A customer shops for clothing inside a Wal-Mart store in the US. Li & Fung said its business supplying Wal-Mart will grow and may be profitable as early as this year. Matthew Staver / Bloomberg

Exporter Li & Fung Ltd, pinched by weakening US and European demand, said on Wednesday it has acquired five companies, fuelling a surge in its shares as investors cheered the firm's return to an acquisition strategy that they view as key to its growth.

Li & Fung, which supplies consumer goods such as garments and toys to household names including Wal-Mart Stores Inc, Timberland Co, said it is buying five sourcing and trading firms as it tries to cope with rising raw materials and labor costs on the mainland, its major sourcing destination.

The Hong Kong-based company did not disclose the value of the transactions, but said the acquisitions in the United States, Europe and Thailand would complement its trading and distribution networks, and carried a single-digit price/earnings ratio.

"There have been worries that Li & Fung might not be able to achieve its three-year targets after it announced it would focus on organic growth in the coming years," said Gabriel Chan, an analyst at Credit Suisse.

In May, Li & Fung said it would focus on internal growth over the next three years, but would look for acquisition opportunities in Japan.

Li & Fung, which missed its 2008-2010 profit target, has set an ambitious growth plan for 2011-2013, aiming for a core operating profit of $1.5 billion by 2013. This compares with $725 million in core operating profit it booked last year against a target of $1 billion.

The deals were unveiled after a four-hour analyst briefing, the first of its kind for the company, to clarify its growth strategy. Previously, analysts and investors had complained about a lack of communication with the company and transparency on its accounting methodology.

Investors also took heart from the company's remark on Wednesday that the division that handles sourcing for Wal-Mart Stores Inc will grow and may be profitable as early as this year.

Dow Famulak, president of the company's DSG group, told analysts that the unit is "just getting started" and has an "addressable business" of as much as $100 billion.

The outsourcer signed a supply agreement with the world's biggest retailer last year and has said the deal may contribute $2 billion in revenue in 2011. Li & Fung made 65 percent of its $16 billion in revenue in the US last year.

"Wal-Mart likes to squeeze their suppliers so their margins are very thin," said Alex Au, Hong Kong-based managing director of Richland Capital Management Ltd, which oversees $300 million of assets. "If they give more guidance and information to the investors and show that there is a positive outlook on that part of the business, it will definitely help their shares."

Shares of Li & Fung jumped as much as 11 percent to a session high of HK$16.40 before closing up 5.6 percent at HK$15.58 on heavy turnover of HK$904 million.

Li & Fung executives told the analyst briefing the company planned to expand its sourcing business in fast-growing emerging markets, such as the mainland, South America and Eastern Europe. The company was also banking on higher-margin business such as beauty products for growth.

"We will continue to pursue acquisitions to complement our organic business growth during this new three-year plan, 2011-2013," Vice-Chairman William Fung said in a statement.

Li & Fung aimed for a larger presence in markets such as Turkey, India and China for its beauty business, which included products from cosmetics to clothing, company executives said.

"As far as growth, higher margin businesses are growing the fastest because they are smaller," Chief Executive Bruce Rockowitz told analysts. "There is no doubt that there is opportunity to grow much faster (as the) large business is there."

Li & Fung said rising costs had a limited impact on its key trading business so far.

Bloomberg - Reuters

(HK Edition 06/23/2011 page2)