Annual Report 2007 Key Financial Highlights
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07 Contents 2 Corporate Information 3 Key Financial Highlights 6 Chairman’s Statement 12 Management Discussion & Analysis 22 Corporate Governance 38 Directors and Senior Management 42 Information for Investors 43 Report of the Directors 56 Independent Auditor’s Report 58 Statement of Accounts 132 Ten-Year Financial Summary Corporate Information Non-Executive Directors Executive Directors Victor FUNG Kwok King, Chairman William FUNG Kwok Lun, Managing Director Paul Edward SELWAY-SWIFT* Bruce Philip ROCKOWITZ Allan WONG Chi Yun* Henry CHAN Franklin Warren McFARLAN* Danny LAU Sai Wing Makoto YASUDA* Annabella LEUNG Wai Ping LAU Butt Farn * Independent Non-executive Directors Group Chief Compliance Officer Chief Operating Officer James SIU Kai Lau Chen Kuan JEANG Company Secretary Qualified Accountant Terry WAN Mei Chow Edward YIM Kam Chuen Legal Advisors Principal Bankers JSM The Hongkong and Shanghai Banking 16th-19th Floors, Prince’s Building Corporation Limited 10 Chater Road, Central Citibank, N. A. Hong Kong JPMorgan Chase Bank, N.A. Registered Office Standard Chartered Bank (Hong Kong) Limited Canon’s Court, 22 Victoria Street Hamilton HM12, Bermuda Auditor PricewaterhouseCoopers Hong Kong Office Certified Public Accountants 11th Floor, LiFung Tower 22nd Floor, Prince’s Building, Central 888 Cheung Sha Wan Road Hong Kong Kowloon, Hong Kong 2 Li & Fung Limited Annual Report 2007 Key Financial Highlights 2007 2006 Change HK$’000 HK$’000 Turnover 92,459,949 68,010,257 +36% Total Margin 10,285,728 7, 6 4 7, 0 0 3 +35% As percentage of Turnover 11.12% 11.24% Core Operating Profit 3,186,601 2,344,226 +36% As percentage of Turnover 3.45% 3.45% Profit attributable to shareholders of the Company 3,060,036 2,201,819 +39% As percentage of Turnover 3.31% 3.24% Earnings per Share – basic 89.5 HK cents 67.1 HK cents +33% Dividend per Share – Final 50 HK cents 39 HK cents +28% – Full year 71 HK cents 55 HK cents +29% Shareholders’ Funds 9,895,317 8,299,208 Net Assets per Share HK$2.88 HK$2.43 Turnover by Export Markets Turnover by Product HK$ million HK$ million 92,460 92,460 2% 2% 2% 3% 31% 26% 68,010 68,010 2% 2% 2% 55,617 55,617 32% 2% 4% 47,171 47,171 2% 18% 3% 3% 42,631 42,631 32% 3% 1% 5% 37,281 37,281 3% 1% 4% 19% 33% 1% 3% 4% 2% 4% 20% 33% 3% 19% 32% 69% 19% 72% 65% 68% 67% 68% 69% 67% 72% 70% 68% 68% 02 03 04 05 06 07 02 03 04 05 06 07 3-Year Plan 3-Year Plan 3-Year Plan 3-Year Plan USA Australasia Europe Central & Latin America Softgoods Canada Rest of The World Hardgoods Li & Fung Limited Annual Report 2007 3 Europe & The Mediterranean North Asia South Asia Southeast Asia South Africa Global Reach, Local Presence Europe & The North Asia South Asia Mediterranean Beijing Amman Amersfoort Changsha Bangalore The Americas Amsterdam Chengdu Chennai Barcelona Dalian Colombo Bremerhaven Dongguan Delhi Bucharest Guangzhou Dhaka Cairo Hangzhou Faisalabad Casablanca Hepu Karachi Denizli Hong Kong Lahore Düsseldorf Liuyang Mumbai Huddersfield Longhua Sharjah Istanbul Macau Tirupur Izmir Nanjing Keighley Ningbo The Americas Leeds Qingdao Boston London Seoul Gaffney Lucca Shanghai Guadalajara Madrid Shantou Guatemala City Milan Shenzhen Managua Moscow Suzhou Mexico City Oporto Taipei New York City Paris Tok yo San Francisco Sofia Zhanjiang San Pedro Sula St. Gallen Santo Domingo Trowbridge Southeast Asia Vienna Bangkok Vilnius Hanoi Warsaw Ho Chi Minh City Jakarta South Africa Johor Antananarivo Makati Durban Phnom Penh Moka Saipan Singapore Headquartered in Hong Kong, the Company’s extensive global sourcing network covers over 80 offices in more than 40 economies around the world. With a growing network of nearly 10,000 international suppliers, Li & Fung explores the world to find quality-conscious, cost-effective manufacturers in order to provide the highest-quality goods, exceptional value and reliable, on- time delivery. Committed to the highest standards, our 13,300 staff around the world give Li & Fung the global reach and local presence to conduct strict quality assurance testing through factory evaluations, lab testing, on-site production monitoring and multiple inspections. The professionals at Li & Fung act as an extension of customers' own businesses to manage all aspects of the global supply chain. Chairman’s Statement Victor FUNG Kwok King i & Fung’s strategic approach to growth through diversification L has borne fruit with strong results for 2007 despite uncertain macroeconomic conditions. These results have seen the Group exceed the ambitious targets laid out in the Three-Year Plan back in 2005. I am pleased to report that the target to grow turnover from US$6 billion in 2004 to US$10 billion by 2007, has been exceeded. Indeed during 2007, the Group recorded turnover of US$11.85 billion (HK$92.46 billion), 19% or US$1.85 billion (HK$14.46 billion) higher than the goal set at the beginning of the last Three-Year Plan. This result has been achieved against a backdrop of a global economic environment dominated by concerns about a slowing US economy, worldwide inflationary pressures, and the impact of the sub-prime market on consumer sentiment. As the Group’s results have indicated, its turnover growth has proved to be resilient and we remain cautiously optimistic going forward. 