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Public company info - Li & Fung Ltd. , 00494.HK
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Li & Fung Ltd., 00494.HK - Company Profile
Chairman Fung Kwok Lun William
Share Issued (share) 8,539,000,000
Par Currency Hong Kong Dollar
Par Value 0.0125
Industry International Trade
Corporate Profile Business Summary: The Group is Principally engaged in trading, logistics and distribution of consumer products. Performance for the year: Group turnover decreased by 10.1% to US$11.4 billion Total margin decreased by 9.1% to US$1,219 million while total margin as a percentage of turnover increased from 10.6% to 10.7%. The Group recorded a net profit attributable to shareholders of US$17 million for 2019. This is compared to a net loss of US$13 million for 2018. Business Review Integrated Supply Chain and Logistics Services Have Become Critical for OmniChannel Retail In 2019, the retail industry continued to be disrupted by advances in omni-channel technology and cross-border e-commerce. By strengthening the Group’s global sourcing network, digital product development and design as well as logistics services, the Group is well positioned to help the Group’s customers tackle changes brought about by these disruptions. End-consumers, equipped with mobile technology and higher price transparency, expect brands and retailers to provide higher levels of product customization, richer experiences and more flexible purchase and delivery options. In response to this, the Group’s customers - brand owners and retailers - continued to transform their organizations and develop more sophisticated omni-channel interface to their end consumers. As a result, the Group’s customers’ procurement functions need to accommodate shorter production lead times, increased SKU variety and more complex logistics requirements. This requires their supply chain and logistics service providers to be more flexible, nimble and resilient. Over the past few years, the Group has leveraged the Group’s global network and developed a comprehensive suite of integrated services that evolve with the needs of the Group’s customers. Early adopters of the Group’s speed model have already significantly shortened their pre-production cycles through process redesign and converting analog processes into digital ones. The Group’s digital platform, comprising cutting-edge services such as 3D virtual design, digital sampling and the trend engine, enables the Group’s customers to make faster, better-informed product decisions. As a result, they have been able to realize tangible benefits such as reduced mark-downs, better sell-through rates and improved inventory management. At the same time, however, carrying leaner inventory contributed to destocking the Group saw in the last few years and created short-term pressure on the turnover of the Group’s Supply Chain Solutions business. The Group’s e-Logistics and global hubbing services enable the Group’s customers to store, package and draw from a common pool of inventory to deliver to either retail outlets and/or end-consumers’ doorsteps.The Group will continue to help customers optimize their supply chain and logistics operations to cement sticky long-term relationships. Comprehensive Global Network – Best Defense Against Disruptions from the Trade War and COVID-19 Virus The protracted trade war between the US and China presented big challenges to the global retail supply chain in 2019. As negotiations between the two countries grind on, tariff levels, the categories of goods affected, and implementation deadlines have changed frequently, requiring swift adjustments along the supply chain. At the same time, the fundamental shift in the US-China relationship has accelerated the production migration out of China and bilateral free trade agreements have proliferated. The unraveling of the World Trade Organization framework has created a complex trade environment, which coincidentally presented the Group’s business models with opportunities not seen for the last 20 years. The recent COVID-19 virus outbreak has also caused a major disruption in the global supply chain. The restricted international travels and flow of goods have made it more difficult for customers to source products and made the supply chain significantly more complex. Over the decades, the Group has cultivated deep relationships with suppliers, local business communities, and governments across the Group’s network of more than 50 economies. These relationships allow them to navigate the global supply chain effectively and move production to mitigate the impact of tariff hikes or other factors impacting global trade flows. As an example, the Group helped a US womenswear retailer formulate and execute a plan to reduce its reliance on China from 70% to 20% within two years by diversifying its sourcing to eight other economies across the Group’s network. Another customer, an accessories retailer, has been decreasing its China-sourcing from 40% to a targeted 10% by the end of 2020 by redirecting its orders to seven other economies. The Group expects that the stabilization of global trade relationships will take some time, and that the value of the Group’s global network should remain even more apparent in this period of great uncertainty and volatility. Fundamental Reorganization of the Supply Chain Solutions Business The reorganization of the Supply Chain Solutions business (“SCS”) announced in August 2018 was the most profound for the Group’s sourcing business in close to 30 years, and it created the right structure