Li & Fung shares soar 21pc as investors buy into spin-off plan

Analysts raise ratings on the basis of a higher valuation from listing of brands operations

PUBLISHED : Saturday, 22 March, 2014, 1:30am
UPDATED : Monday, 31 March, 2014, 1:35pm

Shares of global sourcing and trading firm Li & Fung shot up 21.17 per cent yesterday, the most in five years after it announced better than expected earnings and a plan to spin off its licensee operations.

The planned split, which would see Global Brands Group list later this year - distributing shares on a one-to-one basis - led brokerages CLSA and Nomura to raise their ratings to buy. Ten out of 17 analysts surveyed by Bloomberg have a buy or outperform rating on the firm.

The investor appeal, analysts say, lies in more focused operations and larger market capitalisation.

"We like it very much," Standard Chartered head of greater China research Charles Yan Zhixiong said. "It's a wise decision to spin off the Global Brands business. It will help the company increase its valuation. It could be traded on a higher multiple."

CLSA head of consumer research Aaron Fischer said: "What you've got is a business that is very much focused on pure sourcing and logistics and a very asset-light business with not a lot of growth but quite good returns versus a sexy business with some exciting brands with growth potential."

Yan said he thought the spin off strategy was something the firm would repeat.

"In the future, we expect them to spin off Global Brands into more brands like they did with the Trinity [menswear] business," he said. "One company [will be] split into two companies. In the future, it could be four or five [companies] but each would be added value for shareholders."

Li & Fung's brand division, which holds licences for lifestyle brands such as Coach, Jennifer Lopez and Cole Haan, recorded revenues of US$3.3 billion and core operating profit of US$134 million last year.

BNP Paribas analyst Michelle Cheng wrote in a note yesterday that Li & Fung had "well-established know-how in supply chain management and cost control but running brands requires a different skill set with more investment initially and direct responses to consumer needs".

If all goes according to plan, Spencer Fung, the 40-year-old eldest son of honorary chairman Victor Fung Kwok-king, will become the fourth-generation of Fungs to run the business.

"Spencer is better at operations," Yan said. "He is a good candidate for the traditional business which is sourcing and logistics. [Chief executive] Bruce Rockowitz is good at brand management and marketing."

Spencer Fung joined the business in 2001 and was appointed chief operating officer in 2012. He holds degrees from Harvard and Northeastern University.