2 highlights 3 management discussion and analysis 5 managing … · 2018. 4. 4. · li & fung...

2 Highlights

3 Management Discussion and Analysis

3 Chairman’s Statement

5 Managing Director’s Report

9 Corporate Governance

13 Directors’ Interests and Short Positions in Shares,

Underlying Shares and Debentures

17 Substantial Shareholders and Other Information

18 Interim Financial Report

32 Information for Investors

Contents

L i & Fung L im i ted I n te r im Repor t 2003 2

Highl igh t s

Half Year Results To 30 June 2003

(HK$ millions) 2003 2002 change

Turnover 18,106 14,328 +26%

Core Operating Profit* 436 335 +30%

As % of Turnover 2.41% 2.34%

Net Profit 414 340 +22%

Earnings per Share 14.3 HK cents 11.8 HK cents +21%

Dividend per Share 10 HK cents 8.5 HK cents +18%

* Before amortisation of goodwill and provision for investments.

Highlights

● Strong turnover growth from market share gains and inclusion of Janco contribution

● Results robust despite uncertainties caused by Iraqi War and SARS

● Strong operating results somewhat affected by lower interest income and higher taxprovision

● Hardgoods share continues to grow

01.Highlights 25/8/2003, 9:40 PM2


Management D i scus s ion and Ana l y s i s

Chairman’s Statement

Introduction

Li & Fung performed well in the first half of 2003, a time marked by great global insecurity.

Whilst the global economy, and particularly the economy of the United States, was slow to

recover, Li & Fung through the strength of its strong management and operations was able to

navigate the SARS epidemic and the war in Iraq without impact to the Group’s bottom line.

Performance

I am pleased to report robust turnover for the Group which increased 26% to HK$18.1 billion

during the first half of the year. Profits attributable to shareholders were HK$414 million, a

22% increase compared with HK$340 million for the same period in 2002. Earnings per share

were 14.3 HK cents. The Board of Directors has declared an interim dividend of 10 HK cents

per share.

The last six months have been tumultuous globally, but particularly in Hong Kong and Asia.

I am happy to report that while the US market remained sluggish, brands and retailers still

sought our services due to the Group’s proven record as the premier supply chain partner.

The successful integration of Janco’s business helped to broaden the Group’s customer

base and contributed to our gross profit.

The Group’s continuous expansion of its sourcing network also contributed to the positive

results by providing customers with quick response and flexible alternatives throughout our

network. It was evident during the time of the SARS epidemic that we were able to offer

undisrupted services and alternative sources of products. The Group has expanded its network

in the Chinese Mainland China and Vietnam over the past months. We now have sixteen offices

in the Mainland and will be adding more offices to ensure a comprehensive network by end of

2004. The recently concluded Closer Economic Partnership Arrangement (CEPA) agreement

between Hong Kong and the Mainland will allow Hong Kong based service sectors to integrate

rapidly with the Pearl River Delta and the rest of the Chinese Mainland. The Group, being one

of the foremost providers in trade related services, is expected to benefit greatly from this.

02.Management Discussion 25/8/2003, 9:27 PM3


Management Discussion and Analysis (Continued)

Prospects for the Rest of the Year

The Group is confident that diversifying our product mix as well as our customer base will put

us in good stead to prudently garner better performance in 2003. We anticipate from orders

on hand and indications from customers that the Group is set for a double-digit increase in

turnover. This success is due in part to greater product diversification within our hardgoods,

expansion of the value-retailer segments and increasing value-added services for our customers.

Furthermore, the Group is servicing a number of new customers with good sales potential.

The Group is in the process of finalizing a new licensing agreement with Levi Strauss & Co. in

which the Group will develop and distribute tops for men, women and children under the Levi

Strauss SignatureTM label for sales to major mass market retailers. This partnership will be

able to provide Li & Fung with an entry into higher margin business models.

Whilst the Group is actively pursuing new ventures, we also maintain our commitment to cost

management and margin improvements. This is in line with the Group’s Three-Year Plan starting

in 2002. Although we had a slow start that first year, we remain committed to pursuing our

Three-Year Plan targets by 2004.

To realize these objectives, we will continue to be on the lookout for acquisitions that will help

diversify our business. The Group’s strong cash position will make these acquisitions possible.

Corporate Governance

The Board is committed to maintaining a strong record in corporate governance. Our Chief

Compliance Officer, who heads the Group’s Corporate Governance Division, supervises our

internal controls and ensures that the Group diligently follows best practices.

Our Audit Committee comprises six non-executive directors, four of whom are independent

directors, and the Chief Compliance Officer. The Group’s Risk Management Committee is charged

with continuously monitoring Li & Fung’s risk management and internal control systems.

Conclusion

While the global economy is still in a period of uncertainty, the Group remains confident of its

leading market position and its proven track record. This record should provide our investors

reassurance through the rest of the year and into the future.

Victor FUNG Kwok King

Chairman

Hong Kong, 13 August 2003


L i & Fung L im i ted I n te r im Repor t 20035


Managing Director’s Report

Results Review

Group performance was strong for the first half of 2003 and represented a good rebound

against the first half of 2002 when business suffered from the shocks of the US terrorist

attacks in September 2001. During the period, although the US retail market has yet to show

signs of strengthening, the Group enjoyed good demand from its customer base. Increasingly,

our customers are relying on the Group’s wide spread sourcing network and capabilities to

help them stay competitive in a tough market place.

During the period under review, turnover saw a hefty increase of 26% to HK$18.1 billion. Part

of the increase was due to the contribution of Janco Overseas Limited, which was only acquired

in August 2002. However, even disregarding Janco’s contribution, the Group’s organic growth

still registered a robust increase of 18% over the previous year.

Although Janco added top line growth, it operates on a much lower margin than the rest of the

Group, given its target customers in the value sector. Hence, the Group’s Total Margin declined

slightly from 9.4% to 9.1%. Our margin without Janco remains unchanged from the year before.

