* 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 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
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
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
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
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
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
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
($1 = 7.7518 Hong Kong dollars)
(Additional reporting by Vikram Subhedar; Editing by Anne Marie
Roantree and Richard Pullin)