Retailing middleman Linmark Group has found its share price marked down and left on the bargain counter as investors worry that a sluggish United States economy and a possible war with Iraq will hurt order volumes and earnings. But Linmark, which has been dubbed 'baby Li & Fung' after its blue-chip rival, was far from being defenceless in a hostile business environment, said chief executive Steven Feniger. 'Our order books are looking strong,' said Mr Feniger, who knows the retailing and sourcing business inside out from 20 years service at clothing store Marks and Spencer. 'Obviously if there is a long war, it could have a depressing effect. All other things being equal we are looking at vigorous growth continuing.' Linmark, which sources clothing and hard goods in Asia for big stores in the West, slipped 0.51 per cent to HK$1.93 yesterday in slim trading. The stock is off 32.86 per cent from the peak of $2.875 it hit soon after its $1.68 per share initial public offering in May last year. Despite the subdued share price performance, Linmark has delivered the earnings goods against a deflationary backdrop. Last month, it announced that turnover for the six months to October 31 jumped 45.2 per cent to US$23.2 million, with net profits up 18.9 per cent. Keeping Linmark on a growth path has not been easy because excess production capacity in Asia was being met with weak demand in the West. 'We are under price deflationary pressure on soft goods, on clothing', which made up 89 per cent of sales, he said. '[Deflation] is running between 6 per cent and 8 per cent per year. It is very significant.' Unlike Li & Fung and other rivals, Linmark does not buy goods from factories and then sell them on to customers, Mr Feniger said. Instead, it picks the best factory for the order and oversees pricing, quality and delivery. Clients write the purchase order to the factory and Linmark bills the client a commission of between 5 per cent and 8 per cent of the order. 'What the customers love about it is they know the true price. Customers always worry about what the agent is charging in the middle. 'By having this model and by having a reputation for integrity, we are finding we are getting a strong, positive reaction from our customers.' But old model Linmark was only marking time. 'On the traditional agency business, if left to our own devices, our volumes are going up a bit and our value is coming down because of deflation,' Mr Feniger said. To fight back, Linmark has added some bells and whistles to its business model, offering new 'value-added' services for its customers. It is now offering its own clothing design capability. For instance, it has leveraged on its market intelligence to create a 'Global Mind' branded range for its biggest customer, Canada's Hudson Bay. 'Hong Kong is the garment engine room of the world. All the sampling before it gets put into bulk production either gets done in Hong Kong or in Shenzhen,' said Mr Feniger at the company's modest head office in Tsim Sha Tsui. Secondly, Linmark now undertakes not only to source clothing factories but also those that supply packaging and trims, which can make up 20 per cent of the cost of a shirt. Finally, Linmark is helping to answer the questions Western stores have to face about the labour standards in the factories from which they buy cheap products. The firm offers what it calls independent global compliance services, with its inspection teams auditing factory payrolls and interviewing staff to make sure rules are kept on wages, overtime, rest days and minimum working ages. The new trio of services only started last year but already makes up 27.7 per cent of turnover. Linmark, which was 72 per cent owned by Singapore-listed Roly Group, was in talks to sign up some fresh blue-chip clients to add to names like Warnaco, Mr Feniger said. There is huge potential as Western stores seek to maintain margins by sourcing in Asia. Increasingly, they are looking to use companies like Linmark rather than run their own Asian operations or work with suppliers based in the West which charge mark-ups as high as 20 per cent. The Western-based suppliers may have up to 75 per cent of the business of finding goods abroad for stores in their home countries. 'We want to tackle that business and we want to get it,' Mr Feniger said. 'The potential is unbelievable. Our big challenge is to demonstrate that these domestic importers are no longer the future.' For now the market was in a 'show-me' mode, Mr Feniger said. Linmark is going to have to win its spurs as a premium stock by consistently turning in the earnings growth that he and analysts are expecting. DBS Vickers Securities is expecting earnings per share to grow by 32 per cent annually between last year and next year. Linmark is trading on a price-earnings ratio of 13 times this year's expected earnings, according to DBS. That is just half the valuation of 'big daddy' Li & Fung, which has the profits track record to prove that playing middleman can be a growth business. Graphic: LIN07gbz