Leveraging on our expanded scale, Core Operating Margins before amortisation of goodwill

and provision for investments increased from 2.34% to 2.41%. As a result the Group’s Core

Operating Profit registered a healthy growth of 30%.

Despite strong operating performance, a drop in non-trading income had an unfavorable effect

on Group results. Due to the downward trend in interest rates, the Group’s interest income

generated from cash reserves declined to HK$21 million, from HK$30 million last year. The

Group has made a HK$13 million provision for investments to reflect a permanent diminution

in value of our venture capital investments. Goodwill amortisation charges also increased

from HK$2 million to HK$11 million, reflecting impact for the Janco acquisition.

Taking into account the above, plus contribution from associated companies, tax and minority

interests, the Group’s profit attributable to shareholders was HK$414 million, a 22% increase

from the year before.




Segmental Analysis

In line with our strategy to achieve a more balanced business mix, the hardgoods business

again performed well, with turnover and operating profit increasing by 44% and 53% respectively.

The addition of Janco helped fuel this growth but organic growth was also strong as the Group

continues to build more anchor customers in categories such as home products and toys. The

hardgoods business accounted for 31% of Group turnover in the first half of 2003, up from

27% in the same period last year.

Softgoods business accounted for 69% of turnover during the first half of 2003, and enjoyed

a healthy growth of 20% with particular strength coming from the value sector. With better

leverage on the existing cost base operating profit for softgoods grew at a higher rate of 26%.

Geographically, the Group experienced strong demand from its customers across the board.

In all markets, turnover and operating profit saw increases of over 20%. In particular, our

European business benefited from the stronger Euro. Our Japan business alliance with Nichimen

is also starting to reach economies of scale. After some startup losses last year, East Asia

produced a small profit for the first half of 2003.

Financial Position and Liquidity

The Group continues to be in a strong financial position, with cash and cash equivalents amounting

to HK$1.9 billion on 30 June 2003. Normal trading operations are well supported by over

HK$10 billion in bank trade finance. In addition, the Group has available bank loans and

overdraft facilities of HK$505 million out of which only HK$199 million has been utilized. As

at 30 June 2003, the Group’s gearing ratio was 0.85%, based on long term liabilities of HK$30

million and shareholder’s equity of HK$3.6 billion. The current ratio was 1.4, based on current

assets of HK$5.6 billion and current liabilities of HK$4 billion.

At the end of June 2003, charges on assets amounted to HK$118 million to cover banking

facilities in the ordinary course of business.

There were no material changes to the Group’s borrowings since 31 December 2002.

The Hong Kong Society of Accountants has issued a revised Statement of Standard Accounting

Practice No. 12 (revised) “Income Taxes” (“SSAP 12 (revised)”) which is effective for accounting

periods commencing on or after 1 January 2003. The SSAP 12 (revised) has introduced a new

basis of accounting for income taxes (including both current and deferred tax) and additional

disclosure requirements to the financial statements. With the adoption of the SSAP 12 (revised),

there was a net deferred tax of HK$3 million credit to the profit and loss account for the half

year.


L i & Fung L im i ted I n te r im Repor t 20037


Foreign Exchange Risk Management

Most of the Group’s cash balances are deposited in HK$ or US$ with major international

banks in Hong Kong. The Group has a HK$35 million short term revolving loan denominated

in Yen as a currency hedge against shares held in Nissho Iwai-Nichimen Holdings Corporation,

a strategic investment made in 2001 in the Business Alliance to open up the Japanese

market.

Apart from the above, most of the Group’s assets, liabilities, revenues and payments are

either in HK$ or US$. Therefore, we consider our risk exposure to foreign exchange rate

fluctuations minimal.

Capital Commitments and Contingent Liabilities

There are no material contingent liabilities or off-balance sheet obligations other than

trade bills discounted in the ordinary course of business as noted in the accounts.

Human Resources

As at 30 June 2003, the Group had a total work force of 5,710, of which 1,918 were

based in our Hong Kong headquarters and 3,792 were located overseas throughout our

sourcing network across 40 countries and territories.

The Group offers its staff competitive remuneration schemes. In addition, discretionary

bonuses and share options are also granted to eligible staff based on individual and Group

performance. The Group is committed to nurturing a learning culture in the organization.

Heavy emphasis is placed on training and development, as the Group’s success is dependent

on the efforts of a skilled, motivated work force. Total staff costs for the six months

ending 30 June 2003 were HK$722 million, compared against HK$613 million in 2002.

Prospects and Progress on Three-Year Plan 2002-2004

Due to the slow start to the plan in 2002, the Group is behind in its Three-Year Plan to

double our profits by 2004. However, management remains committed to pursuing this

target for the remainder of the plan. The second half of 2002 and the first half of 2003

has seen satisfactory growth broadly in line with the plan.

Judging from orders on hand and indications from our customers, the Group anticipates

that double-digit increase in turnover can be achieved for the rest of the year. The Group

is also starting to service a number of new customers with good sales potential in the

medium term.




In the area of new initiatives, the Group is in the process of negotiating and finalizing a

licensing arrangement with the Levi Strauss & Co., in which we will design, source and distribute

men’s, women’s, boys’ and girls’ tops under the Levi Strauss SignatureTM label for sales to

major mass market retailers. The line is expected to be delivered to stores for the Fall Season

of 2004. This initiative also represents an important foray into the higher margin business

area in line with the Group’s Three-Year Plan Strategy.

Apart from developing higher margin businesses, management continues to actively evaluate

acquisition opportunities to accelerate our growth. Progress in this area was somewhat delayed

by the outbreak of SARS but activity has since resumed vigorously. The Group has a strong

capacity in this respect with close to HK$2 billion in cash reserves.

William FUNG Kwok Lun

Managing Director

Hong Kong, 13 August 2003



Corpora te Governance

Corporate Governance

The Board of Directors is committed to principles of corporate governance consistent with

prudent enhancement and management of shareholder value. These principles emphasize

transparency, accountability and independence.

