January 8, 2010

Li & Fung (494 HK)

HK$43.00
Target price Upside Current price
COMPANY INSIGHTS

+31% HK$32.80

Dont fight The Matrix own the Outsourcing Oracle

Evolution of Li & Fung's 3-year plans
6,000 5,000 4,000 3,000 2,000
Create new culture. Regional stream organization, operations focus and IT invesment. New service agency model. Unbundling distribution and the creation of a "Menu of Services." Lead industry change. Reinvent distribution through valuechain logistics. Create operating leverage. Active acquisition strategy.

Matt Marsden Matthew.marsden@samsungfn.com +852 3411 3710 Technical analysis contributed by: Seung Min You and Sang Cheol Im Samsung Securities Korea*

1,000

0
Net profit (HK$m)

1999-2001

2002-2004

2005-2007

2008-2010E

What is the Matrix? Control Morpheus, The Matrix, 1999.

Bears attack Li & Fung due to lack of organic growth and aggressive acquisitions. However, the companys strategy has been successful in delivering historical growth; our case study of Oracle (ORCL US, N/R) plus analysis from McKinsey shows that the market rewards Active Acquirers that take advantage of a downturn (while 60% of companies simply freeze). Given the fragmented nature of the sourcing market, far from being problematic, a policy of acquisitive growth strengthens Li & Fungs formidable Global Matrix, which represents a sustainable competitive advantage. Moreover, we believe that the present macro recovery will surprise on the upside led by inventory restocking and a shift to an inflationary cycle. Importantly, the Li & Fung Matrix is demonstrating operational leverage for the first time. Combined, these factors drive impressive earnings growth. We think that a moderate re-rating to the historical average 25x PE is justified by 32% 2009-11e EPS CAGR. Note - this CAGR is NOT inflated by calculating it from the cyclical low (which would be 2008), and is above the 27% EPS CAGR from 2005-07, which triggered a re-rating to over 35x PE. Given ROE recovery and all time high EBIT margins plus positive newsflow from better retail sales, a return to the average 25x PE may even be conservative. Our 12-month target of HK$43.00 represents 31% upside. BUY Li & Fung.
SUMMARY FINANCIAL DATA
Revenue (HK$m) YoY growth EBIT (HK$m) EBIT margin EPS (diluted, HK$) YoY growth Net margin ROE PE Dividend yield

SAMSUNG vs THE STREET

Li & Fung Reloaded

Samsung target price vs Consensus Samsung 2010e EPS vs Consensus Street recommendation distribution

+19% +15%
62% Buy 19% Hold 19% Sell

Our 2010e EPS numbers are 15% ahead of consensus, driven by a combination of operating leverage (Li & Fung is demonstrably increasing EBIT margins for the first time), the impact of 2009 acquisitions, plus a macro recovery which will surprise on the upside. Three Oracles help us divine that this stock will reward investors: Our case study of Oracle (ORCL US, N/R) and McKinseys work shows that the market will reward companies that can successfully grow via Active Acquisition. The Oracle of Omaha. Warren Buffet, looks to invest in companies with a sustainable competitive advantage. Li & Fungs sourcing network has been strengthened by recent acquisitions and qualifies as a Deep moat. The Oracle from the Matrix movie trilogy shows that countercyclical investment can bring rewards. Our 12-month price target of HK$43 is significantly ahead of consensus.

12-07
92,460 36.0% 3,600 3.9% 0.88 32.9% 3.3% 31.0% 37.1x 2.2%

12-08 110,722 19.8% 3,044 2.7% 0.69 -22.1% 2.2% 18.1% 47.7x 1.7%

12-09E 115,686 4.5% 4,547 3.9% 1.06 54.0% 3.4% 21.8% 31.0x 2.6%

12-10E 148,925 28.7% 6,452 4.3% 1.54 45.4% 3.8% 28.4% 21.3x 3.8%

12-11E 176,120 18.3% 7,794 4.4% 1.86 20.7% 3.9% 31.2% 17.6x 4.6%

Source: Company reports, Samsung Securities. Price based on close 6 January 2010 HK$32.80.
This report has been prepared by Samsung Securities (Asia) Limited. *Not licensed in Hong Kong nor carrying on any business in Hong Kong. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 29

January 8, 2010

Li & Fung
RETURN FORECAST

THE PITCH

Growth by acquisition is not a negative. Our case studies show that the market rewards reputable companies that are Active acquirers. The acquisitions completed during the downturn will help Li & Fung outperform during recovery, and have strengthened the companys core sustainable competitive advantage; Li & Fungs Matrix of global sourcing capabilities. For the first time, Li & Fung is achieving operational leverage through cost savings. As top line picks up, earnings will explode. We see 32% EPS CAGR 2009-11e, which easily justifies a return to the historical mean PER of 25x.

<15%
Fundamentals

15-30%

>30%

Stars reflect absolute value of u/downside to target price

FUNDAMENTALS

Li & Fungs acquisition strategy is NOT a negative, and has helped build The Matrix of global sourcing capabilities which is a sustainable competitive advantage. Earnings should surprise on the upside as top line growth combines with operational leverage to deliver 32% EPS CAGR 2009-11e. Valuation

p3

The companys core strength - its global matrix - has been enhanced by
recent acquisitions. Li & Fung operates in a fragmented market; so far from being problematic, their policy of acquisitive growth is essential to success.

Our base case PE valuation yields a January 2011 price objective of HK$43, which represents 31% upside. Technicals

Macro recovery will surprise on the upside. We forecast 29% YoY revenue
growth in 2010e helped by inventory restocking, a shift to inflation and 2009 acquisitions.

Mild correction near-term likely. We find the stock attractive long-term technically.

Top line recovery will combine with operational leverage, for the first time,
resulting in earnings upside surprise. Our 2010e EPS is 15% above consensus.
VALUATION

VALUATION
12-08A PER (x) PBR (x) EV/EBITDA (x) Dividend Yield (%) ROE (%) 47.7x 8.6x 34.4x 1.7% 18.1% 12-09E 31.0x 6.7x 23.5x 2.6% 21.8% 12-10E 21.3x 6.0x 17.1x 3.8% 28.4%

p17

A moderate re-rating to the historic average of 25x PE is supported by 32%

EPS CAGR 2009-11e. Note - our EPS CAGR is NOT inflated by calculating it from the cyclical low (which would use 2008 as a base).

We note that our 2009-11e EPS CAGR is above the 27% EPS CAGR seen in
2005-07, which triggered a re-rating to over 35x PE.

SAMSUNG vs THE STREET

ROEs are heading back to historic highs and EBIT margins are actually going
Street 36.03 1.34 10/3/3

Samsung Target price (HK$) EPS 10E (HK$) Buy/Hold/Sell

AT A GLANCE

to be higher. Plus newsflow will be positive. Far from being aggressive, a return to the historic average PE of 25x may even be conservative.

43.00 1.54 Buy

Using a 25x PE target applied to blended 2010 / 11e EPS gives us a January
2011 price objective of HK$43.00, representing 31% upside.

A DCF yields a fair value of HK$44.00, representing 34% upside.

Li & Fung is the worlds leading sourcing agency. Sector Market capitalization Shares outstanding (float) 52 week high-low Bloomberg One year performance Li & Fung Hang Seng Index 1M +0% -1% 6M +59% +22% Sourcing US$15.5bn 3,776m/60.8% HK$12.4 36.2 494 HK 12M +136% +43%

TECHNICALS

p20

A mild correction is in the offing over the next two quarters. That said, with the medium-term support line remaining intact, a strong
downward trend reversal is unlikely in the near term.

In the medium to long term, we find the stock attractive technically.

BEAR VIEWS & BLUE SKIES

p22

A bear view PE based valuation yields a fair value of HK$19.00, representing

42% downside.

A blue sky PE based valuation yields a fair value of HK$54.00, representing

65% upside.
THREE NUMBERS THAT MATTER

Top line growth

2010e

EPS CAGR

2009-11e

ROE recovery

2010e

+29%
After -2% YoY top line decline in H1 2009 (the first ever YoY decline in our memory) we think that a return to organic growth and acquisitions will boost top line, and forecast 29% growth this year.

+32%
After a 22% YoY decline in 2008, EPS growth is returning. We forecast 32% CAGR 2009-11e.

28%
Top line growth and operational leverage will lead to a recovery in return metrics. We forecast ROE will improve from 18% in 2008 to 28% in 2010e.

January 8, 2010

Li & Fung
INDEX

1. Business fundamentals 2. Valuation 3. Technical analysis 4. Bear Views & Blue Skies

p3 p17 p20 p22

Fundamentals
Li & Fungs acquisition strategy is NOT a negative, and has helped build The Matrix of global sourcing capabilities which is a sustainable competitive advantage. Earnings should surprise on the upside as top line growth combines with operational leverage to deliver 32% EPS CAGR 2009-11e.

1. Business Fundamentals

Of Oracles and Acquisitions

Three Oracles Three Oracles help us divine that this stock will reward investors: 1) A case study of the software services giant Oracle (ORCL US, N/R), reveals that the companys active acquisition strategy has driven share price outperformance since mid-2004. We explore McKinseys study of acquisition strategies, and conclude that far from being a negative, the market should reward Li & Fung for its Active Acquisition policy. The Oracle of Omaha, Warren Buffet, looks to invest in companies which have dug deep economic moats. This serves to remind us of Li & Fungs core strength of its Global Sourcing Matrix, which has been strengthened further by recent acquisitions. The Matrix acts as a sustainable competitive advantage, locking in customers and suppliers. The Oracle from The Matrix movies. This oracle has the power of foresight, but she herself claims that she lacks the ability to see past her own choice, explaining that no one, including herself, can see past a choice they do not understand. This reminds us of how bears on Li & Fung dont understand that inorganic growth can be entirely a good thing.

2)

3)

We forecast an earnings explosion in 2010-11e driven by top line growth as the macroeconomic recovery surprises on the upside, combined with acquisition gains and (for the first time) operational leverage at Li & Fung. We forecast 32% EPS CAGR 2009-11e. 1) Oracle (ORCL US) "We'd be interested in buying almost anything" Bears attack Li & Fung for the previous lack of organic growth (H1 09 revenues declined by 2% YoY), and for the highly acquisitive nature of the company i.e. Li & Fung has effectively been buying revenue, but has still not managed to generate top line growth during the downturn.
McKinsey have found that a companys actual choice of markets and M&As are crucial.

However, McKinsey have found that, long-term, a companys actual choice of markets and M&As are four times more important than outperforming in its markets. In The Granularity of Growth, McKinsey created a database of roughly 200 global companies and decomposed the most important sources of growth; market momentum, mergers, and share gains. Then they identified segments that had experienced significant upturns or downturns and looked at the strategies companies adopted during those periods. Finally, McKinsey computed each companys total returns to shareholders so as to compare performance across growth strategies.
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January 8, 2010

Li & Fung
In a downturn, an effective acquisition strategy creates significant value for shareholders.

McKinsey found that of the potential strategic moves companies can take to grow in a downturndivest, acquire, invest to gain sharean effective acquisition strategy (defined as growth through M&A at a rate higher than that of 75% of a companys peers) created significant value for shareholders. During an upturn, on the other hand, divestments created slightly more value than acquisitions did. Many companies simply freeze: 60% of companies in the database made no portfolio moves at all in downturns (vs. 40% in upturns). The best growth companies take a different approach. They view a downturn as a time to increase their leads and make acquisitions. They pounce on the opportunities it creates with an alacrity that is the stuff of legends: think of GEs speedy dispatch of an army of deal makers to Asia after the financial markets took a downturn in 1998. Were not saying companies should go on a spending spree in a downturn and tighten their belts in an upturn. Nor are we unaware that some companies simply arent in a financial position to exploit the opportunities downturns present. But for large numbers of healthy companies and their CEOs, we hope our research findings are a useful counterweight to the natural tendency, which is likely to harm shareholders. Simply put, countercyclical investment can separate the leaders from the also-rans. Source: M&A strategies in a down market, McKinsey, August 2008.

Li & Fungs is an Active Acquirer, and has taken advantage of the downturn to add to its capabilities, increasing stickiness to clients.

In conclusion, while organic revenue growth through gaining market share is important for companies, this alone seldom guarantees long-term growth. We believe that Li & Fungs is an Active Acquirer, and as such has taken advantage of the downturn to add to its capabilities and competitive edge, increasing stickiness to clients. We think that the acquisition strategy will help to generate EPS CAGR of 32% 2009-11e, which will be reflected in the future stock price. Oracle case study The watershed event for Oracle this decade was in June 2003 when executives launched an unwelcome bid to acquire archrival PeopleSoft. Oracle's hostile, litigious takeover scheme, finally consummated some 18 months later in January 2005, marked the opening salvo in Oracle's new acquisition and growth strategies, a path which it had appeared unwilling to take on such a grand scale in the past. "We'd be interested in buying almost anything," CEO Ellison proclaimed at an analysts meeting in July 2003. True to Ellison's word, by the close of 2009 Oracle had acquired 56 companies30 of which filled out Oracle's applications portfolio, and 26 of which spruced up its technology lines of business. What about the results for Oracle's diverse groups of willing and not-so-willing customers? Industry analysts interviewed for this article claim it's a mixed bag: "Customers have benefited from increased number and range of solutionsfrom continued investment, such as Apps Unlimited, and especially from the integration work that Oracle has done," says Warren Wilson, research director at Ovum. "But they're increasingly locked in to Oraclewith far fewer options and switching costs [that] are high."

January 8, 2010

Li & Fung
Three Oracles

Oracles CEO Larry Ellison

Oracle of Omaha Warren Buffet The Oracle from The Matrix

Sources SHCollective.com, Hackthematrix.org

Its most recent quarterly data reveals that during a global economic recessionwith steep drops in software spending by its customersthe vendor was able to increase profitability and operating margins, year over year. And, in comparison to rival SAP, the returns from Oracle's acquired customer bases have been able to cushion deep dives in software revenues.
We do not think that there should be a stigma to buying something rather than building it yourself.

In a 2008 interview with The New York Times, Ellison said: "It's crazy to say you will only grow through [in-house] innovation. It's bizarre that there's a stigma to buying something rather than building it yourself." Source: CIO.com, December 2009.

Oracles stock price has significantly outperformed since the company adopted an active acquisition strategy.

From FY00 to FY09, Oracles revenues grew from US$10bn to US$23bn. Moreover, the stock price has significantly outperformed since the company adopted an active acquisition strategy. From the beginning of 2003, Oracle shares have put on 112%, over five times as much as the 22% gain in the S&P, and twice as much as the broad S&P I.T. indexs gain of 59%.
Oracles stock price outperformance 2003-09 30

25

20

15

10

US$ 5 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Oracl stock price

Source: Bloomberg

Rel to S&P 500 index

Rel to S&P IT index

Li & Fung has also pursued an aggressive acquisition strategy, announcing 23 purchases from the beginning of 2006.

Li & Fung has also pursued an aggressive acquisition strategy, announcing 23 purchases from the beginning of 2006 (we expect more smaller roll up acquisitions, completed in H2 2009, to be reported at the 2009 results announcement in late March 2010).

