Peak Sports Listed: Open 1,000 Stores Next Year

Peak Sports plans to list on the Hong Kong Stock Exchange on September 29. With an issue price of HK$4.1 per share, the company's IPO is projected to raise around HK$1.7 billion, exceeding the initial estimate of HK$1.5 billion. Excluding the over-allotment option, Peak’s total share capital after listing will be 2.09 billion shares. The company’s total market cap is expected to reach HK$8.6 billion. The Xu Jingnan family owns 61% of Peak's equity, making their wealth exceed HK$5.2 billion.

Peak Sports CEO Xu Zhihua

Three Rounds of Financing

"21st Century": Given that Qian Jia proposed the listing proposal back in 2005, why did it take so long to finalize this step? Why did the company choose Hong Kong as the listing venue?

Xu Zhihua: Qian Jia can be seen as both a financial investor and a strategic advisor. They proposed the idea of going public in 2005, but we didn’t act on it until January 2007. The delay was due to an agreement we made with Qian Jia to wait until after the company’s 2006 financial results were released. The introduction of Sequoia Investment marked the beginning of our serious preparations for an IPO. As a U.S.-based private equity fund, Sequoia not only brought us access to international resources but also provided additional funding for our business growth. Although the idea of going public was early, the preparation took longer. Initially, we planned to list in 2008, but market conditions forced us to postpone it.

The choice of listing location was carefully considered. Our goal is to establish ourselves as an international brand, and we wanted to attract a global audience and diversify our shareholder base. Hong Kong, being close to our primary market and speaking the same language, seemed ideal. Additionally, the Hong Kong Stock Exchange has strong credibility, which made Hong Kong the right choice.

"21st Century": How did Peak select its three rounds of financing?

Xu Zhihua: Qian Jia's investment was our first round of financing. The second round began in 2007, with Redwood as the earliest investor. Later, we brought in partners like Shenzhen Innovation Investment. When we initially planned to go public in 2008, we also brought in smaller investors like Creative Capital. There was an agreement that if we failed to list by the end of April 2009, they would have an exit mechanism providing returns above their investment.

Due to market conditions, the listing was delayed until this year. The third round of financing in April was partly to cover the withdrawal funds from the second round and also to assess potential investors who could add value to the company.

In the third round, we brought in CCB International and Legend Investment. In November 2008, they expressed interest, and we eventually reached agreements. CCB is our main banking partner and is expected to assist us with credit and financing. Choosing Legend Investment was strategic; Liu Chuanzhi, the founder of Legend, is a respected entrepreneur, and his brand carries significant weight. His involvement could enhance our brand visibility and business development.

Of course, investors look for good returns. Peak’s three-year compound annual growth rate in sales has been 80%, and the promising future of the sports brand industry is something investors value highly.

30%-40% Growth Rate

"21st Century": In terms of fundraising, 361 Degrees uses 38.9% of its funds for promotions and sponsorships, while Peak allocates 48.3% to advertising and marketing. Is this an over-reliance on marketing at the expense of product development?

Xu Zhihua: While it might seem like most of our fundraising goes toward marketing, nearly 20% is actually dedicated to product R&D and production expansion. This is one aspect. Moreover, after over 20 years of development, we have built solid expertise in product quality and productivity. Additionally, only 40% of footwear and 10% of apparel are produced in-house; the rest are outsourced. This shows that we are well-established in terms of product quality and production capabilities.

On another note, for many Chinese companies, brand building and channel expansion are critical areas of focus. These are areas where we aim to strengthen our position. By investing in brand influence and channel expansion, we hope to boost product sales. From a practical standpoint, this investment supports the core business. Ensuring quality and production efficiency while enhancing branding and expanding channels remains a priority.

"21st Century": What is Peak’s core competitive edge, and how do you plan to achieve high growth targets?

Xu Zhihua: Our strategy moving forward is to become a professional sports brand. Through partnerships with professional sports leagues, we aim to enhance the public's awareness of sports professionalism and offer more affordable yet high-quality products. Our long-standing collaboration with the NBA is a testament to our product quality. From 2006 to 2009, our compound annual growth rate in sales was 80%, largely due to effective brand promotion and channel expansion. In the future, we will continue to focus on these areas. However, sustaining an 80% growth rate is unrealistic in the long term. Over the next five years, we aim for a more realistic growth rate of 30%-40%.

We will definitely expand our product lines to include tennis, football, and running gear. Looking at international experiences, single-branded sports brands have found success. In the short term, our primary focus will remain on strengthening the Peak brand. Once profitability reaches a certain threshold, we may consider multi-brand strategies through acquisitions, though this is not currently part of our plan. Our broader strategy involves internationalizing resource allocation and exploring both domestic and international acquisitions.

"21st Century": Some suggest that increasing gross profit margins to 40% within two years is ambitious, given that margins were 32.5% in 2008 and 38.2% in the first half of this year. Does this plan seem overly optimistic?

Xu Zhihua: It might seem challenging to increase margins without significant fluctuations in raw material costs. However, our gross margin already reached 38.2% in the first half of this year, a 6-percentage-point increase from last year. Reaching 40% in two years doesn't seem impossible. Our strategy includes offering products with higher gross margins, such as NBA signature basketball shoes, which will contribute to raising the overall margin. Additionally, we plan to increase the wholesale prices for distributors, but the retail prices will remain unchanged. We’ll also provide more support to our distributors to help them grow sales and maintain overall profitability.

Store Expansion Plans

"21st Century": How does Peak plan to expand its store network over the next two years? Will you maintain open retail rights for distributors? How do you view the future of the Chinese sports brand market?

Xu Zhihua: We expect to open around 1,000 new stores annually in the next two years. We're granting retail rights to distributors because it provides them with more flexibility. Distributors can manage their own channels, which helps us control inventory more effectively. The sports brand market in China is vast and will continue to grow rapidly. The sports industry is undoubtedly a sunrise sector. However, competition among premium brands is becoming increasingly fierce, much like the Warring States period following the Spring and Autumn era. Despite this, the consumer market remains promising, and we believe there will be significant opportunities ahead.