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Photographer: Qilai Shen/Bloomberg Photographer: Qilai Shen/Bloomberg

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A short-seller ambush on China’s sportswear sector has failed spectacularly this year as consumers embrace patriotic clothing.

Anta Sports Products Ltd. -- a subject of multiple critical reports by Blue Orca Capital, GMT Research and Carson Block’s Muddy Waters Capital -- leads a gauge of Chinese companies listed in Hong Kong with a gain of more than 100% this year. Rival Li Ning Co., which was briefly caught in the crossfire despite not being a direct target -- is the fourth-best performing stock on the MSCI Asia Pacific Index with a 208% surge.

Chinese consumers are choosing home-grown sportswear brands at a time when the country’s trade war with the U.S. and protests in Hong Kong have fanned national pride. The companies have revamped their brands along more nationalist styles known as “Guochao” -- including using folklore references or printing “China” in large characters. Robust sales reported by the two firms show the strategy is working.

“Chinese consumers have been responsive to a rejuvenation of brands at home, while the trade spat with the U.S. has stoked national pride and led local names with Chinese elements to gain popularity,” said Edward Lui, an analyst at Bocom International Holdings Co. Ltd.

Anta was among several sportswear companies targeted by GMT Research in June 2018, which questioned financials of sportswear makers based in China’s Fujian province. The firm was again attacked in May this year by short seller Soren Aandahl, founder of Blue Orca Capital, for its accounting and corporate governance, before Muddy Waters Capital cited concerns over its financial reporting less than two months later.

But investors were not swayed, while both companies reported sales growth in the third quarter. “The Guochao story is the main thread boosting valuations in the two companies,” said Ken Huang, a fund manager at Beijing Heircastle Asset Management Co Ltd.

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Blue Orca’s Aandahl and a representative for Muddy Waters didn’t immediately reply to emails seeking comment on their trades.

Patriotic Push

Gillem Tulloch, the founder of GMT Research and author of last year’s report “Fake or Fabulous,” acknowledged that the Guochao push “helped justify” Anta’s jump, though he insisted the company’s valuations remain problematic. “It seems to be too frothy for me,” he said by phone on Monday.

UOB Kay Hian last month upgraded Li Ning to buy on an expected sales boost from “ patriotic spending” amid a backlash in China against the National Basketball Association over a tweet about the Hong Kong protests. Beijing’s strategy to promote the sports industry to drive growth, and a rising interest in fitness in China prompted several investment banks to raise the ratings of other local sportswear makers including Anta this year.

Anta closed up 1.9% in Hong Kong on Tuesday, while Li Ning fell 4.6%, its biggest drop in eight weeks.

The industry’s boom could last as long as a decade, said Beijing Heircastle’s Huang. “It’s still in its early stages of growth,” he said. “Sporting something with giant ‘China’ characters wouldn’t have worked years ago, but this time the companies have inadvertently hit the jackpot.”

— With assistance by April Ma, Mengchen Lu, Claire Che, and Kevin Kingsbury

( Updates stock prices in 2nd and 10th paragraphs. )