January 8, 2010

Li & Fung
Li & Fungs acquisitions 2006-09
Announced Consolidated Acquired company Total acquisition price date from Upfront amount Oct-09 Nov-09 Wear Me Apparel US$102m Performance based US$300m in 2010-14 5.6x-22x 2008 PBT US-based designer and seller of young men's and children's apparel Expand into new markets and categories including those for young men and juniors Jun-09 Clearskies (Shubiz's N.A sourcing operation in China) Mar-09 Mar-09 Shubiz JMI N.A N.A N.A Shanghai-based producer of highend gloves, outerwear and accessories Feb-09 Mar-09 Liz Claiborne' sourcing operation US$83m None N.A US-based designer and retailer of and fragrance products with FY07 sales of US$1.3bn Nov-08 Nov-08 Miles Fashion US$51m None 4.9x 2007 PBT German apparel wholesaler to discounters and retail chains in Europe Aug-08 Sep-08 Van Zeeland US$200m US$295m in 2009-11 5.3x-13x 2007 PBT NYC based importer of mid-tier and department store handbags Strengthen the handbag business Internal cash and in the US. Expand retail distribution channels Jul-08 Wilson & Wong Trading Jul-08 RT Sourcing N.A N.A N.A N.A N.A N.A HK based manufacturer focusing on ladies fashion garments Sourcing company specializing in primary packaging and components for beauty brands Apr-08 Giant Merchandising's T-shirt licensed business Feb-08 Silvereed Group N.A N.A N.A HKbased manufacturer focusing on ladies fashion garments Jan-08 Jan-08 Imagine (C.D.P Asia) HKD$33m None 2.7x 2007 PBT Asian based company designing and Strengthen health, beauty and developing point-of-sales displays for cosmetics business retailers and manufacturers globally Sep-07 4Q 07 Liz Claiborne' four brands (Emma James, Intuitions, JH collectibles, Tapemeasure) Nov-07 Nov-07 American Marketing US$128m Enterprises Dec-07 Alliance Merchandising US$13m None N.A None 8.6x 2006 PBT US based children's entertainment character licensed company One of the largest Indian buying agency specializing in home hardgoods Aug-07 Sep-07 Regatta US$148 US$152m by Apr 2012 5.3x-10.7x 2006 PBT US apparel and brand management company offering proprietary brands and private label products Enhance Li & Fung's designing and marketing ability in proprietary brands Cash raised via new share issuance plus internal reserves Aug-07 Aug-07 Peter Black GBP48m None 5.2x FY07 PBT Supplier of footwear, accessories and Develop Li & Fung's European personal care merchandise to UK and Continental European retailers onshore business and support the health, beauty and cosmetics business Jun-07 Jun-07 CGroup US$120m US$80m per half year from Mar 2008 10.3x-17.2x 2006 PBT HK based health, beauty and cosmetics supplier chain company Leverage synergies with existing customers Cash raised via new share issuance plus internal reserves Feb-07 Mar-07 Tommy Hilfiger's sourcing operation Sep-06 Mar-07 KarstadtQuelle's sourcing arm EUR60m None 5.5x 2005 PBT US$248m None 8x FY06 PAT Tommy Hilfiger is a designer brand with American lifestyle Leader in the department store and mail order business in Germany Reinforce Li & Fung's designer brand souring capabilities Rebalance Li & Fung's geographical mix and enhance sourcing capabilities Internal cash Internal cash Internal cash Expand Li & Fung's leadership in Internal cash the children's sleepwear business Strengthen geographical mix of business N.A No initial cash consideration N.A N.A US based designer and retailer of fashion brands of apparel, accessories and fragrance products Expand Li & Fung's proprietary brand portfolio N.A Internal cash Expand fashion customer base N.A N.A N.A N.A US licensee of brands Provide further category and brand expansion in licensed product business N.A Strengthen health, beauty and cosmetics business N.A Expands fashion customer base N.A borrowings Accelerate the Europe onshore business Internal cash Enhance Li & Fung's sourcing Internal cash Expand product offering for existing customers N.A N.A N.A UK-based designer and supplier of ladies' fashion footwear to UK retailers Grow Li & Fung's footwear presence in Europe N.A Internal cash Deal multiple Business scope Reason for acquisition Financing

fashion brands, apparel, accessories platform

January 8, 2010

Li & Fung
2006 2006 Homestead N.A N.A N.A US home textile company Enhance the home textiles business Jul-06 Sep-06 Rossetti Handbags and Accessories May-06 May-06 Oxford womenswear US$37m Group None 3.7x FY05 OP US$162m US$41m 5.7x 2005 PBT Designer and importer of handbags in Expand the handbag category the US Design-intensive producer of midpriced private label women's apparel collections targeting US mass merchants Boost private label wholesale business in the US Internal cash and bank borrowings Internal cash and bank borrowings N.A

Source: Samsung Securities, Company reports

We see a direct comparison between the acquisition strategies of Oracle and Li & Fung: Both companies make opportunistic acquisitions of larger companies, while also employing a Roll up acquisition strategy which selectively acquires smaller companies to gain core competencies, gain access to a new geography or gain entry or increased penetration into clients. Oracle buys the intellectual property of others, while Li & Fung buys sourcing capabilities. Oracle has gained market leverage by building a full technology stack and a broad portfolio of applications to offer customers. In a similar fashion, Li & Fung has become an Automatic go to in the sourcing market because of its scale, reach into 40 sourcing territories and extensive category sourcing capabilities. Both companies have achieved customer stickiness. Both companies use acquisitions to ensure continuous growth. Both gain new talent from acquisitions. In fact, the majority of Li & Fungs directors have been bought into the company via acquisition.

Acquisitions have helped both companies achieve growth and customer stickiness.

A key difference in the situation between Oracle and Li & Fung, is that Li & Fung faces less competition when making acquisitions.

However, a key difference in the situation between Oracle and Li & Fung, is that Oracles aggressive buying strategy has nudged other enterprise vendors, including SAP and IBM, to make purchases that they might not have otherwise made if Oracle wasn't a deep-pocketed and ever-present threat to buy up every promising vendor in sight. SAP and IBM have bought dozens of other companies over the last five years. Li & Fung has much more limited competition in making acquisitions. This is simply because no other player in the sourcing agency space has achieved anywhere near the scale of Li & Fung (the nearest competitor, The Connor Group, commands around one tenth of Li & Fungs billings). Li & Fung tends to employ a three-year earn-out policy when paying for acquisitions, in order to retain management talent and maximize acquisition value / minimize risk.

Li & Fung management can wait for opportunities that represent real value.

Management guide that they can afford to be patient and wait for opportunities that represent real value e.g. the acquisition of Wear Me Apparel announced in November 2009 for US$102m, was at just US$20m above the NAV value of the company and at around 3.5x 2010e PE. Li & Fung was able to take advantage of a Private Equity owner who needed to exit this company to make the purchase at such an attractive valuation. Agent Smith: If you can't beat us... Agent Smith Clone: ...join us! Agent Thompson: You! Agent Smith: Yes, me. [turns Thompson into another Smith] Agent Smith: Me... me... me... Agent Smith Clone: Me too! Source: The Matrix Revolutions, 2003.

January 8, 2010

Li & Fung
War chest makes Li & Fung dangerous to short After two rounds of fundraising, US$500m in new shares to Temasek in September 2008 (issued at no discount) and a placement of 120m shares at a 6% discount in May 2009 raising US$346m, Li & Fung guide that they are able to finance around US$900m of acquisitions per annum from existing cash, credit lines and operational cash flow.
Shorting Li & Fung can be dangerous because of managements capacity to announce deals.

It occurs to us that shorting Li & Fung stock can be a very dangerous game management have the capability to surprise the market by announcing a large acquisition (or outsourcing deal) at any time. 2) The Oracle of Omaha The Oracle of Omaha Warren Buffet looks to invest in companies he describes as having an Economic moat, which is the ability of the company to keep its competitors at bay from hurting its profits we think this is just a poetic way of saying Sustainable competitive advantage. The wider the moat, the longer the company can protect its profits. The deeper the moat, the more profitable the company is. In general, there are four ways for a company to build an economic moat: 1. 2. 3. 4. Low costs or prices. Locking in customers. Locking out competitors. Product differentiation and branding.

Its worth reminding ourselves that Li & Fungs acquisitions have helped to build a moat that is both wide and deep: Li & Fung has built a sourcing matrix with over 80 offices, sourcing from 40 countries. Li & Fungs Matrix is illustrated on page 10. The Matrix provides customers with prices that they could not source themselves, hence locking them in. Li & Fung seeks to become a partner to selected suppliers (Li & Fung has a network of over 8,000 suppliers) providing trade finance, a steady flow of orders from a large customer base and so is able to secure competitive prices although Li & Fung does not seek to represent more than 30% of any one suppliers output. In terms of product differentiation, no competitor has Li & Fungs scale, and Li & Fung can provide a one-stop-shop service for design, material sourcing, product testing, quality assurance, compliance checking of factories, logistics and help clients navigate around quota systems and trade restrictions. In terms of branding, our channel checks indicate that, because of scale, Li & Fung has achieved an automatic Go to status in the sourcing market. Moreover, company management is adept at investor and public relations (perhaps too polished sometimes), have a sound reputation and a good track record. The example of the Cargo Pants illustrated below, taken from the book Competing in a flat world, Fung, Fung and Wind, 2008, nicely summarizes the capabilities of Li & Fungs network.

Li & Fungs sourcing Matrix provides a sustainable competitive advantage.

January 8, 2010

Li & Fung
Cargo pants: The power of network orchestration

Source: Competing in a flat world, Fung, Fung & Wind, 2008.

A US retailer places an order with Li & Fung for 300,000 pairs of mens twill cargo shorts. Li & Fung owns no factories, no weaving machines, no dye, no cloth, no zippers. It does not directly employ a single seamstress. Yet one month later, the order is shipped. The buttons come from China; the zippers come from Japan; the yarn is spun in Pakistan, and woven into fabric and dyed in China; and the garment is sewn together in Bangladesh. Because the customer needs quick delivery, the order is divided among three factories. If the order had come in two weeks later, it would have resulted in a completely different supply chain, using different partners drawn from a network of 8,300 suppliers around the globe. Like a message routed through Internet, the project moves along the best specific path chosen from a broader network. The supply chain is evoked by the order the customer. This is the power of network orchestration. 3) The Oracle from the Matrix
Management had the foresight to actively acquire companies during the downturn.

In the Matrix film trilogy, the Oracle is a mysterious but powerful figure, incongruously depicted as a cheerful old lady who enjoys smoking cigarettes and baking cookies. She possesses the power of foresight, which she uses to advise and guide the humans attempting to fight the system. We liken this to the Li & Fung management team, with the foresight to actively acquire companies during the downturn. We also liken this to our own forecasts, which predict strong earnings growth at Li & Fung 2009-11e. Later, she is revealed to be a sapient program that is integral to the very nature of the Matrix itself. Whether her power of prediction is deterministic or not is a concept given much treatment in all three films. She herself claims that she lacks the ability to see past her own choice, explaining that no one, including herself, can see past a choice they do not understand. This reminds us of how bears on Li & Fung dont understand that inorganic growth can be entirely a good thing.
9

January 8, 2010

Li & Fung
The Li & Fung Matrix
Huddersfield St Albans London Amersfoort Paris Vienna Turin Oporto Madrid Barcelona Warsaw Bremerhaven Bucharest Dusseldorf Sofia Istanbul Izmir Denizli Cairo

Dalian Beijing Qingdao Nanjing Suzhou Shanghai Hangzhou Ningbo Hepu Longhua Shantou

Chengdu Guangzhou Dongguan Shenzhen Liuyang Zhanjiang Taipei Seoul Tokyo Macau Hong Kong

Amman Sharjah Faisalabad Karachi Lahore Delhi

Mumbai Bangalore Chennai Tripura Colombo Dhaka

San Francisco Boston New York City Gaffney Guadalajara Mexico City Guatemala City Managua San Pedro Sula Santo Domingo

Durban Antananarivo Moka

Bangkok Hanoi Phnom Penh Ho Chi Minh City Makati Saipan Kuala Lumpur Singapore Jakarta

Source: Li & Fung

10

January 8, 2010

Li & Fung
Earnings explosion A combination of factors will drive strong earnings growth at Li & Fung through 200911e: Inventory restocking at Li & Fungs major customers, supported by a Western consumer that simply refuses to lay down and die. The evidence points to the end of the current deflationary cycle. We believe that the macroeconomic environment is likely to provide a positive surprise to the market. Our top line forecasts for Li & Fung are ahead of consensus by 9% in 2010e and 13% in 2011e, see page 14. We estimate that acquisitions made through 2009 will add at least HK$817m to 2010e EBIT (13% of 2010e EBIT). For the first time ever, Li & Fung is achieving operational leverage as part of the current 2008-10 three-year plan, see page 16. Soft base effect. H1 2009 revenues declined by 2% YoY. Li & Fung had to grapple with deflation of 7%, plus bankruptcy of some key accounts. No accounts have gone bankrupt since the results were released in August, and we think that deflationary pressures are easing fast.

Macro environment is likely to provide a positive surprise to the market.

For the first time achieving operational leverage.

We forecast that Li & Fung will grow net profit by a CAGR of 32% 2009-2011e.

We forecast that Li & Fung will grow net profit by a CAGR of 32% 2009-2011e (NB we do not inflate this figure by using the weak year of 2008 as a base).
Li & Fungs revenue growth and net profit 2006-12E.

40.0% 35.0% 30.0% 25.0% 20.0%

9,000 8,000 7,000 6,000 5,000 4,000

15.0% 10.0% 5.0% 0.0% 2006 2007 2008 2009E 2010E 2011E 2012E

3,000 2,000 1,000 0

Net profit (HK$m, RHS)

Revenue YoY growth (LHS)

Source: Company reports, Samsung Securities

The stage is set for a better cyclical start for 2010 Apart from raising productivity and reducing costs, one of the other ways Li & Fungs customers have reacted to the downturn, is to reduce inventory levels. Li & Fung tell us that most of their clients have reduced inventory substantially in 2009 in order to reduce risk. We understand that most businesses prefer to re-stock only when there are sure signs of end-demand, even if this proves to be a more costly approach to managing inventory.

11

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Li & Fung
China and HK monthly freight volume by air (YoY change)

(%) 40 30 20 10 0 -10 -20 -30 -40 Jul-07 Jul-08

Jan-07

Jan-08

Mar-07

Jan-09

Jul-09

Sep-07

Sep-08

May-07

May-08

HK Freight Volume by Air (RHS)

Source: Bloomberg

China Freight Volume by Air (LHS)

Inventory restocking is imminent.

We think that the Inventory to Sales ratio of US wholesalers has now fallen to levels that suggest that a correction is imminent. Indeed, volumes of air freight are growing rapidly, which suggests that the inventory restocking cycle has actually begun.
China exports and US wholesale inventory / sales ratio (%) 70 60 50 40 30 1.15 1.20

May-09

20
10 0 -10 -20 -30 93 95 97 99 01 03 05 07 09

China Exports (3mma, YoY%) US Wholesale Inventory to Sales Ratio (3mma, RHS Inverted)
Source: Bloomberg

Anecdotally, low inventory levels at some North American retailers may rapidly be becoming a problem. The economist Louis Gave provides some amusing anecdotal evidence from his Christmas holidays: Louis recently relayed his frustration from his holiday in Whistler, Canada: He could not find a single shop stocking ski boots for his youngest son, He had to visit three shops before finally finding gloves to the kids, He had to see five shops before being able to find sleds for the kids,
12

Sep-09

(x)
1.10

1.25
1.30 1.35 1.40

Nov-09

Nov-07

Mar-08

Nov-08

Mar-09

January 8, 2010

Li & Fung
He was forced to do three shops before finding ski boots of his size (and no freakish feet size either, just a normal size 10).

