HSBC downgrades Nike on coronavirus fears

HSBC (HSBC) downgraded Nike (NKE) from Buy to Hold due to the potential impact of the coronavirus.

“We see a somewhat stretched valuation, mainland China profit risk and FX headwinds as limiting the upside,” said a recent HSBC report about the state of the sporting goods sector, led by analyst Erwan Rambourg.

“We note that in the short term, [sporting goods] companies in particular face headwinds from the coronavirus outbreak on two fronts given. A significant portion of sales and profits come from mainland China and Asia, and there is a risk that part of the supply chain could be disrupted due to the challenges in mainland China right now,” the report noted. 

People wearing a protective facemask to protect against the COVID-19 coronavirus walk past an Apple store and a Nike shop outside of a nearly empty shopping mall, minutes after rush hour, in Beijing on February 24, 2020. (Photo by NICOLAS ASFOURI / AFP) (Photo by NICOLAS ASFOURI/AFP via Getty Images)

Rambourg told Yahoo Finance that the sales impact from the coronavirus is easier to factor in than supply chain disruptions due to things like online sales orders not being fulfilled on time or in full.

“I think the sales part of the equation is clearly going to hurt; the supply chain of the equation is more of a question mark. It’s very difficult for us to gauge how much disruption there will be at the supply level, working with what we know, which is not much. We’ve taken the view that the sales disruption will be a lot more significant than the supply part of the action,” he said.

On February 4, Nike CEO John Donahoe said in a statement that the company, “is prioritizing the health and safety of our teammates and partners, in cooperation with local authorities.” At that time, Nike closed about half of its Nike-owned stores.  

Greater China is a vital part of Nike’s global sales strategy. The Swoosh brand’s international business in the region grew 23% in Q2.

HSBC, however, told Yahoo Finance that Nike has done a good job in diversifying its supply chain when it comes to footwear. 

HONG KONG, CHINA - 2020/01/31: Multinational sport clothing brands Adidas, Puma and Nike logos seen at a store in Hong Kong. (Photo by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)

According to the investment bank, Nike’s manufacturing in mainland China has decreased from 34% in 2010 to 26% of its total footwear production in 2018, and nearly half of Nike’s apparel is now produced outside of the 2010 top three markets: China, China, Vietnam and Indonesia.

HSBC’s new price target for the Swoosh brand is $112, up from $95. Overall, HSBC believes that Nike and the Sporting Goods sector are good investments. 

“Within the industry industry, health is the new wealth for young people,” Rambourg said. “Fundamentally, this is a good sector to be in for a few reasons—one essentially that it’s driven by youth and consumers who are aspiring to live healthier lives. There’s a lot of evidence the younger generation is smoking less, drinking less, exercising more, and, basically, flocking to these brands, and there’s a lot of innovation,” he said.

Reggie Wade is a writer for Yahoo Finance. Follow him on Twitter at @ReggieWade.

Read more:

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and reddit.