REFILE-UPDATE 1-Li & Fung shares jump after company signals worst behind it

Wed Aug 14, 2013 11:03pm EDT

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By Donny Kwok

HONG KONG Aug 15 (Reuters) - Shares of global sourcing firm Li & Fung Ltd jumped more than 9 percent on Thursday as investors cheered news that the worst is over for the company and looked ahead to what it said would be a recovery this year.

Li & Fung, the world's largest supplier of goods to retailers including Wal-Mart Inc and Target, reported a 70 percent drop in first-half net profit on Tuesday but said it was on track for a recovery in 2013.

"People are looking at the core operating profit, margins and cash flow which are all showing improvement, and that is fuelling hopes that the company is bottoming out and heading for a recovery," said Alex Wong, a director at Ample Finance Group.

"But I have doubts about the sustaintabiliy of the rally as (the company) only shows signs of improvement and signs of recovery. Further evidence is needed to prove it is actually coming out of the woods."

Some investors got burnt earlier this year when Li & Fung flagged a steep profit fall in January, just two months after an analyst briefing, leading some to question the credibility of its earnings guidance.

The company said this week it was on target to turn around its struggling U.S. business by the end of the year, although it acknowledged conditions were still challenging in its single largest market, which accounts for about 60 percent of revenue.

Li & Fung chairman William Fung told reporters at the earnings briefing on Tuesday that he had seen double digit growth in order values from some of his major customers, while others were showing high single digit growth.

He gave no details on the identity of the customers.

The company provided few specific details or figures to support its upbeat view and said the outlook for Europe, which accounts for about 18 percent of revenue, was uncertain.

"We are confident we have done everything we can to get back to those 2011 levels, so bar an unforeseen world disaster, we should be fine," chief executive Bruce Rockowitz said at the earnings briefing.

A day after it flagged a better second half, U.S. data showed retail sales rose in July, pointing to an acceleration in consumer spending which could benefit some of Li & Fung's key customers.

Shares of the company, which has a market value of $11.4 billion, jumped as much as 10 percent to HK$11.58, beating a 0.6 percent gain for the benchmark Hang Seng Index.

Along with sluggish U.S. growth, investors have worried about the long-term future of the firm's business model and its role as a middle man as companies look to cut costs and source directly for themselves.

Rockowitz said this week the company was now focusing on brands with bigger potential instead of smaller brands in sectors including accessories, beauty and shoes.

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