20130725-巴黎银行证券-The_worst_should_be_over_14页_1mb

Li & Fung Financial Analysis Summary

Core Content

Li & Fung is a global sourcing and distribution company that has faced challenges in its financial performance, particularly in 2012, due to restructuring and writedowns. The report outlines a positive outlook for the company, suggesting that the worst should be over and that the company is expected to show strong recovery in the second half of 2013 (2H13E).

Main Points

• Earnings and Sales Outlook:

  • Li & Fung is expected to report 1H13E sales of USD9,169m, a 0.4% y-y increase, representing 42.1% of the full year estimate.
  • Core operating profit is expected to decline by 4.4% y-y in 1H13E due to restructuring expenses and lower sales scale.
  • Net income is projected to drop by 65.0% y-y to USD109m, as the company had a significant gain from re-measurement of contingent consideration in the previous year.
  • The company is expected to see 13.5% y-y sales growth and 137.9% y-y core operating profit growth in 2H13E, driven by ASP improvement, US retail sales recovery, and margin expansion.

• Business Unit Performance:

  • Trading business: Expected to see a 2.0% y-y sales increase with 1.1% y-y core operating profit growth, due to cost-plus model and ASP deflation.
  • Logistics business: Expected to grow by 20% y-y in 1H13E, being a bright spot off a low base.
  • Distribution business: Expects 82.8% y-y core operating profit decline in 1H13E due to restructuring and low base, but a strong recovery is anticipated in 2H13E with margin improvements.

• Valuation and Target Price:

  • The report upgrades Li & Fung to BUY with a new DCF-based target price of HKD12.28, up from HKD9.32.
  • The target price implies a 20.5x/15.5x P/E for 2013E/2014E, which is considered fair given the potential earnings recovery.
  • The company currently trades at 17.9x/13.5x P/E and 2.2x/2.1x P/B, which are lower than historical averages.

• Long-Term Concerns:

  • Organic growth and M&A contributions have been slowing in recent years.
  • The company's distribution business still needs to prove its sustainability, as it has undergone restructuring and margins are not yet stable.
  • Retailers are increasing direct sourcing, suppliers are consolidating, and production is moving out of China, which could cap organic growth.

Key Information

• Earnings Recovery Catalysts:

  • Earnings recovery in 2H13E after aggressive writedowns in 2H12.
  • Modest price inflation in 2H13E.
  • Steady US retail sales and reconnection to US retail sales numbers.
  • Lower valuation and improving yield.

• Valuation Metrics:

  • Recurring EPS (USD): 0.08 in 2013E, rising to 0.10 in 2014E and 0.12 in 2015E.
  • Recurring P/E: 17.9x in 2013E, 13.5x in 2014E, and 11.7x in 2015E.
  • EV/EBITDA: 10.8x in 2013E, 9.0x in 2014E, and 8.1x in 2015E.
  • Price/Book: 2.2x in 2013E and 2.1x in 2014E.

• Sensitivity Analysis:

  • A 0.5% change in core operating margin could impact 2013E/2014E net profit by 15.0% / 12.6%.
  • The report includes a sensitivity table showing the impact of different scenarios on core operating profit and net profit.

• Risk and Market Outlook:

  • The report identifies key macro risks that could impact stock performance, including economic downturns and supply chain disruptions.
  • The company is expected to re-connect with retail indices if the restructuring efforts are successful.
  • US retail sales are seen as a key driver of near-term share price momentum.
  • The distribution business is a key focus area for margin recovery and long-term sustainability.

• Market Position and Share Price:

  • Li & Fung has traditionally been a solid US proxy with 62.5% sales exposure to the US in 2012.
  • The company's share price has underperformed since the poor results in August 2012, but is expected to recover in the short term.
  • The report includes share price performance data and P/E and P/B bands for the 12-month forward outlook.

Conclusion

The report suggests that while Li & Fung has faced short-term challenges, the company is expected to show strong recovery in the second half of 2013. The upgrade to BUY with a higher target price reflects the potential for positive momentum and improved valuation. However, long-term concerns about the sustainability of the business model and margin expansion remain. The company needs to demonstrate consistent performance in the distribution business and maintain its competitive edge in the sourcing and trading segments.