China Sportswear Industry May Grow 18% This Year, Xtep Says

China’s sportswear industry will grow between 15 to 18 percent this year and next as rising incomes in the world’s second-largest economy spur demand for clothing, according to Xtep International Holdings Ltd.

Xtep, part-owned by the Carlyle Group, will continue to open stores in smaller cities where there’s room for expansion, Chief Financial Officer Terry Ho said in a July 19 interview in Hong Kong. “China is still a very good market” and sales grew at least 20 percent in the past four quarters, he said.

The clothing maker’s stock rose 3.2 percent in Hong Kong trading, the most in more than two weeks, paring this year’s slide. Xtep has slumped since July 7, when bigger rival Li Ning Co. forecast a drop in first-half sales, raising concerns that the industry’s growth may stagnate.

“We have the room and space to increase roughly a few hundred stores per year,” Ho said. “ The store expansion is natural following the market expansion.”

Xtep has 7,300 stores and may add about 500 by the end of 2011, Ho said. The company based in Fujian, the southeast coastal province in China, targets mass-market customers in second-tier cities, selling sports shoes and apparel at lower prices than competitors Li Ning or China Dongxiang Group Co.

Cheaper Than Nike

“There are a lot of young people and people with lower income in small cities” who can’t afford 700 yuan for a pair of shoes from Nike Inc. or Li Ning, said Huei-Chen Flannery, a Shanghai-based analyst at Everbright Securities Co. “Their monthly salary may not even be that much.”

Xtep serves these consumers, who still make up the bulk of China’s population, Flannery said.

The company has focused expansion outside Beijing, Shanghai, Guangzhou, and Shenzhen. Eighty percent of its stores are in smaller cities, Ho said.

Xtep’s stock climbed 14 Hong Kong cents to HK$4.48 at the 4 p.m. close of trading in Hong Kong and has lost 18 percent this year. The Hang Seng benchmark index fell 0.1 percent today.

China’s economy may expand 9.6 percent this year, according to the International Monetary Fund. The country of 1.3 billion people aims to double workers’ wages by the end of 2015 to boost consumption and help low-income families cope with rising costs.

‘Market Saturation’

Li Ning dropped 16 percent, the most in more than six months, on July 7 after forecasting a 5 percent drop in first-half sales because of higher costs and strengthening competition. Its profit margin may narrow to as low as 6 percent from 13 percent a year earlier, it said.

“After five years of growth, major sportswear brands in China have reached market saturation,” Ken Lee, a Hong Kong-based analyst at UOB Kay Hian Holdings Ltd., said in a July 6 note to clients. Store expansion is “resulting in cannibalization of sales and price competition,” he said.

Li Ning has plunged 44 percent on Hong Kong’s stock exchange this year, while China Dongxiang, owner of the Kappa brand in China, has plummeted 48 percent. China Dongxiang said on July 8 that first-half sales probably shrank by 45 percent from a year earlier and that it bought back unsold inventory.

China Dongxiang advanced 3.5 percent to HK$1.76 today while Li Ning rose 0.8 percent to HK$9.20.

Li Ning bought back 100 million yuan ($15 million) worth of unsold inventory from distributors in the first half of this year and will buy back another 200 million yuan in the second half, according to investor relations manager Li Chuan.

Xtep has a no-return policy, according to Ho. Orders are reviewed as they are placed and distributors are told “if we think they’re under- or over-stocking,” he said.

“It’s a very clear and strict policy,” Ho said. If Xtep allowed returns, “then you will always overstock and expect me to take it back when you can’t sell it,” he said.

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