Downturn erodes Li & Fung earnings
Global trading company Li & Fung says continuing gloom in the global economy dented its core earnings in the first half of the year.
Nevertheless, the company said its net profit jumped 33 per cent - buoyed by a writedown of acquisition costs.
The company plans to make more acquisitions by the end of the year to achieve its three-year target of US$1.5 billion in core operating profit by 2013, said William Fung Kwok-lun, the chairman of Li & Fung, yesterday.
He said the company could finance acquisitions of up to US$1 billion at present, given that it has US$300 million cash on hand.
The trading company for global consumer brands such as Procter & Gamble and Kimberly-Clark reported US$312 million in net profit in the first six months to June, up from US$236 million a year earlier, boosted by a writedown on the costs of previous acquisitions.
The writedown came after some of the acquisitions failed to generate as much income as expected. When it acquires a company, Li & Fung pays a down payment of one third of the consideration, and the remainder of the price is subject to earnings reaching a certain level.
Core operating profit dipped 22 per cent year-on-year to US$221 million on a slower turnaround in its trading business in the US, rising sourcing prices on the mainland and the set-up costs of its trading business in Asia.
Dividends per share were slashed 21 per cent to 15 HK cents to reflect the drop in core earnings.
'We have yet to see the trough [of the economy],' said Fung. 'There are a lot of acquisitions in the pipeline with very attractive prices.'
The company is pinning its hopes on a turnaround in the US economy after the presidential election later this year.
Acquisitions will begin to pay off next year and should help the firm meet its three-year target, said Bruce Rockowitz, chief executive of Li & Fung. 'We are working on a strong pipeline of acquisitions,' he said.
Yesterday, the company closed a multimillion-US dollar outsourcing deal with Target Australia, a mid-market department store for apparel and homewares.
Rockowitz added that the Asia market, which accounts for 12.6 per cent of the company's total sales, would be the earnings driver for the company. A showroom for apparel products would be established in Shanghai by the end of the year and he expected sales from fashion to top US$1 billion in Asia.
'Weak economic data from the US could potentially hamper the pace of recovery in consumer demand, which could lead to even more conservative order decisions for the second half,' a report by Morgan Stanley said.
Though the outlook in Europe remains grim, the securities firm thought Li & Fung could weather the storm relatively better than its peers as most of its business is in Britain and Germany.
Li & Fung sales from the US rose 11.3 per cent to US$5.7 billion, while those from Europe fell 13 per cent to US$ 1.7 billion. Sales from China were up 5.5 per cent to US$555 million.
Shares in Li & Fung rose 3.1 per cent to HK$15.98 yesterday.