Peak Sports Listed: Open 1,000 Stores Next Year

Peak Sports is preparing to list on the Hong Kong Stock Exchange on September 29. Based on the set issue price of HK$4.1, the company's IPO aims to raise approximately HK$1.7 billion, surpassing the initial estimate of HK$1.5 billion. Excluding the over-allotment option, Peak’s total share capital after listing will total 2.09 billion shares. The company's market capitalization is expected to reach HK$8.6 billion. The Xu Jingnan family owns 61% of Peak Sports' equity. This means the Hui family’s net worth is projected to exceed HK$5.2 billion.

Peak Sports CEO Xu Zhihua

Three Rounds of Financing

"21st Century": Given that the idea of a public listing was proposed back in 2005, why did it take so long to proceed, and why was Hong Kong chosen as the listing site?

Xu Zhihua: Qian Jia could be seen as both a financial investor and a financial advisor to the company. They proposed a listing idea in 2005, but it wasn’t until January 2007 that the investment was finally implemented. The delay was due to an agreement made with Qian Jia stipulating that the deal would only be finalized after the company’s 2006 financial statements were released and funds were secured.

The introduction of Sequoia Investment marked the beginning of the company's serious efforts towards going public. As a U.S.-based private equity fund, Sequoia not only provided access to more international resources but also brought additional funding to support the company’s growth. While the idea of a public listing was early, the preparation took longer. Initially, the company planned to go public in 2008, but market conditions forced a postponement.

In choosing the listing location, the company considered several factors: its aim is to establish itself as an international brand with a global presence. Hong Kong, being a Chinese-speaking market with close proximity to its primary customer base, offers ease of communication and has strong market influence. Thus, Hong Kong was selected as the listing venue.

"21st Century": How did Peak Sports decide on the three rounds of financing?

Xu Zhihua: Qian Jia’s investment was the company’s first round of financing. The second round began in 2007, with Sequoia Capital as the earliest investor, followed by others like Shenzhen Innovation Investment. When the company initially planned to go public in 2008, it also brought on a group of small shareholders, including Creative Capital. An agreement was signed with these shareholders, allowing them an exit mechanism if the company failed to list by April 2009.

Due to market conditions, the listing was delayed until this year. The third round of financing in April this year aimed partly to cover withdrawal funds from the second round and partly to attract strategic investors who could bring added value to the company.

In this third round, the company introduced CCB International and Legend Investment. Both CCB International and Legend Investment expressed interest in early 2008, and an agreement was eventually reached.

CCB serves as the company’s primary bank and is expected to assist with credit and financing in the future. Legend Investment was selected because Liu Chuanzhi, its founder, is a renowned entrepreneur, and Legend’s brand and influence can positively impact the company’s branding and business development.

Of course, all investments seek substantial returns. With a three-year compound annual growth rate of 80%, Peak Sports’ high growth potential and promising future in the sports brand sector make it an attractive investment opportunity.

30%-40% Growth Rate

"21st Century": Regarding fundraising, 361 Degrees allocates 38.9% of its funds for promotion and sponsorship, whereas Peak Sports uses 48.3% for advertising and marketing. Is this excessive reliance on marketing at the expense of R&D?

Xu Zhihua:表面上看，公司募集资金的大部分用于广告和营销，而非直接支持主营业务的发展。但实际上，近20%的资金将用于产品研发和生产扩张。这是其中之一。此外，经过二十多年的发展，公司在产品质量和生产能力方面积累了相当丰富的经验。另外，公司自身仅负责约40%的鞋类生产和10%的服装生产，其余部分均外包。可以说，公司在产品质量和生产方面已经非常成熟，这正是公司的优势所在。

另一方面，对于许多中国企业来说，品牌和渠道往往是发展的短板，这也是公司目前希望加强的领域。通过投资来巩固品牌影响力并扩大销售渠道，其目的正是为了促进公司产品的销售。从某种意义上讲，这部分投入也是在支持主营业务的发展。在确保质量和生产的同时，提升品牌和拓展渠道是当务之急。

"21st Century": What is Peak Sports' core competitive edge? How does it plan to achieve high growth targets?

Xu Zhihua: Our future strategy is to become a professional sports brand. By promoting professional sports experiences to the public, we aim to offer more cost-effective products. We have had a long-term partnership with the NBA, where NBA players have worn our shoes during competitions, confirming the quality of our products. From 2006 to 2009, the company's three-year compound annual sales growth rate was 80%. This is closely related to brand promotion and channel expansion. In the future, we will continue to focus on these areas. However, in the long run, our compound growth rate cannot always remain at 80%, but within five years, we still aim for a 30%-40% growth rate.

Expanding the product line will certainly be part of our strategy. In the future, it will also involve tennis, football, and running sports.

Based on international experience, a single-brand and single-style approach can lead to success. In the short term, the company's main effort will still be to enhance the brand of Peak. Once the company reaches a certain profit level, it may consider multi-brand development through mergers and acquisitions. The company's strategy is to internationalize resource allocation, potentially involving international and domestic acquisitions, though there are no specific plans at this stage.

"21st Century": When asked about increasing the gross profit margin to 40% within two years, compared to 32.5% in 2008 and 38.2% in the first half of this year, isn't this plan overly ambitious?

Xu Zhihua: It seems challenging to significantly raise gross margins without significant fluctuations in raw material prices. However, the company's gross margin in the first half of this year reached 38.2%, a 6-percentage-point increase from last year. Therefore, reaching 40% within two years does not seem unattainable.

The company's strategy is to provide more high-margin products, such as NBA-branded basketball shoes, which will increase the overall gross profit margin. Additionally, the company plans to raise the distributor pricing of its products, but market prices will remain unchanged. We will raise distributor prices while providing them with more support to help boost sales, ensuring their overall profitability.

Store Expansion Plan

"21st Century": How is the company planning to expand its store network in the next two years? Will it continue to grant open retail rights to distributors? How does the company view the consumer market and industry outlook for Chinese sports brands in the coming years?

Xu Zhihua: It is estimated that around 1,000 new stores will be opened annually over the next two years. We are granting retail rights to distributors to give them more flexibility. Distributors can manage their own channels, which helps us to better control our inventory levels.

The consumer market for sports brands in China is vast, and we expect rapid growth in the future. The sports brand industry is undoubtedly a sunrise industry. However, competition among high-quality brands will intensify as the market matures. From the Spring and Autumn period to the Warring States era, the landscape of single-product brands has shifted, and the future will see even fiercer competition among premium brands.