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Chinese Companies Cut Ties with Houston Rockets: Can This Have Implications on Nike?

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The feud between China and the NBA has started to heat up after the NBA commissioner announced on Tuesday that he would not be regulating what his general managers or players say. The friction between the second largest economy and the NBA started after, Daryl Morey, General Manager of the Houston Rockets tweeted out his support for the Hong Kong anti-government protests stating “Fight for freedom, stand with Hong Kong.” The tweet was quickly deleted and followed up by a statement that tried to diffuse the situation. Morey stated that he apologized for his previous comment and that his opinion is his own and did not represent the Rockets or NBA.

The NBA initially responded to the Houston GM’s actions by releasing an apologetic statement on Sunday that was heavily scrutinized by politicians. The move brought on significant bipartisan criticism as legislators voiced their disapproval of the NBA’s seemingly weak response. Many politicians accused the NBA of putting their financial interests above freedom of speech.

To make matters worse for the NBA, China’s largest online shopping sites owned by giants Alibaba (BABA - Free Report) and (JD - Free Report) appear to have removed items related to the Houston Rockets. Searches in Chinese for “Houston Rockets” and “Rockets” on Alibaba-owned Taobao and Tmall and its rival reportedly yielded no results. Joseph Tsai who is an Alibaba cofounder and is the current owner of the NBA’s Brooklyn Nets also chimed in with his disapproval of Daryl Morey’s comments. The Brooklyn Nets owner stated that “the hurt that this incident has caused will take a long time to repair.”

In addition, Chinese tech giant Tencent (TCEHY - Free Report) , which owns the digital rights to NBA games in China, said it would stop showing Rockets matches and news related to the team. The Chinese tech giant has been the digital media partner of the NBA since 2009 and recently just signed an extension of their deal to the 2024-2025 season that is reportedly worth $1.5 billion.

Can This Hurt Nike?

The quarrel between the NBA and China has some investors worried about the possible implications it may bring onto Nike (NKE - Free Report) . The shoemaking icon has ties to both the NBA and China and can potentially get caught in the cross fire.

Greater China, which is a term generally used to refer to mainland China, Hong Kong, Macao and Taiwan, has been Nike’s fastest-growing region for over a year now. The Greater China segment led the pack with strong sales and helped the Nike brand reach 7% growth in its first fiscal quarter of 2020. Greater China reported 22% growth in sales in Q1 easily outpacing the other segments.

Nike is the exclusive on-court apparel provider for the NBA. It signed the eight-year deal in the 2017-18 season, taking over from Adidas (ADDYY - Free Report) . Some investors are concerned that the brewing quarrel between the NBA and China can cause Chinese consumers to boycott Nike products.

This of course would significantly hinder Nike’s financials and growth trajectories. However, some analysts don’t think this will come back to bite Nike. Sam Poser of the Susquehanna Financial Group stated that “Chinese consumers perceive Nike as a global athletic brand, not associated with any country or part of the world.” However, if China decides to ramp up their censorship of the league and its likeliness, Nike may get caught in the middle as jersey, shoe, and other Nike branded merchandise sales would dip lower.

Bottom Line

The NBA and China’s feud is doing anything but help bridge the divide between the world’s two largest economies. Nike, as the official on-court apparel provider for the NBA, may have a lot to lose if the relationship between the NBA and China were to suddenly come to an end. China is a huge growth region for Nike as country represents over 300 million basketball players and roughly 500 million NBA fans. Nike shares are up 23.7% YTD and the stock sports a Zacks Rank #2 (Buy).

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