In order to reinforce independence, accountability and responsibility, the role of the Group

Chairman is separate from that of the Group Managing Director. The Board has established

the Nomination Committee, the Audit Committee, the Risk Management Committee and the

Compensation Committee with defined terms of reference. All committees are chaired by non-

executive directors.

Corporate governance practices adopted by the Company during the six-month period to 30

June 2003 are in line with those practices set out in the Company’s 2002 Annual Report.

Nomination Committee

The Nomination Committee was established in August 2001 to make recommendations to the

Board on the appointment of directors and the management of board succession. No meeting

has yet been held in 2003, and its current members include:

Dr Victor FUNG Kwok King – Committee Chairman

Mr Paul Edward SELWAY–SWIFT *

Dr William FUNG Kwok Lun

Audit Committee

The Audit Committee has been established since 1998 to provide advice and recommendations

to the Board. Its current members include:


Mr Paul Edward SELWAY–SWIFT *

Mr Allan WONG Chi Yun *

Professor Franklin Warren McFARLAN *

Mr Leslie BOYD

Mr Makoto YASUDA *

Mr James SIU Kai Lau (Chief Compliance Officer) – Secretary

The majority of the Committee members are independent non-executive directors. All Committee

members possess appropriate industry and financial experience to advise on Company’s matters.

03.Corporate Gover 25/8/2003, 9:27 PM9


Corporate Governance (Continued)

The Audit Committee has met twice in 2003 (with an average attendance rate of 79%) to

review with senior management and the Company’s internal and external auditors the internal

and external audit findings, the accounting principles and practices adopted by the Group,

and to discuss auditing, internal control, risk management and financial reporting matters

(including interim financial statements for the six months ended 30 June 2003 before recommending

them to the Board for approval). In order to further enhance independent reporting by external

auditors, part of the aforementioned meetings was attended only by independent non-executive

directors and external auditors.

Risk Management Committee

The Risk Management Committee was established in August 2001 to review and make

recommendations to the Board on the Group’s risk management and internal control systems.

The Committee reports to the Board in conjunction with the Audit Committee and it has met

once in 2003 (with an attendance rate of 100%). Its current members include:



Mr James SIU Kai Lau (Chief Compliance Officer)

Mr Frank LEONG Kwok Yee (Chief Financial Officer)

Compensation Committee

The Compensation Committee has been established since 1993 with the responsibility of

approving the remuneration policy for all directors and senior executives, including annual

allocation of Share Options to employees under the Company’s Employee Share Option Scheme.

The Compensation Committee has met once in 2003 (with an attendance rate of 100%) and

its current members include:

Mr Allan WONG Chi Yun * – Committee Chairman

Dr Victor FUNG Kwok King


* independent non-executive director

Code of Conduct and Business Ethics

The Group’s reputation capital is built on its long established standards of ethics in conducting

business. Guidelines of the Group’s core business ethical practices as endorsed by the Board

are set out in our Code of Conduct and Business Ethics for all directors and staff.




Internal Control

The internal control and accounting systems of the Group are designed to provide reasonable

assurance that assets are safeguarded against unauthorised use or disposition, that transactions

are executed in accordance with management’s authorisation and that the accounting records

are reliable for preparing financial information used within the business or for publication and

maintaining accountability for assets and liabilities. Qualified personnel throughout the Group

maintain and monitor these internal accounting controls on an ongoing basis. The Group’s

Corporate Governance Division, under the supervision of the Group’s Chief Compliance Officer,

independently reviews these controls, evaluates their adequacy, effectiveness and compliance,

and reports directly to the Audit Committee.

Compliance with the Listing Rules

None of the directors is aware of any information that would reasonably indicate that the

Company is not, or was not for any part of the six-month period to 30 June 2003, in compliance

with the Code of Best Practice as set out in Appendix 14 to the Rules Governing the Listing of

Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

Disclosure of financial information in this report complies with Appendix 16 of the Listing

Rules.

Corporate Social Responsibility and Sustainability

The Group has developed a Supplier Code of Conduct to be observed by all its approved

vendors around the globe. The Code is a set of rigorous labor, health and environmental standards

based on national labor laws, International Labor Organisation (ILO)’s conventions and treaties,

and international best practices.

The Group is a member of Business for Social Responsibility (BSR), an international organisation

based in the US that promotes the respect for ethical values, people, community and the

environment.

The Group is also a participant of the United Nation’s Global Compact initiative that forms a

platform for the promotion of human rights, labor welfare and the environment through the

dissemination of good practices based on certain universal principles - the Nine Principles.

In 2003, the Company continues to be included as a component of the Dow Jones Sustainability

World Indexes, the world’s first global indexes tracking the performance of companies worldwide

that lead their industry in three main dimensions of corporate sustainability: social, economic

and environmental responsibilities.




Investor Relations and Communication

The Company continues to pursue a proactive policy of promoting investor relations and

communication by maintaining regular meetings with institutional shareholders and analysts.

In order to further promote effective communication, the Company maintains a website

(www.lifung.com) to disseminate shareholder information electronically on a timely basis.

Community Service

The Company endorses senior executives in participating in community services and accepting

public offices which currently include various government and non-government advisory boards

and professional associations promoting Hong Kong’s exports, advance of international trade,

community’s quality-housing solutions and best corporate governance practices.

The Company further provides institutional support in the form of sponsorships for universities

and charitable support by direct donation or direct employee involvement in fundraising activities

organized by leading charitable organizations.



