Company results lower than expected; looks to expand networks

Consumer goods exporter Li & Fung said Thursday that it hopes to double its core operating profit to $1.5 billion by 2013 through expansion of its sourcing networks.

The company, which is a major supplier to retailers such as Wal Mart Stores Ltd and Target Corp, announced its plans on the same day it reported its full-year earnings for 2010.

The company posted a record HK$4.28 billion net profit for the year, lower than the consensus HK$5.03 billion, but a 27 percent increase over the HK$3.37 it reported in 2009.

Li & Fung unveiled its new three-year plan in its earnings statement to the Hong Kong Stock Exchange. It said it aims to achieve core operating profit of $1.5 billion in 2013, 50 percent higher than in the previous three-year plan.

"We expect that the European onshore business will track the development pattern of US onshore business very closely and actively grow via acquisitions during this plan period," it said in the statement.

However, the company's core operating profit for 2010 failed to meet its $1 billion target set in the previous three-year target, instead coming in at $725 million. It also fell short of a $20 billion total sales target for the year by achieving $16 billion instead.

The company attributed the shortfall to the global financial crisis in 2008 and various company bankruptcy cases.

Looking ahead, the exporter also forecast that it could fuel profit based on organic growth and acquisition prospects.

"We can leverage our strengths in organic growth and deal-making capabilities to fuel future business growth," said Li & Fung Group Managing Director William Fung at the company's results briefing. "Though the Japanese earthquake and the Middle East political turmoil may persist for some time, nevertheless it should be resolved within three years so that these unpredictable events should not have a big effect on our three-year plan."

Li & Fung went on a buying spree in 2010 as it made several acquisitions in a bid to diversify its product portfolio. Huge acquisition deals in 2010 included the purchase of Visage and Jimlar Corporation as well as the privatization of its 42 percent-owned logistics affiliate Integrated Distribution Services.

"These acquisition deals in 2010 brought approximately $3.7 billion of annualized turnover to the company in 2010 so that the company will continue to pursue more acquisitions in the coming year," Fung said.

Li & Fung Trading President Bruce Rockowitz added that in addition to the reliance on organic growth and acquisitions, the company will expand its sourcing business on the mainland to propel future profit growth.

"We are targeting middle class consumers as the market penetration of the mainland consumer market is still limited. We are planning to introduce more US and European luxury brands to attract more shopping from mainland consumers," Rockowitz said.

However, equity analysts are rather skeptical about the capability of Li & Fung to realize the business objectives laid down in its new three-year plan.

"The objectives are heavily dependent on the economic recovery pace of the US. And as the Japanese massive earthquake may take a toll on the global economic recovery process, there is a lot of market uncertainty about whether these targets can be realized," said Dickie Wong, a research manager at Kingston Security.

The company's core operating profit rose 42 percent to HK$5.65 billion in 2010 due to organic growth and margin expansion from its onshore businesses. Company revenue grew 19 percent to HK$124.1 billion, reflecting improving market sentiment, it said.

The company declared a final dividend of HK$0.52 per share for a total dividend of HK$0.90 per share for the year, representing a jump of 20 percent.

Li & Fung's share price slipped 0.23 percent to HK$42.95 in Thursday trading ahead of its earnings announcement.

Reuters contributed to this story.

China Daily

(HK Edition 03/25/2011 page3)