20140109-巴黎银行证券-From_M_A_to_organic_growth_12页_761kb

Li & Fung (494 HK) Summary

Core Content and Key Insights

Li & Fung Limited, based in Hong Kong, is a global leader in consumer goods design, development, sourcing, and distribution. The company is shifting its focus from mergers and acquisitions (M&A) to organic growth in its three-year plan (FY14-16E), which will be detailed in March 2014. This strategic shift aims to address market concerns about its M&A history and improve cash flow. The company's new Vendor Support Service is a significant step towards enhancing operational efficiency and expanding its service offerings, including vendor advice on production relocation.

Market Performance and Valuation

• Target Price: HKD12.28 (unchanged)
• Current Close: HKD10.82
• Upside: +13.5%
• Dividend Yield (2013E): 4.6%
• Valuation Metrics:
  • Recurring P/E (2013E): 18.1
  • Recurring P/E @ Target Price: 20.5
  • EV/EBITDA (2013E): 11.0
  • EV/EBITDA @ Target Price: 12.3
  • Price/Book (2013E): 2.2
  • Net Debt/Equity (2013E): 19.5%
  • ROE (2013E): 12.3%

Earnings and Performance

• Earnings Recovery: Li & Fung is expected to recover earnings in 2013, supported by restructuring efforts and the absence of one-off items.
• EPS Growth:
  • 2013E: 120.1%
  • 2014E: 32.8%
  • 2015E: 15.1%
• Operating Performance:
  • Core Operating EBITDA Margin (2013E): 5.5%
  • Core Operating EBIT Margin (2013E): 4.1%
  • Net Margin (2013E): 3.0%
  • ROIC (2013E): 11.8%
  • ROE (2013E): 12.3%

Business Segments

• Trading:
  • Focus on improving ASPs due to rising global labor costs.
  • Management expects mild growth in the US and improved outlook in the UK and Germany.
• Distribution:
  • Post-restructuring, LF USA is expected to return to growth from 2H13.
  • Margins are expected to normalize from 2015.
  • LF Asia remains the key growth area.
• Logistics:
  • Expected to maintain steady growth, with a 25% growth rate in 2013E and 2014E.

Key Concerns

• Execution Risk: The success of the distribution business, especially LF USA, is a key concern. It was the main drag on earnings in 2012 and needs to show positive results to restore investor confidence.
• Market Expectations: Current market expectations are still low, which supports the BUY rating due to undervaluation.
• Recurring EPS: Expected to grow from USD 0.08 in 2013E to USD 0.12 in 2015E.

Investment Thesis

• BUY Rating Justification:
  • Earnings recovery and improved performance.
  • Refocus on organic growth and cash flow.
  • Low market expectations and attractive dividend yield.
  • Undemanding valuations, with the target price based on DCF analysis.
• Catalysts:
  • Positive macroeconomic and retail data from the US and Europe.
  • Raw material price trends.
  • Margin improvements.

Risks

• Downside Risks:
  • Weaker-than-expected recoveries in the US and Europe.
  • Slow restructuring process.
  • Weak cross-selling effects.
  • Aggressive fundraising.
  • Poor execution in the distribution business.

Company Background

• Geographic Breakdown:
  • US: 60.9% of 1H13 sales.
  • Europe: 17.8%.
  • China: 8%.
• Major Shareholders:
  • Fung Family holds 33% of shares.
• Historical Sales Growth:
  • 2013E: 7.6%.
  • 2014E: 10.7%.
  • 2015E: 8.2%.
• Key Executives:
  • Victor Fung Kwok King: Honorary Chairman (Age: 67, Joined: 1973)
  • William Fung Kwok Lun: Group Chairman (Age: 64, Joined: 1972)
  • Bruce Philip Rockowitz: Group President and CEO (Age: 54, Joined: 2001)

Financial Highlights

• Recurring Net Profit:
  • 2013E: USD 646M.
  • 2014E: USD 857M.
  • 2015E: USD 987M.
• Free Cash Flow to Equity:
  • 2013E: USD 518M.
  • 2014E: USD 770M.
  • 2015E: USD 946M.
• Net Debt/Equity:
  • 2013E: 19.5%.
  • 2014E: 23.0%.
  • 2015E: 22.0%.

Valuation Trends

• Price/Book Ratio:
  • 2013E: 2.2.
  • 2014E: 2.1.
  • 2015E: 2.0.
• P/FCF:
  • 2013E: 22.5.
  • 2014E: 15.2.
  • 2015E: 12.3.

Conclusion

The company is transitioning from M&A to organic growth, with a focus on improving efficiency and expanding services. While the BUY rating is supported by earnings recovery, low valuations, and a strong dividend yield, the execution of the distribution business, especially LF USA, remains a key risk. The company's strategic shift is expected to lead to better financial performance and long-term growth, particularly in Asia. Investors should monitor the progress of the distribution segment and macroeconomic developments in the US and Europe for potential positive catalysts.