THE GROWTH OF CHINA’S SPORTSWEAR INDUSTRY March 2020

LEVEL 15, THREE PACIFIC +852 2295-1500 PLACE, 1 QUEEN’S ROAD [email protected] EAST, HONG KONG TABLE OF CONTENTS

1 Understanding the growth of China’s sportswear industry 2

1 LEVEL 15, THREE PACIFIC +852 2295-1500 PLACE, 1 QUEEN’S ROAD [email protected] EAST, HONG KONG THE GROWTH OF CHINA’S SPORTSWEAR INDUSTRY

UNDERSTANDING THE GROWTH OF 1 CHINA’S SPORTSWEAR INDUSTRY

• The move towards healthier lifestyles is boosting the sportswear industry

• Casualwear is now a mainstream fashion trend

• The government is promoting cleaner living

• Foreign brands face competition from local producers

The robust growth of the sportswear industry is not just a Chinese consumer trend but also a global phenomenon. With rising health awareness, more people are participating in sporting activities and being careful about what they eat. For instance, marathon running in China is growing in popularity, with a record 1,581 races and related events taking place in 2018 (from 1,102 in 2017). During the same period, the number of participants rose to 5.83 million (a 17% increase) according to the Chinese Athletics Association (CAA).

2 CASUAL URBAN LIFESTYLE

The desire for a healthier life has translated into a fashion trend that is benefiting the sportswear industry. Consumers, especially the younger generation, want to look good and energetic, so the demand for sportswear has moved beyond functional and apparel toward casual urban lifestyle outfits. For examples, girls wear Lululemon yoga pants the weekend even though they are not working out. Similarly, it has become more fashionable to wear an apple watch rather than a luxury brand.

EXHIBIT 1. CHINA SPORTSWEAR MARKET SIZE RMB mn China Sportswear Market Size 300,000

264,760

250,000 221,523

190,429 2.6% 200,000 3.8% 3.9% 166,912 4.6%

148,335 3.3% 5.8% 141,776 2.5% 150,000 139,229 4.5% 130,567 134,683 6.1% 4.0% 4.4% 115,354 2.3% 4.6% 5.0% 11.1% 6.2% 3.9% 5.5% 2.0% 3.5% 100,000 5.1% 10.2% 3.6% 6.2% 6.6% 0.9% 1.6% 2.6% 1.5% 0.5% 0.7% 1.0% 5.1% 2.4% 19.5% 0.9% 7.5% 6.8% 6.9% 9.8% 0.3% 5.1% 6.4% 0.9% 7.6% 7.9% 6.2% 0.7% 0.2% 7.2% 18.3% 6.6% 6.5% 0.3% 0.3% 0.6% 6.6% 9.4% 5.9% 0.2% 10.1% 7.3% 6.6% 50,000 0.2% 8.5% 16.1% 12.0% 7.9% 7.7% 12.1% 9.0% 15.3% 8.2% 14.8% 7.0% 13.3% 15.0% 10.7% 20.8% 9.7% 9.5% 19.8% 16.9% 18.4% 12.7% 12.1% 13.4% 14.8% 14.9% 15.4% 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Nike ANTA Li Ning Xtep Others

Source: Company data, Euromonitor, Morgan Stanley, January 2020

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DRESS DOWN EVERY DAY

It was uncommon for the older generation to appear unshaven or wear informal clothes to work. Today, however, many young men sport a beard and/or dress more casually in the office, especially with many tech companies adopting a more relaxed approach to their employees’ attire. This development explains why most luxury brands now feature sports shoes, and sportswear companies are expanding into the casualwear market. A good model here is the success of the Fila brand in China.

EXHIBIT 2. SPORTSWEAR SALES AS % OF TOTAL APPAREL AND EXHIBIT 3. APPAREL AND SPORTSWEAR PER CAPITAL EXPENDITURE USD FOOTWEAR SALES Sportswear Per Capita Experditure (USD) 25% 350

300 20% 250

15% 200

10% 150 100 5% 50

0% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 200 400 600 800 1000 1200 China Taiwan Japan Singapore China China (2019-25e) Taiwan Japan Hong Kong South Korea Singapore Hong Kong South Korea

Source: Euromonitor, Morgan Stanley, January 2020 Source: Euromonitor, Morgan Stanley, January 2020

EASE PRESSURE ON HEALTHCARE COSTS

The Chinese government is also supporting the sports industry. The sector was indeed overlooked in the past, but it has been playing catch up in recent years. For example, the total number of sports facilities in China increased from 850,000 in 2004 to 1.96 million in 2017, a year-on-year growth of approximately 6%. We believe that government support will continue going forward: for instance, China is ageing fast with a declining birth rate, so healthcare spending will inevitably increase. If more people adopt healthy lifestyles, then the social burden will decrease.

Elsewhere, we have seen the introduction of regulations to reduce the time kids spend playing online games. However, encouraging youngsters to participate in various sports could be a better solution to this issue. Meanwhile, there will be the Tokyo Summer Olympics in 2020, followed by Beijing Winter Olympics in 2022, which will also support the sportswear industry in the near term.

4 PROUDLY MADE IN CHINA

One interesting trend we see is the rising demand for local brands. Young Chinese consumers have grown up amid strong economic growth and are proud of their country, i.e. strong nationalism. Their parents’ generation preferred foreign brands given a belief that these were of a higher quality. However, this assumption has changed, and many young consumers do not care if a product is local or from overseas as long as it is trendy. One good example is Li- Ning, which is a very popular high-end sportswear label with a similar price point to foreign lines, such as Nike and Adidas. We expect that strong industry growth will continue to benefit both global and local brands, but we think that the US-China trade war will support home-grown names in the near term.

EXHIBIT 4. CHINA SPORTSWEAR PRODUCT RANGE AND PRICE POINTS BY BRANDS

Category Running Basketball Lifestyle Brand Anta Li Ning Xtep Adidas Anta Li Ning Nike Anta Li Ning Adidas

Premium (>RMB 1,000) RMB 1,393 RMB 1,299 RMB 1,599 RMB 2,599

Mid-end RMB 499 RMB 469 RMB 469 RMB 629 RMB 699 RMB 499 RMB 449 RMB 999 RMB 799

Low-end (

Source: Company data, Tmall, Morgan Stanley, November 2019

EXHIBIT 5. LI NING’S FASHION LINE VS. OTHER PREMIUM AND LUXURY BRANDS

Band/Product Series Li Ning Adidas Luxury Brands

Fashionable Footwaer Price Range

RMB 400-1,300 RMB 1,000-5,000 > RMB 5,000

Band/Product Series Li Ning Other Streetwear Brands

Fashionable Apparel Price Range

RMB 300-1,000 RMB 1,300-2,500+

Source: Company data, Morgan Stanley, November 2019

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