Hong Kong company reporting season

Li & Fung’s interim profit beats estimate, delivering a sterling start to transformation plan

Li& Fung announces new joint venture with South Ocean Knitters

PUBLISHED : Thursday, 24 August, 2017, 7:29pm
UPDATED : Thursday, 24 August, 2017, 11:00pm

Li & Fung, one of the world’s biggest merchandise sourcing agents and supply chain managers, announced an interim profit that beat an analyst’s estimate, delivering an auspicious start to its three-year transformation plan to recast its business to meet the challenges of e-commerce.

Net profit rose 39.6 per cent to US$101 million in the first six months, beating a US$60 million estimate expected in a Bloomberg survey.

Core operating profit, which excludes interest expense, non-operating and non-recurring items, rose 8.7 per cent to US$170 million. Sales fell 9 per cent to US$7.3 billion during the period, from last year’s US$8 billion.

Li & Fung, founded in 1906, is six months into a three-year plan to reorganise its traditional business as the global middleman for manufacturers to meet the digital age, seeking to remain competitive and relevant while the large retailers that make up its core customers increasingly sell directly to buyers online.

“I am very pleased that our first-half results reflect early success in our three-year plan initiatives,” said Spencer Fung, group chief executive and a great grandson of the company’s founder. “The new supply chain model we are creating is gaining traction and customers are reacting positively.”

Li & Fung has set a new three-year target to increase its revenue and core operating profit by “low double digit” percentages between 2016 and 2019 in March, after it missed profit goals for 2014 to 2016.

The company announced in March this year that it would spend US$150 million between 2017 and 2019 to digitalise its operation “to create the supply chain of the future”.

By adopting technologies to produce virtual product samples and make use of the vast amount of supply chain data it has access to, the firm aims to cut the retail industry’s average supply chain cycle to 21 weeks from 40 weeks currently, including design, factory selection, production and delivery.

As much as 80 per cent of Li & Fung’s turnover in the first half came from its services segment, including supply chain solutions and logistics. Profits in this segment were up 33.1 per cent in the period.

In contrast to its sweaters, furniture and beauty products saw core operating profits fall by 28.6 per cent, which the company attributed to weak consumer sentiment in Europe.

The company also announced a venture with South Ocean Knitters Holdings Limited, a global exporter and manufacturer of knitwear,to become one of the world’s largest knitter suppliers. The total turnover of the venture, Cobalt Fashion Holding limited, is US$700 million, with 62 per cent of it owned by Li & Fung, while the remaining 38 per cent is owned by South Ocean.

“This is first time we’re in a joint venture,” said William Fung, chairman of the company. The venture gives Li & Fung “first-hand insight into how knitwear and its supply chain can be transformed to best suit today’s fast changing apparel market,” he said.

The company has a tough road to follow as the traditional trading giant tries to transform from its century old bricks-and-mortar business mode to a more digitalised operation.

The company’s shares rose 0.7 per cent to HK$2.9 on Thursday, before the results were announced.