Li & Fung still bullish in a bearish world
Its business mix of sourcing, distribution and logistics has increased its margins, says the chief who is confident of meeting profit target
Despite trading amid a global slowdown, Li & Fung expects profits and revenue to improve next year. Chief executive officer Bruce Rockowitz said the company's revenue from distribution should rise from US$6 billion this year to US$8 billion or US$9 billion next year.
The distribution business offers the highest profit margin among the company's three businesses, followed by logistics and sourcing, he said. "Our margins have gone up every year because of the mix," he said.
Prior to 2004, all of Li & Fung's business came from sourcing, but now distribution accounts for about 30 per cent and sourcing accounts for about 60 per cent, Rockowitz said.
Sourcing involves obtaining products from factories while distribution delivers the goods to the retailers.
Li & Fung "is repositioning itself as a distributor rather than a sourcing agent. The company is going to leverage its network to expand into the distributor business", said Standard Chartered analyst Charles Yan after attending a company webchat. He predicted that distribution's share of Li & Fung's revenue will increase.
Rockowitz disagreed that Li & Fung was radically reinventing itself as a distributor, saying its business model of owning no factories, retail outlets and inventory remains.
At the webchat, the management repeated its goal of earning US$1.5 billion of operating profit next year.
It is possible Li & Fung's revenue in 2013 will be double what it was three years ago, said Rockowitz. "We continue to double our business every three years."
Nomura analyst Tanuj Shori however said it will struggle to meet the target. "Our estimate is much lower, at US$1.1 billion. That is the market consensus estimate," Shori said.
Even if Li & Fung falls short of its US$1.5 billion operating target, the gap should not be that great, said Rockowitz.
Taking a more bearish view, a Cantor Fitzgerald report of August 10 has cut its forecast for Li & Fung's recurring net profit by 31 per cent this year and 18 per cent next year.
"Li & Fung reported dismal first-half earnings with core operating profit declining by 22 per cent," said Cantor Fitzgerald.
Li & Fung's operating profit of US$244 million in the first half was 47.7 per cent below consensus estimates, mainly due to a sharp decline in profits from its distribution business, said a JP Morgan report.
The company's share price dropped 3 per cent to HK$12.66 yesterday.
