Monday, February 12, 2007

Possibly The Best China/Asia Play With Possibly The Best Mgmt In Asia

Readers of this blog will know that I have been an ardent admirer of Li & Fung from HK. It is possibly the "best China/Asia play" with possibly the best management in Asia. Trading company Li & Fung (0494) has entered into an agreement with Tommy Hilfiger to acquire the designer's global sourcing operations for HK$ 1.9 billion. Turnover of the sourcing operations for the year ended March was approximately HK$5.48 billion, while unaudited attributable adjusted earnings amounted to around HK$242 million, Li & Fung said Sunday. The deal is to be completed before March 28, with financing coming from internal cash resources. In September, the company raised around US$314.9 million (HK$2.46 billion), mainly for M&A activity and opportunity such as this. Tommy Hilfiger's buying offices in Hong Kong, Taiwan, India, Bangladesh and Sri Lanka will be integrated into Li & Fung, which buys consumer goods and manages supply chains for retailers and brands worldwide through its 70 offices in 40 countries and territories.

But why Li & Fung ... Li & Fung, one of Hong Kong's largest export trading company, has been an innovator in supply chain management. Its basic philosophy behind supply chain management is to reduce costs and lead times, allowing its customers to buy "closer to the market." Li & Fung has been a pioneer in "dispersed manufacturing." It performs the higher-value-added tasks such as design and quality control in Hong Kong, and outsources the lower-value-added tasks to the best possible locations around the world. The result is something new: a truly global product. To produce a garment, for example, the company might purchase yarn from Korea that will be woven and dyed in Taiwan, then shipped to Thailand for final assembly, where it will be matched with zippers from a Japanese company. For every order, the goal is to customize the value chain to meet the customer's specific needs. Companies like Li & Fung, narrowly focused and professionally managed, could be the trend for the next decade. Its edge:

1) Its integrated, one stop shop, squeezing out the savings due to economies of scale and leverage in purchasing due to its size
2) Its integrated, allowing clients to be involved or make alterations anytime along the supply chain line. This also allows for very speedy in-out from design phase to final product. The speed to market is a huge advantage.
3) The bulk of operations are in China, which has basically the most cost-effective labour production center in the world. Add that to a sophisticated tech driven supply chain at every level, it is hard to top.
4) Li & Fung is actually very high up on the supply chain due to the value-add they provide to clients.
5) Enjoys excellent margins due to unique business model. Clients will find it very sticky to be with Li & Fung once they have dealt with them. Margins in the region of 25%, well cushioned from external risks.
6) Excellent management. Clear vision, grand startegy witgh key performance indicators at every stage. Been ticking off these flags one by one with great execution. Extra point for Western mgmt philosophies coupled with very strong Asian roots and sensibilities.

It is clear the company has broken through their limited mindset from the 90s. In the 90s, the company was good but struggled to surge past the US1bn turnover mark. By improving and adding value all along the supply chain, they have become almost invaluable to more clients. In 2004 the company reached US6bn in turnover and last year, its hovering near the US10bn mark, and all that on excellent margins.

Its obvious due to the size of the company now, it cannot rely on organic growth anymore. Hence the recent acquisition of KarstadtQuelle International Sourcing for EUR60m and the purchase of Hilfiger's sourcing operations.

Li & Fung will be well protected even in an economic downturn as that would cause more companies to outsource more. Li & Fung is the classic company that jumps a few rungs of ladder every 3 years, and its hard to ride along with it as you cannot imagine any further growth for the company. So, at around HK25 currently, it should have no problems scaling above HK30 this year and beyond. Though its market cap is already US11bn, the company is on a good thing and their excellent management which tries to improve at every level with zero complacency bodes well for its future.

Company is helmed by Victor Fung. Victor holds Bachelor and Master Degrees in Electrical Engineering from the Massachusetts Institute of Technology, and a Doctorate in Business Economics from Harvard University. Victor holds a number of civic and professional appointments. He is a member of Chinese People’s Political Consultative Conference and the Hong Kong Government Judicial Officers Recommendation Committee. From 1991 to 2000, Victor Fung was Chairman of the Hong Kong Trade Development Council and from 1996 to 2003, he was the Hong Kong representative on the APEC Business Advisory Council. In 2003, the Government awarded Dr. Fung the Gold Bauhinia Star for distinguished service to the community. His brother, William Fung is Group Managing Director. WilliamFung graduated from Princeton University with a Bachelor of Science degree in Engineering and holds an MBA degree from the Harvard Graduate School of Business. He was conferred the degree of Doctor of Business Administration, honors causa, by the Hong Kong University of Science & Technology. He currently serves as a member of the Economic and Employment Council of the Hong Kong Special Administrative Region.

1 comment:

peter said...

The article which you had published is the classic example of excellent Supply Chain Management Services . The basic them of the supply chain management system is to reduce the production cost. So that it can sale the good at less cost then their competitors.