6 Li & Fung Limited Annual Report 2007 05 Li&Fung (AR) Chairman 6 11/4/2008, 11:04 PM Chairman’s Statement (continued) Performance Market and Business In 2007, Group turnover increased 36% to US$11.85 billion While the full effects of the slowdown of the US economy (HK$92.46 billion). Profit attributable to shareholders was remain uncertain, the Group remains cautiously optimistic HK$3.06 billion, representing a 39% increase over the about prospects for continued growth. HK$2.20 billion for 2006. This result is reflected in the The global trend towards outsourcing has shown no signs basic earnings per share which were 89.5 HK cents of abating despite sluggish sentiment. Indeed, past trends compared with 67.1 HK cents for 2006. indicate that customers turn to outsourcing in the face The Group Board of directors has proposed a final dividend of increasing cost pressures in a weak economic of 50 HK cents per share which, together with an interim environment in order to preserve profit margins. dividend of 21 HK cents per share, will give a total dividend Li & Fung’s capacity to move swiftly and decisively as of 71 HK cents per share for 2007. new, cost-efficient sourcing markets have emerged has placed the Group at the forefront of the sourcing business worldwide. This has brought additional benefits to a growing customer base worldwide for whom time and cost are critical. Earnings per Share Dividend Payout Dividend per Share HK cents % 90 89.5 80 100 71 85 82* 82 84 70 67.1 81 80 60.9* 80 60 55.6* 55 50 46.5* 22.7* 45.5* 60 40 37.4* 34* 31.8* 30 27.7* 40 20 38.2* 20 10 0 0 02 03 04 0506 07 02 03 04 05 06 07 3-Year Plan 3-Year Plan Earnings per Share 3-Year Plan 3-Year Plan Interim and Final Dividend per Share Special Dividend per Share * Excluding Special Dividend * As adjusted for the effect of a 1-for-10 Bonus Issue Li & Fung Limited Annual Report 2007 7 Chairman’s Statement (continued) Much of the Group’s success during 2007 has been derived Inflationary pressures are widespread and have impacted from the Group’s continued adherence to its growth on some core source markets, such as China. The Group’s strategy, undertaking both organic business expansion ability to source across more than 40 economies has and selective strategic acquisitions. This has underpinned positioned us well. This has seen the continued growth our increased diversification plans which formed a key of some important source markets during the year under part of our Three-Year Plan 2005-2007. review such as Vietnam and Turkey which have both grown by 69% and 59% respectively for Li & Fung. China, which This diversification has been undertaken across business continued to act as a key source country, grew during lines and across geographies and will continue to form 2007 by 33%, the eighth ranked source market in terms an important platform of our new Three-Year Plan. While of growth. Furthermore, in 2007, we have expanded our the US market remains important to the Group, we expect network further by opening office in Changsha, China; to see continued growth in turnover from Europe as seen Lucca, Italy; Casablanca, Morocco; Moscow, Russia; in the increase of share of turnover to 26% in 2007 from Keighley, UK; and Trowbridge, UK. 18% in 2006 . While less than half of the Group’s products were sourced Expansion into new business lines opened new avenues from China (48%) in 2007, we expect China to remain for growth and new consumer markets for the Group. an important market in global sourcing. Specifically, Li & Fung expanded into Health, Beauty and Cosmetics for the first time through the acquisition of The spread of source markets across different geographies CGroup and, through the acquisition of Peter Black, has reflected the increased segmentation of customer broadened its Footwear line significantly, particularly in needs. Global supply chain management has called for a the UK. Such acquisitions are well positioned to complement higher degree of specialisation and diversification in order the existing core sourcing business. to meet those increasingly disparate needs. This expansion has increased the Group’s overall offering Recent product recalls from China and ongoing trade to customers around the world which is now more protectionism issues, particularly involving China and the comprehensive and efficient.