required for the new business environment. This included forming a sourcing and production platform across countries to focus on operational excellence, distinguishing between account management and business development responsibilities at customer-facing functions, with the former focusing on gaining market share and the latter winning new customers, and creating a digital platform for the entire organization. This reorganization was followed by the recruitment of a Chief Operating Officer (COO) in October 2018 to lead the sourcing and production platform, the recruitment of a Chief Digital Officer (CDO) in early January 2019 to lead the digital drive, and the appointment of a new Group President in late January 2019 to focus on account management and business development. These new senior leadership team members have deep specialty knowledge and strong execution track records. Under the new leadership and strategy, the Group made encouraging progress in operational excellence, account management and business development. Key performance indicators (KPIs) such as ontime delivery rates and claim rates improved across the board and customer satisfaction level increased. Focused account management was received positively by customers, and this positioned them to gain more of their wallet share in the future. In parallel the Group reviewed the Group’s customer portfolio and began to exit non-strategic customers. This resulted in short-term turnover pressure but stronger risk control, cost rationalization, and resource allocation. The Group’s account management and business development efforts, strengthened by the Group’s leadership in digital solutions and services and the geographic diversity of the Group’s sourcing network, yielded encouraging business wins. 2019 was one of the Group’s most successful years in terms of converting new customers, bringing in new businesses with an annualized value of several hundred million dollars. Although a few of these businesses will take several years to ramp up and the Group may not immediately see significant near-term financial impact, they validated the relevance of the Group’s business model and reconfirmed that the Group’s service offering resonates with the needs of the Group’s customers. Regarding the Group’s sourcing and production platform, the Group replaced the old siloed model with a new collaborative model in which all businesses within a country integrate their resources for increased leverage, better communication and improved vendor management. Four regional platforms were set up to strengthen multi-country supervision and coordination. For each of these platforms, new leaders with deep production knowledge and experience were appointed. These leaders reside in the Group’s countries of production and took over sourcing and production activities from account managers who previously made decisions remotely under the old structure. A productivity drive, modeled after the successful implementation in India, which produced multiple-year positive jaws between revenue and operating costs, was carried out in major production countries. The positive feedback from customers and vendors on the Group’s organizational restructuring and management change reinforced the Group’s confidence in the direction the Group has taken. Digital Platform: Leadership in 3D and Product Development The Group’s digitalization initiatives began when the Group launched the Group’s Three-Year Plan (2017-2019). The Group’s digital offering has since gained solid traction among customers, and has helped secure the Group’s leadership position in the 3D virtual design space. More customers are leaning on them for digital services and guidance on how to integrate digital product development into their business processes. The Group is also helping customers take their own digital leaps with design and development, visual planning and assortment, and digital selling. On the whole, the penetration of the Group’s end-to-end virtual design center of excellence has continued to deepen within the Group’s customer portfolio. The Group’s trend engine, which helps predict fashion trends, went into production in 2019. This is a digital tool to help customers make better-informed design and production decisions. Overall, the Group’s digital services continued to gain traction, which allowed them to start monetizing these services in the first half of 2019. The build-out of the Group’s digital platform accelerated after the Group’s new CDO joined in January 2019. Various siloed applications were organized into a unified platform and the Group’s direction and priorities were reset to reflect latest changes in the business landscape. Apart from investing in the Group’s capabilities, the Group has formed strategic partnerships with various ecosystem partners to broaden and enrich the Group’s offering to customers. Overall, the Group made significant progress in building an open, flexible digital platform over the course of the last Three-Year Plan, which serves as a strong foundation for the next phase of development and implementation. Temasek’s US$300 Million Investment in Logistics Business The Group’s Logistics business (“LF Logistics”) has been a bright spot since it became part of Li & Fung in 2010. It continues to benefit from the tailwind of rising middle-class consumption in Asia, the growth of e-commerce logistics, and geographic and vertical expansion. Despite the short-term impact of the US-China trade war and COVID-19 virus, the business’ long-term prospects remain intact. As preparatory work in connection