Shares of China's best-known local sportswear group, Li Ning Co Ltd, slid 3.8 percent on Thursday after it reported disappointing earnings and warned it could post a full-year loss as inventories weighed and marketing costs rose.

The $19 billion Chinese sporting goods market had been a bright spot for companies such as Nike and Adidas , but slowing economic growth in the country and bloated inventories are taking a toll on bottom lines.

"Li Ning's poor performance has more to do with its own strategic missteps rather than an overall slowdown of the Chinese market," said James Roy, an analyst at China Market Research Group.

"As a brand it is in an awkward position - it's neither premium like Nike or Adidas nor cheap like ANTA or smaller Chinese brands like Xtep."

Li Ning, backed by Singapore sovereign fund GIC and private equity fund TPG Capital, is the latest consumer products company to come under pressure from China's economic slowdown, which has hit demand for everything from home appliances to luxury goods.

"TPG will have to make major changes to Li Ning's brand strategy ahead of the three-year timeline it has set if it wants to get a good return on its investment," Roy added.

Data showing China's factory activity in August shrank at its fastest pace in nine months provided further evidence on Thursday that the world's second-largest economy is struggling to recover.

Shares of Li Ning, whose stock has more than halved in recent months, fell as much as 7 percent to HK$4.12 before closing at HK$4.26 after it posted an 85 percent slide in first-half, and said it may post a loss for 2012. .

That lagged a 1.2 percent gain in the benchmark Hang Seng Index.

"The escalating competition within the Chinese sporting goods industry is fuelling greater intensity amongst sportswear brands competing for distribution channels," chairman Li Ning said at an earnings briefing.

Analysts said Li Ning had tried to approach the higher price level of the big global sports brands but had failed to convince consumers it was worthy of such aspirations.

"We believe Li Ning will aggressively reduce fall/winter 2012 and even 1H 2013 wholesale orders, increase inventory buyback, close non-performing stores and make short-term operational adjustments to pave the way for long-term growth," Bank of America Merrill Lynch wrote in a research note.

"Earnings will be highly uncertain during this transition process in 2012/13."

INVENTORIES WEIGH

Like many other local sportswear groups, Li Ning is cutting back on new store openings after an expansion blitz that followed the 2008 Beijing Olympics.

The company said inventories climbed to 1.14 billion yuan as of end-June, up from 1.13 billion at the end of December and compared with 991.6 million yuan at the end of June 2011, weighing on its growth prospects.

Executive vice-chairman Kim Jin-Goon, who is also a managing director at TPG, told a news briefing that Li Ning would speed up retail inventory clearance, although he did not provide details. Kim said in July it could take 6-12 months for inventories to return to a normal level.

Chief Financial Officer Chong Yik Kay said he expected the gross profit margin for the second half to be similar to that of the first half, when it stood at 44.2 percent, down from 47.3 percent a year earlier.

China International Capital Corp Ltd maintained a "sell" rating on Li Ning and said it saw limited upside to earnings.

"Despite stringent controls and an expensive CBA sponsorship that has yet to kick in, Li Ning's operational leverage is gone along with a decreasing revenue base," it said.