In fact, every shop told Louis the same story: "we under-ordered, because we feared demand would be very weak..." Meanwhile, yesterday Whistler had its biggest-ever day, with more than 20k people on the mountain! This might quickly get problematic. After all, the Olympics are five weeks away, and it takes two to three months to get stock in...The way we see it, the low inventory levels does not portend well for the deflationists out there. Indeed, after a day of very frustrating shopping, Louis would have gladly paid whatever the asking price was for his kids boots, sleds and gloves... This all comes back to a theme that we have tried to highlight in our research: the risk is not that the US recovery will be anemic, the risk is that is it will be anything but anemic. After all, a stronger-than-expected rebound could trigger a scramble by policy makers to get out from behind the curve and a scramble to restock goods on the shelves, putting pressure on prices.... As such, the recent rally in the US$ makes sense, as does the weakness of government bonds. Source: Ticking the boxes, GaveKal, 29 December 2009.
Inflationary expectations return.

Our strategist, Alfred Chin, believes that a lower CPI base and pressure from rising food prices will likely lead to inflationary expectations in the equity market generally.
Consumer price index YoY % (%) 10 8 6 4

2
0 -2 -4 05 06 US
Source: Bloomberg

07 Eurozone

08 CHINA

09

Li & Fung guide that they think that the current deflationary cycle will shift to inflation from mid-2010. This will relieve ASP pressure across the board and help Li & Fungs cost plus sourcing agency model. So far, the official data is showing minimal restocking at company levels, but it seems that the U.S. consumer simply refuses to lay down and die.
U.S. Christmas holiday sales rose 3.6% YoY.

Indeed, SpendingPulse, a unit of MasterCard Advisers, has reported that US Christmas holiday sales rose 3.6% YoY, or 1% taking in to account the extra day between Thanksgiving and Christmas in 2009 (SpendingPulse relies on data from the MasterCard payments network and estimates for use of cash and other payment forms. It excludes automobile and gasoline sales). This does not appear to just be low-end discount spending: Apple reported strong holiday sales too (pushing shares to a new record high), highlighting decent discretionary consumer demand.
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Our forecasts vs market consensus
FY ending 31 Dec Revenue (HK$m) Consensus Highest Lowest Samsung Difference 115,431 133,646 109,615 115,686 0% 136,103 154,325 119,116 148,925 9% 156,047 182,546 139,124 176,120 13% 2009E 2010E 2011E

EBIT (HK$m) Consensus Highest Lowest Samsung Difference 4,299 4,819 3,121 4,547 6% 5,832 7,189 4,502 6,452 11% 7,000 8,161 5,181 7,794 11%

Net profits (HK$m) Consensus Highest Lowest Samsung Difference 3,669 4,275 3,012 3,882 6% 5,017 6,254 3,920 5,645 13% 6,007 7,341 4,603 6,814 13%

Diluted EPS (HK$) Consensus Highest Lowest Samsung Difference 0.99 1.15 0.81 1.06 7% 1.34 1.66 1.04 1.54 15% 1.59 1.94 1.23 1.86 17%

DPS (HK$) Consensus Highest Lowest Samsung Difference Source: Bloomberg consensus, Samsung Securities 0.80 0.94 0.57 0.85 7% 1.07 1.33 0.85 1.24 16% 1.27 1.56 0.80 1.49 18%

Li & Fungs guidance has become more upbeat.

On 24 December the companys own guidance turned upbeat. During an interview with Bloomberg, Bruce Rockowitz, Li & Fungs President, stated: The cycle is at the bottom and Things are incrementally coming up. Western consumers are no longer concerned about what they only really need and the price. Its now changing to what people want. The luxury sector, which died in the depths of the downturn, is recovering. Mr. Rockowitz was feeling Much more happy, much more bullish by far.than a year ago.

We forecast YoY top line growth of 29% in 2010e (helped by acquisitions made in 2009) and 18% in 2011e.
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Self flagellation of achieving operating leverage How do organizations plan in a way that allows for renewal but also creates enough stability so entrepreneurial units know where they stand? How do companies in a flat world balance the need to motivate their divisions to move towards a common goal with the freedom to allow them to respond to changes in their immediate business environments? The solution for L&F has been to develop a planning process that creates stretch goals that are renewed every three years. In this rapidly changing world, five-year plans are too long and one-year budgets are too short to build anything meaningful (like client relationships). Three years seems to be just the right duration. From Competing in a Flat World, Fung, Fung and Wind, January 2008. L&Fs management publicly announce three-year plans. These are not public guidance but Stretch Goals. While the company does not always hit the self imposed targets (e.g. Li & Fung missed the 2002-2004 plan due to SARs and the general economic slowdown), we are impressed with the challenge and management focus that the plans generate. Group Managing Director William Fung has referred to the Self flagellation of meeting the three-year plans.
Li & Fung: Evolution of the 3-year plan

6,000 5,000 4,000 3,000 2,000 1,000 0

Net profit (HK$m) Create new culture. Regional stream organization, operations focus and IT invesment. New service agency model. Unbundling distribution and the creation of a "Menu of Services." Lead industry change. Reinvent distribution through valuechain logistics.

Create operating leverage. Active acquisition strategy.

1999-2001

2002-2004

2005-2007

2008-2010E

Source: Competing in a flat world, Samsung Securities

For the current 2008-10 plan, the company has the following goals: To grow group revenues from US$12bn in 2007, to US$20bn in 2010. We forecast that Li & Fung can generate US$19.2bn top line by 2010e, 4% short of its goal. Of revenues, US$3bn is to come from the U.S. Onshore business and US$1bn is to come from the European Onshore business. We forecast that the company can hit its target to generate US$4bn revenues from the Onshore businesses. To achieve a 2x goal, i.e. to grow core operating profit at twice the rate of revenues to reach US$1bn by 2010 i.e. to create operating leverage. We forecast that core operating profit will reach US$833m by 2010e, i.e. 17% short of managements goal.

Li & Fungs current 3-year plan aims to create operating leverage.

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Li & Fung
The big surprise at H1 2009 results was the cost savings achieved. Li & Fung reported a 6% YoY drop in total operating expenses. The company guide that operating expenses can drop by 10% YoY i.e. 2008 operating expenses of HK$8.9bn can decrease to HK$8.1bn in 2009e. Moreover, more cost cutting can be achieved in 2010e. A look through our historical accounts indicates that Li & Fung have never achieved economies of scale, despite an incredible 22% top line CAGR 1992 2007. In our opinion, a focus on expense control and operating leverage marks a milestone in the maturity of Li & Fung, and a strong new earnings driver going forward.
Samsung forecasts vs Li & Fungs 2008-10 plan
(in US$m) Total revenue Sourcing US onshore European onshore Core operating profit Samsung 19,216 14,818 3,392 1,006 833 Li & Fungs 2010 plan 20,000 16,000 3,000 1,000 1,000 Difference -3.9% -7.4% 13.1% 0.6% -16.7%

Source: Company reports, Samsung Securities

The operational leverage that we are currently seeing, positions the business very nicely for any rebound in top line.

The operational leverage that we are currently seeing at Li & Fung positions the business very nicely for any rebound in top line. This is exactly what we anticipate for 2010e. We forecast that EBIT margin will recover from 2.7% in 2008 to a normalized 3.9% in 2009e, but then reach a new high of 4.3% in 2010e.
Li & Fung EBIT and EBIT growth 2006-14E
14,000 12,000 10,000 8,000 20% 6,000 10% 4,000 2,000 0 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 0% 60% 50% 40% 30%

-10%
-20%

EBIT (HK$m, LHS)

EBIT YoY growth (RHS)

Source: Company reports, Samsung Securities

The Architect: What you did was dangerous. The Oracle: Change always is, but its worth it. Source: The Matrix Revolutions, 2003.

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INDEX

1. Business fundamentals 2. Valuation 3. Technical analysis 4. Bear Views & Blue Skies

p3 p17 p20 p22

Valuation
Our base case PE valuation yields a January 2011 price objective of HK$43, which represents 31% upside.

2. Valuation

Increasing return metrics lead us to Zion

At some point, Li & Fungs growth rate will inevitably slow. But across 2010-11e, we think that earnings will be propelled by a combination of improvement in the macroeconomic environment, the impact of acquisitions and operational leverage. Operational leverage should enhance return metrics. For 2008-11e, we forecast expansion in ROE from 18% to 31%, ROA from 7% to 12% and ROIC from 15% to 32%.
Li & Fungs return metrics 2006-12E

At some point, Li & Fungs growth rate will inevitably slow

40.0% 35.0%

...but that point is not yet here. Operational leverage will help bottom line growth and increase returns.

30.0% 25.0% 20.0% 15.0% 10.0% 5.0%

0.0%
2006 2007 2008 2009E 2010E 2011E 2012E

ROE

ROA

ROIC

Source: Samsung Securities, Company reports

Increasing return metrics should support valuation multiples.

Examining the PE band for the stock from 2003 to date, we find that Li & Fung has traded within a volatile one-year forward PE range of between 12x and 55x. The average one-year forward PE has been 25x. We choose to use this period, as pre 2003 the stocks valuation was affected by the Dot Com Bubble, trading over 50x PE during some periods, because of Li & Fungs On-Line Studio Direct internet business venture (now discontinued).

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January 8, 2010

Li & Fung
Li & Fung: One-year forward PE bands
50.0 HK$ 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0

30x 25x

20x

15x

EPS CAGR 2005-07, when the stock price really took off, was 26%.

5.0 0.0 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Source: Company reports, Samsung Securities, Bloomberg

We forecast 2009-11e underlying EPS CAGR of 32%.

The stock price hit an all time high of HK$39.25 in November 2007. The stock experienced multiple expansion from mid-2004 through 2007. We note that EPS CAGR 2005-07, when the stock price really took off, was 27% (EPS CAGR 2004-07 was 20%). We forecast 2009-11e underlying EPS CAGR of 32% (NB we are not inflating our EPS CAGR number by using the low base year of 2008).

We are not inflating our EPS CAGR by using a low base.

We are therefore comfortable using the historical 2003 -09 average of 25x as our oneyear forward PE multiple target. In fact, we think that with recovering ROE, EBIT margins heading for an all time high, positive newsflow from better retail sales plus fast EPS growth, targeting 25x PE may even be conservative. In January 2011 we believe that the market will partly be pricing the stock from anticipated 2011 earnings. Thus, we blend our 2010e and 2011e EPS to arrive at HK$1.70 and multiply this figure by 25x to yield a PE multiple based priced target of HK$43, rounding to the nearest Hong Kong dollar. Our price objective represents 31% upside. We initiate coverage of Li & Fung with a three-star BUY rating. DCF valuation for reference We provide a DCF valuation for reference. We use a WACC of 9.5% and a long-term growth rate of 3.0%. We explicitly forecast out for 10 years. We think that our assumptions are reasonable. Our FCF CAGR 2010-19e is 15%, this compares with historical FCF CAGR of 28% over 2001-09e.

We are comfortable targeting the historical average PER of 25x.

Our price objective represents 31% upside.

For reference, a DCF valuation emerges at HK$44 per share.

Our DCF fair value emerges at HK$44 per share, rounding to the nearest Hong Kong dollar, implying 34% upside.

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Li & Fung

Li & Fung: DCF valuation

Current price (HK$, 6 Jan 2010) Weighted average number of shares - basic Mkt cap (HK$m) Net debt (2009E) EV (HK$m) % Equity % Debt Risk free rate Equity risk premium Beta Cost of equity Cost of debt Tax rate WACC 32.8 3,651 119,752 1,416 121,168 99% 1% 4.0% 6.0% 0.93 9.6% 3.0% 12.0% 9.5%

Explicit forecast (HK$m) NOPLAT Depreciation and amortization Change in working capital CapEx Free Cash Flow PV of FCF Sum of PV of explicit forecast

2009E 4,161 613 -156 -521 4,096

2010E 5,871 629 -1,109 -655 4,736 4,325 58,648

2011E 7,015 660 -1,005 -757 5,912 4,931

2012E 8,210 700 -943 -854 7,113 5,418

2013E 9,311 747 -1,101 -931 8,027 5,584

2014E 11,011 805 -1,276 -1,046 9,494 6,031

2015E 12,421 869 -1,151 -1,138 11,001 6,382

2016E 13,722 936 -1,156 -1,223 12,279 6,506

2017E 15,041 1,005 -1,579 -1,300 13,167 6,371

2018E 16,309 1,073 -1,133 -1,365 14,885 6,577

2019E 17,569 1,139 -1,123 -1,421 16,164 6,523

Terminal growth assumption WACC FCF at 2020E (HK$m) Terminal value of FCF at 2019 (HK$m) PV of terminal forecast

3.0% 9.5% 16,649 256,176 103,381 LT Growth Rate

Enterprise Value (HK$m) Net debt ((HK$m, 2009E) Intrinsic Market value (HK$m) Value per share (HK$) Current price (HK$, 6 Jan 2010) Upside potential

162,029 1,416 160,613 44.0 32.8 34% WACC 8.5% 9.0% 9.5% 10.0% 10.5%

2.0% 43.7 41.7 40.0 38.5 37.1

2.5% 46.2 43.8 41.8 40.1 38.6

3.0% 49.1 46.3 44.0 42.0 40.2

3.5% 52.7 49.3 46.5 44.1 42.1

4.0% 57.0 52.8 49.5 46.6 44.3

Source: Samsung Securities estimates.

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January 8, 2010

Li & Fung
INDEX

1. Business fundamentals 2. Valuation 3. Technical analysis 4. Bear Views & Blue Skies

p3 p17 p20 p22

Technical
A mild correction is in the offing over the next two quarters. That said, with the medium-term support line remaining intact, a strong downward trend reversal is unlikely in the near term. In the medium to long term, we find the stock attractive technically.

3. Technical Analysis

Welcome to the machine

Agent Smith: Never send a human to do a machines work. Source: The Matrix, 1999. Undergoing a technical correction

Analysts SeungMin You chartist.you@samsung.com (822) 2020-7024 SangCheol Im sangcheol.m@samsung.com (822) 2020-7779

The stock has been stuck in a narrow range since October 2009 on investor caution as the stock approaches its historic high (hit in November 2007). We do not find any evidence to suggest that the recent correction has eroded the stocks medium-term uptrend. However, we believe the technical correction will continue for another one to two quarters for the following reasons: 1) 2) Our trend-following trading model based on the fraction MACD showed a selling signal at end-2009, indicating a slowdown in upside momentum. Relative strength vs the Hang Seng Index will likely turn down, facing resistance at the March 2009 high.

We believe the current technical correction will continue for another one to two quarters.

In the medium to long term, we find the stock attractive technically, as it has remained in an uptrend within a gradual, but stable band since 2000 and the RS vs HSI has sustained an uptrend over the same period.
Li & Fung (494.HK) weekly log, 40-week EMA, fraction MACD, RS
40 35 30 25

40-Week EMA 40-Week EMA shifted 5 weeks forward S L

S L

40 35 30 25

20

20

In the medium to long term, we find the stock attractive.

S
15

S L L

15

10 Bullish 1.10 Bearish Bullish Bearish Bearish Bullish

10

2.1

frac MACD(10,20)

2.0 1.9 1.8

1.05

1.00

1.7 1.6

0.95

1.5 1.4 Bear

0.90

1.3

0.85 Bull 2005 A M J J A S O N D 2006 A M J J A S O N D 2007

Relative Strength to HSI (RHS) Bull

A M J J A S O N D 2008 M A M J J A S O N D 2009 M A M J J A S O N D 2010 A M J J A

1.2 1.1

Identifying market trend: When 40-week EMA turn positive and Fraction MACD is above 1, we indicate that the market is in bullish trend. Trading signal: Long signal (L) is indicated when the stock surpasses the weekly high, which formed when the fraction MACD breaches its signal line upward. Conversely, short signal (S) appears when the stock surpasses the weekly low, which formed when the fraction MACD breaches its signal line downward. Source: Bloomberg, Samsung Securities

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January 8, 2010

Li & Fung

Li & Fung (494.HK) monthly log, RS

50 40 30 20 50 40 30 20

10

10

11 10 9 8 7 6 5 4 3 2 1 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

11 10 9 8 7 6 5

Relative strength vs HSI (RHS)

4 3 2 1

Source: Bloomberg, Samsung Securities

A downward trend reversal is unlikely in the near term.