D i r e c t o r s ’ I n t e r e s t s a n d S h o r t P o s i t i o n s i n S h a r e s ,U n d e r l y i n g S h a r e s a n d D e b e n t u r e s

As at 30 June 2003, the interests of each director, chief executive and their associates in the

shares and share options of the Company and its associated corporations (within the meaning

of the Securities and Futures Ordinance (“SFO”)), as recorded in the register maintained by

the Company pursuant to Section 352 of the SFO are as follows:

(A) Shares of the Company of HK$0.025 each (“Shares”)

Number of Shares

PersonsPersonal Corporate Family Trust/similar acting Other Totalinterest interest interest interest in concert interest interests

Dr Victor FUNG Kwok King — 1,180,500,000 1 — 50,750,000 2 — — 1,231,250,000

Dr William FUNG Kwok Lun 68,502,300 1,180,500,000 1 4,000 — — — 1,249,006,300

Mr Henry CHAN 3,280,000 — — — — — 3,280,000

Mr Danny LAU Sai Wing 7,240,000 — — — — — 7,240,000

Ms Annabella LEUNG Wai Ping 3,200,000 — — — — — 3,200,000

Mr Bruce Philip ROCKOWITZ 8,000 — — 50,374,100 3 — — 50,382,100

Mr LAU Butt Farn 2,200,000 — — — — — 2,200,000

Professor Franklin Warren — — — 52,000 4 — — 52,000

McFARLAN

Mr Leslie BOYD — — — 10,000 5 — — 10,000

None of the above directors has any interest of short positions in the Shares or underlying

shares of the Company.

Notes:

(1) As at 30 June 2003,

(a) King Lun Holdings Limited (“King Lun”), a private company incorporated

in the British Virgin Islands, held 49,950,800 Shares.

(b) King Lun through its wholly-owned Hong Kong incorporated subsidiary, Li

& Fung (1937) Limited, held 996,000,000 Shares.

(c) Li & Fung (1937) Limited, through Orient Ocean Holdings Limited (“Orient

Ocean”), a private company incorporated in the British Virgin Islands, held

134,549,200 Shares. Li & Fung (1937) Limited held 50% voting rights

with no beneficial interest in Orient Ocean.

04.Directors Interests 25/8/2003, 9:26 PM13


Directors’ Interests and Short Positions in Shares,

Underlying Shares and Debentures (Continued)

Dr Victor FUNG Kwok King and Dr William FUNG Kwok Lun are deemed to have

interests in the 1,180,500,000 Shares, i.e. the total number of Shares mentioned

in notes (1)(a), (b) and (c) above, through their personal or other interests in

King Lun as set out below:

(i) 1,332,840 shares in King Lun, representing 50% of its issued share capital,

are owned by J.P. Morgan Trust Company (Jersey) Limited, the trustee of a

trust established for the benefit of the family of Dr Victor FUNG Kwok

King.

(ii) 1,332,840 shares in King Lun, representing 50% of its issued share capital,

are owned by Dr William FUNG Kwok Lun.

(2) 50,750,000 Shares in the Company are held by J.P. Morgan Trust Company (Jersey)

Limited, the trustee of a trust established for the benefit of the family of

Dr Victor FUNG Kwok King.

(3) 50,374,100 Shares in the Company are held by Hurricane Millennium Holdings

Limited, a company beneficially owned by a trust which has been set up for the

benefit of family members of Mr Bruce Philip ROCKOWITZ.

(4) 52,000 Shares in the Company are held by a trust established for the benefit of

Professor Franklin Warren McFARLAN and managed by Fleet Bank, Boston.

(5) 10,000 Shares in the Company are held by Maitland Trustees Limited, the trustee

of a trust, in respect of which the family of Mr Leslie BOYD are potential discretionary

beneficiaries.

(B) Share Options

The interests of the directors and chief executives in the share options of the Company

are detailed in the Share Options section stating below.

Save as disclosed above, at no time during the year, the directors and chief executives (including

their spouse and children under 18 years of age) had any interest in, or had been granted, or

exercised, any rights to subscribe for shares (or warrants or debentures, if applicable) of the

Company or its associated corporations required to be disclosed pursuant to the SFO.





Share Options

Old Share Option Scheme

The share option scheme of the Company being adopted on 2 June 1992 (the “Old Scheme”)

has expired on 1 June 2002. Despite the fact that no further options may be granted under the

Old Scheme, all its terms will remain in force to govern the exercise of all the options previously

granted. The terms of the Old Scheme were disclosed in the 2002 Annual Report. As at

30 June 2003, there are options (“Share Options”) relating to 31,140,000 Shares granted by

the Company pursuant to the Old Scheme which are valid and outstanding.

Details of the Share Options granted under the Old Scheme and remain outstanding as at

30 June 2003 are as follows:

Options Options Options Options Optionsheld at granted exercised lapsed held at Exercise

1 January during the during the during the 30 June Price Exercisable Exercisable2003 period period period 2003 HK$ Grant date from until

Dr William FUNG 480,000 — — — 480,000 15.26 7 July 2000 7 July 2001 6 July 2003Kwok Lun 480,000 — — — 480,000 10.50 18 July 2001 18 July 2002 17 July 2004

480,000 — — — 480,000 7.98 28 August 2001 28 August 2003 27 August 2005

Mr Henry CHAN 240,000 — — — 240,000 15.26 7 July 2000 7 July 2001 6 July 2003240,000 — — — 240,000 10.50 18 July 2001 18 July 2002 17 July 2004240,000 — — — 240,000 7.98 28 August 2001 28 August 2003 27 August 2005

Mr Danny LAU Sai Wing 240,000 — — — 240,000 15.26 7 July 2000 7 July 2001 6 July 2003240,000 — — — 240,000 10.50 18 July 2001 18 July 2002 17 July 2004240,000 — — — 240,000 7.98 28 August 2001 28 August 2003 27 August 2005

Ms Annabella 240,000 — — — 240,000 15.26 7 July 2000 7 July 2001 6 July 2003LEUNG Wai Ping 240,000 — — — 240,000 10.50 18 July 2001 18 July 2002 17 July 2004

240,000 — — — 240,000 7.98 28 August 2001 28 August 2003 27 August 2005

Mr Bruce Philip 240,000 — — — 240,000 7.98 28 August 2001 28 August 2003 27 August 2005ROCKOWITZ

Continuous contract 7,872,000 — — — 7,872,000 15.26 7 July 2000 7 July 2001 6 July 2003employees 9,320,000 — — — 9,320,000 10.50 18 July 2001 18 July 2002 17 July 2004

10,164,000 — — 56,000 10,108,000 7.98 28 August 2001 28 August 2003 27 August 2005

There is no share options granted or exercised under the Old Scheme during the six-month

period ended 30 June 2003.





