LI & FUNG LIMITED (Incorporated in Bermuda with limited liability) Stock Code: 494 ANNUAL REPORT 2011 CONTENTS 2 Corporate Information 3 Key Financial Highlights 6 Chairman’s Statement 12 Management Discussion and Analysis 24 Corporate Governance 40 Sustainability 46 Directors and Senior Management 52 Information for Investors 53 Report of the Directors 64 Independent Auditor’s Report 66 Statement of Accounts 160 Ten-Year Financial Summary CORPORATE INFORMATION NON-EXECUTIVE DIRECTORS EXECUTIVE DIRECTORS Victor FUNG Kwok King, Chairman William FUNG Kwok Lun, Deputy Chairman Paul Edward SELWAY-SWIFT* Bruce Philip ROCKOWITZ, Group President & Chief Executive Officer Allan WONG Chi Yun* Spencer Theodore FUNG Franklin Warren McFARLAN* Martin TANG Yue Nien* Benedict CHANG Yew Teck FU Yuning* * Independent Non-executive Directors GROUP CHIEF COMPLIANCE OFFICER PRINCIPAL BANKERS Srinivasan PARTHASARATHY The Hongkong and Shanghai Banking Corporation Limited Citibank, N.A. COMPANY SECRETARY JPMorgan Chase Bank, N.A. Terry WAN Mei Chow Standard Chartered Bank (Hong Kong) Limited LEGAL ADVISORS AUDITOR Mayer Brown JSM PricewaterhouseCoopers 16th-19th Floors, Prince’s Building Certified Public Accountants 10 Chater Road, Central, Hong Kong 22nd Floor, Prince’s Building, Central Hong Kong REGISTERED OFFICE Canon’s Court, 22 Victoria Street Hamilton HM 12, Bermuda HONG KONG OFFICE 11th Floor, LiFung Tower 888 Cheung Sha Wan Road Kowloon, Hong Kong 2 LI & FUNG LIMITED | ANNUAL REPORT 2011 KEY FINANCIAL HIGHLIGHTS (US$’000) 2011 2010 Change Turnover 20,030,271 15,912,201 +26% Total Margin 3,074,204 2,238,289 +37% As percentage of Turnover 15.3% 14.1% Core Operating Profit 882,056 725,138 +22% As percentage of Turnover 4.4% 4.6% Cash Earnings# 849,585 679,631 +25% As percentage of Turnover 4.2% 4.3% Profit attributable to shareholders of the Company 681,229 548,491 +24% As percentage of Turnover 3.4% 3.4% Earnings per Share – Basic 8.43 US cents 7.17 US cents* +18% Dividend per Share – Final 34 HK cents 26 HK cents* +31% – Full year 53 HK cents 45 HK cents* +18% Shareholders’ Funds 3,933,793 3,626,029 Net Assets per Share US$0.49 US$0.45 # Profit for the year before non-cash interest, depreciation of property, plant and equipment, amortization of intangible assets other than brand licenses, share option expenses and share of profit from associated companies * Adjusted for the effect of Share Subdivision in May 2011 TOTAL MARGIN* TURNOVER CORE OPERATING PROFITS MARGIN % US$ million 15.3 20,030 21,000 16 14.1 18,000 14 15,912 Total Margin 14,195 12 15,000 13,395 10 12,000 8 9,000 6 4.6 4.4 6,000 4 Core Operating Profit Margin 3,000 2 0 0 08 09 10 11 10 11 1st Year 3-YEAR PLAN * Gross Profit plus other income, as percentage of turnover LI & FUNG LIMITED | ANNUAL REPORT 2011 2011 3 EUROPE Amman Den Bosch Lucca Bucharest Hamburg Manchester Cairo Leicester Manno Casablanca Sheffield Milan Istanbul Washington Monheim Izmir Barcelona Paris Milan Bremerhaven Tel Aviv Oporto Den Bosch Trowbridge Sofia Hamburg Vienna Vilnius Huddersfield Washington Sheffield Keighley Bremerhaven London THE AMERICAS Guatemala City Orlando Gaffney Lima Secaucus Great Neck Managua Wytheville Greensboro Mexico City Carlstadt Los Angeles SOUTHERN AFRICA Puebla Far Rockaway New York City Antananarivo Moka Sao Paulo Los Angeles Plano Durban San Pedro Sula Orlando Providence Santo Domingo Redlands Tampa Los Angeles Secaucus New York City Bentonville Trading Offices Logistics Offices Distribution Centers Distribution Offices 4 LI & FUNG LIMITED | ANNUAL REPORT 2011 EAST ASIA Beihai Shanghai Taichung Linkou Dalian Beijing Shantou Taipei Macau Fuzhou Changsha Shenzhen Beijing Nankan Guangzhou Chengdu Taipei Changsha Panyu Hangzhou Dalian Tokyo Chengdu Qingdao Hong Kong Dongguan Wenzhou Dalian Shanghai Macau Guangzhou Xiamen Dayuan Shenyang Nanjing Hangzhou Beijing Foshan Shenzhen Ningbo Hong Kong Chengdu Fuzhou Taicang Shanghai Jiading Dalian Guangzhou Tianjin Shenyang Liuyang Guangzhou Haihu Wuhan Shenzhen Macau Hong Kong Hong Kong Xian Suzhou Nanjing Kaohsiung Jiading Zhangjiagang Tianjin Ningbo Keelung Jinjiang Beijing Wuhan Panyu Shanghai Kaohsiung Changsha Xiamen Qingdao Shenzhen Keelung Chengdu Zhongshan Seoul Taoyuan Kunshan Chongqing SOUTH ASIA Bangalore Chennai SOUTHEAST ASIA Chennai Delhi Bangkok Bandar Seri Begawan Bangkok Colombo Dhaka Hanoi Bangna Bang Pa-In Delhi Faisalabad Ho Chi Minh City Bang Pa-In Bandar Seri Begawan Dhaka Karachi Jakarta Bangpakong Jakarta Faisalabad Lahore Makati Bangsaothong Lamlukka Karachi Mumbai Phnom Penh Lat Krabang Luzon Lahore Saipan Luzon Sabah Sharjah Singapore Mindanao Sarawak Tirupur Bang Pa-In Nongkhae Shah Alam Jakarta Penang Singapore Luzon Sabah Phnom Penh Sarawak Shah Alam Shah Alam Singapore Singapore Surabaya Visayas Li & Fung Limited, the Hong Kong-headquartered multinational group, is recognized as the world’s leader in consumer goods design, development, sourcing and distribution. It manages the supply chain for