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Not so easy

10 Aug 2012 By Edward Hadas

Bruce Rockowitz understands grand gestures. The chief executive of Li & Fung spent $20 million to celebrate his marriage with the popular singer and songwriter Coco Lee in October 2011. In December he affirmed his corporate vows, to double the core operating income of the Hong Kong based trading company between 2010 and 2013. Li & Fung’s first half results suggest shareholders should expect much less.

The shares fell 20 percent on August 10 after the company announced a 22 percent decline in its chosen measure of operating profit, year on year. Reported results were better, but only because two acquisitions have not done as well as hoped, so Li & Fung was able to write back some of the contingent payouts which had initially been included in the purchase price. The acquisitive firm’s revenues increased 5 percent on the previous year, well below the 16 percent compound rate from 2001 to 2010.

Absent high expectations from Rockowitz, the results wouldn’t be a nasty surprise. GDP growth is weak in the United States and Europe, which accounted for 80 percent of first-half revenues. That naturally slows progress in the company’s efforts to diversify and puts pressure on margins. Squeezed customers balk at price increases.

However, analysts and investors clearly thought Li & Fung had so much growth momentum that it was not subject to macroeconomic gravity. Before the announcement the shares traded at 24 times the Reuters analysts’ consensus of 2012 earnings. The Hong Kong index trades at 10 times.

After the earnings report, the shares were trading at the lowest level since Rockowitz’s marriage. The valuation, though, remains optimistic, since the share price fall only reflects the reductions in estimates.

The price could fall further. While Rockowitz remains optimistic about the firm’s various initiatives, it is hard to believe him. With an annual turnover of about $18 billion, it is a challenge to find either organic growth or reasonably cheap and effective acquisitions. Li & Fung increasingly looks like a cyclical growth company, with the emphasis on cyclical. Hopefully Rockwitz will find marriage vows easier to keep.


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