Li Ning sports new equity deal

Chinese sports brand launches its third equity fund raising in as many years as share price continues to collapse.

Chinese sports brand Li Ning announced a third equity fundraising in as many years on Tuesday in an attempt to improve its cash position and reverse a steep share price decline. 

The company unveiled the launch of a five-for-12 open offer of ordinary shares and convertible securities that aims to raise between HK$1.5 billion and HK$1.69 billion ($190 million to $218 million). Its enlarged share capital will expand by 29% as a result of the 583.7 million to 651.9 million share transaction.

The deal has been priced at HK$2.60, representing a 21.92% discount to the stock's HK$3.33 Tuesday close. Investors responded to the news by pushing it down a further 8.11% on Wednesday.

Shares in Li Ning have sunk 50% over the course of 2014, badly underperforming the rest of the Chinese sports good sector. That includes rival ANTA Sports, which has risen 47.2% over the same period.

Li Ning shares have been under particularly heavy short-selling pressure in the last couple of months, partly fuelled by expectations of a new equity fundraising after the company's cash position deteriorated sharply, prompted by an interim net loss.

Analysts at DBS estimated that the new fundraising will dilute earnings per share by 12% to 23% and said that earnings visibility remains weak, even though most of the negatives are now priced in.

Li Ning's existing major shareholders have all committed to subscribe to the open offer. Should no public shareholders take up the deal, founder Li Ning will see his existing 19% stake expand to between 27.9% to 34.7%.

This is held via a vehicle called Viva China. The exact percentage increase is further subject to a decision on whether to convert existing equity-linked debt.

Likewise, TPG's stake could rise from 3.8% to between 7.8% and 8.%, while GIC's will stay flat at 4.2% and Milestone Capital's could rise from 3.6% to between 4.8% and 5.3%. 

In 2012, Li Ning issued Rmb745 million ($120 million) of convertible debt to TPG and GIC, plus a further Rmb1.14 billion in the first half of 2013.

Proceeds from the new deal are mainly being used to fund working capital, with roughly 30% being set aside to repay short-term loans. The funds should enhance Li Ning's capital cushion since analysts believe the company moved into a Rmb267 million net debt position at the end of the first half.

Turnaround plan

This was caused by a first half loss of Rmb586 million. Since 2012, Li Ning has been engaged on a three-year turnaround plan to streamline and reinforce its brand image in the hyper competitive domestic market.

In November, its interim CEO stepped down. In his place, Li Ning himself has taken up the reins until a replacement is appointed. The loss of TPG partner Jin-Goon Kim before the end of the financial year was not viewed in a positive light by the market.

In a conference call on Wednesday, Li Ning told investors the company should enter a new growth phase in 2015 with greater channel efficiency and product compatibility.

"The company has relentlessly adhered to its three strategic focuses, including focusing on the China market, [the] Li Ning brand and the five core sports categories with the highest growth potential in China - basketball, badminton, running, training and sports life," he said.

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