Shares reach 8-month high with 10% jump, rating raised to 'buy'

HONG KONG: Li & Fung Ltd surged the most in eight months in Hong Kong trading after signing a deal with Walmart Stores Inc that strengthens its position as the world's largest supplier of toys, clothes and furniture to retailers.

Li & Fung jumped 10 percent Friday, the most since May 27, to close at HK$35.60, making it the top gainer on the Hang Seng Index, which slid 1.15 percent.

The arrangement, signed on Thursday, may generate an additional $2 billion of sales in the first year, helping Li & Fung meet its $20 billion revenue target for 2010. The company's stock, whose 53 percent gain over the past six months makes it the second-best performer on Hong Kong's benchmark index, was raised to "buy" at Deutsche Bank AG on Friday.

"Walmart could double Li & Fung's business," Joshua Lu and Fiona Lau, Hong Kong-based analysts for Goldman Sachs Group Inc, said in a note to clients on Friday. "We think this partnership offers the strongest proof to date that even at Li & Fung's current scale, growth does not need to slow down."

"They've reached a level of scale in the universe of the sourcing world that it's become the automatic go-to for retailers," Matthew Marsden, who heads consumer research at Samsung Securities said, adding that "Li & Fung stands a very good chance of hitting the $20 billion sales target by the end of this year."

The arrangement comes within eight days of remarks by both Victor and William Fung, the billionaire brothers who are the outsourcer's biggest shareholders, suggesting global demand for consumer goods will be slow to return to the level that existed before the financial crisis. Victor Fung is company chairman, while William Fung is managing director.

Li & Fung, founded in China in 1906 near the end of the Qing dynasty, reported 2008 sales of HK$110.7 billion ($14.2 billion), double the number three years previously, and a profit of HK$2.4 billion. The company, which makes more than 60 percent of its sales in the US, reports 2009 earnings in March.

"The Walmart deal will be able to offer sales and earnings growth drivers in the next two to three years," said Hong Kong-based Deutsche analyst Anne Ling, who raised her share-price forecast to HK$36.85 from HK$32.05.

"We are also more positive on cost-saving exercises as the new account will absorb some of the existing staff," she added.

Goldman Sachs raised its share-price estimate on Li & Fung to HK$43.30 from HK$39.50. The stock is on Goldman Sachs' Asia Pacific "conviction buy" list.

Li & Fung's profit in the first half of last year rose 13 percent to HK$1.4 billion after cutting operating costs.

Rockowitz in December said the company is focusing on growth and has "moved on from cost cutting."

In February, Li & Fung agreed to buy the sourcing business of Liz Claiborne Inc, which had a volume of $1.3 billion in the 2007 fiscal year and whose brands include Lucky Brand, Juicy Couture and Kate Spade.

Net income for Li & Fung in the first six months of last year rose 13 percent to HK$1.4 billion on sales of HK$46.3 billion.

Bloomberg News

(HK Edition 01/30/2010 page2)