Li Ning Co Ltd. shares tumbled on Monday as investors disapproved of the Chinese sportswear maker’s plan to buy a commercial building in Hong Kong, with some analysts saying the move was not the best use of capital.

The stock tumbled 14 percent, taking its declines this year to over 70 percent. That makes it the worst performer on Hong Kong’s Hang Seng China Enterprises Index in 2023.

The company said in a filing on Sunday that it agreed to buy a commercial building in the city for HK$2.2 billion ($282 million) from local developer Henderson Land Development Co. The block in North Point includes a 22-story commercial space and two floors of retail areas, which Li Ning intends to use as its headquarters in Hong Kong to strengthen international business development.

“While we think Li Ning’s commitment to overseas markets is important, we don’t think this property transaction will be favoured by investors,” Morgan Stanley analysts including Dustin Wei wrote in a note. “As sales and earnings uncertainties have been higher for Li Ning and the industry, we think investors are much more focused on shareholder returns and capital allocation than before.”

The company said in a statement to Bloomberg that its decision to set up headquarters in Hong Kong marks an important step in its international business development, and added the site acquisition should support its business growth and brand building.

Chinese sportswear stocks have been in a funk this year amid the nation’s sluggish consumption recovery. Li Ning reported lackluster earnings in the first half amid margin compressions, while same-store-sales declined in the third quarter. The company announced an interim dividend of 0.362 yuan per share for the first half, compared with a final dividend of 0.463 yuan for the year 2022, according to filings.

The property transaction also prompted analysts at UOB Kay Hian Hong Kong Ltd. to downgrade Li Ning, giving the stock its only sell rating, according to Bloomberg-compiled data. The brokerage cut its target price by over 60 percent to HK$18.80, saying the move reflects weak corporate governance.

“This property investment is a less optimal capital deployment than special dividends or share buybacks for shareholders’ value, especially when Chinese sports brands are in the process of channel de-stocking,” Citigroup analysts including Xiaopo Wei wrote in a note. “We expect more negative sentiments on Li Ning and Chinese sports brands in the short term.”

Peers ANTA Sports Products Ltd. and Xtep International Holdings Ltd. fell at least 1 percent each.

By Charlotte Yang

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