Our SSC model-based significant peaks have declined from HK$36.2 to HK$34.6 since Oct 2009, while the MACD has rapidly fallen into negative territory. That said, with the medium-term support line remaining intact, a downward trend reversal is unlikely in the near term. Our first and second support lines lie at HK$30 and HK$25, respectively, the latter carrying more importance technically, based on resistance lines formed between Apr~Jul 2009 and our SSC model-based meaningful troughs. Share-price declines year-t0-date have been mild despite the rapid decline in the MACD, thanks to bargain hunting demand, which has been equally as strong as selling pressure. All in all, a mild rather than deep correction is in the offing.

All in all, a mild rather than deep correction is in the offing.

Li & Fung (494.HK) daily log, MACD, Stochastics, RS

36.20
35

35.00

34.60

30

29.20 24.70 25.25

25.95

31.40

30.10

25

23.50
20.95

24.40
23.05
20

17.24 17.44
15

18.80

19.20

19.50

14.90

MACD (12,26 RHS) 12.40

90 80 70 60 50 40 30 20 10 December 2009 February March April May June July August

1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80

RS to HSI (RHS) Stochastics Slow (10,5,1)

September October November December 2010 February

Note: The Samsung stochastics cycle (SSC) model is used to determine short-to-medium-term trend reversals, and set meaningful resistance (or support) targets using stochastics (slow 10, 5). Meaningful resistance occurs at the Shares intraday peak during a period when the stochastics oscillator turns downward at the 70% level and falls to 30%. In contrast, meaningful support occurs at the Shares intraday trough during a period when stochastics turn upward at 30% and rise to the 70% threshold. Breakthroughs at such targets (30% and 70%) are thought to mark trend reversals Source: Bloomberg, Samsung Securities

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January 8, 2010

Li & Fung
INDEX

1. Business fundamentals 2. Valuation 3. Technical analysis 4. Bear Views & Blue Skies

p3 p17 p20 p22

Bear Views & Blue Skies

Our bear views valuation gives 42% downside, while our blue skies valuation gives 65% upside.

4. Bear Views & Blue Skies

The red pill, or the blue pill?

Markets are all about balance of probability. We provide strong opinions but do not ignore the possibility that events will go against us. We therefore try to quantify the risks if we are wrong. Given two stocks with an identical percentage upside to Target, it is critical to know that one has, for example 5% downside and the other 25%. We believe that this is how many investors think, and we attempt to reflect this in our research. Addressing the bear arguments

We address the bear arguments on Li & Fung.

There are several reasonable bearish arguments on Li & Fung that we will address here: 1. The companys organic growth is deeply negative in 2009. Without acquisitions, Li & Fung would not be growing at all this is not a sustainable business model. We argue that history shows that the market still rewards inorganic growth. We believe that Li & Fungs acquisition strategy has helped to build the companys sourcing matrix capabilities, enhancing its sustainable competitive advantage, and creating a new earnings stream in the U.S. Onshore business. We also think that Li & Fung will be able to return to organic growth from 2010e, benefiting from a better than expected macroeconomic recovery. Moreover, there are many opportunities for Li & Fung e.g. develop its inter-Asia sourcing business to cater to rising Asian consumer spending, spurring a new leg of growth in the mid-term. The companys strategy of buying growth must eventually lead to declining ROIC. Li & Fung is demonstrating that it can achieve (for the first time) operating leverage. This will result in improving return metrics. We anticipate that ROIC will improve from 15% to 32% 2008-11e. Li & Fung can only buy poor businesses at low multiples. Acquisitions or acquired outsourcing procurement contracts are of underperforming brands. Good businesses simply wont sell out to Li & Fung. The example of Wear Me Apparel, acquired for just 3.5x 2010e PE shows that Li & Fung is, in fact, well positioned to opportunistically buy decent businesses at good valuations. This is because acquisition targets realize that they can benefit from plugging in to the sourcing matrix, and Li & Fung does not have to enter a bidding war for acquisitions there are no competitors with anywhere near the same scale. The stock trades at consensus 24x 2010e PER. Surely, this must be too expensive for a company that has to buy all of its growth and is dangerously exposed to weak retail sales in The U.S. and Europe? We think that the macro will surprise on the upside - the company is nicely positioned for recovery. The stocks historical PER from 2003 has been 25x. We forecast 32% EPS CAGR 2009-11e, superior to the 27% EPS CAGR produced 2005-07, when the stock re-rated to over 35x PER. Our PER target of 25x is conservative considering fast EPS growth, recovering ROE, and EBIT margins going to new all time highs.
22

Li & Fung may develop its inter-Asia sourcing business to cater to rising Asian consumer spending, spurring a new leg of growth in the mid-term.

2.

Li & Fung does not have to enter a bidding war for acquisitions.

3.

Our PER target of 25x is conservative considering fast EPS growth, recovering ROE, and EBIT margins going to new all time highs.

4.

January 8, 2010

Li & Fung
For large clients, a face-toface relationship, rather than sourcing on-line, is necessary.

5.

Li & Fung is becoming a large company and is threatened by On-line competition e.g. Ali-Baba. At some point, the growth rate must slow, which should be followed a PE multiple de-rating. This argument must eventually be true, but we think that Li & Fung is far from reaching maturity yet (forecasting 32% EPS CAGR 2009-11e). Li & Fungs clients mostly source in size, so a face-toface business relationship, rather than sourcing via On-line methods, is necessary. We note that Li & Fung discontinued its Studio Direct On-line business unit six years ago. The company refuses to give any financial disclosure on how previous acquisitions are fairing. This is more than disappointing, and must mean that not all acquisitions have been successful. We completely agree with this point. We urge management to increase financial disclosure on previous acquisitions, so that the market can be reassured that the acquisition strategy is working overall.

We urge management to increase financial disclosure on previous acquisitions.

6.

Bear view valuation gives 42% downside

Our bear view quantifies the risks we see for Li & Fung by factoring in a worst case scenario

Our bear view quantifies the risks we see for Li & Fung by factoring in a worst case scenario into the valuation. In our bear view scenario we take the following assumptions: Sales stagnate. We factor in flat sales in 2009e, 2010e and 2011e. Despite the clear signs of economic stabilization and inventory restocking, plus acquisitions, we assume flat revenues from 2008e. Despite the positive trend we see at present, in our bear view we that margins stay flat from 2009e. We assume 2010e and 2011e net margin of 3.4%. Valuation multiples for the stock decline. We use 18x blended 2010/11e for our bear view PE target multiple.

We arrive at a blended 2010/11e EPS of HK$1.03, which is 40% below our base case forecast of HK$1.70.
..which emerges at HK$19 per share, implying 42% downside to the current share price.

Using a PE multiple target of 18x, and rounding to the nearest Hong Kong dollar, we arrive at bear view valuation of HK$19 per share. This implies 42% downside from the stocks current price. Blue sky valuation gives 65 % upside In our blue sky scenario, we keep our 2010e forecasts unchanged, but become more optimistic on our 2011e assumptions:

In our blue sky scenario, we become more optimistic for our 2011e assumptions.

We increase our 2011e YoY top line growth rate from +18% to +25%, resulting in 2011e group revenues of HK$186,156m. This could happen if the group continues to actively acquire. Net margins increase from 3.8% in 2010e to 4.1% in 2011e (up from our current 2011e base case assumption of 3.9%) due to further operating leverage gains. This results in 2011e EPS of HK$2.08. Valuation multiples for the stock become excited. We use 30x blended 2010/11e for our blue skies PE target multiple.

We arrive at a blended 2010/11e EPS of HK$1.81, which is 6% above our base case forecast of HK$1.70.
Our blue sky valuation implies 65% upside to the current share price.

Using a PE multiple target of 30x, and rounding to the nearest Hong Kong dollar, we arrive at blue skies valuation of HK$54 per share. This implies 65% upside to the stocks current price.

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Li & Fung ratios 2004-13E
FY ending 31 Dec YoY growth Total revenue Gross profit Core operating profit Total operating profit (EBIT) Net profit 10.6% 14.4% 17.9% 18.6% 19.4% 17.9% 31.0% 19.6% 21.1% 20.1% 22.3% 29.6% 26.0% 28.0% 23.0% 36.0% 33.2% 35.9% 49.2% 39.0% 19.8% 18.8% -3.2% -15.4% -20.9% 4.5% 6.4% 47.4% 49.4% 60.3% 28.7% 29.9% 41.9% 41.9% 45.4% 18.3% 19.4% 20.8% 20.8% 20.7% 15.5% 16.6% 18.4% 18.4% 18.0% 11.6% 12.6% 14.7% 14.7% 14.1% 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E

Margins GP margin Core OP margin OP margin Net margin 9.2% 3.3% 3.3% 3.2% 10.2% 3.3% 3.4% 3.2% 10.8% 3.4% 3.5% 3.2% 10.6% 3.4% 3.9% 3.3% 10.7% 2.8% 2.7% 2.2% 10.7% 3.9% 3.9% 3.4% 10.8% 4.3% 4.3% 3.8% 10.9% 4.4% 4.4% 3.9% 11.0% 4.5% 4.5% 4.0% 11.1% 4.7% 4.7% 4.0%

Returns ROE ROA ROIC 31.7% 13.2% 48.8% 38.7% 11.7% 30.6% 26.6% 10.0% 26.5% 31.0% 9.6% 22.7% 18.1% 6.5% 15.4% 21.8% 9.0% 21.5% 28.4% 11.3% 28.6% 31.2% 12.2% 32.4% 33.3% 13.0% 36.1% 34.5% 13.6% 38.7%

Working capital Inventory days AR days AP days 4 36 39 5 51 44 8 50 45 9 54 50 9 49 47 9 50 49 9 50 49 9 50 49 9 50 49 10 50 49

Gearing Current ratio Debt/equity Net cash/equity 2.7x 16.0% 33.9% 2.2x 54.3% -27.3% 2.3x 45.8% -4.8% 1.5x 61.2% -46.3% 1.3x 48.2% -31.2% 1.5x 35.8% -8.0% 1.8x 32.0% -2.6% 2.2x 29.1% 1.4% 2.5x 26.4% 6.1% 2.8x 23.9% 9.9%

Valuation PE PB EV/EBITDA Dividend yield 64.4x 20.3x 71.2x 2.0% 59.4x 22.8x 59.6x 1.5% 49.3x 13.0x 46.1x 1.7% 37.1x 11.4x 31.4x 2.2% 47.7x 8.6x 34.4x 1.7% 31.0x 6.7x 23.5x 2.6% 21.3x 6.0x 17.1x 3.8% 17.6x 5.5x 14.3x 4.6% 14.9x 5.0x 12.2x 5.4% 13.1x 4.5x 10.7x 6.1%

Source: Samsung Securities, Company reports

24

January 8, 2010

Li & Fung
Li & Fung income statement 2004-13E
FY ending 31 Dec, HK$m Total revenue Cost of sales 2004 47,171 -42,848 2005 55,617 -49,956 2006 68,010 -60,675 2007 92,460 -82,692 2008 110,722 -99,119 2009E 115,686 -103,343 2010E 148,925 -132,886 2011E 176,120 -156,976 2012E 203,408 -181,095 2013E 226,969 -201,845

Gross profit Other income Total core operating expenses

4,323 223 -2,990

5,661 264 -4,065

7,335 312 -5,303

9,768 518 -7,099

11,603 421 -8,940

12,343 463 -8,259

16,039 596 -10,182

19,144 704 -12,054

22,313 814 -13,902

25,125 908 -15,452

Core operating profit Gain on disposal of assets Other non-core operating expenses

1,556 0 0

1,861 28 -4

2,344 69 0

3,187 457 -43

3,084 0 -40

4,547 0 0

6,452 0 0

7,794 0 0

9,225 0 0

10,581 0 0

Total operating profit (EBIT)

1,556

1,885

2,412

3,600

3,044

4,547

6,452

7,794

9,225

10,581

Depreciation and amortization EBITDA

-145 1,701

-147 2,032

-217 2,629

-263 3,863

-482 3,527

-613 5,160

-629 7,081

-660 8,454

-700 9,924

-747 11,328

Interest income Interest expenses Share of profits of associates

43 -11 36

70 -21 9

98 -148 11

208 -500 5

113 -480 6

106 -416 6

159 -414 6

185 -414 6

216 -414 6

252 -414 6

PBT Taxation

1,623 -133

1,942 -151

2,373 -172

3,314 -253

2,683 -259

4,243 -361

6,204 -558

7,571 -757

9,033 -994

10,426 -1,251

PAT Minority interests

1,490 1

1,791 0

2,202 0

3,061 -1

2,424 -2

3,882 0

5,645 0

6,814 0

8,040 0

9,175 0

Net profit

1,491

1,790

2,202

3,060

2,422

3,882

5,645

6,814

8,040

9,175

Weighted average number of shares - diluted Diluted EPS (HK$)

2,928 0.51

3,243 0.55

3,312 0.66

3,464 0.88

3,520 0.69

3,664 1.06

3,664 1.54

3,664 1.86

3,664 2.19

3,664 2.50

YoY growth Total revenue Gross profit Core operating profit Total operating profit (EBIT) Net profit 10.6% 14.4% 17.9% 18.6% 19.4% 17.9% 31.0% 19.6% 21.1% 20.1% 22.3% 29.6% 26.0% 28.0% 23.0% 36.0% 33.2% 35.9% 49.2% 39.0% 19.8% 18.8% -3.2% -15.4% -20.9% 4.5% 6.4% 47.4% 49.4% 60.3% 28.7% 29.9% 41.9% 41.9% 45.4% 18.3% 19.4% 20.8% 20.8% 20.7% 15.5% 16.6% 18.4% 18.4% 18.0% 11.6% 12.6% 14.7% 14.7% 14.1%

Margins GP margin Core OP margin OP margin Net margin 9.2% 3.3% 3.3% 3.2% 10.2% 3.3% 3.4% 3.2% 10.8% 3.4% 3.5% 3.2% 10.6% 3.4% 3.9% 3.3% 10.7% 2.8% 2.7% 2.2% 10.7% 3.9% 3.9% 3.4% 10.8% 4.3% 4.3% 3.8% 10.9% 4.4% 4.4% 3.9% 11.0% 4.5% 4.5% 4.0% 11.1% 4.7% 4.7% 4.0%

Source: Samsung Securities, Company reports

25

January 8, 2010

Li & Fung
Li & Fung balance sheet 2004-13E
FY ending 31 Dec, HK$m Cash and bank balance Inventories Trade & bills receivables Prepayments, deposits and other receivables Due from related companies Derivative financial instruments Current assets 2004 2,350 458 4,642 767 29 0 8,247 2005 1,248 628 7,739 885 25 4 10,528 2006 3,394 1,331 9,231 1,316 62 0 15,335 2007 1,472 2,060 13,716 1,747 72 0 19,067 2008 2,275 2,329 14,715 2,028 84 35 21,466 2009E 4,950 2,492 15,847 2,155 84 35 25,563 2010E 5,842 3,204 20,401 2,774 84 35 32,340 2011E 6,675 3,871 24,126 3,281 84 35 38,071 2012E 7,839 4,465 27,864 3,790 84 35 44,076 2013E 8,993 5,253 31,092 4,228 84 35 49,686

