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Li & Fung Dropped From Stock Index as Retail Shifts Plague Performance

The world’s largest sourcing company has taken repeated hits from the shift in traditional retail and all that’s come with it.

Poor stock performance just pushed global sourcing firm Li & Fung from its place in Hong Kong’s Hang Seng Index (a tool used to describe the market), which typically indicates the index compiler doesn’t want Li & Fung’s too-low stock price weighing down the index’s average.

“Li & Fung’s share price and business are not doing very well recently,” Louis Tse Ming-kwong, director of Hong Kong securities broker VC Brokerage, told the South China Morning Post. “It’s no surprise for it to be removed from the benchmark index.”

Car manufacturer Geely Automobile Holdings will take Li & Fung’s place in the index, as the compiler, Hang Seng Indexes said it wants to add more privately owned mainland companies to the index in keeping with a trend it sees of private enterprises gaining importance.

“Geely is a major car maker in China,” Tse said. “Its share price performance and market cap is big and would strengthen the Hang Seng Index as a reflection of the most important stock listings in Hong Kong.”

Li & Fung’s stocks have been steadily on the decline for the last five years. The company’s shares were trading at a high of 19.86 Hong Kong dollars ($2.56) in March 2012. In the last two years specifically, the company’s shares have fallen from 7.32 HKD ($0.94) on Feb. 13 2015 to a much lower 3.34 HKD ($0.43) this Feb. 13.

In 2015 Li & Fung was already pleading for shareholders’ patience as stock slid and it forecast further challenges in the face of weak global consumer demand.

An article in the South China Morning Post in May of 2015 said, “The world’s largest consumer goods sourcing company finds itself battered by slowing consumption and high operating costs,” a notion that seems to still be ringing true. Li & Fung group chairman Dr. William K. Fung said at the time that the company is a mid- to long-term investment and that it hardly reacts to short-term stock price movements.

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In its most recent results for the six months ended June 30, 2016, Li & Fung said the “macro and retail environment continues to be difficult.” The company reported a 6.4% decline in turnover, which it owed to deflationary pressure, and its core operating profit fell 14.2% to $182 million.

Traditional retail has been facing tough times, with many of the major stores posting sales declines and losses last year. Consumer demand has been down, which means inventories have piled up, and as retailers work to clear the glut of goods, they are buying less.

“The destocking cycle is a drag on Li & Fung’s order book and we expect this trend to continue in 2017,” financial firm Barron’s wrote in a January blog post, when it also downgraded Li & Fung stock to “sell.”

What’s more, according to Barron’s, Donald Trump’s reign could further weigh on the sourcing firm’s business.

“The outlook for Hong Kong-based Li & Fung, which sources goods for global retailers such as Macy’s and Kohl’s, does not look good under a Donald Trump presidency,” Barron’s wrote just days ahead of the U.S. president’s inauguration. “In addition, Donald Trump’s protectionist stance can’t be good news for a trading empire like Li & Fung. About 64 percent of Li & Fung’s trading turnover comes from the U.S., followed by Europe’s 17 percent.”