LI & FUNG LIMITED (Incorporated in Bermuda with limited liability) Stock Code: 494 10ANNUAL REPORT CONTENTS 2 Corporate Information 3 Key Financial Highlights 6 Chairman’s Statement 12 Management Discussion and Analysis 24 Corporate Governance 40 Sustainability 44 Directors and Senior Management 50 Information for Investors 51 Report of the Directors 63 Independent Auditor’s Report 65 Statement of Accounts 144 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* Spencer Theodore FUNG Franklin Warren McFARLAN* Makoto YASUDA* Martin TANG Yue Nien* Benedict CHANG Yew Teck * Independent Non-executive Directors GROUP CHIEF COMPLIANCE OFFICER PRINCIPAL BANKERS James SIU Kai Lau 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 2010 KEY FINANCIAL HIGHLIGHTS (HK$’000) 2010 2009 Change Turnover 124,115,167 104,478,983 +19% Total Margin 17,458,653 12,717,458 +37% As percentage of Turnover 14.07% 12.17% Core Operating Profit 5,656,077 3,990,106 +42% As percentage of Turnover 4.56% 3.82% Profit attributable to shareholders of the Company 4,278,221 3,369,107 +27% As percentage of Turnover 3.45% 3.22% Earnings per Share – Basic 111.9 HK cents 91.0 HK cents +23% Dividend per Share – Final 52 HK cents 49 HK cents +6% – Full year 90 HK cents 75 HK cents +20% Shareholders’ Funds 28,283,014 17,759,646 Net Assets per Share HK$7.06 HK$4.72 TURNOVER TOTAL MARGIN* HK$ million CORE OPERATING PROFIT MARGIN 140,000 % 14.07 124,115 14 120,000 12.17 110,722 104,479 12 100,000 92,460 Total Margin 10 80,000 68,010 8 60,000 55,617 6 4.56 40,000 3.82 4 20,000 2 Core Operating Profi t Margin 0 0 05 0607 08 09 10 09 10 3-Year Plan 3-Year Plan * Gross Profi t plus other income, as percentage of turnover LI & FUNG LIMITED | ANNUAL REPORT 2010 3 EUROPE Amman Barcelona Moscow Bucharest Bremerhaven Paris Cairo Cologne South Shields Casablanca Den Bosch Trowbridge Istanbul Florence Vienna 5 Izmir Hamburg Washington Lucca Huddersfi eld Keighley 4 Milan Keighley Leicester Oporto London Sheffi eld Sofi a Manchester Vilnius Manno THE AMERICAS Guatemala City San Francisco Lima New Jersey Managua New York City Mexico City Orlando San Pedro Sula Los Angeles Santo Domingo New Jersey Gaffney New York City SOUTHERN AFRICA Antananarivo Durban Moka Trading Offi ces Onshore Offi ces Logistics Offi ces Distribution Centers # Number of Distribution Centers 4 LI & FUNG LIMITED | ANNUAL REPORT 2010 EAST ASIA Beihai Seoul Hong Kong Hong Kong Haihu Beijing Shanghai Macau Kaohsiung Hong Kong Changsha Shantou Nanjing Shanghai Kaohsiung Chengdu Shenzhen Ningbo Shenyang Kunshan Dalian Taipei Shanghai Shenzhen Linkou Dongguan Tokyo Shenyang Taoyuan Nankan Guangzhou Xiamen Shenzhen Taichung Nanshan Hangzhou Zhanjiang Suzhou Taipei Panyu Hong Kong Beijing Tianjin Beijing Qingdao Liuyang Changsha Wuhan Changchuan Shanghai Longhua Chengdu Xiamen Chazhuan Shenyang Macau Chongqing Beijing Chengdu Shenzhen Nanjing Dalian Chengdu Dayuan Taichang Ningbo Fuzhou Dalian Futian Yantian Panyu Guangzhou Fuzhou Fuzhou Zhangjiagang 6 Qingdao Hangzhou Guangzhou Guangzhou Zhongshan 4 20 5 4 3 SOUTH ASIA 4 Bangalore Chennai SOUTHEAST ASIA Chennai Delhi 3 Bangkok Sarawak Haadyai Colombo Dhaka Hanoi Shah Alam Khon Kaen Delhi Faisalabad Ho Chi Minh City Singapore Luzon Dhaka Karachi Jakarta Bang Pa-In Mindanao Faisalabad Lahore Johor Jakarta Nakorn Ratchasima Karachi Mumbai Makati Luzon Nongkhae Lahore Phnom Penh Phnom Penh Penang Sharjah Saipan Shah Alam Shah Alam Tirupur Singapore Singapore Singapore Bangkok Surabaya Surabaya Bang Pa-In Bali Surat Thai BSB Bang Pa-In Visayas Jakarta Bang Wau Wangnoi Lamlukka Bangplee Sabah Chiang Mai 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 from about 240 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 onshore – Li & Fung offers a spectrum of services that covers the entire end-to-end supply chain. LI & FUNG LIMITED | ANNUAL REPORT 2010 5 CHAIRMAN’S STATEMENT Victor Fung Chairman f there were any doubts as to whether the twenty-first century Iwould be the “Asian century”, 2010 may have put them finally to rest. In 2010, the Asia Pacific region emerged in pole position as a global growth driver and the site of one of the most exciting economic and social transformations in contemporary history. We have just begun to grasp the very deep impacts that the rise of Asia will have on global trade and investment, consumer markets and the economic landscape. Many of these changes are already underway, as evidenced in China this year. In an effort to promote social stability and worker living standards, factory wages went up by as much as 20% to 30% in 2010. At the same time, rising consumer demand from China and other developing markets, coupled with unpredictable weather and speculation, led to substantial price increases and volatility for raw materials and commodities. These factors, combined with the ongoing depreciation of the US dollar, have created an environment of rising cost pressures that is having profound impact on trade and global sourcing. 