Li & Fung : Results Announcement

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Incorporated in Bermuda with limited liability | Stock Code: 494

Announcement of Results for the Half Year Ended 30 June 2018

• •Exceeded Three-Year Plan targets in 2017, but 2018 is challenging due to continued destocking, store closures and bankruptcies

• •Profit attributable to shareholders (like-for-like) down 19%

• •Divestment of Product Verticals brought in US$1.1 billion of cash

• •Trade war has minimal impact on our business and mitigated by our 50+ countries of production

• •Announced an aggressive plan to bring greater focus on customers, business development, production platform and digital initiatives

• •Seeking IPO for Logistics business to enhance its growth

HIGHLIGHTS(US$ million)

Group Results1

1H 2018

1H 2017

(Restated)2

Change%

Turnover

5,8506,471 (9.6%)

Total MarginAs % of Turnover

614642 (4.4%)10.5%9.9%

Operating CostsAs % of Turnover

489491 (0.2%)8.4%7.6%

Core Operating ProfitAs % of Turnover

1242.1%

1512.3%

(18.0%)

Gain on Remeasurement of Contingent Consideration

Payable

Profit for the Period

• - Continuing Operations

  - 79

  30

  123

• - Discontinued Operations

  (138)10

• - Total

(59)133

Profit Attributable to Shareholders3

• -Continuing Operations

  50

  91

• - Discontinued Operations1

  (135)10

• - Total

(85)101

Adjusted Profit Attributable to Shareholders4Earnings per Share from Continuing Operations-Basic (HK cents)

50

62

4.68.5

(equivalent to) (US cents)

0.601.09

Dividend per Share (HK cents)

311

• 1. Group results with Discontinued Operations separately presented given the strategic divestment of the three Product Verticals in April 2018. The loss attributable to Shareholders of US$135 million is the result of an operating loss of the discontinued business of the three Product Verticals of US$21 million during primarily the first three months of 2018 and final disposal losses resulting from discontinued business of US$114 million.

• 2. Restated historical financials to reflect the three Product Verticals presented as Discontinued Operations

• 3. Excluding profit attributable to holders of perpetual capital securities and non-controlling interests

• 4. Profit attributable to shareholders for Continuing Operations excluding gain on remeasurement of contingent consideration payable

MANAGEMENT DISCUSSION AND ANALYSIS

Key Highlights

• •Exceeded Three-Year Plan targets in 2017, but 2018 is challenging due to continued destocking, store closures and bankruptcies

• •Profit attributable to shareholders (like-for-like) down 19%

• •Divestment of Product Verticals brought in US$1.1 billion of cash

• •Trade war has minimal impact on our business and mitigated by our 50+ countries of production

• •Announced an aggressive plan to bring greater focus on customers, business development, production platform and digital initiatives

• •Seeking IPO for Logistics business to enhance its growth

Results Overview

Mid-point of Three-Year Plan (2017-2019)

Our Three-Year Plan (2017-2019) got off a strong start in its first year. In 2017, we met our financial targets despite a tough operating environment. The strong start created a higher comparative base for this year, both in terms of core operating profits and margin trends. Pressure on turnover from destocking and deflation remained throughout the first half of 2018. Beginning last year, we spearheaded a comprehensive productivity drive for the entire business operations, and our productivity initiatives continued in 2018. Since the majority of productivity gains were realized last year, the incremental efficiency is having a smaller impact this year. Furthermore, in order to maintain our leadership position in several of our digitalization efforts, we have accelerated our investments in digitalization, which will add to our operating expenses for the year.

While the retail industry and its supply chain continue to undergo profound fundamental shifts, we remain focused on executing our vision to create the supply chain of the future.

Multi-year Destocking Trend

All retailers - online and offline - are focused on carrying the right merchandise at the right time to satisfytoday'sfast changing consumer trends. In order to achieve this, they are looking for solutions to speed up their design-to-production cycle, causing a transitional inventory destocking until optimized inventory levels are reached. Our company has been offering a speed model and digitalization modules to help customers win in the marketplace. Early adopters of the speed model and digitalization modules have already witnessed better operational results in terms of increased sell-through, reduced mark-down and improved inventory levels. Their success has in turn generated additional interest from other customers. While the adoption of our speed model and digitalization modules is positive for the retail industry and our company in the long run, it creates a transitional headwind for our turnover as customers destock their inventory level to a new normal.

At the same time, traditional retailers, who were under pressure from e-commerce a few years ago, have been fighting back with new technologies and innovative solutions. Their investment in e-commerce has allowed them to recapture retail sales and become competitive with pure online competitors. However, this led to an unprecedented number of store closures in 2017 and the pace of store closure is poised to be even higher in 2018. Also, as retailers rationalize their retail footprints, a recalibration of inventory is required. Physical stores typically carry more inventory to create an attractive visual to attract shoppers to the store. As retailers move retail sales to online channels, they are reducing their retail footprints; thus, destocking their store inventory to lower levels. This destocking transition has had a negative impact to our turnover.

We expect the destocking trend to continue until the industry settles into a new inventory equilibrium. We also believe the destocking is a transient phenomenon through which our customers will achieve better operations and financial strength. Destocking can be a multi-year process depending on the pace of adoption of each customer, who are at different stages in this journey. This means the impact on our business might be spread out. Some retailers will encounter more challenges in adapting to new landscape, resulting in distress and, in some cases, bankruptcies.

