A look at one of the Hang Seng's top performers
The boardroom of Li & Fung's Kowloon headquarters is filled with awards the company, its officers and its IR department have received over the years. Until recently, you might have assumed this praise was due to Li & Fung's imitation of a western corporate model. But with the western model looking a little wobbly these days, the company's success is better attributed to a fusion of Chinese and western practices.
'We didn't want to be just a multinational because that would be kind of faceless,' says Li & Fung's chairman, Victor Fung. 'We wanted to be a Chinese multinational with open architecture.'
Fung is the non-executive visionary behind Li & Fung, and as chairman of the Hong Kong Airport Authority, he is an important public figure. His brother, William Fung, is CEO of the company and handles the day-to-day, hands-on direction of the Li & Fung empire. To reassure shareholders, the company has outside directors from Japan and a Harvard Business School professor sitting on the board.
Li & Fung has offices in 40 countries, matching retail demand with industrial supply on a global scale faster than an abacus could click in the old days. 'Grandfather Fung', otherwise known as Fung Pak Liu, originally founded the company almost a century ago in Guangzhou to export silk, porcelain, fireworks and other traditional Chinese products. For a decade now, the company Fung Pak Liu founded has been the Hang Seng's top performer.
Three-year model
IRO Nancy Chen says the company builds its strategies around a three-year plan, almost reminiscent of the Communists' five-year plan. 'We paint a scenario of where we want to be and then we look back to find out where we need to fill in the gaps,' she says. '[This model] helps us share our targets with investors; we want them to be on our backs to make sure we fulfill the plan.'
The Chinese influence shows in other pre-Maoist forms as well. Even though the Li family sold out in the 1940s, the Fung brothers' father kept the name, quoting an ancient aphorism: 'When you drink from a stream, remember the source.' In addition, as Chen points out, 'In Chinese the word Li means profits and Fung means a lot.' Following that vein, the street number of Li & Fung's shining office block is 888, which is supposedly very lucky.
There is more than luck behind the growth of the company, however. In 1970, the Fung brothers consolidated Li & Fung's management by buying out over 30 other family members. In 1989, in Hong Kong's first management buyout, the Fungs took the company private only to relist it in 1992. Although the Fungs still hold some 45 percent of the company, their attention to other shareholders has paid dividends - literally.
Nancy Chen points out that one way of aligning shareholder interests with those of a company's management has been to pay good dividends. And in 2001 Li & Fung's dividend per share was 26.5 Hong Kong cents.
As a trading company the business is asset light. 'Basically [our assets consist of] desks, chairs, computers and this building,' outlines Chen. In case of strategic acquisitions, the company has built up a cash war chest of some US$250 mn.
Chen was a buy-side analyst with a Japanese investment house covering Li & Fung for three and half years before she joined the IR department. That was her first job after graduating from UCLA and returning to her native Hong Kong. Her predecessor at Li & Fung told Chen the company had a lot of potential because its management was well respected but the stock was not widely covered. Of course, now anyone looking at Hong Kong covers the company, but Chen modestly demurs from taking credit.
On the road
Like many, Chen learned IR on the job, but her experience on the buy side comes in handy. 'I know what analysts want to know and can predict what they are going to ask,' Chen explains. She is also one of the founding members of the local chapter of the Investor Relations Association (Asia) (IRAA). As well as her IR responsibilities, Chen is William Fung's personal assistant and works on special projects like acquisitions. She also works closely with CFO Frank Leong.
Li & Fung announces its impending three-year plan with its interim results. Chen, Leong and Fung then go on the road where their target audience comprises global funds. They also meet with other investors interested in the retail sector, and this audience is often assembled by Asian brokers. Sometimes the three-strong IR team splits up in the name of efficiency. Leong goes to Europe and Fung and Chen go to major cities in the US.
Although the meetings are interactive, 'many of our investors take a very long-term view and are not so concerned about short-term vagaries,' reports Chen. Li & Fung survived the Asian currency crises and is coping with the current tie between the Hong Kong dollar and the US dollar. 'We had a slight problem during the Asian currency crisis because people thought we were making out like bandits buying with falling local currencies and selling to the US, but we weren't,' Chen explains. 'Most of our transactions were dollar denominated so we got some advantage, but the impact on the bottom line was small,' she adds.
Since Hong Kong is a major financial center, Chen meets with a lot of investors locally. She also visits Singapore, a budding financial center. Brokers advise the company that Tokyo is a relatively passive investor base. Indeed Chen says that many of the offices she visits there are actually the Tokyo headquarters of US-based investors.
With such a heavy US customer base, the question of an ADR naturally arises. 'In the long term, we probably should [do an ADR],' says Chen. So far, however, the company's bankers say it would take a lot of resources to file accounts according to US Gaap. 'We're not sure what the actual reward will be since we already have good coverage from US investors interested in Asian markets,' notes Chen. On the other hand, 'When China opens up, it would make sense to list there.'
While Hong Kong accounting standards seem to satisfy US institutions, Li & Fung's board is debating whether to move to a quarterly reporting schedule in the interest of transparency. Chen is hesitant. '[The move from interim to quarterly reporting] may improve disclosure and transparency but it really focuses investors on short-term movements [in stock price], which may not have much meaning.'
Moms & pops
One challenge for Chen is identifying shareholders, since most stakes are held through nominees. 'Shareholder tracking services dig up information from the fund prospectuses and through the grapevine - that's as good as it gets,' she says. 'Of course the brokers also know who our biggest owners are.' US international institutional investors are Li & Fung's largest holders. 'That reflects our customer base - 70 percent of our sales are to the US.'
Chen says analysts have started to pay more attention to the stock in recent years, since they have been able to deliver results. Local individual investors are starting to notice the stock as well, Chen adds. Hong Kong's retail players are active traders - and Chen is glad of it. 'Sometimes if fund managers sell the stock it can depress the price quickly, but the retail buyers buy with the dips.' Retail investors act as quasi market-makers, seeking opportunities to buy on the lows and sell on the highs.
According to Chen, retail and institutional investors get the same message. 'Frankly, for us the key is the three-year plan,' she reiterates. 'Our business is difficult to understand, so we have to explain it as simply as possible.'
What the analysts say
They're really good at [giving] access to management; all of them are just a phone call away. They're also pretty transparent about their plans, and management tells you what they intend to do over the next three years, which is a huge help to analysts. Obviously the fact that they have fulfilled the plans lends credibility. I call Nancy Chen and she's very useful and fair in her disclosure. She knows the business, which is more than many IROs here.
Charles Dutton, JPMorgan
Regionally they stack up pretty well. They're very accessible and willing to meet the needs of investors. They are very progressive in their thinking. One of the reasons their stock is so well favored here is that they have adopted policies and procedures that you would typically see in the West. The personality of the business is very much William Fung although their investor relations function really is a team effort.
Mark Rosenfeld, Salomon Smith Barney
They're accessible and it's in the nature of the company to give guidance. The company certainly has delivered the goods over the years, so the investor relations operation is the face of a successful company. It is not a difficult company to explain but people do have a very high respect for its management. They set themselves their three-year plans and for the last few, they have met the expectations, so how much more can you ask?
Robert Sassoon, SG Securities