Li & Fung Slumps in Hong Kong After Profit Misses Estimates

Li & Fung Ltd., the biggest supplier to retailers from Wal-Mart Stores Inc. to Esprit Holdings Ltd., plunged by the most in a year in Hong Kong trading after 2010 profit missed analyst estimates.

Li & Fung declined 9.1 percent to HK$39.05, the most since March 25 last year, while the benchmark Hang Seng Index gained 1 percent. The stock has gained 4.7 percent in the past year, lagging behind the index’s 11.5 percent increase.

The outsourcer yesterday reported net income rose 27 percent to HK$4.28 billion ($549 million) last year, missing all nine analyst estimates in a Bloomberg survey. The average forecast was for HK$5.03 billion profit. Li & Fung may buy logistics companies as it seeks to more than double operating profit at its main business to $1.5 billion by 2013.

Analysts may have “overestimated the contribution” of acquisitions and outsourcing deals made last year, said Matthew Marsden, a Hong Kong-based consumer analyst at Samsung Securities Co., who downgraded Li & Fung. “Earnings downgrades should lead to a period of underperformance for the shares,” he said, lowering the stock’s rating to “sell” from “hold.”

Outsourcing Deals

The Hong Kong-based company will continue to make acquisitions this year, Group Managing Director William Fung said yesterday. Li & Fung will is considering companies in the logistics as well as the health and beauty industries, President Bruce Rockowitz said.

“There are opportunities everywhere,” Rockowitz said in a phone interview late yesterday. “We have businesses all over Asia, the U.S. and Europe. The connectivity between all these different areas is part of our logistics business,” which is expanding, he said.

The supplier of Inditex SA’s Zara and Marks & Spencer Plc completed 16 purchases and “a number” of outsourcing and licensing deals last year, some of which weren’t announced, Rockowitz said at a briefing yesterday. Announced deals last year were worth at least $1.24 billion, according to data compiled by Bloomberg.

The outsourcer, founded as a porcelain and silk trader in southern China in 1906 near the end of the Qing dynasty, also signed a supply agreement with Wal-Mart last year. The deal may contribute $2 billion in revenue this year, Rockowitz said today.

Wal-Mart Deal

“We don’t believe the market will give credit to the company for the full 2013 target of $1.5 billion,” said Aaron Fischer, a Hong Kong-based analyst for CLSA Asia-Pacific Markets. “It seems very likely that 2011 consensus earnings will be reduced materially, which will cause the stock to be down.”

Sales in 2010 rose 19 percent to HK$124 billion ($16 billion), missing the $20 billion target Li & Fung set for itself before the financial crisis.

The Wal-Mart deal has been “slower to ramp up than expected,” Fischer, Huei Suen Ng and Mariana Kou said in a note to clients dated March 21.

Supplying to Wal-Mart, the world’s biggest company by sales, is a high-volume, low-margin business, Rockowitz said.

Rockowitz said Li & Fung still has about $1 billion in its acquisition fund. He’s also looking at opportunities to expand the company’s onshore business, which provides services including designing and importing goods for clients such as U.S. retailers Target Corp. and Kohl’s Corp.

Rising Prices

Contribution to operating profit from the logistics business is expected to reach $100 million in three years, accounting for about 7 percent of the targeted operating profit of the company’s main businesses. Li & Fung bought out Integrated Distribution Services Group Ltd. last year to gain a network in China and other Asian nations.

The purchase of Integrated Distribution Services was its biggest in at least the past decade, according to data compiled by Bloomberg.

The supplier will also benefit from rising prices, Rockowitz said. Consumer-goods factories worldwide may raise prices as much as 30 percent this year because of higher labor and material costs, he said.

Higher prices will be passed on to the company’s customers, he said. Price increases “won’t just happen this year, they will probably continuously increase over the next three years, based on what’s happening in China, based on commodities prices,” Rockowitz said.

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