Li & Fung (494.HK)： Continue to invest in digital，Hold， TP of HK$2.89

机构：德意志银行

评级：持有

 目标价：2.89港元

We expect Li & Fung (LF) to report a Core Operating Profit ( COP) of USD115m on sales of USD6.1bn for 1H18. We estimate NP to reach USD43m during the same period. This is only for the company's continuing operations. For the discontinued operations, we expect a loss of USD85m including a NP of USD15m for the 5-month operation before disposal and a USD100m provision from the sale.

There is no like-for-like comparison as 1H17 was not restated to exclude the vertical business, which was sold in May 2018. But based on available information, we work out a 1H17E P&L model for the continuing operation (Figure 2) Our estimates are based on the following assumptions :

■ Sales declined 5% yoy in 1H18F, including a 7% decline in supply chain solutions mainly due to store closures by its clients in the US and destocking. Shipment of back-to-school items continue to shift to 2H due to a shorter lead time. The Logistic business remains strong, with expected 15% growth. The remaining product business (onshore wholesale operation) is expected to decline by 2%.

■ Total margin is expected to improve from 9.9% to 10.6% for 1H18F. This is mainly due to mix shift. On a like-for-like basis, we expect the total margin for supply chain solutions to report a 0.1ppt improvement to 6.7%, logistics to improve 0.4ppt to 34.3% and the product business to expand 0.7ppt.

■ We continue to expect the company to invest in digital (USD150m investment in total during the 3-Year Plan period). However, we expect that a higher proportion (USD30m for full-year 2018 from previously USD15m) will be expensed instead of capitalized. Together with the topline sales shortfall, we believe there will be operational deleveraging.

■ We estimate COP to decline 18% in 1H and to be down 11% in full-year 2018. We estimate NP to decline 48% to USD43m in 1H vs. a 1% gain in full-year 2018F. We see NP improving in 2H18, mainly due to the absence of a USD35m restructuring cost which was booked in 2H17 and less op deleveraging in 2H with a higher sales mix.

■ 1H trend might not be a good reflection of the full year trend. Considering that sales will likely continue to shift towards 2H due to a shorter lead time, 1H18 results are likely to be weaker when compared to previous 1Hs as most earnings are shifted to 2H18. In our model, we estimate 36% of full-year 2018 COP comes in 1H18 (vs. 39.4% of 1H17).

Our new TP of HK$2.89 translates into core PE of 18x/16x FY18/19F with yields at 4-5%. We believe shares are fairly valued. Maintaining Hold. Upside risks include: 1) a recovery in the US market, especially in apparel which helps its sales growth, and 2) the signing of new accounts. Downside risks include: 1) the loss of existing clients, and 2) continued destocking pressure.