Li & Fung slides another 2.6pc
Shares in export trader Li & Fung continued to fall yesterday even after the group disputed a UBS research report over accounting policies.
The stock was the biggest loser among the Hang Seng Index constituent stocks yesterday, slipping 44 HK cents, or 2.64 per cent, to HK$16.20, against a 0.94 per cent gain in the index to 23,118.07.
The stock has chalked up a 7.2 per cent loss since UBS issued a report on Wednesday slashing its profit forecasts for the next three years and its target share price to HK$9 from HK$16.50. UBS said Li & Fung's recent decision to adopt a new accounting policy, or the so-called HKFRS 3 (revised), 'might not fully reflect the profitability of operations' and that it 'may distort a declining margin trend'.
In a rare move disputing analysts' views, Li & Fung said 'these statements are misleading' and that the new rule was mandatory for all companies.
Li & Fung's group president and chief executive Bruce Rockowitz said writers of the report, UBS analysts Spencer Leung and Erica Poon Werkun, e-mailed him 'a couple of questions' and turned down his offer to meet for discussions.
He was not aware of the contents of the report and was surprised following its publication.
'Analysts are free to come up with their thinking about us, but they should use facts,' Rockowitz told the South China Morning Post yesterday. 'Typically analysts will check with us before making a report. Meeting won't hurt.'
A UBS spokesman declined to comment.
The UBS report cut its forecasts of Li & Fung's earnings by 33 per cent to HK$4.1 billion this year, by 36 per cent to HK$4.59 billion next year and by 25 per cent to HK$6.03 billion in 2013 because of 'a significant increase in operating expenses'. Last year's earnings amounted to HK$4.27 billion.
UBS forecast that the newly acquired logistics service provider, Integrated Distribution Services Group, would add HK$4 billion in operating expenses to Li & Fung's account based on IDS' HK$1.87 billion operating expenses in the first half of last year. It said Li & Fung's sourcing contract with the world's largest retailer, Wal-Mart Stores, would 'put significant pressure on operating expenses in the years ahead'.
Rockowitz disputed that profitability would be hurt by higher operating expenses. He said operating expenses would inevitably be heavier in the first year of its three-year plan to 2013 as it aimed to double its core operating profit to US$1.5 billion by 2013 from US$725 million last year.
AMTD Financial Planning general manager Kenny Tang Sing-hing, who is among a minority of analysts recommending buying Li & Fung shares, said Li & Fung's growth hinged on its acquisition strategies and expansion across the border.
'If it relies on organic growth and has fewer acquisitions, it raises the question of how it will meet its three-year target,' he said. Tang, who had a target price of HK$20 on the stock, was optimistic about extra revenue from Wal-Mart and potential growth from IDS.