand. Remember these?

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MLB, Tencent Partner to Grow Sport of Baseball in China


MLB has partnered with Tencent (TCEHY) to grow the sport of baseball in China. As the Official Digital Broadcasting Partner of MLB within the country, TCEHY will live stream 125 games (including the All-Star Game and every game of the Postseason/World Series) exclusively on Tencent PC, Mobile and OTT platforms. The technology giant has also committed to broadcasting a series of MLB highlight shows and supporting/broadcasting youth baseball and developmental events. Super Baseball Week (April 4-8) will kick off the new partnership; 5 straight days of games featuring the league’s biggest stars (see: Trout, Judge, Bryant).

Howie Long-Short: Tencent Holdings Limited (TCEHY), one of 50 constituent stocks making up the Hang Seng Index (largest companies on HKSE, represent +/- 58% of HKSE cap), is a leading provider of comprehensive internet services in China. The company’s social messaging app WeChat has more than 1 billion users. TCEHY was recently named China’s most valuable brand for a 4th straight year, with WPP and Kantar Millward Brown assessing its brand value (how a brand powers business) at $132.2 billion (+25% YoY). Just how big of a global player is Tencent? The company’s market cap is $496 billion, $30 billion more than Facebook (FB).

Fun Fact: Just one sports related brand made the Top 100 most valuable Chinese brand of 2018 rankings, Anta Sportswear (ANPDY) at #78.

Fan Marino: MLB opened an office in China in 2007 and has maintained 3 Development Centers within the country (Wuxi, Changzhou and Nanjing) since. The fruits of those labors have started to pay off. 3 players have graduated and gone on to sign MLB contracts (“Itchy” Guiyan – O’s, Hai-Cheng Gong – Pirates and Justin Qiangba – Red Sox) and another 12 are currently playing professionally in China. The success can’t just be measured by players on the pro level, though. Since 2014, 36 players have graduated from the program and gone on to play collegiate baseball.

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