New Share Option Scheme

At the 2003 Annual General Meeting of the Company held on 12 May 2003, a new share option

scheme (the “New Scheme”) of the Company was adopted by the shareholders of the Company

to comply with the new requirements of Chapter 17 of the Listing Rules of The Stock Exchange

of Hong Kong Limited. As at 30 June 2003, there are Share Options relating to 52,310,000

Shares granted by the Company pursuant to the New Scheme which are valid and outstanding.

Details of the Share Options granted under the New Scheme and remain outstanding as at

30 June 2003 are as follows:

Options Options Options Options Optionsheld at granted exercised lapsed held at Exercise

1 January during during the during the 30 June Price Exercisable Exercisable2003 the period period period 2003 HK$ Grant date from until

Dr William FUNG — 800,000 — — 800,000 9.20 23 May 2003 23 May 2004 22 May 2007Kwok Lun — 800,000 — — 800,000 9.20 23 May 2003 23 May 2005 22 May 2008

— 800,000 — — 800,000 9.20 23 May 2003 23 May 2006 22 May 2009

Mr Henry CHAN — 400,000 — — 400,000 9.20 23 May 2003 23 May 2004 22 May 2007— 400,000 — — 400,000 9.20 23 May 2003 23 May 2005 22 May 2008— 400,000 — — 400,000 9.20 23 May 2003 23 May 2006 22 May 2009

Mr Danny LAU Sai Wing — 400,000 — — 400,000 9.20 23 May 2003 23 May 2004 22 May 2007— 400,000 — — 400,000 9.20 23 May 2003 23 May 2005 22 May 2008— 400,000 — — 400,000 9.20 23 May 2003 23 May 2006 22 May 2009

Ms Annabella — 400,000 — — 400,000 9.20 23 May 2003 23 May 2004 22 May 2007LEUNG Wai Ping — 400,000 — — 400,000 9.20 23 May 2003 23 May 2005 22 May 2008

— 400,000 — — 400,000 9.20 23 May 2003 23 May 2006 22 May 2009

Mr Bruce Philip — 400,000 — — 400,000 9.20 23 May 2003 23 May 2004 22 May 2007ROCKOWITZ — 400,000 — — 400,000 9.20 23 May 2003 23 May 2005 22 May 2008

— 400,000 — — 400,000 9.20 23 May 2003 23 May 2006 22 May 2009

Continuous contract — 14,390,000 — — 14,390,000 9.20 23 May 2003 23 May 2004 22 May 2007employees — 15,360,000 — — 15,360,000 9.20 23 May 2003 23 May 2005 22 May 2008

— 15,360,000 — — 15,360,000 9.20 23 May 2003 23 May 2006 22 May 2009

The closing market price per share immediately before the date on which the Share Options

were granted was HK$9.00.

The above options granted are not recognised in the accounts until they are exercised. Rule

17.08 of the Listing Rules stipulates that the listed issuer is encouraged to disclose in its annual

report and interim report the value of options granted to participants as referred to in (i) to (v)

of Rule 17.07 during the financial year. The Directors consider it inappropriate to value the

Share Options as a number of factors critical for the valuation cannot be determined accurately.

Any valuation of the Share Options based on various speculative assumptions would be meaningless

and could be misleading to the shareholders. The Directors therefore consider the disclosure of

only the relevant market price and exercise price, which are readily ascertainable, will be appropriate.



Subs tan t i a l Shareho lder s and Other In format ion

Substantial Shareholders

At 30 June 2003, the register of substantial shareholders maintained under Section 336 of

the SFO shows that the Company had been notified of the following substantial shareholder’s

interests, being 5% or more of the Company’s issued share capital:

Number of Shares

Li & Fung (1937) Limited 996,000,000

The Capital Group Companies, Inc. 346,391,345

J.P. Morgan Chase & Co. 201,101,784

None of the above substantial shareholders has any interest of short positions in the Shares

or underlying shares of the Company.

Purchase, Sale or Redemption of the Company’s Listed Securities

The Company has not redeemed any of its listed securities during the period. Neither the

Company nor any of its subsidiaries has purchased or sold any of the Company’s listed securities

during the period.

Interim Dividend

The Board of Directors has resolved to declare an interim dividend of 10 HK cents

(2002: 8.5 HK cents) per Share for the six months ended 30 June 2003 absorbing a

total of HK$289 million (2002: HK$246 million).

Closure of Register of Members

The Register of Members will be closed from 1 September 2003 to 5 September 2003, both

days inclusive, during which period no transfer of shares will be effected. In order to qualify

for the interim dividend, all transfers accompanied by the relevant share certificates must be

lodged with the Company’s Hong Kong branch registrars, Abacus Share Registrars Limited at

Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong

Kong not later than 4:00 p.m. on 29 August 2003. Dividend warrants will be despatched on

5 September 2003.

05.Substantial Shareholders 25/8/2003, 9:24 PM17


19 Consolidated Profit and Loss Account

20 Consolidated Balance Sheet

21 Condensed Consolidated Statement of

Changes in Equity

22 Condensed Consolidated Cash Flow

Statement

Notes to Condensed Accounts

23 1. Basis of preparation and

accounting policies

24 2. Segment information

25 3. Operating profit

25 4. Taxation

26 5. Interim dividend

26 6. Earnings per share

27 7. Capital expenditure

27 8. Trade and bills receivable

28 9. Trade and bills payable

28 10. Long–term liabilities

29 11. Share capital

29 12. Reserves

30 13. Deferred taxation

31 14. Contingent liabilities

31 15. Commitments

31 16. Comparatives

31 17. Approval of interim report

Interim Financial Report


Conso l ida ted Pro f i t and Los s Account

UnauditedSix months ended 30 June

Note 2003 2002HK$’000 HK$’000

Turnover 2 18,106,002 14,327,720

Cost of sales (16,530,713) (13,036,938)

