Main reference: Story in Sinafinance
WE OFTEN LOOK to market success stories to inspire and educate us.
But sometimes, failures among stock picks can tell us even more.
Jumping onboard the fast-sinking Li Ning sportswear ship has been such a costly misstep for many.
The sportswear brand named after its founder and former Olympian has been struggling mightily for the past two years with bulging inventories and cutthroat industry competition in China.
Last week, its shares were suspended from trade after it announced plans to issue convertible shares totaling up to 1.9 billion hkd, with Li Ning Co Ltd (HK: 2331) arguing the move was necessary to raise funds for restructuring and development.
"We are at a critical point in executing our plans and transforming our business," former Olympic gymnast and company founder Mr. Li Ning said in a statement.
Each convertible security, which is convertible into one share at 3.50 hkd each, will be offered to shareholders for every two existing shares held.
At end-January, Li Ning’s shares were trading around 5.22 hkd.
The sportswear firm also said in its official stock market filing that Singapore sovereign fund GIC, US private equity fund TPG Capital and Viva China Holdings Ltd (HK: 8032) had already undertaken to subscribe to Li Ning’s convertible share offer.
"The additional capital to be raised through the open offer and continued support from its key stakeholders will ensure a stable platform while we work to restore the group to sustainable growth and profitability in the long-term and step into a new phase of our development," athlete-turned-executive Mr. Li added.
Late last year, Li Ning Co’s high-profile founder announced he was selling off a 1.36 billion hkd stake in the firm to his talent management firm Viva China, a move which helped boost the Hong Kong-listed sportswear firms shares at the time from several quarters of declining value.
And just as 2012 was drawing to a close, Li Ning Co cautioned of a significant full-year net loss due to 288 million hkd in expenses linked to a campaign to repurchase excess inventory from distributors.
While all this is fine and good from a sustainable growth perspective, it does little in the way of offering anything positive for longstanding existing shareholders, with minority shareholders getting virtually stomped underfoot by the sneaker and sportswear play.
Viva China, long a partner of Mr. Li’s, is reportedly on target to buy up around 60% of the convertible shares.
In one dexterous dismount, Mr. Li has managed not only to harm the long-term interests of his own shareholders, but also minority shareholders in Viva China as well.
Currently, Viva China has a net cash position of around one billion yuan, with a share circulation of 5.5 billion shares, giving it a net cash per share standing of around 0.178 yuan.
With the convertible share move, Li Ning has allowed Viva China to potentially see a net cash decrease of some 70%.
Viva China, likely to take a sizeable equity stake in Li Ning Co, recently withdrew plans for a land expansion deal it had hoped to help fuel its expansion.
Now with the decision from the top to go ahead with the Li Ning Co financing, there will be even less cash on hand to fund organic growth of its own.
We have all the respect in the world for Mr. Li’s prowess on the beam, rings, vault and mat.
But his skills as a financial manager leave something to be desired, especially after his awkward dismount from the firm.
His willingness to sell off a significant part of his holdings in his self-named enterprise show just how far fortunes have fallen at what was just a few short years ago among China’s hottest and fastest-growing sportswear firms.
It’s hard to see where Li Ning Co is headed.
Will the former Olympian and founder fight to regain dominance once he gets the company’s financial house in order again?
Or now that seasoned funds GIC and TPG have their feet in the proverbial door, will it only be a matter of time before Mr. Li Ning becomes just the founder, albeit legendary, of Li Ning Co?
Either way, Li Ning Co investors have been on a rollercoaster ride these past few years and things look like they might be even more uncertain going forward.
I recommend all investors, no matter how large your stake, to make your voices hear loud and clear at the next shareholder meeting.