GETTING GOOD VALUE
CFO Asia and Stern Stewart's annual ranking of Asia's top value creators reveals that CFOs of cash-rich companies are having a tough time putting their money to work.
By Abe De Ramos

One of the toughest jobs a CFO has today is finding the measure of the true value his company returns to shareholders. Everyone needs a report card, especially in today's era of lightning speed e-commerce developments, increasing global competition and a still-tough market for capital. While no perfect measure exists, market value added (MVA) is a good place to start.

In the second annual CFO Asia Performance 100 (P100), we present our own report card, ranking the top corporate wealth creators in Asia. With the aid of the Singapore office of US-based consultancy Stern Stewart, we examined the 1999 accounts of all publicly traded, large capitalization companies in the region. Then we looked at their share prices to determine the ranking, which is based on MVA, the market's measure of how much wealth companies have created compared to the capital put into them.

The results make compelling reading. After freeing themselves of crippling debt and building mountains of cash, many of the top companies in CFO Asia's second annual ranking have yet to generate profits, if the cost of capital is tallied in. That means they score poorly on economic value added (EVA), the measure that reflects what a company earns versus what it was charged to run its business. In fact, of the top 50 companies in the P100, 29 have a negative EVA. Still, their high MVA shows they have won the confidence of investors that they can provide future profits.

Cash Control

Investor confidence is a beautiful thing, but it won't last long if these companies - and their CFOs - don't use the cash on their balance sheets for long-term, wealth-creating investments. At the moment, many CFOs are sitting at the starting line with a full tank and a key in the ignition, but remain unsure of the ground ahead. No one typifies this more than Ding Donghua, CFO of the number-one value creator, mainland mobile phone services provider China Mobile (Hong Kong). Listed only in 1997, the company shot up from nowhere to the top of this year's list. With US$ 2.8 billion in cash on hand - having dominated the market for almost a decade as a monopoly - Ding has the resources to start the race for third generation (3G) mobile phone services almost anywhere in Asia. But when it comes to strategic planning in China, the land where he has lived most of his 63 years, the CFO remains firmly on the side of caution. "We are looking forward to 3G technology," he says from his office in Hong Kong. "But China is really a market that is quite different from the Western market. We will closely monitor [it] to progressively introduce such technologies on a market-driven basis."

In the meantime, Ding is intent on staying cash positive. And investors, who were burned badly during the Asian meltdown, seem to be willing to give him and other telecom and technology companies the benefit of the doubt.

Part of the reason investors are showing such tolerance is that these top value-creating companies have gone a long way towards restoring confidence by deploying classic strategies to build long-term profits. While Ding has made a religion out of lowering the company's cost of capital in China, Taiwan Semiconductor (TSMC) (#4), the chipmaker, has developed world-class techniques to wring costs out of its supply chain and adopt just-in-time manufacturing techniques. These measures have kept its cost of capital low in comparison to other chipmakers around the region.

Also in Taiwan, United Microelectronics (#9), a challenger to TSMC, has created value through a series of canny acquisitions that have allowed it to pick the best production methods from a number of small, innovative Taiwan companies. Hong Kong's real estate giants Hutchison Whampoa (#2), Cheung Kong Holdings (#11) and Sun Hung Kai Properties (#12) have all shown mercurial powers of transformation by diversifying into telecommunications and e-businesses, weaning themselves away from the tough business cycle of real estate.

But not all of the companies on the P100 have rolled out such clearly articulated strategies. Many, like Thailand's BEC World (#70), are all dressed up with nowhere to go. BEC has US$73 million on hand, the result of an IPO that raised 2.8 billion baht just before the Asian crisis clobbered the Thai economy. Chatchai Thiamtong, CFO of the Thai broadcaster, has never had a chance to use the money. "Since then, we got stuck with this so-called nice problem," he says.

A Sticky Business

His frustrations aren't all within his realm of control, either. BEC is planning to introduce digital broadcasting to Thai living rooms. But in order to get the project moving, the company needs a license from a regulator that isn't even formed yet. And to make matters worse, under Thai law, BEC cannot buy back its shares. So to please shareholders, Chatchai has been distributing higher dividends - though this is payable only out of retained earnings. "I have quite a headache from my cash pile. It's a sticky issue. I don't have a vehicle to get rid of the cash," he says.

Miguel Jose Navarrete, CFO of Philippine fast-food chain Jollibee Foods, which slipped to #108 from #74 last year, is caught in a similar bind. The economy remains too soft for him to add new stores. He started 2000 with 1.6 billion pesos (US$35 million) in hand. After spending for a new commissary and initiatives for a recent acquisition, he estimates he will still start 2001 with over 1 billion pesos. "We're searching for ways to deploy this cash," he says. He has set aside another 800 million pesos for a share buyback program, but share buybacks are only a temporary fix. What Jollibee needs to do is improve liquidity to attract new equity investors, particularly foreigners. In January this year, the Philippines opened the retail sector to foreigners, who now can buy up to 40 percent of Jollibee shares.