Gross profit 1,575,289 1,290,782

Other revenues 63,577 59,494

Total margin 1,638,866 1,350,276

Selling expenses (232,018) (198,173)

Merchandising expenses (830,135) (699,103)

Administrative expenses (140,419) (117,765)

Core operating profit 436,294 335,235

Amortisation of goodwill (10,608) (2,089)

Provision for investments (13,402) —

Operating profit 2 & 3 412,284 333,146

Interest income 20,731 29,583

Interest expenses (2,685) (3,812)

Share of profits less losses of

associated companies 9,206 4,153

Profit before taxation 439,536 363,070

Taxation 4 (33,000) (25,124)

Profit after taxation 406,536 337,946

Minority interests 7,822 2,207

Profit attributable to shareholders 414,358 340,153

Interim dividend 5 289,001 245,651

Basic earnings per share 6 14.3 HK cents 11.8 HK cents

07.Consolidated Profit 25/8/2003, 9:24 PM19


Conso l ida ted Ba lance Shee t

Unaudited Audited30 June 31 December

Note 2003 2002HK$’000 HK$’000

Intangible assets 7 356,998 326,696Fixed assets 7 1,490,352 1,263,838Associated companies 26,300 22,255Investments 137,746 139,932Deferred tax assets 13 23,780 —

Current assets

Inventories 189,673 118,082Due from related companies 30,106 22,155Trade and bills receivable 8 2,820,071 3,152,836Other receivables, prepayments and deposits 523,032 499,943Cash and bank balances 2,070,787 2,478,434

5,633,669 6,271,450

Current liabilities

Due to related companies 99 97Trade and bills payable 9 3,194,558 3,369,701Accrued charges and sundry payables 441,814 502,457Taxation 172,172 143,984Current portion of long-term liabilities 10 41,182 51,496Bank loans and overdrafts

Secured 119,060 53,037Unsecured 44,899 38,691

4,013,784 4,159,463

Net current assets 1,619,885 2,111,987

Total assets less current liabilities 3,655,061 3,864,708

Financed by:

Share capital 11 72,250 72,250

Reserves 3,216,185 3,089,967Proposed dividend 289,001 635,803

12 3,505,186 3,725,770

Shareholders’ funds 3,577,436 3,798,020Minority interests 16,089 27,248Non-current liabilities

Long-term liabilities 10 30,400 30,400Pension obligations 5,634 4,029Deferred taxation 13 25,502 5,011

3,655,061 3,864,708

08.Consolidated Balance 25/8/2003, 9:23 PM20

Condensed Conso l ida ted S ta tement o f Changes in Equ i t y


UnauditedSix months ended 30 June

Note 2003 2002HK$’000 HK$’000

Total shareholders’ funds as at 1 January 3,798,020 3,443,051

Exchange adjustment on translation of the

accounts of overseas subsidiaries and

associated companies 12 861 8,887

Profit for the period 12 414,358 340,153

Final dividend paid 12 (635,803) (534,065)

Share premium on issue of new shares — 41,903

Exercise of share options — 254

Total shareholders’ funds as at 30 June 3,577,436 3,300,183

09.Consolidated C S 25/8/2003, 9:23 PM21


Condensed Conso l ida ted Cash F low S ta tement

UnauditedSix months ended 30 June2003 2002

HK$’000 HK$’000

Net cash inflow from operating activities 497,936 299,773

Net cash outflow from investing activities (326,558) (69,762)

Net cash inflow before financing activities 171,378 230,011

Net cash outflow from financing activities (651,654) (495,838)

Decrease in cash and cash equivalents (480,276) (265,827)

Cash and cash equivalents at 1 January 2,386,706 2,591,455

Effect of foreign exchange rate changes 398 6,655

Cash and cash equivalents at 30 June 1,906,828 2,332,283

Analysis of the balances of cash and cash equivalents:

Cash and bank balances 2,070,787 2,474,008

Bank loans and overdrafts (163,959) (141,725)

1,906,828 2,332,283

10.Consolidated Consolid 25/8/2003, 9:22 PM22


Notes to Condensed Account s

1 Basis of preparation and accounting policies

The unaudited interim financial report has been reviewed by the Company’s audit committee,

and reviewed by the Company’s auditors, PricewaterhouseCoopers, in accordance with

Statement of Auditing Standard 700 “Engagements to review interim financial reports”

issued by the Hong Kong Society of Accountants (“HKSA”).

These unaudited consolidated condensed interim accounts have been prepared in accordance

with Hong Kong Statement of Standard Accounting Practice (“SSAP”) 25 “Interim Financial

Reporting” issued by the HKSA.

These condensed interim accounts should be read in conjunction with the 2002 annual

accounts.

The accounting policies and methods of computation used in the preparation of these

condensed interim accounts are consistent with those used in the annual accounts for

the year ended 31 December 2002 except that the Group has adopted the revised SSAP

12 “Income Taxes” issued by the HKSA which is effective for accounting period commencing

on or after 1 January 2003.

The change to the Group’s accounting policies and the effect of adopting this revised

standard is set out below:

Deferred taxation is provided in full, using the liability method, on temporary differences

arising between the tax bases of assets and liabilities and their carrying amounts in the

accounts. Taxation rates enacted or substantively enacted by the balance sheet date

are used to determine deferred taxation.

Deferred tax assets are recognised to the extent that it is probable that future taxable

profit will be available against which the temporary differences can be utilised.

