China apparel retail saw a moderate recovery in 1H26. According to NBS, apparel retail sales of large retailers reached RMB643bn during 5M26, up 7.2% YoY and 5.8ppt above headline social retail growth. However, the recovery was highly uneven. Online apparel retail rose 6.2% YoY, while major offline retailers fell 8.7% as legacy channels continued to be restructured. Department-store apparel foot traffic improved, though mainly for mid-to-high-end brands. The mass apparel market spending remains cautious.

Sportswear growth led by outdoor, professional and premium segments

In 1H26, the sportswear sector experienced a broad deceleration, but intra-sector divergence widened sharply. Anta Sports (2020.HK) continued to dominate the sector with revenue of RMB43.5bn, exceeding the combined revenue of Li Ning, Xtep, and 361 Degrees. Its growth was largely led by outdoor and premium brands, including Descente, Kolon Sport, and MAIA ACTIVE, whose revenue jumped 44.2% YoY to RMB10.7bn. This growth was mostly organic rather than network expansion, contributing about two-thirds of incremental revenue.

Functional and outdoor apparel remains China's fastest-growing apparel sub-segment, with a 2019–2024 CAGR of 10.3%. We expect outdoor, professional and premium brands will continue to lead the industry’s growth and mass sportswear faces persistent discount pressure as homogenised competition intensifies.

Other traditional sportswear brands saw modest changes. Core Anta brand grew 4.8% YoY and FILA 6.1% YoY. Li Ning (2331.HK) grew 2.8% YoY. Xtep (1368.HK) was the sole decliner, with revenue down 0.6% YoY to RMB6.8bn. 361 Degrees (1361.HK) shown a balanced growth, with revenue and net profit both up 8.0% YoY, fueled by an 80% YoY growth in overseas retail and a 140% YoY jump in cross-border e-commerce.

Margin Compression across both upstream and downstream as demand weakened

Value-chain pressures were simultaneously high across upstream and downstream players. Upstream, Shenzhou International (2313.HK) revenue fell 5.3% YoY to RMB14.2bn and net profit dropped 40.0% YoY due to operation deleveraging, with GPM down 4.5ppt YoY. Similarly, Yue Yuen Industrial (551.HK) revenue declined 2.2% YoY to US$3.97bn, and net profit fell 57.9% YoY to US$72mn. Both companies cited soft sportswear client orders.

In the downstream, Nike is reported planning to terminate its mainland China online distribution in 2027. Given the high topline contribution from Nike online (around 20%), Topsports (6110.HK) and Pou Sheng (3813.HK) are expected to face revenue shrinkage. We expect brand principals to continue reclaiming online rights, forcing direct-to-consumer (DTC) transitions and store optimization. As a result, upstream order may stay weak into 1H27.

Online kept gaining share, but growth had come with a price

Online channels continue to gain share, but the cost to grow is increasing.  Companies have to invest in driving online traffic. For instance, Cosmo Lady is adopting KOLs to drive GMV growth across key platforms such as Tmall, Douyin, JD and VIP.com. JNBY is also expanding its private-domain BOX+/WeChat mini-mall and added 22 multi-brand stores. 361 Degrees also runs a "1 store, 6 storefronts" model with JD instant delivery. Meanwhile, online channels are also facing new challenges, it is reported that return rate of women’s wear is as high as 60% and the all-in cost is estimated at around RMB16 per return, leaving many players in a "sell more, lose more" loop. This explains why Cosmo Lady (partner model) and ANTA (inventory pooling, AI merchandising) are actively restructuring their online ecosystems.

Our view

We expect a weak recovery in 2H26 and remain cautious on mass-market players with limited pricing power and elevated inventory risk.  Retailers that are heavily exposed to brand principals are facing risk of the brand reclaiming their online distribution rights.

It is noted that consumers are prioritizing experiential comfort and long-term utility over price alone. This favors brands with differentiated value through material innovation, functional design, or cultural narratives. We expect continued polarization, with premium, technical, and member-centric brands outperforming undifferentiated mass players. Channel efficiency and inventory discipline will remain key swing factors for future earnings. Under this transition, we favor Anta for its multi-brand platform and sustainable momentum in the outdoor and premium segments, and JNBY for its member loyalty and stable dividend profile. Anta and JNBY are currently trading at 13.5x/9.1x FY27E P/E. (Amelia Deng)