Meanwhile, Singapore Airlines, which soared to #15 from #73 last year, is also flying high with a cash surplus, even after a fleet expansion program that gave it the world's youngest fleet - an average age of 5.2 years, versus the industry average of 14. "We have not relied on debt for our expansion," says CFO Cedric Foo. SIA earnings continue to grow - up 13 percent to S$1.16 billion in the year ending March 2000. Yet, like many of our other top-ranked companies, SIA's EVA remains in negative territory.

EVA-rich or not, CFOs sitting on cash know they will have to find effective ways to spend the money and boost shareholder value sooner rather than later. "We recognize that the cost of debt can be lower than the cost of equity, and we may be able to optimize our capital structure by taking on a prudent amount of debt," admits Foo. He has no borrowing plans at the moment, and like BEC, he says SIA has also been returning shareholder value by paying out higher dividends. He has also launched a share buy-back program. For the latest financial year, SIA raised its dividend from S$0.25 to S$0.30 a share. Since September 1999, SIA has bought back S$915 million worth of shares. "SIA will continue to look at ways to optimize its capital structure in order to enhance shareholder value-added," says Foo.

Navarrete, who is working with Stern Stewart on how to apply EVA in his operations, agrees. "We can average our cost of capital down if we have debt. That's where we're headed, and the reason for that is this shareholder value concept," he says. Meanwhile, Chatchai is just waiting for regulators to grant him a digital broadcasting license before heading back to the capital markets. Until then - by a fait accompli of governments and markets - they face a rising cost of capital from carrying all that cash.

The Leverage Joe

China Mobile's Ding agrees. "From my perspective, the most important objective of a CFO is to get the cheapest cost of capital." He vows that his astronomic cash position will soon become earthbound when China Mobile goes to the capital markets to fund the acquisition of some seven mobile phone units in the mainland from its parent company, China Mobile Group.

Ding has not yet reached the valuation stage for the acquisition, so he has yet to decide on what kind of capital raising exercise he wants to go for. A good part of that would likely be in local currency. "We have a lot of room to buy assets in China, so we have a lot of ways to improve our capitalization structure through the financing of acquisitions. We can increase our debt and achieve a better gearing ratio. Renminbi loans are now cheaper than foreign currency [loans], in terms of interest cost. It would also remove a lot of foreign currency risk, because our revenues are in renminbi," he says.

Ding hasn't shied away completely from the international capital markets. He raised US$600 million from a five-year global bond issuance last year. Despite the high risk premiums he has to pay to global investors, he would like to build on the relationship he has forged with investors. "Broadening the investor base is one measure we can utilize to minimize the cost of capital. US investors are now quite familiar with us. I'd like to make sure that European and Japanese investors have the same good knowledge about the company."

The same goes for Singapore-based Chartered Semiconductor (#23), the third-largest independent foundry in the world. Without subtracting its cash pile of US$1 billion, Chartered has a gearing ratio of 34 percent, and CFO Chia Song Hwee would like to see this grow to 50 percent by the end of next year. This is after he makes use of a US$820 million loan to fund the expansion of his company's fifth fabrication plant, curiously called Fab 6.

Dear Prudence

For Chia, getting it cheap is a matter of timing and creativity. When he funded the fourth factory at the peak of the crisis in 1998, he opted for an interest spread that widens or narrows depending on the quality of his financial ratios. For Fab 6, Chia captured a lower benchmark and lower spreads. "Knowing the market was tough. We tried to create flexibility, so we had a built-in mechanism that allowed our interest rate to [float] over time. [Funding Fab 6] was more competitive because it came at a time when the market was more favorable."

But knowing how to keep funding costs low does not give these CFOs the license to over-leverage. Ding is setting a ceiling for China Mobile's gearing at 25 to 35 percent. "We deliberately take a prudent approach. Over the past few years, investors have been quite concerned about the devaluation of the renminbi, and they would like to see that the company does not have too much foreign debt."

Peter Tse, CFO of Hong Kong power provider CLP Holdings, which slipped to #24 from #7 last year, has struggled to find the ideal mix of debt in his company's capital structure, eventually returning the cash to shareholders by buying back 15 percent of CLP's issued share capital. This lowered the cost of capital, because it also reduced equity compared to debt, which costs less to carry. Tse says his strategy is to keep the debt-to-total capital ratio to a maximum of 35 percent and maintain an ÔA' grade long-term credit rating. Both moves would give CLP access to cheaper funding sources in the international capital markets.

