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By Chong Koh Ping 

Investors are betting that China's two biggest sportswear companies will emerge from the pandemic even stronger.

The Hong Kong-traded shares of both Anta Sports Products Ltd. and Li Ning Co. have more than doubled in the past 12 months, pushing measures of valuation such as price-earnings ratios unusually high. Anta's stock closed at 130.90 Hong Kong dollars Wednesday, the equivalent of $16.83, giving it a market value of more than $45 billion.

HSBC analyst Lina Yan said the two are the only domestic brands expanding their shares of the Chinese market. "This scarcity value attracted investors from all avenues," she said.

Anta ranks third and Li Ning fourth in China, according to market-research firm Euromonitor International, trailing only Nike Inc. and Adidas AG. And the Chinese companies' stock-price gains beat both: Nike has risen 62% in the 12 months to Tuesday, giving it a market value of about $217 billion, while Adidas is up 37%.

In the past two weeks, local apparel stocks including Anta and Li Ninga have also gotten a boost from a Chinese boycott of international businesses that have shunned cotton produced in the western Xinjiang region over forced-labor concerns.

That suggests investors expect the boycott to lift domestic brands' sales at the expense of Nike and Adidas, which have been embroiled in the controversy. Analysts see that confidence as premature.

"It's too early to tell if the saga could boost sales," said Tony Li, an analyst at Haitong International. "The share-price jump was sentiment-driven; it wasn't rooted in fundamentals."

More broadly, though, younger Chinese consumers increasingly favor domestic brands as they catch up with foreign brands in quality and innovation--a long-term trend that should work in favor of Anta and Li Ning.

The two Chinese giants have taken different approaches. Anta sells brands such as Fila and Descente in China, as well as clothes and shoes bearing its own name. Li Ning, founded by the Olympic gymnast of the same name, focuses on a single brand.

Both companies have international sponsorship deals: In basketball, Anta works with Golden State Warriors guard Klay Thompson, for example, while Li Ning has signed players such as Toronto Raptors guard Fred VanVleet and Miami Heat forward Jimmy Butler.

They have stronger management than their smaller domestic rivals, said analyst Mr. Li, and were better able to switch to selling online during the pandemic, helping widen the gap between them and those Chinese competitors. For 2020, Anta reported a 53% increase in online revenue; Li Ning, 23%.

When bricks-and-mortar stores shut during lockdowns early last year, the companies started selling more products via social-media platforms and live-streaming apps.

"The market leaders have the resources to use new marketing campaigns to draw younger customers," said Mr. Li. For example, Anta has hired Li Jiaqi, an online opinion leader known as China's "lipstick king," to promote its products.

Morningstar equity analyst Ivan Su said two other structural shifts favor the Chinese giants. One is the home market's potential. "There is room for bigger growth off a lower base," he said. The average Chinese consumer spends $20 to $30 a year on sneakers, sweatpants and other outdoor and sports-inspired clothing, he estimated, about a 10th of what a U.S. consumer spends.

The other is that people are growing more comfortable donning active wear even when they aren't exercising. It's a global trend, but "especially in China, sportswear is a big part of daily wear," he said.

Euromonitor says sector-wide sales in China will grow 21% this year. They shrank 1.5% last year, after growing between 16% and 21% annually from 2016 to 2019.

One cause for concern: The stocks' valuations have risen far beyond their five-year averages. Anta's stock trades at 36 times forecast earnings, similar to the ratios of Nike and Adidas, and Li Ning is even pricier, at 43.5 times, according to FactSet.

The financial system is flush with money chasing riskier investments, including funds that have flowed from mainland China into Hong Kong stocks, said Mr. Su. That extra liquidity has helped push the stocks higher, he said.

He values Anta at close to the current share price. "The share price has more than doubled in one year, but the fundamentals haven't doubled," said Mr. Su.

HSBC's Ms. Yan said any share-price gains for the two companies this year would be driven by profit growth rather than further rises in their price-earnings ratios, given that their valuations are now close to those of their international peers.

Write to Chong Koh Ping at chong.kohping@wsj.com

(END) Dow Jones Newswires

April 07, 2021 05:44 ET (09:44 GMT)

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