Why Did One Of China's Biggest Consumer Names Sell-Off 20% Thursday?

Sportswear maker Li Ning Co Ltd LNGGY LNGGF became the latest casualty of a downturn in China and Hong Kong, after the company announced Wednesday night it had missed sales expectations in the third quarter. Shares in Hong Kong trading plunged more than 20% on the news.

Li Ning said in a stock exchange announcement that revenue for all its sales channels except for its physical retail stores had increased by just a single digit percentage point in the January-to-September period. For retail sales, the company posted an increase of around 20% or so, it said.

Li Ning said there had been a decline of around 2.5% in point-of-sale distributors for its products throughout China in the period as well as a similar decline in same store sales. Management said on a conference call with analysts that they now expect the company to post a revenue increase in the low single digits and cut its net margin forecast by nearly half to 0.9%.

Separately, investment bank Nomura lowered its price target for Li Ning to HK$43.7 from HK$64.10, pointing to the fact that inventory stands at a 5-month high now as one of the main reasons for the revision.

Nomura said that it expects Li Ning’s profit growth to slow and cut its forecast P/E multiple for Li Ning to 25x from 33x previously. Nomura retained a buy rating on the stock, which is currently trading around half of the bank’s target price after Thursday’s big sell-off.

Why It Matters: Li Ning is considered by investors as one proxy for the overall health of the Chinese retail market. As online retailers JD.com Inc JD and Alibaba Group Holding Limited BABA go head-to-head to battle for Single’s Day sales, with both offering unprecedented discounts to shoppers to stimulate demand, retail sales and margins are currently in focus.

The sharp sell-off in Li Ning shares Thursday shows how sensitive to bearish sales news coming out of the sector traders are right now.