PPE Intangible assets Prepaid premium for land leases Investment in associated companies Available for sale financial assets Deferred tax assets Investment securities Non-current assets

715 1,304 765 56 0 73 110 3,024

948 2,809 766 7 92 118 0 4,740

1,114 4,713 681 14 82 106 0 6,710

1,130 11,375 3 15 85 116 0 12,723

1,283 14,602 3 24 20 111 0 16,043

2,749 14,531 2 24 20 111 0 17,437

2,859 14,465 2 24 20 111 0 17,481

3,038 14,402 2 24 20 111 0 17,597

3,269 14,343 2 24 20 111 0 17,770

3,528 14,286 2 24 20 111 0 17,971

Total assets

11,270

15,268

22,045

31,789

37,509

43,000

49,821

55,668

61,846

67,657

Trade and bills payables Accrual charges and sundry payables Current portion of LT liabilities Short term bank loans Bank overdraft Bank advances for discounted bills Taxation payable Others Total current liabilities

4,625 741 41 203 0 0 291 125 6,026

6,059 1,006 0 0 204 1,554 391 648 9,862

7,544 1,316 0 2,777 92 123 321 765 12,937

11,231 2,395 0 442 205 328 466 1,279 16,346

12,667 2,772 0 278 93 313 466 1,259 17,848

13,873 2,831 0 200 93 313 466 1,259 19,036

17,840 3,641 0 200 93 313 466 1,259 23,811

21,074 4,301 0 200 93 313 466 1,259 27,705

24,311 4,961 0 200 93 313 466 1,259 31,604

27,097 5,530 0 200 93 313 466 1,259 34,958

Long term liabilities Balance of purchase consideration payable Pension obligations Deferred taxation Non-current liabilities

509 0 18 7 535

753 0 20 8 781

797 0 25 18 841

5,064 464 30 21 5,579

5,760 383 24 112 6,279

5,760 300 24 112 6,196

5,760 250 24 112 6,146

5,760 200 24 112 6,096

5,760 200 24 112 6,096

5,760 200 24 112 6,096

Share capital Reserves Proposed dividend Minority interest Total shareholders' equity

73 3,064 1,605 -32 4,709

73 3,540 1,043 -32 4,625

85 6,883 1,331 -32 8,267

86 8,082 1,727 -31 9,864

91 12,122 1,199 -30 13,382

91 15,580 2,127 -30 17,769

91 16,709 3,093 -30 19,864

91 18,072 3,734 -30 21,867

91 19,680 4,405 -30 24,147

91 21,515 5,027 -30 26,603

Total liabilities and shareholder's equity

11,270

15,268

22,045

31,789

37,509

43,000

49,821

55,668

61,846

67,657

Source: Samsung Securities, Company reports

26

January 8, 2010

Li & Fung
Li & Fung cashflow 2004-13E
FY ending 31 Dec, HK$m EBIT Depreciation and amortization Gain / Loss on disposals Others Operating profit before changes in working capital Change in working capital Cash generated from operating activities HK profits tax paid Overseas tax paid Net cash inflow / (outflow) from operating activities 2004 1,556 145 2 41 1,744 -524 1,221 -80 -26 1,115 2005 1,885 147 -25 47 2,054 174 2,228 -60 -54 2,114 2006 2,412 217 -62 58 2,625 -1,930 695 -149 -73 473 2007 3,600 263 -426 112 3,549 664 4,213 -122 -71 4,020 2008 3,044 482 -2 86 3,610 214 3,825 -165 -82 3,578 2009E 4,547 613 0 0 5,160 -156 5,004 -361 0 4,643 2010E 6,452 629 0 0 7,081 -1,109 5,972 -558 0 5,414 2011E 7,794 660 0 0 8,454 -1,005 7,449 -757 0 6,692 2012E 9,225 700 0 0 9,924 -943 8,982 -994 0 7,988 2013E 10,581 747 0 0 11,328 -1,101 10,227 -1,251 0 8,976

Purchase of PPE Acquisitions Settlement of consideration payable for acquisitions Disposals Interest Income Others Net cash inflow / (outflow) from operating activities

-206 -67 -146 6 43 -31 -401

-369 -708 -133 9 70 51 -1,079

-302 -1,264 -685 22 98 117 -2,014

-320 -4,565 -814 491 208 -36 -5,035

-494 -2,457 -919 73 113 -27 -3,711

-521 -1,468 -83 0 106 -12 -1,978

-655 0 -50 0 159 -12 -558

-757 0 -50 0 185 -12 -634

-854 0 0 0 216 -12 -650

-931 0 0 0 252 -12 -690

Net proceeds from new shares New bank loans Repayment of bank loans Issue of long-term notes Interest paid Dividends paid Others Net cash inflow / (outflow) from investing activities

122 0 0 0 -11 -1,078 -6 -973

175 0 -44 0 -14 -2,034 -191 -2,108

2,886 0 2,594 0 -148 -1,564 0 3,768

275 0 -2,737 3,862 -431 -2,051 0 -1,081

4,072 0 71 0 -400 -2,560 0 1,183

2,682 0 -78 0 -416 -2,178 0 10

0 0 0 0 -414 -3,550 0 -3,964

0 0 0 0 -414 -4,811 0 -5,225

0 0 0 0 -414 -5,760 0 -6,174

0 0 0 0 -414 -6,718 0 -7,132

Net increase / (decrease) in cash and cash equivalents Foreign exchange difference Cash and cash equivalents (year beginning) Cash and cash equivalents (year-end)

-259 15 2,391 2,147

-1,074 -29 2,147 1,044

2,228 31 1,044 3,302

-2,097 61 3,302 1,267

1,050 -135 1,267 2,182

2,675 0 2,182 4,857

892 0 4,857 5,748

833 0 5,748 6,581

1,164 0 6,581 7,745

1,155 0 7,745 8,900

Source: Samsung Securities, Company reports

27

January 8, 2010

Li & Fung
Appendix: Our favorite lines from The Matrix
Morpheus: This is your last chance. After this, there is no turning back. You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland and I show you how deep the rabbit-hole goes. Morpheus: The pill you took is part of a trace program. It's designed to disrupt your input/output carrier signal so we can pinpoint your location. Neo: What does that mean? Cypher: It means buckle your seatbelt, Dorothy, 'cause Kansas is going bye-bye. Oracle: I'd ask you to sit down, but, you're not going to anyway. And don't worry about the vase. Neo: What vase? [Neo turns to look for a vase, and as he does, he knocks over a vase of flowers, which shatters on the floor] Oracle: That vase. Neo: I'm sorry... Oracle: I said don't worry about it. I'll get one of my kids to fix it. Neo: How did you know? Oracle: Ohh, what's really going to bake your noodle later on is, would you still have broken it if I hadn't said anything? Neo: I know kung fu. Morpheus: [eyeing him, hand on chin] Show me. Morpheus: How did I beat you? Neo: You... you're too fast. Morpheus: Do you believe that my being stronger or faster has anything to do with my muscles in this place? Do you think that's air you're breathing now? Agent Smith: Tell me, Mr. Anderson, what good is a phone call when you are unable to speak? Neo: What are you trying to tell me? That I can dodge bullets? Morpheus: No, Neo. I'm trying to tell you that when you're ready, you won't have to. Neo: Okey dokey.. free my mind. Right, no problem, free my mind, free my mind, no problem, right... Oracle: You're cuter than I thought. I can see why she likes you. Neo: Who? Oracle: Not too bright, though. Agent Smith: Do you hear that, Mr. Anderson? That is the sound of inevitability. Cypher: I know what you're thinking, 'cause right now I'm thinking the same thing. Actually, I've been thinking it ever since I got here: Why oh why didn't I take the BLUE pill? Tank: So what do you need? Besides a miracle. Neo: Guns. Lots of guns. Trinity: Neo... nobody has ever done this before. Neo: That's why it's going to work. Source: neoandtrinity.net

28

January 8, 2010

Li & Fung

Disclosures & Disclaimers

For reports to be distributed to US: Securities research is prepared, issued and exclusively distributed by Samsung Securities (Asia) Limited in Hong Kong, an organization licensed with the Securities and Futures Commission of Hong Kong. This research may be distributed in the United States only to major institutional investors as defined under applicable US regulations and may not be circulated to any other person otherwise. All transactions by US investors involving securities discussed in this report must be effected through Samsung Securities (America) Inc., a broker-dealer registered with the US Securities & Exchange Commission and a member of the Financial Industry Regulatory Authority, and not through a non-U.S. affiliate. The analysts listed [on the front of this report] are employees of Samsung Securities (Asia) Limited, or a non-U.S. affiliate thereof, and are not registered/qualified as research analysts under applicable U.S. rules and regulations and may not be subject to U.S. restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. For reports to be distributed to UK: "This report is not an invitation nor is it intended to be an inducement to engage in investment activity for the purpose of section 21 of the Financial Services and Markets Act 2000 of the United Kingdom ("FSMA"). To the extent that this report does constitute such an invitation or inducement, it is directed only at (i) persons who are investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) of the United Kingdom (the "Financial Promotion Order"); (ii) persons who fall within Articles 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order; and (iii) any other persons to whom this report can, for the purposes of section 21 of FSMA, otherwise lawfully be made (all such persons together being referred to as "relevant persons"). Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. Persons who are not relevant persons should not rely on this report." For reports to be distributed to Korea: This report is for private circulation only, not for sale, and is issued and distributed only to persons who are regarded as professional investors as defined under the Financial Investment Services and Capital Markets Act of Korea. For reports to be distributed to Singapore: This report is provided pursuant to the financial advisory licensing exemption under Regulation 27(1)(e) of the Financial Advisers Regulation of Singapore and accordingly may only be provided to persons in Singapore who are institutional investors as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore. This report is intended only for the person to whom Samsung has provided this report and such person may not send, forward or transmit in any way this report or any copy of this report to any other person." Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on the overall revenues, including investment banking revenues of Samsung Securities (Asia) Limited and its related entities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Additional information is available upon request. Information has been obtained from sources believed to be reliable but Samsung do not warrant its completeness or accuracy except with respect to any disclosures relative to [Name of Issuer] and/or its affiliates and the analysts involvement with the issuer that is the subject of the research. The pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a Samsung subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

Copyright 2009 Samsung Securities (Asia) Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Samsung Securities (Asia) Limited.

29

January 29, 2010

Li & Fung (494 HK)

Company Update

The Ultimate Outsourcer

WHATS THE STORY?

Event: Li & Fung announced a major new deal to act as a direct sourcing agent for Wal-Mart, to add at least US$2bn per annum to top line from mid-2010. Impact: This deal proves that the companys sourcing network provides a sustainable competitive advantage. Li & Fung becomes the ultimate outsourcer. Action: The impact on market consensus EPS estimates will be limited to around +1% to +5% in 2010-11e. However, we expect valuation multiple expansion to 25x PER on better long-term growth prospects. BUY Li & Fung.

THE QUICK VIEW

Matt Marsden matthew.marsden@samsungfn.com +852 3411 3710

AT A GLANCE

After market close yesterday, Li & Fung announced that they have entered into a series of agreements to supply clothes and other consumer goods to Wal-Mart. This was followed by an international conference call.

Main points:
Management guide that the deal should initially generate an additional annual US$2bn of sales (conservatively) from July 2010e. Wal-Mart isnt obligated to any sourcing volume under the agreement or exclusivity to Li & Fung i.e. Wal-Mart may still source any goods from other suppliers (Li & Fung began supplying WalMart in 2003) but the deal is expected to become a major growth driver for Li & Fung for the next two three-year plans, through 2016. We estimate that Wal-Mart, the worlds largest retailer, will become Li & Fungs biggest client by 2012e, overtaking Kohls by sourcing US$2.5bn worth of goods. The long-term potential of this deal is clearly significant. We estimate that WalMart will add US$5bn to top line, with an EBIT margin of 1.5%, by 2017e. Li & Fung will create a buying agency within its network called WSG (Wal-Mart Sourcing Group) to handle the business, which will be based in Hong Kong and over time, will employ hundreds of employees, Li & Fung President Bruce Rockowitz said. The company is transferring top management talent to run the new unit, which will be co-located with Li & Fungs existing business. WSG will not compete with Wal-Marts direct sourcing arm. Wal-Mart will have a call option to acquire WSG after January 1, 2016. No details are available on the option price, but William Fung guided that the option represented a Fair deal for both parties. He added that this mechanism actually gave Li & Fung a higher degree of security than usual, as most clients could just leave at any time, if they became unhappy, without paying any penalty. The deal means that Li & Fung stands a very good chance of hitting its three-year plan revenue target of US$20bn by the end of 2010. We increase our 2010e top line estimate from US$19.2bn to US$20.2bn. The margins for WSG will be in line with those of a very high volume business, Rockowitz said. During the conference call, management guided that typical net margins for a very high volume client are between 1% and 4%. We increase our EPS estimates by 1% in 2010e, 2% in 2011e and 3% in 2012e.

HK$43.00
Target price Up/downside Current price Sector Market capitalization Shares outstanding (float) 52 week high-low Bloomberg One year performance Li & Fung Hang Seng Index 1M +1% -5% 6M +35% -1%

+33% HK$32.30
Sourcing US$15,743m 3,777m (61%) HK$36.20 14.22 494 HK 12M +102% 55%

SAMSUNG vs THE STREET

Dont fight The Matrix

Samsung target price vs Consensus Samsung 2010e EPS vs Consensus Street recommendation distribution

+14% +14%
67% Buy 17% Hold 17% Sell

Our 2010e EPS numbers are 14% ahead of consensus, driven by a combination of: Operating leverage (Li & Fung is demonstrably increasing EBIT margins for the first time). The impact of 2009 acquisitions. The impact of the new Wal-Mart deal. Plus a macro recovery which will surprise on the upside.

A replay of the call is available for 14 days on: International dialing: +852 2112 1555 Passcode: 218552#

This report has been prepared by Samsung Securities (Asia) Limited. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 8

January 29, 2010

Company Update Li & Fung

Dont fight The Matrix
Li & Fungs policy of acquisitive growth has created a global sourcing matrix, which represents a sustainable competitive advantage. The latest deal with Wal-Mart proves that Li & Fungs scale - the ability to source from over 15,000 suppliers in more than 40 territories - makes it an Automatic go to for retailers looking to improve their supply chain. We see 2009-11e EPS CAGR of 34% driven by:
50

blend our 2010e and 2011e EPS to arrive at HK$1.73 and multiply this figure by 25x to yield a PE multiple based priced target of HK$43, rounding to the nearest Hong Kong dollar No change to our target price). Our 12-month price objective represents 33% upside. We reiterate our three-star BUY rating on Li & Fung.
Li & Fung: 1-year forward PE band chart
30x
45 40 35 30 25 20 15 10 5

The macro recovery will surprise on the upside led by inventory restocking and a shift to an inflationary cycle. Importantly, Li & Fung is demonstrating operational leverage for the first time. We note that H1 2009 net income for Li & Fung in rose 13% YoY to HK$1.4bn (US$180m) on sales which were down 2% YoY to HK$46.3bn (US$6bn) due to cost savings. Management guide that margins will continue to improve in 2010e driven by continuing repositioning of staff and general cost efficiencies. Gains from recent acquisitions and the Wal-Mart deal.

