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Asia300

Major Walmart supplier considers shifting away from China sourcing

Trump's punitive tariff plan drags Li & Fung's shares down more than 10%

Hong Kong-based Li & Fung, a supplier of clothes and household goods to major U.S. and European retailers like Walmart and Macy's, suggested it may shift its sourcing away from China.

HONG KONG -- With the U.S. poised to slap high tariffs on Chinese imports, the chief executive of Hong Kong trading company Li & Fung has suggested the company might shift production from China.

In a results briefing on Thursday, Li & Fung CEO Spencer Fung said his company, which supplies clothes and household goods to U.S. retailers, would not be significantly affected by the U.S. levies.

Li & Fung operates in over 40 countries and can shift sourcing or production from China to other locations to avert impact.

Despite Fung's attempt to allay investor concerns, the company's shares dropped over 10% in Friday trading.

Li & Fung supplies clothes and household goods to major U.S. and European retailers, including Walmart and Macy's. It designs items itself, produces them and handles delivery logistics. Although about a half of its purchases are from factories in China, the company has shifted clothes production to Vietnam and Indonesia in recent years as wages in China have gone up. Fung said the company has also taken measures to mitigate potential U.S. tariff increases.

Chairman William Fung Kwok-lun said it is not yet clear whether clothes and household goods will be subject to the U.S. tariffs, but if they are U.S. consumers would end up paying more. The products Li & Fung handles, he said, are not made in the U.S., and Americans would have no cheaper alternatives.

As for the company's results, Li & Fung suffered a net loss of $375 million in 2017, although its core operating profit rose 12% from the previous year to $356 million.

Following the announcement, Anson Chan, an analyst at Daiwa Capital Markets in Hong Kong, raised the target price from 4.7 Hong Kong dollars to HK$4.8, 11% more than Thursday's closing price. Chan said his view falls outside the mainstream but that he has "more confidence in the supply chain service industry's growth outlook" and believes Li & Fung has "the market leadership to gain market share, thanks to its continual investment in infrastructure."

As for a possible China-U.S. trade war, Chan noted comments from Li & Fung management during an analyst meeting on Thursday that the company is "well positioned to absorb any uncertainty through its global sourcing network."

However, the market's initial reaction to the Trump administration's plan to impose punitive tariffs on China was rather harsh with regard to Li & Fung, whose shares on Friday tumbled 10.2% to HK$3.87, far outpacing the 2.5% drop that the benchmark Hang Seng index took to close at 30,309.29.

Moody's Investors Service on Friday maintained Li & Fung's Baa1 rating and a negative outlook. "The confirmation of the Baa1 rating primarily reflects Li & Fung's operating results in 2017 that showed signs of stabilization on a like-for-like basis, and our expectation that its business transformation initiative will help the company turn around its operations," said Gloria Tsuen, vice president and senior analyst at Moody's.

Li & Fung's market position in the global sourcing and trading of consumer products is considered to be strong. It also has highly diversified customer and supplier portfolios. Yet the negative outlook remains as the rating agency sees "uncertainty over the company's ability to turn around its revenue and earnings against the backdrop of ongoing structural industry challenges."

Nikkei Asian Review Business and Market News Editor Kenji Kawase contributed to this story.

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