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Broker Cuts Li & Fung Stock Target 26%, Signals Tough Times Ahead

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The road from 2011 to today has been a long and downward winding one for global sourcing firm Li & Fung.

In the last five years, the company’s share price has fallen 80 percent from its high above 20 Hong Kong dollars ($2.58), trading on the Hong Kong exchange Monday at 3.83 HKD (49 cents), according to Barron’s Asia.

“The stock has been pummeled by the rise of e-commerce platforms and fast fashion, while it’s also felt the pain from slower growth in large economies like the U.S. and Europe since the global financial crisis,” Barron’s wrote in a blog post.

What’s worse, Brexit and terrorism look likely to spell tougher days ahead, adding increasing uncertainty to the trading business.

Japanese investment bank and securities brokerage Daiwa Securities Group cut its recommendation on Li & Fung shares from outperform to hold (often the lowest recommendation put on a stock) last week.

The broker lowered its earnings per share estimate for 2016 to 2018 by 20 percent to 23 percent, owed to what it called a likely slowdown in revenue growth thanks to: pricing pressure from the competitive global retail environment and a lower contribution from Europe on unfavorable currency headwinds and the domestic consumption sentiment due to Brexit and recent rampant terrorism.

Daiwa also estimates the euro will fall 10 percent against the dollar in the period and lead to a 2 percent decline in Li and Fung’s earnings per share in 2017. The company’s shedding of its LF Asia business in June could also weigh on revenue growth.

“While we see L&F’s earnings growth remaining weak up to 2018, its strong dividend and cash flow should cushion the share-price downside. Upside risk: a robust recovery in the Europe and global retail industry; downside risk: customer concentration and a further major fall in the EUR/GBP,” Daiwa said.

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