Li & Fung is due to see a leap in earnings over the next three years as the scope and size of the trading company's operations grow. The company sources goods, especially low-cost manufactured mass consumer products, for export. Last year, the company bought Inchcape Buying Services, now called Dodwell, which will broaden its customer, product and sourcing bases. Dodwell will also improve Li & Fung's margin from 3 per cent to 4 per cent. The reason why this company may be a good investment is because the management has a proven track record of reliability, and sales at this high volume orientated company are about to soar. At Friday's close of $6.95, down 10 cents on the day, the company's share is on 15.4 times 1995 earnings and 12.8 times prospective earnings in 1996. This compares with 14 times 1995 earnings on the Hang Seng Index, 12.8 times prospective earnings in 1996 and 11.6 times prospective earnings in 1997. Given the changes going on at Li & Fung and the brightening economic prospects in the United States, which ought to help boost sales, a better prospective earnings rating is warranted. Dodwell is expected to add $2.5 billion to sales last year. From this year, annual sales of more than $5 billion are expected. Li & Fung is set to see sales jump 58 per cent in 1995 to $9.6 billion. Sales are expected to grow 36 per cent in 1996 to $13.15 billion. According to Crosby Securities, sales are expected to reach $16.08 billion by 1998, placing the company in the big league of trading companies. After absorbing Dodwell, Li & Fung's export market customer base is more balanced with the European share rising from 16 per cent to 40 per cent and the US share falling from 84 per cent to 60 per cent. The product mix has hard goods rising from 20 per cent to 30 per cent in 1995, with the remainder being soft goods. Profit attributable to shareholders in 1995 is expected to drop 57 per cent to $240 million with earnings per share falling the same margin to 44 cents. This drop includes an exceptional in 1994 of $349 million from the sale of Cyrk Inc in the US. Excluding the exceptional, profit is forecast to rise 18 per cent after tax. Profit growth ahead looks healthy. In 1996 profit is expected to rise more than 20 per cent to $296 million. In 1997 it is expected to grow 24 per cent to $360 million, and rising a further 20 per cent to $430 million in 1998. Risk at the company relates to trade issues. Should a big bust-up between either Europe and China or the US and China over trade result in tangible trade barriers in the future, or the removal of favoured trade status, Li & Fung's sales and margin will be hurt. Li & Fung also needs to maintain its edge in its highly competitive export business as customer loyalty is poor and direct sourcing, missing out the middle-man, is growing. Economic conditions in the US and Europe are also key drivers determining the company's sales. Any big downturn in activity in either market will damage sales and profit prospects. Crosby says: 'The trend of sourcing mass produced products for companies in the US and Europe from lower-cost Asian countries will continue in the foreseeable future.' Li & Fung is well-placed to benefit from this trend. The brokerage is looking for a 1996 price-earnings ratio of between 14 and 14.5 times. This would suggest an upside of between 10 and 18.7 per cent.