with the proposed spin-off IPO of LF Logistics was underway, the Group continued to evaluate strategic alternatives for the business. After considering market conditions and geopolitical uncertainties, the Group decided to postpone the IPO and bring in Temasek as the Group’s pre-IPO strategic investor. Temasek invested US$300 million for a 21.7% stake in LF Logistics. As the controlling shareholder of LF Logistics, the Group will continue to consolidate its results in the Group’s financial statements. Through the Temasek transaction, the Group not only accomplished some of the objectives of the proposed IPO, but also brought in a reputable long-term investor. Temasek’s investment enhanced the Group’s capital structure and financial flexibility. Most importantly, it will help accelerate LF Logistics’ business expansion. Bond Refinancing: Further Optimization of the Capital Structure In June 2019, the Group took an early draw-down of US$300 million from existing long-term bank loan facilities to prevent any market-driven risk that might impact the repayment of the Group’s US$750 million bond due in May 2020 (the “old bond”) and allow them to maintain maximum flexibility in refinancing. In the second half of 2019, the Group captured a favorable market window to issue US$500 million in a fiveyear bond (the “new bond”) in two tranches. The new bond carries a coupon rate of 4.375%, which is 87.5 basis points lower than that of the old bond. The issuance of the new bond was well received by the market. At the same time, the Group successfully tendered for US$376 million, or approximately 50%, of the old bond. The remaining US$374 million will be redeemed at maturity with cash on hand. As a result of this refinancing, the Group extended the Group’s debt maturity profile and lowered net debt outstanding compared to the prior year. After the redemption in May 2020, the Group will be further lower the Group’s gross debt. Strategic Accomplishments of the Three-Year Plan (2017-2019) From the perspective of the entire Three-Year Plan (2017-2019), the Group made encouraging progress along the three main themes: Speed, Innovation, Digitalization. Both the Group’s speed model and digital services have gained traction with major customers who use them to speed up their supply chains. The efficiency gained has generated tangible benefits such as reduced mark-downs and better sellthrough rates for these customers. The Group is seen as a leader in 3D virtual design and various applications on the Group’s digital platform, such as the trend engine, are adding unique value to the Group’s customers’ business processes. The Group also established a data team to continually explore new ways to derive valuable insights from the vast amount of data that flows through the Group’s system. In the broader ecosystem, the Group mapped out more than a thousand technology companies and formed strategic partnerships with those that complement the Group’s capabilities. Overall, the Group made significant progress towards the Group’s goal of creating the Supply Chain of the Future to help the Group’s customers navigate the digital economy. The Group has established ourselves as a unique digital supply chain service provider with clear leadership in 3D product development. Compared to the beginning of 2017, the Group has become more focused, more digitally savvy, and more financially flexible. The Three-Year Plan (2017-2019) was one of the most transformative in the recent history of the Company, and it has laid a strong foundation for them. Prospects: Uncertainties in the global trade landscape will continue to affect the supply chain over the next few years. The conclusion of phase one of the US-China trade negotiations created a temporary window of respite, but without clearly defined goals and a set time frame, phase two may prove to be more difficult. The migration of production out of China is driven not only by tariff increases but also the country’s push to transform from a manufacturing exporter into a high-end value-added service provider. We believe this trend will continue and more retailers will pursue a diversified supply chain network. Given the continuing macroeconomic and geopolitical challenges, we plan to continue to assist our customers in navigating the complex supply chain and optimizing their sourcing and production through our global network of more than 50 economies. The group expect that geopolitical uncertainty and its impact on the global supply chain will further intensify in 2020. The entire supply chain from upstream raw materials sourcing to downstream production and shipping will need to be completely rewired and transformed. This will add to near-term challenges and potential disruptions in the global trade flow. At the time of writing, the COVID-19 virus has already spread to more than 100 countries around the world and the situation is still escalating. There have been quarantines and travel restrictions of unprecedented scale, causing simultaneous disruptions on both supply and demand sides of the economy. China’s supply chains are gradually returning to normalcy but other countries might experience the same disruption cycle. The global outbreak is negatively impacting consumer sentiment and mid-tier, non-essential consumer goods are likely to be hit hardest. The overall retail demand environment for years to come may also be affected. Retailers are already discounting their goods and accumulating inventory due to weak consumer demand. They will also be reassessing their supply chains for the next few months. As retailers