Investors turn bullish on Li & Fung after makeover

Options traders are turning bullish on Li & Fung, a supplier to Wal-Mart Stores, betting on a revival of its American operations after the stock lost 61 per cent of its value.

Calls with an exercise price 10 per cent above Li & Fung shares cost two points more than puts, according to three-month options data. The gap, which widens as demand from bulls increases, jumped to 3.18 points on February 21, the most since April 2011.

Li & Fung's profit will climb 21 per cent this year, analysts estimate. The stock closed at HK$10.16 on Friday, down from HK$25.93 in January 2011.

The company has changed management and cut brands to revive its United States unit, buying Lornamead Acquisition, the owner of brands including Finesse and Aqua Net, last year to expand its market share in personal-care products.

Investors are betting that Li & Fung, which gets more than 80 per cent of its revenue from the US and Europe, will benefit from global growth forecast to accelerate this year to the fastest pace since 2011.

"People should be turning more positive on Li & Fung," said Nicholas Studholme, an analyst at Sun Hung Kai Financial. "US consumer spending is improving slowly and will probably get better. There should be an upward drift in the company's profit margins following the acquisition of higher-value-added assets and completion of the US restructuring."

Analysts have raised ratings on Li & Fung since it said on January 6 that its performance last year was solid, matching its forecast, which it did not specify. Mizuho Securities lifted its rating on the stock to buy from neutral on January 13.