There is also the deal with Levi Strauss, which the company hopes will double earnings by next year.

In addition, Li & Fung shares have matched the company's good prospects. Over the past 12 months, the counter has climbed 45.9 per cent, compared with a gain of 4.1 per cent in the Hang Seng Index.

And for analysts this is precisely the point. Li & Fung now trades at 26 times forward earnings, compared with 15.8 times for the index.

Thomson First Call found a consensus 'hold' recommendation for the stock.

'I am holding on for the time being,' said Patrick Choo, a director at Kingsway Fund Management.

He said the first-half results were a bit above expectations. Brokers estimate full-year net profit will reach HK$1.2 billion, or 18.21 per cent higher than last year.

While the outlook for Li & Fung may look bright, most of the optimism may already be priced into the stock.

'It's a bit expensive,' Mr Choo said. 'But the old lady may still have steam left in her yet, with the Levi Signature deal just around the corner.'

On Wednesday, Li & Fung announced a proposed licensing arrangement with Levi Strauss to design, manufacture and market men's, women's, boys' and girls' tops under the Levi Strauss Signature label in the United States from autumn next year. The clothes will be sold exclusively to mass market retailer Wal-Mart.

Analysts were generally positive on the partnership.

'Our take on the deal is that Li & Fung gets most of what it wants,' said Mark Rosenfeld and David Wong of Citigroup Smith Barney.

Under the arrangement, Li & Fung will produce only what Wal-Mart buys, avoiding potential inventory pile-ups.

The Citigroup analysts estimated full-year revenue contribution from the Levi Strauss deal would start from the fourth quarter of next year at US$100 million, rising to $300 million in 2005. They upgraded their rating on Li & Fung from 'in-line' to 'outperform'.

ING Financial Markets analyst Amelia Mehta expected the Levi Strauss deal to increase Li & Fung's bottom line by 2.1 per cent next year and 6.2 per cent in 2005. She has a 'buy' rating on the stock with a price target of HK$13.

'The deal would help lift the company's margins,' she said.

The licensing business is expected to generate much higher margins compared with about 2 per cent for its core sourcing operations, given the greater involvement in the product development process. This would shore up the company's falling margins.

To head off margin pressure, Li & Fung has invested in other value-added business such as product development capabilities, made several acquisitions and sought out new customers.

But margin pressure is not the only issue. Some analysts worry Li & Fung's niche as a sourcing agent will be eroded over time.

'With gradual trade liberalisation, the niche that Li & Fung occupies may shrink in the medium term as retailers begin to do sourcing on their own. For the time being it is fine,' Mr Choo said.

Some analysts said smaller rival Linmark Group would be a better buy, given its less demanding valuation. Brokers polled by Thomson put a consensus 'buy' rating on Linmark, which trades at 16 times forward earnings.

But Li & Fung has its core supporters. 'Linmark has had a good run too and is indeed cheaper but it is not very well followed by the investment community. In this business, scale is quite important and I prefer to stick with the bigger companies,' Mr Choo said.