Hongshan and Li-Ning Go Abroad Together, Sending Two Market Signals

By Muxin Xu

On October 22, Li-Ning announced that it would form a joint venture with Hongshan. The announcement contained the following key details:

1. The joint venture aims to operate Li-Ning's business in regions outside mainland China.

2. Li-Ning Company and Li-Ning himself will collectively hold 55% of the new company's shares, while Hongshan will hold 45%.

3. The rationale for forming the joint venture is that Li-Ning needs a team with greater overseas resources and experience to handle its international expansion — and that team is Hongshan.

In China, joint ventures between VC firms and industry giants are relatively uncommon. After all, the typical VC model involves minority equity investments aimed at outsized returns, and most VC firms simply don't have the capital to support such structures. Previous precedents have mostly taken the form of LP investments: for instance, Nestlé was the cornerstone investor in Tiantu Capital's first USD fund; L'Oréal also made headlines when it announced an investment in Cathay Capital's innovation fund. For corporate players, using VC firms as their eyes and ears in China makes it easier to find strategic investment targets in a relatively unfamiliar environment.

Yet China's capital markets have changed dramatically. From global USD LPs investing in China, to an increasing number of domestic brands trying to go global; from dwindling minority equity opportunities, to buyout transactions being discussed repeatedly. There's no doubt that financial investors must move closer to industry.

This joint venture between Hongshan and Li-Ning represents the convergence of two of the most prominent trends in today's market.

Not Hongshan's First Experiment

This isn't the first time Hongshan has partnered with an industry player to form a joint venture.

In 2020, Starbucks China and Hongshan announced a strategic partnership to "collaborate on next-generation food and retail technology, jointly accelerating the pace of digital innovation at Starbucks China." In short, Starbucks wanted to improve its digital capabilities, and as the biggest winner of the previous internet wave, Hongshan's formidable network of internet companies could provide abundant resources and support.

For Li-Ning, beyond the experience of partnering with industry players, what's more crucial is undoubtedly Hongshan's overseas consumer investment portfolio — including star companies like SHEIN, Amer Sports, Aukey, Aventon, and Miracle Miles.

Beyond its investment activities, Hongshan has also established offices in Singapore, London, and other locations — "physical nodes" for companies going global.

In fact, since 2020, Li-Ning's Viva China Holdings has successively acquired Hong Kong casual wear brand Bossini, Italian luxury brand Amedeo Testoni, and the century-old British footwear brand Clarks. Clearly, Li-Ning has also been expanding into overseas markets and non-sports categories through acquisitions.

Of course, Li-Ning has stumbled in its "buy, buy, buy" strategy before. In 2002, Li-Ning acquired the century-old Italian brand Kappa and managed to operate it successfully for a time. But nine years later, due to overexpansion, Kappa was hit by a wave of store closures, causing Li-Ning's stock price to plummet 60% for the year and ceding its position as China's top sportswear brand to Anta.

Therefore, partnering with Hongshan — which inherently possesses greater international vision and resources — serves as an additional layer of protection.

From Light to Heavy, Who Can Escape?

Forming a joint venture with a listed company looks more like something a PE firm would do. By comparison, PE firms typically have more complete operating teams and more buyout experience. Though in China, this requires a different perspective: in a market where large-scale buyout transactions have yet to emerge, truly experienced PE firms are extremely scarce.

But for a VC firm, the logic for extracting returns from a joint venture is likely quite different.

In July 2023, pharmaceutical giant Pfizer partnered with Flagship Pioneering Ventures, whose core investment strategy is "incubate first, invest later." Under the agreement, both parties would provide $50 million in initial investment, and Pfizer could leverage Flagship's technological resources to jointly explore ten new projects. If any drug successfully reached the market, Flagship and its portfolio companies would be eligible for milestone payments of up to $700 million. In other words, this is a "pre-collaboration" style transaction.

Compared to traditional VC, this resembles a more complex identity combining equity investment, intermediary functions, and elements of controlling acquisitions. But then again, isn't this itself a transformation path for today's primary market?

According to IT Juzi data, Q3 2024 primary market equity investment transaction value reached 224.142 billion yuan — seemingly a significant rebound from Q2's low of 145 billion yuan, inevitably raising the question of whether the venture capital market is recovering.

However, breaking down this data reveals that the Q3 figure was actually driven by several large transactions, including Dalian Xindameng's 60 billion yuan financing, Huawei Yinwang Intelligent's 23 billion yuan financing, and billion-yuan-level rounds for companies like Luhua and NIO. Excluding these transactions, only 19.1 billion yuan in investment was distributed across more than 900 companies.

Money is flowing toward certainty, matched naturally by larger check sizes, bigger players, deeper involvement, and heavier services.

VCs and PE firms know the temperature of the water and have long since entered an urgent phase of transformation. For example, in 2022, Yuanhe Puhua managing partner Tong Chen Datong stated: "A wave of M&A will emerge in China in 2023. Beyond our normal investment activities, our fund is actively building relationships with platforms, companies, and industry leaders." Genesis Capital, known for its consumer investments, established an M&A team last year.

The market is changing. And Hongshan is searching for new answers.

Image source | IC Photo