Deferred taxation is provided on temporary differences arising on investments in subsidiaries

and associated companies except where the timing of the reversal of the temporary

difference can be controlled and it is probable that the temporary difference will not

reverse in the foreseeable future.

In prior year, deferred taxation was accounted for at the current taxation rate in respect

of timing differences between profit as computed for taxation purposes and profit as

stated in the accounts to the extent that a liability or an asset was expected to be

payable or recoverable in the foreseeable future. The adoption of the revised SSAP 12

represents a change in accounting policy, which has been applied retrospectively. Since

the adoption of this revised SSAP had no material impact on the Group’s accounts in

prior periods/years, comparative figures have not been restated.

11.Notes of Account 25/8/2003, 9:21 PM23


Notes to Condensed Accounts (Continued)

2 Segment information

The principal activity of the Group is the export trading of consumer products.

(a) Geographical segments

An analysis of the Group’s segment turnover and contribution to operating profit

for the period by geographical segments is as follows:

Turnover Operating profitSix months ended 30 June Six months ended 30 June

2003 2002 2003 2002HK$’000 HK$’000 HK$’000 HK$’000

Principal markets:

North America 13,513,544 10,592,406 335,480 260,249

Europe 3,469,691 2,850,380 88,813 67,684

Southern Hemisphere 556,001 444,203 10,529 8,347

East Asia 566,766 440,731 1,472 (1,045)

18,106,002 14,327,720 436,294 335,235

Amortisation of goodwill — — (10,608) (2,089)

Provision for investments — — (13,402) —

18,106,002 14,327,720 412,284 333,146

(b) Business segments

An analysis of the Group’s segment turnover and contribution to operating profit

for the period by business segments is as follows:

Turnover Operating profitSix months ended 30 June Six months ended 30 June

2003 2002 2003 2002HK$’000 HK$’000 HK$’000 HK$’000

Softgoods 12,520,118 10,443,520 352,066 280,203

Hardgoods 5,585,884 3,884,200 84,228 55,032

18,106,002 14,327,720 436,294 335,235

Amortisation of goodwill — — (10,608) (2,089)

Provision for investments — — (13,402) —

18,106,002 14,327,720 412,284 333,146




3 Operating profit

Operating profit is stated after charging the following:

Six months ended 30 June2003 2002

HK$’000 HK$’000

Amortisation of goodwill 10,608 2,089

Amortisation of development costs 2,115 2,564

Depreciation of fixed assets 59,090 52,568

Loss on disposal of fixed assets 1,184 448

4 Taxation

Hong Kong profits tax has been provided for at the rate of 17.5% (2002: 16%) on the

estimated assessable profit for the period. Taxation on overseas profits has been calculated

on the estimated assessable profit for the period at the rates of taxation prevailing in

the countries in which the Group operates.

The amount of taxation charged/(credited) to the consolidated profit and loss account

represents:


HK$’000 HK$’000

Hong Kong profits tax 24,962 20,496

Overseas taxation 10,465 3,963

Deferred taxation relating to the origination and

reversal of temporary differences (3,962) —

Deferred taxation resulting from an increase

in tax rate 675 —

32,140 24,459

Share of taxation attributable to associated companies

- Hong Kong 730 665

- Overseas 130 —

860 665

Total taxation charge 33,000 25,124




4 Taxation (Continued)

At the date of this report, certain subsidiaries of the Group have disputes with the

Hong Kong Inland Revenue involving additional assessments of tax of approximately

HK$372 million on the non-taxable claim of certain non-Hong Kong sourced income

and the deduction claim of marketing expenses for the years of assessment from

1992/1993 to 2001/2002. Under professional advice, the subsidiaries are pursuing

objection against the additional assessments and the directors believe that no material

tax liabilities will finally crystallise. Accordingly, the directors consider that sufficient

tax provision has been made in this regard.

5 Interim dividend


HK$’000 HK$’000

Proposed, of HK$0.1 per ordinary share

(2002: HK$0.085 per share) 289,001 245,651

6 Earnings per share

The calculation of basic earnings per share is based on the Group’s profit attributable

to shareholders of HK$414,358,000 (2002: HK$340,153,000) and on the weighted

average number of 2,890,012,000 (2002: 2,883,024,000) shares in issue during the

period.

In the event that share options outstanding at 30 June 2003 and 2002 respectively

were exercised in full, the diluted earnings per share would not be significantly different

from the earnings per share as disclosed in the consolidated profit and loss account.




7 Capital expenditure

Intangible assets

DevelopmentGoodwill costs Total Fixed assetsHK$’000 HK$’000 HK$’000 HK$’000

Six months ended 30 June 2003Net book amount

as at 1 January 2003 298,917 27,779 326,696 1,263,838

Development costs recognised

as an asset — 710 710 –

Additions 42,315 — 42,315 288,312

Disposals — — — (2,718)

Amortisation/depreciation

charge (Note 3) (10,608) (2,115) (12,723) (59,090)

Exchange adjustment — — — 10

Net book amount

as at 30 June 2003 330,624 26,374 356,998 1,490,352

8 Trade and bills receivable

The ageing analysis of trade and bills receivable is as follows:

Current to 91 to 181 to Over90 days 180 days 360 days 360 days Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Balance at30 June 2003 2,734,222 64,706 18,420 2,723 2,820,071

Balance at

31 December 2002 3,039,277 87,477 19,835 6,247 3,152,836

Majority of the Group’s business are on sight letter of credit, usance letter of credit up

to a tenor of 120 days, documents against payment or customers’ letter of credit to

suppliers. The remaining balances of the business are on open account terms payable

against deliveries of shipments which are mostly covered by customers’ standby letters

of credit or bank guarantees.




