* Li & Fung shares fall 16 pct to three-month low
* Surprise profit warning sparks credibility concerns
* Analysts concerned about acquisition strategy
* Role as middleman under scrutiny amid slowdown (Updates shares, adds analyst quote)
By Donny Kwok
HONG KONG, Jan 14 (Reuters) - Investors questioned the credibility of earnings guidance from global supply chain manager Li & Fung after it flagged a steep profit fall just two months after an analyst briefing, rattling market watchers and sending its shares down 16 percent.
The warning by Li & Fung, which sources and supplies goods from shoes to cosmetics for retailers such as Wal-Mart Stores Inc and Target Corp, caught investors off-guard and triggered concern it won't reach an ambitious three-year earnings target.
The Hong Kong-listed company, which has reported shrinking margins in recent years, warned on Friday its 2012 core operating profit, which excludes exceptional items, would fall 40 percent, due to restructuring costs and provisions tied to its U.S. business.
Li & Fung, which replaced the head of its U.S. unit, said last August that a turnaround of its U.S. unit, which accounts for about 60 percent of revenue, had been slower than expected.
"The profit warning shook the market as it came just a short period after its latest analyst meeting," said Steve Chow, an analyst at Kingsway Research. "It will have an impact on how seriously people will take the company's earnings guidance in future."
Barclays analysts said in a note that the timing would likely raise questions on management's "guidance credibility", just two months before the company is due to report its full-year results.
The warning comes nearly two years into Li & Fung's 3-year plan to grow core operating profit to $1.5 billion by 2013, which Executive Chairman William Fung said last March was still on track.
Some investors have questioned whether Li & Fung's reliance on acquisitions to meet growth targets is working, and say its business model is at risk as companies look to save costs by cutting out the middleman and sourcing goods directly.
The latest profit warning means the firm now expects core operating profit to fall to around $500 million in 2012, well short of its three-year target ending in 2013.
Shares of Li & Fung, whose global distribution centres make it a useful barometer of consumer sentiment, fell as much as 16 percent to HK$11.64, the lowest since October, while the benchmark Hang Seng Index added 0.6 percent. It was the stock's biggest percentage loss since August last year.
The plunge came amid heavy volume -- more than six times the stock's 30-day average -- and triggered a series of broker downgrades, with DBS cutting the stock to "Sell", Morgan Stanley to "Underweight" and CIMB downgrading it to "Neutral".
Nearly a third of Li & Fung shares that can be borrowed are out on loan, compared with an average of about 8.6 percent for Hang Seng index constituents, according to data from Markit Securities Finance, indicating some hedge funds are also anticipating a slump in the shares.
Analysts at Credit Suisse noted that as well as the weakness in the company's U.S. business, it appeared that some companies Li & Fung had acquired in the past few years had failed to meet earnings targets.
Li & Fung said on Friday it planned to further reduce brands for distribution in the United States, which analysts said pointed to the failure of some acquisitions.
"Over the past few years, L&F's consistent earnings disappointment and frequent fund raisings have proven our view that the company's acquisition strategy to grow earnings is unsustainable, given the slow organic growth and the grim growth prospects of the newly-acquired companies," UOB Kay Hian wrote in a research note.
Last March, the company raised HK$3.9 billion ($500 million) in a share sale to fund business development and acquisitions.
Along with sluggish U.S. growth, investors have worried about the long-term future of the company's business model.
"We are concerned about the sustainability of its role as the middleman. Its market share is shrinking as more retail groups and clients take up their own sourcing works," UOB Kay Hian said.
Li & Fung, which is valued at nearly $15 billion, on Friday sought to reassure investors over its role as a supplier, telling analysts that large retailers opening their own sourcing offices would act as competitors rather than taking away all of that business. ($1 = 7.7518 Hong Kong dollars) (Additional reporting by Vikram Subhedar; Editing by Anne Marie Roantree and Richard Pullin)