TPG faces a challenge in Li Ning

Despite China's fast-growing consumer classes, Li Ning has been struggling for over a year to maintain its sales in the face of keen competition from both local and international brands. The company's estimated results for 2011 made for grim reading. Revenue was expected to decline by 6-7% from 2010 levels, while costs rise by 7-8%, contributing to a 7-8% fall in net profit margin.

One day later, Li Ning said it would sell RMB750 million ($119 million) in convertible bonds - RMB561 million to TPG and the remainder to Government of Singapore Investment Corp. (GIC). If fully converted, TPG would acquire 142 million in new and ordinary shares, amounting to a 12% equity stake. GIC would hold 8%, up from 6% prior to the deal, with founder Li Ning remaining the single largest shareholder.

The funds will be used for brand development, investment into sports sponsorships, product research and the roll-out of sixth-generation stores.

"Li Ning is one of the early and most iconic brands in China," said Stephen Peel, managing partner of TPG Asia.
TPG's investment in Daphne - though the purchase of RMB550 million worth of convertible bonds with warrants - fell during the year the retailer reported a 20% year-on-year decline in net profit. TPG appointed a non-executive director to advise Daphne on enhancing its supply chain system.

In 2010 and the first half of 2011, net profit rose 51% year-on-year and 132% year-on-year, respectively. The company credited the turnaround to the performance of its core brands, buoyed by an expanded retail network. Daphne's share price has trebled since TPG's investment was first announced.

Li Ning might prove harder to revive. The company's problems are largely blamed on a failed attempt to reposition its brand. It attempted to move up market and challenge Nike and Adidas, hiking prices and focusing more on first-tier cities. Not only has it lost out to these two global giants, but it has seen local rivals such as Anta and Peak Sports grab market share in the second- and third-tier markets.

"The sportswear industry is structurally more competitive than footwear," said UBS in a report. "We also have a softer economy than 2009 when TPG first invested in Daphne." Deutsche bank also highlights downside risks despite TPG's involvement. It retains a "hold" rating for Li Ning and a target price of HK$6.5, about 20% lower than the current trading price.

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• Topics
• Consumer
• Expansion
• Greater China
• TPG Capital
• China
• Consumer
• Growth capital
• Structured finance