Top scores all around
We are Overweight on the Chinese sportswear industry. Last year’s inventory issue is largely over and the sector has proved relatively defensive in terms of domestic consumption. Our top pick is ANTA for its near-term growth and rising brand equity. We also like Li Ning for its long-term strategy to dominate the indoor sports segment although the counter may be under pressure due to an expected earnings slowdown in the near term. We favour China Dongxiang for its fashionable branding and higher gross margin.
» Rising demand for sportswear brands
The rising demand for sportswear in China has been driven by higher disposable income, increasing sports participation, rising consumer sophistication, and increasing popularity of professional sports. Domestic sportswear brands have prospered during the last decade mainly by capturing the lower-tier market while global players have entered and captured the high-end market.
» Fashionable sportswear on an uptrend vs functional
Based on product design and marketing strategy, sportswear can be categorized as either functional or fashionable. Fashionable sportswear is picking up as people are increasingly turning to this style of attire for their leisure time or on casual occasions. Over 2003-12, we expect fashionable sportswear to grow at a faster 37.6% than overall sportswear growth of 23.0%.
» Spotting the winners
By company, we like those that will face the least competition, be highly profitable and sport the best growth momentum. Market adaptability and/or defensiveness to major economic shocks would be key attributes in our top picks as well. We prefer ANTA near-term from a PEG perspective while long-term, we like Li Ning’s positioning strategy.
» ANTA for near-term growth; Li Ning for long-term strategy
Li Ning’s past average premium of 30% to its peers due to its market stronghold, longer track record and strong brand equity is narrowing as peers ANTA and CDX catch up in terms of brand equity and market share. While profit taking may cap some near term upside in the sector, we recommend buying on weakness to capture the long-term solid growth prospects in the sector.

TABLE OF CONTENTS
Executive summary 2
Rising demand for sportswear brands 2
Fashionable sportswear on an uptrend vs functional 2
Spotting the winners 2
ANTA for near-term growth; Li Ning for long-term strategy 2
Rising demand for sportswear brands 4
Spending on clothing & recreational activities strongly correlates with disposable income 4
Successful business model attracts mushrooming of new brands 5
Fashionable sportswear on an uptrend vs functional 7
Fashion vs function – how it stacks up 7
Fashionable sportswear on an uptrend with rising disposable incomes 8
Inventory overhang from the 2008 Olympics is dissipating 8
Spotting the winners 10
Current competitive landscape 10
Foreign brands dominate first-tier cities; now expanding into lower-tier cities 12
Domestic brands – a scramble to differentiate 12
Growth prospects and defensiveness 13
Profitability – Li Ning has the highest ROE 14
ANTA for near-term growth; Li Ning for long-term strategy 16
Li Ning’s trading premium to its peers is gradually narrowing 16
Valuing our picks 16
ANTA: Grass-roots rising star 19
China Dongxiang: Sports in style 29
Li Ning: Catching badminton fever 39
Analyst profile 47