UPDATE 2-Li & Fung says aims to spin off brands in HK as profit beats forecasts

Thu Mar 20, 2014 8:39am EDT

* Intends to achieve over 2 times 2013 core operating profit

* Full-year profit $725 mln vs $577.1 million estimate

* Core operating profit margin rises to 4.2 percent (Add management comment, spin-off plan)

By Donny Kwok

HONG KONG, March 20 (Reuters) - Global exporter Li & Fung Ltd said on Thursday it plans to spin off its global brands and licensing business under its Global Brands Group and list it in Hong Kong this year as part of the company's three-year strategy.

Chief executive Bruce Rockowitz was speaking after Li & Fung reported a 17 percent rise in full-year net profit, boosted by a strengthened foothold in Asia as it moves to capture increasing consumer spending in the region.

"Li & Fung will be going back to its core of taking other people's brands. It is less volatile," Rockowitz told a news conference. "On the other side of the coin, the brands business has gone through a difficult time and it is on its way up."

Shareholders with a stake in Li & Fung will automatically get one share each in the spin-off, he added.

Chairman William Fung said the company's earnings were back on track and the spin-off would not raise cash. "It's probably the simplest way to do a spin-off. We are not raising any money and it's not an IPO in the traditional sense," Fung said, adding that Global Brands is a $3 billion business.

Global Brands' licensing business is focused mainly on American brands, Rockowitz said, and the U.S. market is "slowly getting better but it is still not robust".

Rockowitz would become chief executive of Global Brands Group, while Li & Fung chief operating officer Spencer Fung would take over his post at the global exporter.

The pro-forma 2013 net sales of Global Brands amounted to $3.3 billion, with core operating profit at $134 million.

For its three-year plan ending in 2016, Li & Fung hopes to see the core operating profit of its global brands and licensing division more than double from the 2013 level.

STRONG EARNINGS

The consumer goods exporter, which supplies retailers like Kohl's Corp and Wal-Mart Stores Inc with clothing, toys and other products, posted a net profit of $725 million for 2013, beating forecasts of $577.1 million, according to Thomson Reuters' Starmine SmartEstimate. That compared to a net profit of $617 million in 2012.

The Hong Kong-based group switched its strategy three years ago to become less of a middleman and more of a brand-management business as major clients sourced more goods directly from manufacturers. It also embarked on a string on mostly minor acquisitions.

As part of the new three-year plan, Li & Fung in January announced the establishment of a dedicated Vendor Support Services business unit to enhance factory and worker safety, raise standards and improve operational efficiencies in its global supply chain.

The company said core operating profit increased by 70 percent to $871 million and its core operating profit margin increased to 4.2 percent from 2.5 percent.

Li & Fung appears attractive with an estimated dividend yield of 4.7 compared with the peer average of 2.3, according to StarMine SmartEstimates.

The company's shares, which have plunged about 60 percent from an all-time high hit in 2011, are the eighth best-performing stock on the benchmark Hang Seng index so far this year. The shares closed up 1 percent on Thursday ahead of the results announcement, outpacing 1.8 percent fall in benchmark Hang Seng Index. (Additional reporting by Patturaja Murugaboopathy; Editing by Michael Urquhart and Mark Heinrich)

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