Increased Global Competition in Retail

The competition in retail has increased dramatically due to global e-commerce and logistics. Pure e-commerce brands have been gaining scale and market share as they ship globally. Technology giants have also expanded into brick-and-mortar format in addition to their e-commerce platforms to host brands and facilitate global retail sales. Borderless sales are becoming more of a commonplace as e-commerce platforms around the world sell directly to end-consumers globally. This has led to increased price transparency across the markets and channels. As a response, retailers are permanently promotional in order to capture sales, requiring our customers to source ever more cost-effectively.

Select Economies Recovering but Trade Uncertainty Looms

While the economic recovery, especially in the US, remained solid, uncertainties loomed and posed potential disruptions to the supply chain. Tension between China and the US over trade further escalated in 2018 with potential implications on alternatives for sourcing countries. Separately, China is also tightening environmental regulations, adding to inflationary pressure on manufacturers. With a vast global network of factories spanning more than 40 economies, we are prepared to take advantage of any disruption in the global trade flow and help our customers source the right merchandise at the right time. This remains a core competitive advantage of the company and a key differentiator during uncertain times.

Strategic Initiatives

On the strategy front, we have been making strides in transforming the business. The global business development team, a dedicated resource on a global basis set up in early 2017, has successfully developed a strong customer pipeline by adopting a solution-based approach. From this pipeline, we aim to convert new key customers that are critical in meeting our current Three-Year Plan. For existing customers, our account management teams continued to assist our customers in adopting changing business needs and upsell our new value-added services.

Efforts by the corporate development team, set up to bring together diverse partners in the ecosystem, have begun to bear fruits. The team has entered into multiple cooperation arrangements with various technology start-ups and supply chain ecosystem partners to develop and offer new supply chain services to our brands and retailer customers, as well as factories. Our data universe continued to grow organically, providing an ever-more fertile ground for our data analytics team to generate new insights and develop differentiated data analytics products such as the trend engine, helping our customers make better-informed design and buying decisions.

Speed Model and Digitalization

Our Group remains focusedon speed to increase the velocity of our customers' supply chains tomeet growing consumer expectations driven by e-commerce. We have created a speed model along with a series of digitalization modules to facilitate the faster supply chain. Early adopters of our supply chain solutions with emphasis on speed and digitalization have achieved better operational results in terms of increased sell-through, reduced mark-down and improved inventory levels. Their success has generated additional interest from other customers. Furthermore, we have made significant effort and investment in developing and rolling out our digital offerings such as the virtual sampling, materials marketplace, trend engine, production tracking tool, and dynamic costing portal. These digitalization modules can further shorten the design-to-production-cycle and have gained significant traction along various parts of the supply chain.

While we earmarked US$150 million for spending on digitalization over the Three-Year Plan, the scale of investment in 2017 was relatively conservative since we were in the early exploration stage. With our leadership position in digitalized supply chain established, we have accelerated the investments in digitalization to maintain the momentum and further entrench our lead. Some of this spending will be classified as operating expenses instead of capital expenditures. This will have a negative impact on our operating profit but it will also reduce expected capital expenditure.

Overall, we are pleased with our progress in digitalization and we remain on track to deliver a fully-integrated digital platform that connects suppliers, customers and other partners with end-to-end visibility and data analytics. This will serve as the nucleus of our future service offerings enabling Li & Fung to provide better, faster supply chain services beyond the traditional sourcing services.

IPO of Logistics business

Our Logistics business("LF Logistics")has grown double digit on an annualized basis top and bottom line since it became a part of Li & Fung at the end of 2010. It continues to benefit from the tailwind of the rising middle-class consumption in Asia, e-commerce logistics, geographic and vertical expansions. In order to further accelerate LF Logistics business'growth momentum, we have decided to seek a separate listing of our Logistics business on the Hong Kong Stock Exchange. We have engaged professional third parties as advisers to advise on the potential spin-off and separate listing of LF Logistics. Post spin-off, we expect to remain the controlling shareholder of LF Logistics and continue to consolidate the results of LF Logistics in our financial statements. We expect the timing of the listing would be as early as first half 2019 depending on market conditions and other factors. We believe the proposed spin-off will allow us to unlock the value of LF Logistics and accelerate its growth, and further enhance the capital structure and financial flexibility for the Group.

Strategic Divestment of Product Verticals

In December 2017, we announced the strategic divestment of the three Product Verticals, furniture, beauty and sweaters for US$1.1 billion to further simplify our business. The divestment received approval from our Independent Shareholders in January 2018. The transaction was subsequently approved by the regulators and completed in April 2018. Our financial results and management discussion and analysis will mainly focus on our Continuing Operations, which consist of Supply Chain Solutions, Logistics and Onshore Wholesale businesses. The three Product Verticals are classified as Discontinued Operations and presented separately in the consolidated profit and loss account as a single line item.

Special Dividend and Redemption of US$500 Million Perpetual Capital Securities

The divestment of the three Product Verticals brought in US$1.1 billion in cash. In May 2018, we returned US$520 million to our shareholders in the form of special dividends. In the same month, we also redeemed US$500 million in perpetual capital securities. The redemption further strengthened our capital structure and it will also reduce our distribution to perpetual capital securities holders by US$30 million on an annual basis.