Li & Fung's recurring profits could take a 17% dive

As it admitted a 40% crash in operating profit.

According to Barclays Research, while the majority of the 40% operating profit decline in 2012 pertains to non-recurring charges, the numbers also imply the recurring profits for 2012 are 17% lower than they earlier thought.

Barclays cut its 2012 and 2013 core operating profit estimates by 17% and 15%; and reduced target price by 17% to HK$13.5 (still based on 18x 2013E P/E).

Company announced 2012 operating profit will be down 40% y-y. Management said it was taking charges related to shutting down select brands in the MESH business.

Here's more from Barclays:

We estimate that over 20% of the y-y decline in profits is to do with non-recurring charges related to closure of business lines in LF USA. However, this still implies recurring profits being lower vs our earlier estimates by c17%.

This is due to revenue being flat (we expected +7% growth) and margins being lower than expected due to continued pressure in the distribution business. We are therefore revising down our recurring operating profit estimates for 2012 by 17% and 2013 by 15%, our 2013 net income by 19%. Short term, we expect at least 10% downside to Friday's close.

This will likely raise questions on management's guidance credibility as it comes only after a few weeks from its mid-Nov Analyst Day. The earliest potential positive catalyst will not be until Aug's 1H13 results. Short term, there appears only downside unless there is a 'strong' 2013 guidance backed with credible financials.

Near term, deteriorating sentiment could push the stock to well below our target price. Key upside risk is US Retailers' recovery leading to stronger than expected 2013 results and announcement of large and accretive acquisitions.