retailers and brands worldwide with over 300 offices and distribution centers in more than 40 economies spanning across the Americas, Europe, Africa and Asia. Through its three interconnected Business Networks – Trading, Logistics and Distribution – Li & Fung offers a spectrum of services that covers the entire end-to-end supply chain. LI & FUNG LIMITED | ANNUAL REPORT 2011 5 CHAIRMAN’S STATEMENT At Li & Fung, 2011 was the start of a new era of growth, marked by a series of remarkable transitions and efforts designed to ensure the Group’s future leadership of a rapidly changing global supply chain. The establishment of three business Networks – Trading, Logistics and Distribution – opens the door to significant growth opportunities. It enables us to sell across these distinct yet interconnected areas. It also provides us with yet another way to serve our customers through expanded scope and capabilities. In these times of global economic uncertainty, this proposition will be especially important as we work toward a new era of growth. Undoubtedly, the market environment will remain challenging. While the US is expected to grow modestly, the Eurozone’s GDP may contract as the debt crisis continues to create drag on its economic recovery. Nevertheless, the Group has committed significant effort and resources to ensuring that its three Networks are equipped to grow. Our growth in the immediate future will focus on cross-selling and increasing our market share, Victor Fung which will enable us to grow faster than the overall Chairman growth in our markets. 6 LI & FUNG LIMITED | ANNUAL REPORT 2011 CHAIRMAN’S STATEMENT (CONTINUED) PERFORMANCE MARKET & BUSINESS In 2011, Group turnover increased by 26% to US$20,030 In past years, our business strategy has been based on million. Profit attributable to shareholders was US$681 million, sourcing goods in Asia for consumption in developed markets an increase of 24% compared to 2010 (US$548 million). such as the US and Europe. Indeed, OECD countries are Earnings per share were 8.43 US cents compared with 7.17 US currently responsible for 80% of global consumption. Moving cents for 2010. forward, we are adjusting our strategy to take advantage of domestic consumption increases throughout Asia, particularly The Board of Directors has resolved to declare a dividend of among its most populous economies, such as China. In 34 HK cents per share (2010: 26 HK cents, adjusted for the 2010, the US and Europe accounted for 89% of the Group’s effect of Share Subdivision in May 2011). turnover. In 2011 that figure shrank to 81%, with China and the rest of Asia making up the difference. The Group’s ability to capture business in such promising new consumer markets is a welcome development and one that we feel will help us continue to offset the sluggish global economy. PROFIT ATTRIBUTABLE TO SHAREHOLDERS EARNINGS PER SHARE | DIVIDENDS PER SHARE US$ million US cents 681 700 10 600 8.43 548 8 7.17* 500 6.79 432 5.83* 5.77* 400 6 4.81* 311 4.44* 3.65* 300 4 200 2 100 0 0 08 09 10 11 08 09 10 11 1st Year 1st Year 3-YEAR PLAN 3-YEAR PLAN Earnings per Share Interim and Final Dividend per Share * Adjusted for the effect of Share Subdivision in May 2011 LI & FUNG LIMITED | ANNUAL REPORT 2011 7 CHAIRMAN’S STATEMENT (CONTINUED) On the production side, it is estimated that Asia will account for bolstered even more our range of products and services. over half of the world’s output by 2050. China has long been With these investments, we are even better equipped to grow the world’s manufacturing powerhouse, and it remains the organically as future growth opportunities rise with the global biggest sourcing market for the Group. However, with wages in economic recovery. the Pearl River Delta rising by 30% in recent times, this region is no longer the low-cost center of years past. Regions such as One particular advantage of having these three Networks is that Bangladesh, Vietnam and Cambodia as well as western and by offering an unparalleled suite of global supply chain solutions northern China are gaining preference among cost-sensitive for our customers, we will also generate new revenue streams customers. and drive organic growth through substantial cross-selling opportunities. Operationally, this past year was significant because it marked the reorganization of the Group structure along three lines: Since the founding of Li & Fung in 1906, we have continually Trading, Logistics and Distribution. During the year we worked questioned and strengthened our business and management tirelessly to strengthen these Networks through organic growth methods to adapt to an ever-changing world. In this context, and acquisition while also streamlining operations. Acquisitions we have made sustainability a key pillar of our current included several largelarge deals and smaller roll-uproll-up deals thatthat Three-Year Plan for 2011–2013, and in 2011 we continued to expand the implementation of our Sustainability Strategy.