HK$

25x 20x 15x

0
Jul-05 Jan-03 Jun-03 Jan-08 Nov-03 Sep-04 Dec-05 Aug-07 Jun-08 Nov-08 Sep-09 Jul-10 May-06 Dec-10 Apr-04 Oct-06 Feb-05 Mar-07 Apr-09 Feb-10

Please see our report Dont fight The MatrixOwn the Outsourcing Oracle, published January 8, 2010, for our full thesis.
Samsung forecasts: Old vs new 20010-12E
FY ending 31 Dec, HK$m 2010E Total turnover EBIT Diluted EPS (HK$) 2011E Total turnover EBIT Diluted EPS (HK$) 2012E Total turnover EBIT Diluted EPS (HK$) 222,783 9,515 2.26 203,408 9,225 2.19 10% 3% 3% 191,620 7,980 1.90 176,120 7,794 1.86 9% 2% 2% 156,675 6,530 1.56 148,925 6,452 1.54 5% 1% 1% New Old Change

Source: Bloomberg, Samsung Securities

Bear views and blue skies

Markets are all about balance of probability. We provide strong opinions but do not ignore the possibility that events will go against us. We therefore try to quantify the risks if we are wrong. Given two stocks with an identical percentage upside to Target, it is critical to know that one has, for example 5% downside and the other 25%. This is how many investors think, and we attempt to reflect this in our research.

Bear view valuation gives 41% downside

Our bear view quantifies the risks we see for Li & Fung by factoring in a worst case scenario into the valuation. In our bear view scenario we take the following assumptions: Sales stagnate. We factor in flat sales in 2009e, 2010e and 2011e. Despite the clear signs of economic stabilization and inventory restocking, plus acquisitions and the Wal-Mart deal, we assume flat revenues from 2008e. Despite the positive trend we see at present, in our bear view we that margins stay flat from 2009e. We assume 2010e and 2011e net margin of 3.4%. Valuation multiples for the stock decline. We use 18x blended 2010/11e for our bear view PE target multiple.

Source: Samsung Securities

Base case valuation gives 33% upside

We think that a moderate re-rating to the historical average 25x PE is justified by 34% 2009-11e EPS CAGR. Note - this CAGR is NOT inflated by calculating it from the cyclical low (which would be 2008), and is above the 27% EPS CAGR from 2005-07, which triggered a re-rating to over 30x PE. Given ROE recovery and all time high EBIT margins plus positive newsflow from better retail sales, a return to the average PE could even be conservative. In January 2011 we believe that the market will partly be pricing the stock from anticipated 2011 earnings. Thus, we

We arrive at a blended 2010/11e EPS of HK$1.03, which is 41% below our base case forecast of HK$1.73. Using a PE multiple target of 18x, and rounding to the nearest Hong Kong dollar, we arrive at bear view valuation of HK$19 per share. This implies 41% downside from the stocks current price.

January 29, 2010

Company Update Li & Fung

Blue sky valuation gives 73 % upside
In our blue sky scenario, we keep our 2010e forecasts unchanged, but become more optimistic on our 2011e assumptions: We increase our 2011e YoY top line growth rate from +22% to +25%, resulting in 2011e group revenues of HK$195,844m. This could happen if the group continues to actively acquire or the Wal-Mart business does better than estimated. Net margins increase from 3.8% in 2010e to 4.1% in 2011e (up from our current 2011e base case assumption of 3.9%) due to further operating leverage gains. This results in 2011e EPS of HK$2.19. Valuation multiples for the stock become excited. We use 30x blended 2010/11e for our blue skies PE target multiple. respond to changes in their immediate business environments? The solution for L&F has been to develop a planning process that creates stretch goals that are renewed every three years. In this rapidly changing world, five-year plans are too long and one-year budgets are too short to build anything meaningful (like client relationships). Three years seems to be just the right duration. From Competing in a Flat World, Fung, Fung and Wind, January 2008. L&Fs management publicly announce three-year plans. These are not public guidance but Stretch Goals. While the company does not always hit the self imposed targets (e.g. Li & Fung missed the 2002-2004 plan due to SARs and the general economic slowdown), we are impressed with the challenge and management focus that the plans generate. Group Managing Director William Fung has referred to the Self flagellation of meeting the three-year plans. For the current 2008-10 plan, the company has the following goals: To grow group revenues from US$12bn in 2007, to US$20bn in 2010. We forecast that Li & Fung can reach this goal, generating US$20.2bn top line by 2010e. US$4bn of revenues to come from the Onshore businesses. We forecast that this target will be hit. To achieve a 2x goal. To grow core operating profit at twice the rate of revenues to reach US$1bn by 2010 i.e. to create operating leverage. We forecast that core operating profit will reach US$843m by 2010e, 16% short of managements goal.

We arrive at a blended 2010/11e EPS of HK$1.88, which is 9% above our base case forecast of HK$1.73. Using a PE multiple target of 30x, and rounding to the nearest Hong Kong dollar, we arrive at blue skies valuation of HK$56 per share. This implies 73% upside to the stocks current price.

Self flagellation of the three-year plan

How do organizations plan in a way that allows for renewal but also creates enough stability so entrepreneurial units know where they stand? How do companies in a flat world balance the need to motivate their divisions to move towards a common goal with the freedom to allow them to

Li & Fung: Evolution of the 3-year plan 6,000 Create operating leverage. Active acquisition strategy.

5,000

4,000

3,000

2,000

Create new culture. Regional stream organization, operations focus and IT invesment.

New service agency model. Unbundling distribution and the creation of a "Menu of Services."

Lead industry change. Reinvent distribution through value-chain logistics.

1,000

0 Net profit forecast (HK$m)

1999-2001

2002-2004

2005-2007

2008-2010E

Source: Competing in a flat world, Samsung Securities

January 29, 2010

Company Update Li & Fung

Li & Fung Ratios 2004-13E
(FY ending 31 Dec) YoY growth Total revenue Gross profit Core operating profit Total operating profit (EBIT) Net profit 10.6% 14.4% 17.9% 18.6% 19.4% 17.9% 31.0% 19.6% 21.1% 20.1% 22.3% 29.6% 26.0% 28.0% 23.0% 36.0% 33.2% 35.9% 49.2% 39.0% 19.8% 18.8% -3.2% -15.4% -20.9% 4.5% 6.4% 47.4% 49.4% 60.3% 35.4% 36.7% 43.6% 43.6% 47.2% 22.3% 23.4% 22.2% 22.2% 22.1% 16.3% 17.3% 19.2% 19.2% 18.9% 12.3% 13.3% 14.9% 14.9% 14.3% 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2013E

Margins GP margin Core OP margin OP margin Net margin 9.2% 3.3% 3.3% 3.2% 10.2% 3.3% 3.4% 3.2% 10.8% 3.4% 3.5% 3.2% 10.6% 3.4% 3.9% 3.3% 10.7% 2.8% 2.7% 2.2% 10.7% 3.9% 3.9% 3.4% 10.8% 4.2% 4.2% 3.6% 10.9% 4.2% 4.2% 3.6% 11.0% 4.3% 4.3% 3.7% 11.1% 4.4% 4.4% 3.8%

Returns ROE ROA ROIC 31.7% 13.2% 48.8% 38.7% 11.7% 30.6% 26.6% 10.0% 26.5% 31.0% 9.6% 22.7% 18.1% 6.5% 15.4% 21.8% 9.0% 21.5% 28.7% 11.2% 28.6% 31.7% 12.0% 32.3% 34.0% 12.8% 36.0% 35.2% 13.3% 38.4%

Working capital Inventory days AR days AP days 4 36 39 5 51 44 8 50 45 9 54 50 9 49 47 9 50 49 9 50 49 9 50 49 9 50 49 10 50 49

Gearing Current ratio Debt/equity Net cash/equity 2.7x 16.0% 33.9% 2.2x 54.3% -27.3% 2.3x 45.8% -4.8% 1.5x 61.2% -46.3% 1.3x 48.2% -31.2% 1.5x 35.8% -8.0% 1.9x 32.0% -3.8% 2.3x 28.9% -0.7% 2.6x 26.1% 3.8% 2.9x 23.6% 7.2%

Valuation PE PB EV/EBITDA Dividend yield 63.4x 20.0x 70.2x 2.1% 58.5x 22.5x 58.7x 1.5% 48.6x 12.8x 45.4x 1.7% 36.6x 11.2x 30.9x 2.2% 46.9x 8.4x 33.8x 1.8% 30.5x 6.6x 23.1x 2.6% 20.7x 5.9x 16.7x 3.9% 17.0x 5.4x 13.8x 4.7% 14.3x 4.8x 11.7x 5.6% 12.5x 4.4x 10.2x 6.4%

Source: Company data, Samsung Securities, all multiples based on the close price of HK$32.3 on 28 Jan 2010

January 29, 2010

Company Update Li & Fung

Li & Fung Income statement 2004-13E
(FY ending 31 Dec, HK$m) Total revenue Cost of sales 2004 47,171 -42,848 2005 55,617 -49,956 2006 68,010 -60,675 2007 92,460 -82,692 2008 110,722 -99,119 2009E 115,686 -103,343 2010E 156,675 -139,802 2011E 191,620 -170,791 2012E 222,783 -198,344 2013E 250,219 -222,521

Gross profit Other income Total core operating expenses

4,323 223 -2,990

5,661 264 -4,065

7,335 312 -5,303

9,768 518 -7,099

11,603 421 -8,940

12,343 463 -8,259

16,873 627 -10,970

20,828 766 -13,615

24,439 891 -15,814

27,698 1,001 -17,770

Core operating profit Gain on disposal of assets Other non-core operating expenses

1,556 0 0

1,861 28 -4

2,344 69 0

3,187 457 -43

3,084 0 -40

4,547 0 0

6,530 0 0

7,980 0 0

9,515 0 0

10,930 0 0

Total operating profit (EBIT)

1,556

1,885

2,412

3,600

3,044

4,547

6,530

7,980

9,515

10,930

Depreciation and amortization EBITDA

-145 1,701

-147 2,032

-217 2,629

-263 3,863

-482 3,527

-613 5,160

-635 7,164

-675 8,655

-725 10,241

-784 11,714

Interest income Interest expenses Share of profits of associates

43 -11 36

70 -21 9

98 -148 11

208 -500 5

113 -480 6

106 -416 6

156 -414 6

174 -414 6

199 -414 6

231 -414 6

PBT Taxation

1,623 -133

1,942 -151

2,373 -172

3,314 -253

2,683 -259

4,243 -361

6,278 -565

7,747 -775

9,307 -1,024

10,753 -1,290

PAT Minority interests

1,490 1

1,791 0

2,202 0

3,061 -1

2,424 -2

3,882 0

5,713 0

6,972 0

8,284 0

9,463 0

Net profit

1,491

1,790

2,202

3,060

2,422

3,882

5,713

6,972

8,284

9,463

Weighted average number of shares - diluted Diluted EPS (HK$)

2,928 0.51

3,243 0.55

3,312 0.66

3,464 0.88

3,520 0.69

3,664 1.06

3,664 1.56

3,664 1.90

3,664 2.26

3,664 2.58

YoY growth Total revenue Gross profit Core operating profit Total operating profit (EBIT) Net profit 10.6% 14.4% 17.9% 18.6% 19.4% 17.9% 31.0% 19.6% 21.1% 20.1% 22.3% 29.6% 26.0% 28.0% 23.0% 36.0% 33.2% 35.9% 49.2% 39.0% 19.8% 18.8% -3.2% -15.4% -20.9% 4.5% 6.4% 47.4% 49.4% 60.3% 35.4% 36.7% 43.6% 43.6% 47.2% 22.3% 23.4% 22.2% 22.2% 22.0% 16.3% 17.3% 19.2% 19.2% 18.8% 12.3% 13.3% 14.9% 14.9% 14.2%

Margins GP margin Core OP margin OP margin Net margin 9.2% 3.3% 3.3% 3.2% 10.2% 3.3% 3.4% 3.2% 10.8% 3.4% 3.5% 3.2% 10.6% 3.4% 3.9% 3.3% 10.7% 2.8% 2.7% 2.2% 10.7% 3.9% 3.9% 3.4% 10.8% 4.2% 4.2% 3.6% 10.9% 4.2% 4.2% 3.6% 11.0% 4.3% 4.3% 3.7% 11.1% 4.4% 4.4% 3.8%

Source: Company data, Samsung Securities

January 29, 2010

Company Update Li & Fung

Li & Fung Balance sheet 2004-13E
(FY ending 31 Dec, HK$m) Cash and bank balance Inventories Trade & bills receivables Prepayments, deposits and other receivables Due from related companies Derivative financial instruments Current assets 2004 2,350 458 4,642 767 29 0 8,247 2005 1,248 628 7,739 885 25 4 10,528 2006 3,394 1,331 9,231 1,316 62 0 15,335 2007 1,472 2,060 13,716 1,747 72 0 19,067 2008 2,275 2,329 14,715 2,028 84 35 21,466 2009E 4,950 2,492 15,847 2,155 84 35 25,563 2010E 5,608 3,371 21,462 2,919 84 35 33,479 2011E 6,207 4,211 26,249 3,570 84 35 40,356 2012E 7,278 4,891 30,518 4,150 84 35 46,957 2013E 8,295 5,792 34,277 4,662 84 35 53,143

PPE Intangible assets Prepaid premium for land leases Investment in associated companies Available for sale financial assets Deferred tax assets Investment securities Non-current assets

715 1,304 765 56 0 73 110 3,024

948 2,809 766 7 92 118 0 4,740

1,114 4,713 681 14 82 106 0 6,710

1,130 11,375 3 15 85 116 0 12,723

1,283 14,602 3 24 20 111 0 16,043

2,749 14,531 2 24 20 111 0 17,437

2,888 14,465 2 24 20 111 0 17,510

3,118 14,402 2 24 20 111 0 17,677

3,405 14,343 2 24 20 111 0 17,905

3,722 14,286 2 24 20 111 0 18,165

Total assets

11,270

15,268

22,045

31,789

37,509

43,000

50,989

58,033

64,862

71,309

Trade and bills payables Accrual charges and sundry payables Current portion of LT liabilities Short term bank loans Bank overdraft Bank advances for discounted bills Taxation payable Others Total current liabilities

4,625 741 41 203 0 0 291 125 6,026

6,059 1,006 0 0 204 1,554 391 648 9,862

7,544 1,316 0 2,777 92 123 321 765 12,937

11,231 2,395 0 442 205 328 466 1,279 16,346

12,667 2,772 0 278 93 313 466 1,259 17,848

13,873 2,831 0 200 93 313 466 1,259 19,036

18,768 3,830 0 200 93 313 466 1,259 24,929

22,928 4,679 0 200 93 313 466 1,259 29,939

26,627 5,434 0 200 93 313 466 1,259 34,392

29,873 6,096 0 200 93 313 466 1,259 38,300

Long term liabilities Balance of purchase consideration payable Pension obligations Deferred taxation Non-current liabilities

509 0 18 7 535

753 0 20 8 781

797 0 25 18 841

5,064 464 30 21 5,579

5,760 383 24 112 6,279

5,760 300 24 112 6,196

5,760 250 24 112 6,146

5,760 200 24 112 6,096

5,760 200 24 112 6,096

5,760 200 24 112 6,096

Share capital Reserves Proposed dividend Minority interest Total shareholders' equity