9 Trade and bills payable

The ageing analysis of trade and bills payable is as follows:

Current to 91 to 181 to Over90 days 180 days 360 days 360 days Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Balance at30 June 2003 3,087,405 73,351 23,670 10,132 3,194,558

Balance at

31 December 2002 3,218,305 108,140 31,718 11,538 3,369,701

10 Long-term liabilities

30 June 31 December2003 2002

HK$’000 HK$’000

Long-term bank loans, secured 34,960 45,274

Other loans 36,622 36,622

71,582 81,896

Current portion of long-term liabilities (41,182) (51,496)

30,400 30,400

At 30 June 2003, the Group’s long-term bank loans and other loans are repayable as

follows:

Long-term bank loans Other loans30 June 31 December 30 June 31 December

2003 2002 2003 2002HK$’000 HK$’000 HK$’000 HK$’000

Within one year 34,960 45,274 6,222 6,222

In the second year — — 6,175 6,175

In the third to fifth year — — 24,225 24,225

34,960 45,274 36,622 36,622




11 Share capital

No. of shares HK$’000(in thousand)

AuthorisedAt 1 January 2003 and 30 June 2003,

ordinary shares of HK$0.025 each 3,200,000 80,000

Issued and fully paidAt 1 January 2003 and 30 June 2003,

ordinary shares of HK$0.025 each 2,890,012 72,250

12 Reserves

Share Capital Exchange Retainedpremium reserve reserve earnings TotalHK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2002 2,833,787 5,630 (65,905) 597,565 3,371,077

2001 final dividend paid — — — (534,065) (534,065)

Share premium on issue

of new shares 45,543 — — — 45,543

Exchange adjustment

on translation of the

accounts of overseas

subsidiaries and

associated companies — — 8,398 — 8,398

Transfer to capital reserve — 181 — (181) —

Profit for the year — — — 1,080,468 1,080,468

2002 interim dividend paid — — — (245,651) (245,651)

At 31 December 2002 2,879,330 5,811 (57,507) 898,136 3,725,770

At 1 January 2003 2,879,330 5,811 (57,507) 898,136 3,725,770

Exchange adjustment

on translation of the

accounts of overseas

subsidiaries and

associated companies — — 861 — 861

Profit for the period — — — 414,358 414,358

2002 final dividend paid — — — (635,803) (635,803)

At 30 June 2003 2,879,330 5,811 (56,646) 676,691 3,505,186




13 Deferred taxation

The movement in deferred tax assets and liabilities during the period/year is as follows:

Deferred tax liabilities

Accelerated tax Deferreddepreciation development costs Others Total2003 2002 2003 2002 2003 2002 2003 2002

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 5,238 5,609 — — (227) (1,641) 5,011 3,968

Charged/(credited) to profit

and loss account 15,099 (371) 2,200 — 3,155 1,722 20,454 1,351

Acquisition of subsidiaries — — — — — (308) — (308)

Exchange differences (1) — — — 38 — 37 —

At 30 June 2003/31 December 2002 20,336 5,238 2,200 — 2,966 (227) 25,502 5,011

Deferred tax assets

Decelerated taxProvisions allowance Tax losses Others Total

2003 2002 2003 2002 2003 2002 2003 2002 2003 2002HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1 January — — — — — — — — — —

Credited to profit

and loss account (4,117) — (1,200) — (16,600) — (1,824) — (23,741) —

Exchange

differences (28) — (10) — — — (1) — (39) —

At 30 June 2003/

31 December

2002 (4,145) — (1,210) — (16,600) — (1,825) — (23,780) —


HK$’000 HK$’000

The amounts shown in the balance sheet

include the following:

Deferred tax assets to be recovered after

more than 12 months (12,776) —

Deferred tax liabilities to be settled after

more than 12 months 19,863 4,827




14 Contingent liabilities30 June 31 December

2003 2002HK$’000 HK$’000

Bills of exchange discounted with recourse 921,781 1,069,929Guarantees in respect of banking facilitiesgranted to associated companies 83,827 99,437

Other guarantees 9,600 9,600

1,015,208 1,178,966

15 Commitments

(a) Operating lease commitments

At 30 June 2003, the Group had total future aggregate minimum lease rentalpayments under non-cancellable operating leases as follows:


HK$’000 HK$’000

Within one year 45,057 58,349In the second to fifth year inclusive 99,393 114,289After the fifth year 113,471 123,023

257,921 295,661

(b) Capital commitments for fixed assets


HK$’000 HK$’000

Contracted but not provided for 19,691 203,688

16 Comparatives

Where necessary, comparative figures have been adjusted to conform with changes inpresentation in the current period.

17 Approval of interim report

The interim report as set out on pages 2 to 32 was approved by the Board of Directorson 13 August 2003.



In format ion for Inve s tor s

Listing Information

Listing: Hong Kong Stock Exchange

Stock code: 494

Ticker Symbol

Reuters: 0494.HK

Bloomberg: 494 HK Equity

Key Dates

13 August 2003

Announcement of 2003 Interim Results

1 September 2003 to 5 September 2003

(both days inclusive)

Closure of Register of Shareholders

5 September 2003

Payment of 2003 Interim Dividend

Registrar & Transfer Offices

Principal:

The Bank of Bermuda Limited

6 Front Street, Hamilton HM11, Bermuda

Hong Kong Branch:

Abacus Share Registrars Limited

Ground Floor

Bank of East Asia Harbour View Centre

56 Gloucester Road, Wanchai, Hong Kong

Share Information

Board lot size: 2,000 Shares

Shares outstanding as at 30 June 2003:

2,890,012,000 Shares

Market Capitalization as at 30 June 2003:

HK$29,044,620,600

Earnings per Share for 2003

Interim 14.3 HK cents

Dividend per Share for 2003

Interim 10 HK cents

Enquiries Contact

Ms Nancy Chen

Investor Relations Manager

Telephone: (852) 2300 2333

Fax: (852) 2300 2020

e-mail: [email protected]

Li & Fung Limited

11th Floor, LiFung Tower

888 Cheung Sha Wan Road

Kowloon, Hong Kong

Website

www.lifung.com

www.irasia.com/listco/hk/lifung

12.Information 25/8/2003, 9:21 PM32

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