Tse is fighting the battle on the cost side, as well. He managed to keep operating expenses down by HK$5 billion (US$641 million), or about HK$625 million a year, from his 1992 to 1999 financing plan projection. "CLP measured its cost structure and operating efficiency against some of the very best utilities in the world, who themselves are implementing improvement programs. In that respect, the benchmarks keep rising every year," he says.

To hold down his own, Tse took measures that instilled cost savings in the minds of CLP staff at all levels. "We have engaged in a number of initiatives to continue to drive down costs through fuel purchasing, revised maintenance strategies and process re-engineering, such as bimonthly billing, which reduces the number of meter readers required for each month," he says.

"I really don't know how to emphasize enough how important it is to manage operating costs," adds Chartered's Chia. Because his company now runs five fabs working on different designs placed by different clients, Chartered is determined to keep defect density low and utilization high. This means producing more output without expanding capacity.

In the first quarter of 1999, Chartered Semiconductor's utilization rate was 92 percent. That improved to 103 percent the next quarter, reaching a record 107 percent in the second quarter of 2000. "Making improvements in those areas gives you the best return. There are other things - like improving pricing and working closely with vendors, or having consignment stock to reduce the amount of stock you hold - but these are the main drivers of how efficient a factory can be," Chia says.

Big Brother is Watching

Ding of China Mobile has a meticulous approach to capital expenditures. Before its IPO in November 1997, China Mobile's accounting was a mess. The basic accrual concept, in his words, "was not given such a high regard." Things changed when he took the CFO job after the IPO. Since then, management reviews the accounts of all operations - leased-line expenses, interconnection fees, depreciation, wages and administrative costs - each month and compares them against the budget.

A large part of China Mobile's expenses goes to the lease of transmission lines for its communications network, paid almost entirely to China Telecom. Ding has gradually reduced this, from 18 percent of total cost in the first half of 1999, to 16 percent in first half of 2000. Like CLP, Ding benchmarks his expenses against those of other telecom companies in the world.

"When we see that we are paying a higher tariff to our leased-line provider, we negotiate hard for them to change their tariff," he says. Despite China Telecom's sole position as China Mobile's leased-line provider, Ding has managed to negotiate hard enough that China Telecom reduced its tariff three times in the past year. His bargaining chip? He has enough cash to build his own network.

Careful monitoring of expenses has paid off at CLP as well. Tse says productivity in terms of electricity units delivered per employee has increased by 108 percent since 1993, while China Mobile's subscribers per employee rose from 435 in the first half of 1999 to 679 in the first half of 2000. Although operating expenses grew 18 percent, operating revenue grew twice as much, at 35 percent.

Most of the top companies in the ranking have ensured a tight control on capital expenditures by connecting their control systems to compensation. Though all employees of Singapore Airlines already have share option schemes, CFO Cedric Foo says profit-sharing bonuses are still attached to return on shareholders' funds. Meanwhile, Jaime Ysmael, CFO of Philippine property developer Ayala Land (#66), uses classroom mathematics to determine how much to reward his staff.

With its diverse portfolio of residential, corporate and commercial projects, Ayala Land groups its ventures into six strategic business units, or SBUs, with managers running each SBU like a company in itself. Each makes its own investment strategies and prepares its own budgets, while senior management fine-tunes and approves. Meeting these budgets is just the first test.

"Once they have met that, there is another quantitative measure that we call operating performance indices. These are based on specific measures aside from ROE, such as total revenues or cashflow from operations, receivables turnover and inventory turnover," Ysmael says. He then assigns weight to each of these factors. "We normally assign a higher percentage in areas that we want to emphasize in our bottom line. Sometimes it's cashflow, if we feel cashflow is more critical. We do the balancing every year. If they meet 75 percent, they [are rewarded]," he says.

Some CFOs, like Chia of Chartered Semiconductor, use EVA as a reference for incentives, although he does so warily, saying it discourages long-term investment thinking. "The manager will say, ÔWhy do I want to invest US$100 million if it will destroy my EVA?' But those investments would be critical for the growth of the company," Chia says.

Tse of CLP Holdings not only buys this argument, but takes it further, saying EVA doesn't give justice, not just to his staff, but to shareholders as well. He explains: "EVA can penalize managers for pursuing growth strategies. When an investmest is made under EVA, its full cost is reflected in the capital charge, and the resulting EVA will be artificially low. As the investment depreciates, the capital charge declines. At maturity, the EVA will therefore be artificially high. Hence, managers rewarded for maximizing EVA are likely to avoid growth strategies that result in a short-term EVA reduction - even if it creates long-term value for shareholders."

EVAngelists or not, the breed of CFOs in our P100 agree that shareholder value must be paramount. As Ding puts it: "I realize that I must maximize total return to shareholders. My goal is not only to establish China Mobile as a global multimedia services provider, but also to establish a world-class financial department."

Abe De Ramos is a senior writer for CFO Asia.