Hong Kong company reporting season

First-half net profit at sourcing giant Li & Fung beats analysts’ forecasts

PUBLISHED : Thursday, 25 August, 2016, 8:05pm
UPDATED : Thursday, 25 August, 2016, 10:28pm

Li & Fung, the Hong Kong sourcing company that supplies clothes and toys to overseas retailers including Wal-Mart, reported a better-than-expected profit decline in the first half, thanks to reduced operating costs amid a deflationary environment and reduced orders.

First-half net profit fell to US$72 million from US$149 million a year earlier, beating an average forecast of US$68 million, based on the mean forecast of 13 analysts in a Bloomberg poll. Basic earnings per share fell to 6.7 HK cents. The company proposed an interim dividend of 11 HK cents per share, down from 13 HK cents a year earlier.

“The first six months of the year was the toughest retail and trading period we have operated in since the global financial crisis in 2008,” chief executive Spencer Fung said at a briefing on Thursday. “We expect the trend to continue in the second half and the amount of orders will remain at the level in the first half ... we will focus on our core customers.”

The company’s core operating profit for the first half declined 14.2 per cent to US$156 million, as that of trading business slid 19.1 per cent to US$129 million, despite a 20.8 per cent rise in its logistics business.

Total revenue dropped 6.4 per cent to US$8.07 billion from US$8.63 billion in the first half of 2015, compared with analyst estimates of US$8.45 billion.

The first six months of the year was the toughest retail and trading period we have operated in since the global financial crisis in 2008

Operating cost fell 2.8 per cent to US$779 million thanks to improved efficiency.

Fung said Britain’s vote to leave the European Union would not have much impact on its business given that many British clients do business globally, adding that he saw opportunities in Germany, Italy and Spain.

He said Li & Fung’s 2014-2016 plan is still on track. Its next three-year plan, which will be announced in early 2017, will focus on “speed, innovation and digitalisation of the entire supply chain”.

The company will maintain the payment of 50 to 60 per cent of core operating profit as dividend, Fung said.

The company’s shares have fallen 23 per cent in value so far this year. They ended flat at HK$3.94 on Thursday before the result was announced.

“We believe revenue growth for Li & Fung’s European business will be challenged by Brexit and increasing terrorist attacks over 2016 to 2018. Moreover, a mixed US retail segment – weakening apparel sales but a pick-up in hard-goods sales growth so far this year – has added uncertainty to its trading business,” Daiwa Securities Anson Chan and Jennifer Wu wrote in a note.

Li & Fung earns 60 per cent of its revenue from the US, with Europe and Asia accounting for about 16 per cent each.

“Global consumption demand is weaker than expected, while Li & Fung has limited exposure to the athleisure trend, which continues to cannibalise casual wear,” Macquarie analysts Linda Huang and Ricky Lam wrote in a note before the results announcement.

US retail sales in July remained unchanged from the month earlier, missing market expectations of a 0.4 per cent month-on-month increase.

However, Chan and Wu still expect Li & Fung to maintain its annual dividend per share at 3.6 to 3.9 US cents over 2016 to 2018, given that its cash flow remains healthy.

In May, the company announced the disposal of its Asia consumer and health care distribution business to Dah Chong Hong Holdings for US$350 million, as it refocuses on its core sourcing and logistics businesses in Asia. The deal was completed in June.