switch to airfreight rather than shipping, and weak demand leads to order cancellations, our margin and turnover could be affected. So far, retail has been weak over the first two months of 2020, and the COVID-19 virus impact is adding even more volatility and uncertainty to our 2020 outlook, especially that of our Logistics business operating in China and various Southeast Asian countries. The group expect the multi-year destocking trend in retail to continue in 2020. While innovations in the retail industry are creating more opportunities for our new services, they will also cause more disruptions for some of our customers, potentially bringing about further store closures. Earlier decisions by some of our customers to bring their supply chain management in-house will take some time to complete as there is typically a transition period of many months, and we expect to continue experiencing some negative top-line financial impact as a result. In addition, The group continue to recalibrate our customer base to optimize the risk-reward balance. Revenue contributions from customers with higher margins but also higher credit risk is likely to decrease, negatively impacting turnover and total margin. All these factors will remain headwinds for our business. However, the pressure will be alleviated by a few factors. First, under our new organizational structure and leadership, our account management function is now singularly focused on providing the optimum customer service and curating the best experience for our customers. As customer satisfaction improves, we expect our market share with existing customers to increase over time. Second, our customer focus is supported by the enhanced operational excellence of a truly global sourcing and production platform. The transformation of the platform in 2019 has resulted in better operating leverage and faster response times for our customers. Many changes were modeled on our India business, which enjoyed substantial improvement in operational performance. We are confident that these changes will lead to higher levels of customer satisfaction and more business opportunities. We expect to continue our restructuring and reorganizing efforts over the course of the next few years, aimed at continued improvement in productivity and rightsizing of our overall operating cost base. The group expect the Onshore Wholesale business to remain under pressure. The cost structure of the business has improved, and productivity drives will continue. However, now the spread of COVID- 19 virus in the US and Europe, and Brexit may negatively impact consumer sentiment in the UK and other major countries, potentially impacting the top line and margin. The strong organic growth momentum of the in-country logistics business is expected to face some headwinds in 2020 due to the economic slowdown in China and the impact of the COVID-19 virus outbreak in China and the various Asian countries. The global freight management business may continue to experience challenges arising from uncertainty around US-China trade relations and shipment delays due to production interruption in China and potentially other Asian countries as the virus outbreak expands to more countries across the globe. Nevertheless, The group continue to believe in the long-term growth prospects of the Logistics business. Facing these adversities, The group are taking actions to mitigate the impact through aggressive productivity improvement and cost control initiatives. The Temasek investment of US$300 million is a clear indication of the long-term value of the business. This will provide the Logistics business with sufficient capital to resume its growth and capture the rising consumption of the middle-income class in Asia in the medium- and long-run. As for the SCS and Onshore Wholesale businesses, the loss of working days and backlogs at Chinese ports due to the COVID-19 virus outbreak may cause delays in production and shipment, especially in the first half of 2020. While The group continue to assist our customers in transferring production out of China, The group expect near-term impact of shipment delays and customers becoming more cautious in placing new orders. As the outbreak expands into North America and Europe, it may further affect retail sentiment, which is already being battered by economic weakness. At this juncture, we believe the impact will be felt throughout the year. We expect to provide a more informed discussion on this topic in our 2020 interim results. Nevertheless, our diversified sourcing platform is designed to withstand these sudden disruptions in the supply chain, and we are actively assisting our customers in alleviating the impact. Finally, turning to our digital platform, 3D virtual design and digital product development will continue to be key priorities. Our digital platform will be developed to enhance our customers’ product development capabilities through improved processes and efficiency, as well as to design a completely new way to approach the product development cycle for the omni-channel retail. In the longer run, the platform will be the basis of a fully integrated, end-to-end responsive supply chain that covers physical, digital and financial flows. Continued spending will put pressure on our operating margin, but we believe that digitalization is necessary for the long-term business success of Li & Fung. Digitalization initiatives have already started to deliver results and The group expect more tangible returns from these initiatives.

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