6 LI & FUNG LIMITED | ANNUAL REPORT 2010 CHAIRMAN’S STATEMENT (CONTINUED) In response, some companies have been shifting certain parts To extend this competitive advantage, we are constantly of their supply chain operations in China inland and away from seeking new locations that can deliver the right combination the more expensive coastal areas, or out of the country and into of quality and value. We also strive to identify opportunities lower-cost sites in Bangladesh, Cambodia, India, Indonesia and to strengthen our offerings or build strategic capability. Our Vietnam. While it may be too early to call this a long-term trend, acquisition of Integrated Distribution Services Group Limited the implications are clear: Global retailers and brands need (“IDS”), which greatly enhances our distribution and logistics partners with networks that can provide them with flexibility, capabilities—particularly in the high growth region of Asia—is an quality and value regardless of market conditions. example. Li & Fung operates well in this fast-changing environment. The The Group’s successful integration of this key business, as Group recognizes the importance of offering our customers well as the integration of other important new businesses and flexibility and cost-effective choices, which we deliver through our position as a global leader in sourcing and supply chain our global network of 15,000 factories and approximately 240 management, make us cautiously optimistic moving forward as offices and distribution centers in more than 40 economies. we embark upon our new Three-Year Plan 2011-2013. NET PROFIT EARNINGS PER SHARE | DIVIDEND PER SHARE HK$ million HK cents 4,500 120 111.9 4,278 110 4,000 100 91.0 90 89.5 3,500 3,369 90 3,060 80 75 71 3,000 69.3 70 67.1 2,422 2,500 57 60 55.6* 55 2,202 50 45.5* 2,000 1,790 40 1,500 30 20 1,000 10 500 0 05 06 07 08 09 10 0 3-Year Plan 3-Year Plan 05 06 07 08 09 10 Earnings per Share 3-Year Plan 3-Year Plan Interim and Final Dividend per Share *As adjusted for the effect of a 1-for-10 Bonus Issue LI & FUNG LIMITED | ANNUAL REPORT 2010 7 CHAIRMAN’S STATEMENT (CONTINUED) PERFORMANCE MARKET & BUSINESS In 2010, Group turnover increased by 19% to HK$124,115 With our new Three-Year Plan comes a new set of aggressive million. Profit attributable to shareholders was HK$4,278 million, targets. Achieving these will require that we continue to build an increase of 27% compared to 2009 (HK$3,369 million). our three global networks—trading, onshore and logistics Earnings per share were 111.9 HK cents compared with 91.0 networks—to meet customers’ own constantly evolving needs. HK cents for 2009. With cash available for acquisitions and a prudently managed The Board of Directors has resolved to declare a dividend of balance sheet, the Group continues to seek out synergistic 52 HK cents per share (2009: 49 HK cents). opportunities while pursuing organic growth that can help us meet our targets. In early 2010 we signed a major outsourcing deal with Wal-Mart Stores, Inc. During the year the Group also acquired Jimlar Corporation, a leading designer, distributor and supplier of footwear in the US and internationally. Other notable acquisitions signed include Visage Group Limited, Jackel Group, Cipriani Accessories Inc. and Oxford Apparel. In particular, the October 2010 acquisition of IDS, a leading DIVIDEND PAYOUT distribution and logistics services provider, has greatly strengthened Li & Fung’s end-to-end supply chain solution offerings with enhanced distribution and logistics capabilities. It % also expands the Group’s global network deeper into emerging 100 markets, including the global growth engines of Asia, led by 84 84 84 83 China.