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Li & Fung Surges After UBS Upgrades Outsourcer: Hong Kong Mover

Li & Fung Ltd. (494), the world’s largest supplier of clothes and toys to retailers, climbed the most in 17 months in Hong Kong trading after UBS AG upgraded the stock to Neutral from Sell.

Li & Fung advanced as much as 7.8 percent to HK$11.10, headed for the biggest gain since Nov. 28, 2011, before trading at HK$11.04 as of 10:18 a.m. in Hong Kong.

The stock has lost more than 50 percent of its value since January 2011, as a sluggish U.S. economy hurt orders from the outsourcer’s biggest market. Li & Fung in March said it will miss its three-year target of $1.5 billion operating income by 2013, and Standard & Poor’s in April lowered its credit rating.

“We upgrade Li & Fung to Neutral due to a lack of near-term catalysts and lower settlement on previous acquisitions,” UBS analysts led by Spencer Leung wrote in a note to clients.

Morgan Stanley and Macquarie Securities in March upgraded Li & Fung, citing its balance sheet and dividends. The Morgan Stanley analysts said the stock’s “negativity is mostly priced in.”

“Our long-term de-rating thesis remains intact,” the UBS analysts wrote. “The golden decade of China sourcing has passed as the wage advantage diminishes.”

Li & Fung’s “slowdown in acquisitions and the decline in dividends” will probably continue, said the Hong Kong-based analysts, who included Erica Poon Werkun and Siguo Chen.

Li & Fung’s profit last year fell 9.4 percent to $617 million, missing the average of 17 analysts’ estimates compiled by Bloomberg. It was the first profit decline in four years for the company, which traces its beginnings to 1906 when parent Li & Fung Group was founded.

The supplier to Wal-Mart Stores Inc. and Target Corp. (TGT) had $680 million in cash at the end of last year, compared with $426 million in 2011, according to data compiled by Bloomberg.

To contact Bloomberg News staff for this story: Jack Gao in Shanghai at ygao40@bloomberg.net

To contact the editors responsible for this story: Grant Clark at gclark@bloomberg.net; Stephanie Wong at swong139@bloomberg.net

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