73 3,064 1,605 -32 4,709

73 3,540 1,043 -32 4,625

85 6,883 1,331 -32 8,267

86 8,082 1,727 -31 9,864

91 12,122 1,199 -30 13,382

91 15,580 2,127 -30 17,769

91 16,723 3,130 -30 19,914

91 18,117 3,820 -30 21,999

91 19,774 4,539 -30 24,374

91 21,666 5,185 -30 26,913

Total liabilities and shareholder's equity

11,270

15,268

22,045

31,789

37,509

43,000

50,989

58,033

64,862

71,309

Source: Company data, Samsung Securities

January 29, 2010

Company Update Li & Fung

Li & Fung Cashflow 2004-13E
(FY ending 31 Dec, HK$m) EBIT Depreciation and amortization Gain / Loss on disposals Others Operating profit before changes in working capital Change in working capital Cash generated from operating activities HK profits tax paid Overseas tax paid Net cash inflow / (outflow) from operating activities 2004 1,556 145 2 41 1,744 -524 1,221 -80 -26 1,115 2005 1,885 147 -25 47 2,054 174 2,228 -60 -54 2,114 2006 2,412 217 -62 58 2,625 -1,930 695 -149 -73 473 2007 3,600 263 -426 112 3,549 664 4,213 -122 -71 4,020 2008 3,044 482 -2 86 3,610 214 3,825 -165 -82 3,578 2009E 4,547 613 0 0 5,160 -156 5,004 -361 0 4,643 2010E 6,530 635 0 0 7,164 -1,364 5,800 -565 0 5,235 2011E 7,980 675 0 0 8,655 -1,269 7,386 -775 0 6,611 2012E 9,515 725 0 0 10,241 -1,075 9,166 -1,024 0 8,142 2013E 10,930 784 0 0 11,714 -1,263 10,451 -1,290 0 9,161

Purchase of PPE Acquisitions Settlement of consideration payable for acquisitions Disposals Interest Income Others Net cash inflow / (outflow) from operating activities

-206 -67 -146 6 43 -31 -401

-369 -708 -133 9 70 51 -1,079

-302 -1,264 -685 22 98 117 -2,014

-320 -4,565 -814 491 208 -36 -5,035

-494 -2,457 -919 73 113 -27 -3,711

-521 -1,468 -83 0 106 -12 -1,978

-689 0 -50 0 156 -12 -596

-824 0 -50 0 174 -12 -711

-936 0 0 0 199 -12 -748

-1,026 0 0 0 231 -12 -807

Net proceeds from new shares New bank loans Repayment of bank loans Issue of long-term notes Interest paid Dividends paid Others Net cash inflow / (outflow) from investing activities

122 0 0 0 -11 -1,078 -6 -973

175 0 -44 0 -14 -2,034 -191 -2,108

2,886 0 2,594 0 -148 -1,564 0 3,768

275 0 -2,737 3,862 -431 -2,051 0 -1,081

4,072 0 71 0 -400 -2,560 0 1,183

2,682 0 -78 0 -416 -2,178 0 10

0 0 0 0 -414 -3,567 0 -3,981

0 0 0 0 -414 -4,888 0 -5,301

0 0 0 0 -414 -5,908 0 -6,322

0 0 0 0 -414 -6,924 0 -7,338

Net increase / (decrease) in cash and cash equivalents Foreign exchange difference Cash and cash equivalents (year beginning) Cash and cash equivalents (year-end)

-259 15 2,391 2,147

-1,074 -29 2,147 1,044

2,228 31 1,044 3,302

-2,097 61 3,302 1,267

1,050 -135 1,267 2,182

2,675 0 2,182 4,856

659 0 4,856 5,515

598 0 5,515 6,113

1,072 0 6,113 7,185

1,016 0 7,185 8,201

Source: Company data, Samsung Securities

January 29, 2010

Company Update Li & Fung

Disclosures & Disclaimers

For reports to be distributed to US: Securities research is prepared, issued and exclusively distributed by Samsung Securities (Asia) Limited in Hong Kong, an organization licensed with the Securities and Futures Commission of Hong Kong. This research may be distributed in the United States only to major institutional investors as defined under applicable US regulations and may not be circulated to any other person otherwise. All transactions by US investors involving securities discussed in this report must be effected through Samsung Securities (America) Inc., a broker-dealer registered with the US Securities & Exchange Commission and a member of the Financial Industry Regulatory Authority, and not through a non-U.S. affiliate. The analysts listed [on the front of this report] are employees of Samsung Securities (Asia) Limited, or a non-U.S. affiliate thereof, and are not registered/qualified as research analysts under applicable U.S. rules and regulations and may not be subject to U.S. restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. For reports to be distributed to UK: "This report is not an invitation nor is it intended to be an inducement to engage in investment activity for the purpose of section 21 of the Financial Services and Markets Act 2000 of the United Kingdom ("FSMA"). To the extent that this report does constitute such an invitation or inducement, it is directed only at (i) persons who are investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) of the United Kingdom (the "Financial Promotion Order"); (ii) persons who fall within Articles 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order; and (iii) any other persons to whom this report can, for the purposes of section 21 of FSMA, otherwise lawfully be made (all such persons together being referred to as "relevant persons"). Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. Persons who are not relevant persons should not rely on this report." 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Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on the overall revenues, including investment banking revenues of Samsung Securities (Asia) Limited and its related entities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Additional information is available upon request. Information has been obtained from sources believed to be reliable but Samsung do not warrant its completeness or accuracy except with respect to any disclosures relative to [Name of Issuer] and/or its affiliates and the analysts involvement with the issuer that is the subject of the research. The pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a Samsung subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

Copyright 2010 Samsung Securities (Asia) Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Samsung Securities (Asia) Limited.

March 25, 2010

Li & Fung Ltd (494 HK)

Company Update

The Matrix unplugged

WHATS THE STORY?

Event: Li & Fung reported record earnings in 2009, with 39% YoY net profit growth in the toughest ever trading environment. Management gave upbeat guidance for 2010 and long-term growth prospects look rosy. Unfortunately, the markets expectations have become unplugged from reality. The 2009 results actually missed consensus net profit estimates by 10%, and for the first time ever YoY revenues fell, by 6%. All gains were from cost cutting, acquisitions and new outsourcing deals. Impact: Li & Fung has been the best performer in the HSI so far this year, gaining 29% YTD. The stock will surely correct downwards after missing the markets estimates by such a wide margin. The stock was within a whisker of reaching our old target price of HK$43.00, reaching an all time high of HK$42.45 yesterday. We now downgrade our EPS by 12% in 2010e, and 4% in 2011e, and reduce our 12-month target by 7% to HK$40.00. Even though the long-term prospects still look good, market estimates have become over-optimistic. We expect a rash of consensus EPS downgrades. We downgrade the stock to a SELL. Our new target is 4% below the current share price. Action: At 30.5x 2010e PE, the stock price has run ahead of itself. We recommend that investors take profits.

Matthew Marsden Analyst matthew.marsden@samsungfn.com +852 3411 3710 Summer Wang Research Associate summer.wang@samsungfn.com +852 3411 3723
AT A GLANCE

We think that the stock price is likely to overshoot on the downside. Traders should look to profit from shorting this stock in the near-term. We suggest a short Li & Fung / long Esprit pair trade. We suggest that longer-term investors look to re-enter the stock at around HK$35.00 (-17% from the current level).

HK$40.00
Target price Up/downside Current price Market capitalization Shares outstanding (float) 52 week high-low Bloomberg One year performance Li & Fung Ltd Hang Seng Index

-4% HK$41.75
HK$158.0bn 3.78bn (70%) HK$42.05-18.00 1M 494 HK 6M 12M

Welcome back to reality Li & Fung has gained 27% since we initiated coverage on January 8 2010, and has been the best performer in the HSI, outperforming the index by 33% YTD. The stock came within a whisker of hitting our old target price of HK$43.00 when it made a new all time high of HK$42.45 yesterday. Unfortunately, market consensus estimates have become unplugged from reality. The 2009 results released after market close yesterday revealed a net profit number of HK$3,369m, which was 14% below our forecast, and 10% below Bloomberg market consensus. After such a stellar performance, we dont believe that the stock will be able to withstand such a significant earnings miss unscathed. In the Q&A session at the analysts meeting in Hong Kong yesterday, William Fung, who is preparing for his third marathon in London on 25 April, apologized to the analysts present. Dr. Fung said that the company probably should have given updated guidance, when they realized that revenues were going to be down YoY in late 2009 previously Li & Fungs guidance was for flat 2009 revenues. Given the better than expected operational leverage achieved in 2009, if revenues were flat then market consensus expectations would not have been disappointed.

+17% +38% +117% +3% 0% +51%

SAMSUNG vs THE STREET

Early seller catches the worm

Target price vs Consensus 2011e EPS vs Consensus Recommendation distribution

-5% +0%
68% Buy 16% Hold 16% Sell

The market has become over-bullish on this stock with a 68% BUY rating distribution. This is the first SELL published since mid December 2009 (when the stock was at HK$31), according to Bloomberg. We believe that this report will be amongst the first of a series of downgrades as the market adjusts EPS figures back to reality.

This report has been prepared by Samsung Securities (Asia) Limited. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 9

March 25, 2010

Company Update Li & Fung Ltd

The sound of inevitability Ironically, the 2009 results show areas of strength: The company delivered strong operating leverage during the year due to effective cost control measures. Indeed, Li & Fung delivered record net profit in 2009. Margins improved from 2008 due to strong relative performance from the onshore businesses and increasing contribution from higher margin valueadded services. Overall core operating margin expanded from 2.8% in 2008 to 3.8% in 2009. Turnover was affected by exceptionally weak consumer sentiment combined with inventory destocking and customer insolvencies, which could be considered one-off events. The business was also affected by record 9% deflation in 2009. Li & Fung guide that they expect overall inflation to be flat in 2010. We recommend longer-term investors to look to re-enter the stock at around HK$35.00 (-17% from the stocks current level).
Li & Fung: Wal-Mart deal contribution to group revenue
700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2010E 2011E 2012E 2013E 2014E 2015E 2016E

Total revenue (HK$m) Source: Samsung Securities forecasts

Wal-mart Sourcing Group (HK$m)

Disciplined valuation call; Short 494 / Long 330 We must stress that we dont see Li & Fung as a long-term structural short; this is a disciplined valuation call. However, we do see a pair trade opportunity; Short Li & Fung / Long Esprit (330 HK, BUY rating, Target Price HK$79.00). We have the most bullish view on the street on Esprit. We think the company's fortunes will turn around as we go through CY10, driven by: Solid progress in the Retail Division, the positive sales momentum seen in Q2 FY10 (October December 2009) of +18.5% YoY should continue, driven by new store openings and a return to gentle same-store-sales growth. We think that this will combine with margin expansion to deliver FY10e Retail Division EBIT YoY growth of over 20%. An ending of the deterioration in the Wholesale Division. We think that the weak franchise partners are being shaken out. Management guide that wholesale orders will be encouraged by the new designs and positive Retail Division same-store-sales growth. We anticipate that the Wholesale Division will return to gentle growth in H1 FY11e. Moreover, Esprit will gain 100% control of their China business, which will add around 4% to EPS and become a long-term earnings driver. We see a return to EPS growth by 34% YoY in FY11e, and a re-rating to the average PE multiple of 16x (Esprit is currently trading on a FY11e PE of 12.0x).

Moreover, management guidance for 2010 and beyond is upbeat: Top line growth for 2010 YTD is north of 20%. The company is very well positioned to continue to take market share and benefit from the long slow recovery and ongoing inventory restocking cycle. The mother of all outsourcing deals with Wal-Mart should contribute to earnings from 2011e. Due to start up costs, we forecast no contribution to the bottom line from the Wal-Mart deal in 2010. We forecast that Wal-Mart will add HK$186m to group EBIT in 2011e (2% of total group EBIT) growing to HK$775m in 2013 (6% of total EBIT). Li & Fung will continue to benefit from operational leverage in 2010, as cost cuts made in Q4 2009 filter through to operational expenses. For the existing business, excluding recent acquisitions and outsourcing deals, operating costs should be able to drop again on an absolute basis in 2011e.

We forecast an underlying net profit CAGR of 31% 201012e. But, we believe that, trading at a 2010e PE multiple of 30.5x, all of the good news is priced in. We note that Li & Fung is trading at the top of its PE band range see the chart on page 3. Moreover, our 2010e PE estimate of 30.5x factors in 52% YoY net income growth this year. For now, we believe that the stock price will inevitably underperform for a period as the market adjusts its forecasts downwards.

March 25, 2010

Company Update Li & Fung Ltd

Our 12-month target price for Esprit is HK$79.00, representing 33% upside, and is the highest in the market. Moreover, we notice that the PE valuation premium commanded by Li & Fung vs Esprit has never been higher. We think that the market will now correct this anomaly.
Esprit vs Li & Fung: One year forward rolling PE bands
40x 35x 30x

Please see our reports on Li & Fung Dont fight The MatrixOwn the Outsourcing Oracle, published January 8, 2010, and our latest report on Esprit The last piece of bad news. BUY!, published on February 4 2010 for our full thesis on these stocks. Valuation: Base case gives 4% downside We think that a moderate de-rating to the historical average 25x PE is justified by the earnings miss, which will cause a flurry of consensus EPS downgrades on the stock. In March 2011 we believe that the market will partly be pricing the stock from anticipated 2011 earnings. Thus, we blend our 2010e and 2011e EPS to arrive at HK$1.59 and multiply this figure by 25x to yield a PE multiple based priced target of HK$40.00, rounding to the nearest Hong Kong dollar.

25x
20x 15x 10x 5x 0x Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Jul-09 Nov-09 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Our 12-month price objective represents 4% downside. That leads us to downgrade our rating to SELL.
Li & Fung: 1-year forward PE band chart
50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 30x HK$ 25x 20x 15x

ESPRIT HOLDINGS Source: Datastream

LI & FUNG

The currency issue One word of caution; It is widely known that Esprits earnings are highly correlated to EUR / HK$ movement as 85% of sales are in Europe and all profits are reported in HK$. There is a clear currency translation effect - a 1% increase in the EUR vs HK$ translates into around a 1% EPS increase, and vice-versa. We understand that some investors may be nervous about market speculation of a sharp reversal in the dollars fortunes in 2010 hurting Esprits earnings.

Source: Bloomberg, Samsung Securities

In H2 FY09 (January June) average EUR / HK$ was 10.35. Today EUR / HK$ is back at 10.35. If the Euro weakens by more than 4% on average over the next three months, Esprit would experience negative currency effects in H2 FY10e results.
Li & Fung: Samsung forecasts old vs new 2010-12E
HK$m, FY ending 31 Dec 2010E Total turnover EBIT Diluted EPS (HK$) 2011E Total turnover EBIT Diluted EPS (HK$) 2012E Total turnover EBIT Diluted EPS (HK$) Source: Samsung Securities New 142,728 5,828 1.38 182,925 7,746 1.83 234,255 9,883 2.34 Old 156,675 6,530 1.56 191,620 7,980 1.90 222,783 9,515 2.26 Change -9% -11% -12% -5% -3% -4% 5% 4% 4%

Bear views and blue skies Markets are all about balance of probability. We provide strong opinions but do not ignore the possibility that events will go against us. We therefore try to quantify the risks if we are wrong. Given two stocks with an identical percentage upside to Target, it is critical to know that one has, for example 5% downside and the other 25%. This is how many investors think, and we attempt to reflect this in our research. Bear view valuation gives 52% downside Our bear view quantifies the risks we see for Li & Fung by factoring a worst case scenario into the valuation. In our bear view scenario we take the following assumptions: We factor in 10% YoY sales growth in 2010e. This is below management guidance for revenue growth north of 20% so far in 2010, and ignores the clear signs of economic

March 25, 2010

Company Update Li & Fung Ltd

stabilization and inventory restocking, plus acquisitions and the Wal-Mart deal, which should boost revenue growth further. Despite the positive trend we see at present, in our bear view we that margins stay flat from 2009. We assume 2010e net margin of 3.2%. Valuation multiples for the stock decline to 20x PE, and we use 2010e EPS. Blue sky valuation gives 27 % upside In our blue sky scenario, we use a DCF model to capture the long-term value of Li & Fung. We provide a three-stage DCF valuation, using a WACC of 10.5%. We explicitly forecast out for ten years to the end of 2019e. We then assume a 3.0% terminal FCF growth rate into perpetuity. Our DCF fair value emerges at HK$53.00 per share, rounding to the nearest Hong Kong dollar, implying 27% upside.
Li & Fung: DCF valuation
Risk free rate Equity risk premium Beta Cost of equity Cost of debt Tax rate WACC Explicit forecast (HK$m) NOPAT Depreciation and amortization Change in working capital Capex Free Cash Flow PV of FCF Sum of PV of explicit forecast Terminal growth assumption WACC FCF at 2020E Terminal value of FCF at 2019a PV of terminal forecast Enterprise Value Net debt (2009E) Intrinsic Market value Value per share (HK$) Current price (HK$, 24 March 2010) Upside potential Source: Samsung Securities 4.0% 7.0% 0.93 10.5% 3.0% 10.0% 10.5% 2009 3,621 540 1,483 -470 5,174 2010E 5,408 462 -1,783 -628 3,459 3,209 70,234 2011E 7,126 544 -1,222 -787 5,662 4,754 2012E 9,043 652 -1,479 -984 7,232 5,494 2013E 11,437 752 -2,173 -1,217 8,799 6,049 2014E 14,248 823 -2,265 -1,479 11,327 7,046 2015E 17,075 910 -2,332 -1,730 13,924 7,838 2016E 19,487 997 -1,101 -1,808 17,575 8,952 2017E 21,717 1,083 -1,843 -1,892 19,065 8,788 2018E 23,815 1,168 -1,192 -1,959 21,833 9,106 2019E 25,897 1,252 -1,282 -2,027 23,840 8,998

We arrive at a 2010e EPS of HK$0.99, which is 38% below our base case forecast of HK$1.38. Using a PE multiple target of 20x, and rounding to the nearest Hong Kong dollar, we arrive at bear view valuation of HK$20 per share. This implies 52% downside from the stocks current price.

