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SCMP Reporter

Shares in the little Li & Fung have outpaced their larger rival's over the past 12 months

Mention the name Li & Fung and most investors will know the blue-chip sourcing agent, but the name of Linmark Group is lesser known.

In investment circles, Linmark is the 'little Li & Fung' of the sourcing world, a Mini Me to its larger rival. 'We are eight times smaller,' executive director Steven Feniger notes.

And like the Austin Powers character, Linmark punches above its weight.

Over the past 12 months, Li & Fung shares have climbed 22.4 per cent, closing at $11.20 yesterday. Linmark, meanwhile, has gained 38.75 per cent over the same period to $2.775.

Although analysts say the run-up was because Linmark's smaller size makes it more prone to volatility, others say there is more to the story.

Last week, Linmark reported results for the first time since listing last year. Net profit rose 47.8 per cent to US$12.33 million for the year to April, lower than the market consensus of $13.16 million, according to Thomson First Call.

But despite the shortfall, brokers remain upbeat. A poll by Thomson First Call found a consensus 'buy' recommendation for the stock. Analysts believe new customers will drive earnings.

Last month, Linmark signed three-year exclusive agreements with clothing retailers Edgars Consolidated Stores in South Africa and Dr Rehfeld in Germany.

'We believe these two accounts together should contribute 8 per cent of turnover next year, rising to 10 per cent' in the 2005 financial year, GK Goh Research analyst Renee Tai said. Ms Tai, who has a 'buy' rating on the stock, estimated turnover would grow 27.9 per cent to US$56.7 million next year.

She said the new accounts would also reduce the company's dependence on only a handful of large customers. Although Linmark has 30 customers, its two biggest - Warnaco and Hudson's Bay - together accounted for about 65 per cent of turnover for the year to April.

What is more, Linmark is preparing for the mainland market. It has expanded its office network in China, establishing a presence in four major cities.

But the mainland retail market is still in its infancy and prices are much lower, Mr Feniger said, and the company does not expect China sales to be significant yet.

New customers aside, Linmark is also looking at new businesses to shore up margins against dropping apparel prices. The sourcing business accounted for about 73 per cent of turnover in the year to April, and revenue is charged on a commission of about 5 to 8 per cent on the apparel price.

Linmark  expects apparel prices drop 6 to 8 per cent next year and the years beyond.

Further deflation is expected as Southeast Asian manufacturers cut prices to retain orders in response to the lifting of export quotas on Chinese apparel products in 2005.

To counter the deflationary pressure, Linmark has moved into higher-margin, value-added services such as packaging and trimming, social compliance and auditing work, and product design and development. Value-added services accounted for about 24.7 per cent of turnover and 18.6 per cent of net profit this year.

But analysts are divided on the company's growth prospects, with some saying Linmark shares are fully valued.

Linmark has a forward price-to-earnings ratio of 12 to 13 times - a steep discount to 24 times for Li & Fung.

Core Pacific-Yamaichi analyst Bonnie Lai recommended Linmark with a HK$2.90 price target. But she expected the dividend payment ratio to remain low at 35 to 40 per cent as the company conserves resources for possible mergers and acquisitions.



Sourcing agent Linmark  punches above its weight