Agent Smith: Do you hear that Mr. Anderson? That is the sound of inevitability. Source: The Matrix, 1999.

3.0% 10.5% 24,555 326,961 123,404 193,638 2,572 196,210 53.0 41.8 27% HK$ 9.5% 10.0% 10.5% 11.0% 11.5% 2.0% 52.7 50.6 48.8 47.2 45.7 LT Growth Rate 2.5% 3.0% 55.2 58.1 52.8 55.4 50.8 53.0 49.0 50.9 47.3 49.1 3.5% 61.5 58.3 55.6 53.2 51.1 4.0% 65.6 61.7 58.5 55.7 53.3

WACC

March 25, 2010

Company Update Li & Fung Ltd

Li & Fung: Financial ratios

FY ending 31 Dec YoY growth Total revenue Gross profit Core operating profit Total operating profit (EBIT) Net profit Margins Gross margin Core operating margin EBIT margin Net margin Returns ROE ROA ROIC Working capital Inventory days AR days AP days Gearing Current ratio Debt/equity Net cash/equity Valuation PE PB EV/EBITDA Dividend yield 2004 10.6% 14.4% 17.9% 18.6% 19.4% 2005 17.9% 31.0% 19.6% 21.1% 20.1% 2006 22.3% 29.6% 26.0% 28.0% 23.0% 2007 36.0% 33.2% 35.9% 49.2% 39.0% 2008 19.8% 18.8% -3.2% -15.4% -20.9% 2009 -5.6% 4.0% 29.4% 27.4% 39.1% 2010E 36.6% 28.6% 46.1% 50.2% 51.9% 2011E 28.2% 29.3% 32.9% 32.9% 32.8% 2012E 28.1% 29.2% 27.6% 27.6% 28.2% 2013E 26.7% 27.8% 27.2% 27.2% 27.5%

9.2% 3.3% 3.3% 3.2%

10.2% 3.3% 3.4% 3.2%

10.8% 3.4% 3.5% 3.2%

10.6% 3.4% 3.9% 3.3%

10.7% 2.8% 2.7% 2.2%

10.8% 3.8% 3.7% 3.2%

10.9% 4.1% 4.1% 3.6%

11.0% 4.2% 4.2% 3.7%

11.1% 4.2% 4.2% 3.7%

11.2% 4.2% 4.2% 3.7%

31.7% 13.2% 48.8%

38.7% 11.7% 30.6%

26.6% 10.0% 26.5%

31.0% 9.6% 22.7%

18.1% 6.5% 15.4%

19.0% 8.1% 18.4%

26.1% 10.7% 22.3%

31.2% 12.2% 26.6%

35.5% 13.2% 30.6%

39.6% 14.2% 34.9%

4 36 39

5 51 44

8 50 45

9 54 50

9 49 47

9 44 47

9 48 49

9 48 49

9 48 49

10 48 49

2.7x 16.0% 33.9%

2.2x 54.3% -27.3%

2.3x 45.8% -4.8%

1.5x 61.2% -46.3%

1.3x 48.2% -31.2%

1.1x 38.2% -14.5%

1.2x 34.6% -26.8%

1.4x 31.1% -25.4%

1.7x 27.6% -22.9%

2.1x 24.2% -18.9%

82.0x 25.8x 92.3x 1.6%

75.6x 29.1x 77.3x 1.2%

62.8x 16.6x 59.8x 1.3%

47.3x 14.5x 40.7x 1.7%

60.7x 10.9x 44.5x 1.4%

46.1x 8.7x 35.5x 1.8%

30.4x 7.9x 25.0x 2.6%

22.9x 7.1x 18.9x 3.5%

17.8x 6.3x 14.9x 4.5%

14.0x 5.5x 11.8x 5.8%

Source: Company data, Samsung Securities, Valuation based on HK$41.75 as at market close 24 March 2010

March 25, 2010

Company Update Li & Fung Ltd

Li & Fung: Income statement

HK$m, FY ending 31 Dec Total revenue Cost of sales Gross profit Other income Total core operating expenses Core operating profit Gain on disposal of assets Other non-core operating expenses Total operating profit (EBIT) Depreciation and amortization EBITDA Interest income Interest expenses Share of profits of associates PBT Taxation PAT Minority interests Net profit Weighted average number of shares - diluted Diluted EPS (HK$) DPS (HK$) YoY growth Total revenue Gross profit Core operating profit Total operating profit (EBIT) Net profit Margins Gross margin Core operating margin EBIT margin Net margin Source: Company data, Samsung Securities 2004 47,171 -42,848 4,323 223 -2,990 1,556 0 0 1,556 -145 1,701 43 -11 36 1,623 -133 1,490 1 1,491 2,928 0.51 0.67 2005 55,617 -49,956 5,661 264 -4,065 1,861 28 -4 1,885 -147 2,032 70 -21 9 1,942 -151 1,791 0 1,790 3,243 0.55 0.49 2006 68,010 -60,675 7,335 312 -5,303 2,344 69 0 2,412 -217 2,629 98 -148 11 2,373 -172 2,202 0 2,202 3,312 0.66 0.56 2007 92,460 -82,692 9,768 518 -7,099 3,187 457 -43 3,600 -263 3,863 208 -500 5 3,314 -253 3,061 -1 3,060 3,464 0.88 0.72 2008 110,722 -99,119 11,603 421 -8,940 3,084 0 -40 3,044 -482 3,527 113 -480 6 2,683 -259 2,424 -2 2,422 3,520 0.69 0.57 2009 104,479 -92,406 12,073 645 -8,727 3,990 0 -111 3,880 -540 4,420 91 -372 8 3,606 -240 3,366 3 3,369 3,720 0.91 0.77 2010E 142,728 -127,205 15,524 571 -10,266 5,828 0 0 5,828 -462 6,290 85 -406 8 5,514 -397 5,117 0 5,117 3,720 1.38 1.11 2011E 182,925 -162,847 20,079 732 -13,064 7,746 0 0 7,746 -544 8,291 40 -406 8 7,388 -591 6,797 0 6,797 3,720 1.83 1.47 2012E 234,255 -208,308 25,947 937 -17,001 9,883 0 0 9,883 -652 10,535 34 -406 8 9,519 -809 8,710 0 8,710 3,720 2.34 1.88 2013E 296,805 -263,633 33,172 1,187 -21,792 12,568 0 0 12,568 -752 13,320 38 -406 8 12,207 -1,099 11,108 0 11,108 3,720 2.99 2.40

10.6% 14.4% 17.9% 18.6% 19.4%

17.9% 31.0% 19.6% 21.1% 20.1%

22.3% 29.6% 26.0% 28.0% 23.0%

36.0% 33.2% 35.9% 49.2% 39.0%

19.8% 18.8% -3.2% -15.4% -20.9%

-5.6% 4.0% 29.4% 27.4% 39.1%

36.6% 28.6% 46.1% 50.2% 51.9%

28.2% 29.3% 32.9% 32.9% 32.8%

28.1% 29.2% 27.6% 27.6% 28.2%

26.7% 27.8% 27.2% 27.2% 27.5%

9.2% 3.3% 3.3% 3.2%

10.2% 3.3% 3.4% 3.2%

10.8% 3.4% 3.5% 3.2%

10.6% 3.4% 3.9% 3.3%

10.7% 2.8% 2.7% 2.2%

10.8% 3.8% 3.7% 3.2%

10.9% 4.1% 4.1% 3.6%

11.0% 4.2% 4.2% 3.7%

11.1% 4.2% 4.2% 3.7%

11.2% 4.2% 4.2% 3.7%

March 25, 2010

Company Update Li & Fung Ltd

Li &Fung: Balance sheet
HK$m, FY ending 31 Dec Cash and bank balance Inventories Trade & bills receivables Prepayments, deposits and other receivables Due from related companies Derivative financial instruments Current assets PPE Intangible assets Prepaid premium for land leases Investment in associated companies Available for sale financial assets Deferred tax assets Investment securities Non-current assets Total assets Trade and bills payables Accrual charges and sundry payables Current portion of LT liabilities Short term bank loans Bank overdraft Bank advances for discounted bills Taxation payable Others Total current liabilities Long term liabilities Balance of purchase consideration payable Pension obligations Deferred taxation Non-current liabilities Share capital Reserves Proposed dividend Minority interest Total shareholders' equity Total liabilities and shareholder's equity Source: Company data, Samsung Securities 2004 2,350 458 4,642 767 29 0 8,247 715 1,304 765 56 0 73 110 3,024 11,270 4,625 741 41 203 0 0 291 125 6,026 509 0 18 7 535 73 3,064 1,605 -32 4,709 11,270 2005 1,248 628 7,739 885 25 4 10,528 948 2,809 766 7 92 118 0 4,740 15,268 6,059 1,006 0 0 204 1,554 391 648 9,862 753 0 20 8 781 73 3,540 1,043 -32 4,625 15,268 2006 3,394 1,331 9,231 1,316 62 0 15,335 1,114 4,713 681 14 82 106 0 6,710 22,045 7,544 1,316 0 2,777 92 123 321 765 12,937 797 0 25 18 841 85 6,883 1,331 -32 8,267 22,045 2007 1,472 2,060 13,716 1,747 72 0 19,067 1,130 11,375 3 15 85 116 0 12,723 31,789 11,231 2,395 0 442 205 328 466 1,279 16,346 5,064 464 30 21 5,579 86 8,082 1,727 -31 9,864 31,789 2008 2,275 2,329 14,715 2,028 84 35 21,466 1,283 14,602 3 24 20 111 0 16,043 37,509 12,667 2,772 0 278 93 313 466 1,259 17,848 5,760 383 24 112 6,279 91 12,122 1,199 -30 13,382 37,509 2009 4,202 2,383 12,561 2,332 99 3 21,579 1,256 18,203 2 28 720 58 0 20,267 41,847 12,005 3,120 0 0 47 302 521 1,462 17,458 6,425 140 26 71 6,662 94 15,811 1,854 -33 17,726 41,847 2010E 1,530 3,067 18,770 2,659 99 3 26,127 2,745 18,098 2 28 720 58 0 21,651 47,778 17,077 3,485 0 0 47 302 521 0 21,432 6,425 250 26 71 6,772 94 16,834 2,679 -33 19,574 47,778 2011E 1,236 4,015 24,056 3,408 99 3 32,817 4,101 18,002 2 28 720 58 0 22,911 55,728 21,862 4,462 0 0 47 302 521 0 27,194 6,425 200 26 71 6,722 94 18,194 3,558 -33 21,813 55,728 2012E 1,150 5,136 30,806 4,364 99 3 41,558 5,537 17,916 2 28 720 58 0 24,262 65,820 27,965 5,707 0 0 47 302 521 0 34,542 6,425 200 26 71 6,722 94 19,936 4,560 -33 24,556 65,820 2013E 1,471 6,862 39,032 5,530 99 3 52,996 6,601 17,835 2 28 720 58 0 25,244 78,240 35,392 7,223 0 0 47 302 521 0 43,485 6,425 200 26 71 6,722 94 22,157 5,815 -33 28,033 78,240

March 25, 2010

Company Update Li & Fung Ltd

Li & Fung: Cash flow
HK$m, FY ending 31 Dec EBIT Depreciation and amortization Others Operating profit before changes in working capital Change in working capital Tax paid Net cash inflow / (outflow) from operating activities Capex Disposals Interest Income Others Net cash inflow / (outflow) from operating activities Net proceeds from new shares Change in bank loans Issue of long-term notes Interest paid Dividends paid Others Net cash inflow / (outflow) from investing activities Net increase / (decrease) in cash and cash equivalents Foreign exchange difference Cash and cash equivalents (year beginning) Cash and cash equivalents (year end) Source: Company data, Samsung Securities 2004 1,556 145 43 1,744 -524 -106 1,115 -419 6 43 -31 -401 122 0 0 -11 -1,078 -6 -973 -259 15 2,391 2,147 2005 1,885 147 22 2,054 174 -115 2,114 -1,209 9 70 51 -1,079 175 -44 0 -14 -2,034 -146 -2,108 -1,074 -29 2,147 1,044 2006 2,412 217 -4 2,625 -1,930 -222 473 -2,252 22 98 117 -2,014 2,886 2,594 0 -148 -1,564 -2,594 3,768 2,228 31 1,044 3,302 2007 3,600 263 -314 3,549 664 -193 4,020 -5,699 491 208 -36 -5,035 275 -2,737 3,862 -431 -2,051 2,737 -1,081 -2,097 61 3,302 1,267 2008 3,044 482 84 3,610 214 -247 3,578 -3,870 73 113 -27 -3,711 4,072 71 0 -400 -2,560 -71 1,183 1,050 -135 1,267 2,182 2009 3,880 540 0 4,420 1,483 -240 5,662 -1,978 0 91 -3,828 -5,715 2,682 -335 0 -372 -2,179 0 -538 1,973 0 2,182 4,155 2010E 5,828 462 0 6,290 -1,783 -397 4,110 -3,181 0 85 -10 -3,106 0 0 0 -406 -3,269 0 -3,676 -2,672 0 4,155 1,483 2011E 7,746 544 0 8,291 -1,222 -591 6,477 -1,837 0 40 -10 -1,807 0 0 0 -406 -4,558 0 -4,964 -294 0 1,483 1,189 2012E 9,883 652 0 10,535 -1,479 -809 8,247 -1,984 0 34 -10 -1,960 0 0 0 -406 -5,966 0 -6,373 -86 0 1,189 1,103 2013E 12,568 752 0 13,320 -2,173 -1,099 10,048 -1,717 0 38 -10 -1,689 0 0 0 -406 -7,631 0 -8,038 321 0 1,103 1,424

March 25, 2010

Company Update Li & Fung Ltd

Disclosures & Disclaimers
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