THE TRANSPARENCY GANG
Producing a winning annual report is becoming more and more important to CFOs in Asia. Here are the companies that do it best.
By Elizabeth Fry

Since finance entered the Internet era, the very notion of producing a glossy year-end document, duplicating it at great expense and mailing it out to thousands of shareholders seems almost quaint. After all, even the most arcane financial data can be posted on a corporate website in minutes these days. PC penetration may not be high in many parts of Asia, but shareholders in even the most remote villages can usually find an Internet cafe where they can check out their investments.

The fact is, however, that annual reports are not turning into the holy relics of a bygone era. In our first Asia-wide ranking of corporate annual reports, CFO Asia joined forces with the Credit Suisse First Boston (CSFB) Asia equity research team to scour the published accounts of nearly 400 listed companies across the region. In the course of selecting the 25 winners of the CFO Asia/CSFB Best Annual Reports Awards, we discovered that Asia's top companies are increasingly putting more elbow grease into producing the best set of annual accounts possible. Yes, moves are being made to make use of cyberspace for improving investor relations. But by talking to the CFOs of our winning companies, we found that those thick books of photos, facts and figures have become more relevant today than ever before.

Why? The answers are both internal and external. First, more finance managers in Asia are learning that shareholders count. And despite the move to Internet speed in finance, shareholders, analysts and the press still want a point of reference for assessing the value of a company. The clearer that point of reference, the better chance that a company's shares will remain attractive. "If you are a fund manager sitting in another Asian center, or New York or London, your job is made that much more difficult by distance. Good numbers help shorten that distance," says SJ Hwang, CSFB's head of research for Asia. Even better, a clear, in-depth set of accounts, "impacts profoundly both secondary trading of your stock and your primary fundraising ability," he says.

Second, the days where CFOs could invite their favorite analysts or shareholders into the boardroom for a cozy chat are ending. Known as selective disclosure, this practice has been hammered by no less an authority than the head of the US Securities and Exchange Commission (SEC), Arthur Levitt. In the SEC's recent ruling against selective disclosure, Levitt dictated that all market-sensitive information must be broadcast publicly or not at all. Although the ruling is for US companies only, the edict has sent a chill wind through corporate Asia.

According to analysts, India's regulators are now hell-bent on introducing a similar rule, effective by the end of this calendar year. Hong Kong and Singapore are expected to follow suit. Asian regulators and CFOs point out that the problem of leaking information to selected shareholders is even worse in Asia than the US because Asian countries do not require quarterly reports. As Basil Chan, CFO of Singapore-based Datacraft Asia, a US$418 million-a-year communications and networking systems company, and a member of Singapore's Corporate Governance Committee puts it: "By not reporting quarterly, there is more time between announcements for analysts to ask questions. Therefore, there is a danger that companies could, unintentionally, release privileged information." All the more reason, then, to put as much as possible into a good annual report.

Basil Chan knows better than most about the risk/reward ratios for spending time and money on proper disclosure. Datacraft's devotion to producing a thorough set of accounts has consistently earned it praise in Singapore. As a result, Datacraft's double win in the first CFO Asia/CSFB Best Annual Reports Awards top position for Singapore and one of the three Best in Asia winners is not surprising, at least to Singaporeans.

Take 10,000 Trees and Crush

The company earns these accolades by providing much more information than Singapore's regulators require and by packaging the material in a user-friendly format. Another Best in Asia winner, First Pacific, the Hong Kong-based US$1.2 billion-a-year consumer goods, telecommunications, property and banking group, is also accustomed to collecting prizes for its annual report. But even those winners who have not previously attracted praise for their accounts know well that producing an expansive annual report is more than just a tree-crushing exercise.

Take Mumbai-based Hindalco Industries, one of our Best in Asia winners. Two years ago, the aluminum producer reviewed its disclosure policy and realised that its message that it was boosting shareholder value was not being communicated to the market. So RK Kasliwal, executive president and CFO, revamped the accounts and revealed much more detail about Hindalco's financial and corporate strategy. Judging on the basis of clarity, relevance and the ability to elucidate future strategic direction, CSFB analysts gave Hindalco high points because it provided shareholders far more than it was legally required to, as well as striking the right balance between brevity and depth. At 113 pages, the report gave a good amount of detail, especially for its subsidiaries and associates. While all three regional winners were outstanding in this regard, Hindalco excelled because of its up-front, detailed discussion of corporate plans to enhance shareholder value. Specifically, it reviewed capacity utilization for each product, which is enormously helpful in understanding how well the company uses cash.

The appearance of an Indian name in a ranking of best annual reports may surprise CFOs in Hong Kong and Singapore, but it doesn't surprise CSFB's Hwang. Many Indian companies, he points out, are moving aggressively towards US GAAP standards, providing a high level of disclosure. Companies like Hindalco (and the other Indian winners, Infosys Technologies and Hindustan Lever) not only disclose a great deal of financial data, but they present it in a consistent way. "Others provide a glut of numbers but they lack consistency," he says. Hindustan Lever also reports economic value-added (EVA) numbers, which allow investors to get an even clearer picture of the company's financial health because it focuses on real cash produced, not just an accounting profit. And the competition from India will be getting even tougher as India's disclosure rules are tightened. Starting this year companies will be required to provide breakdowns by market, line of business, and geography, which will please fund managers and analysts even further.

Indeed, tighter disclosure rules will make contests like this one increasingly difficult to judge. In the meantime, according to Hwang, too many companies in Asia stick to providing just the bare minimum to their shareholders revenue, pre-tax profit, net income, and very few notes to the accounts. As he sees it, there are two main problems with the majority of annual reports in Asia. "Some family-controlled companies are [still] run like fiefdoms," he says. "The CFO has absolutely no influence and the CEO is quite happy for their shares to trade at a discount, as long as their shareholders don't interfere," he says. Another barrier is the preconceived notion that good annual reports are expensive to produce, he says. "They [the reports] don't have to be glossy, but I doubt that [many] CFOs realize that," he says.

Deep Pockets Not Required

For a take on producing a high-quality set of accounts on a modest budget, talk to Chay Yee Meng, CFO of Singapore-based NatSteel Electronics. His annual report took second place in the Singapore rankings, yet Chay steered clear of design house glitz. The report can best be described as functional and is produced at a very low cost. Chay has even recycled the photographs (including his own) for three years running. "Senior management hasn't changed in the last few years, so why take new photos? You don't have to pay over-the-top price for an annual report. It's all about how you manage it."

He is just as economical with words. The publication is a slim 91 pages and all but 11 are devoted to financial data in English and then Chinese. The year in review was one paragraph, citing the number of strategic alliances forged that year.

In fact, Chay would like to prune it even more and get rid of what he calls the "ridiculous stuff". By this, he means things like the obvious disclaimer that accounting is done on accrual basis. He finds that particularly irksome. "Of course it is accrual, what else could it be? Why mention it?" he asks. Despite this terseness, the judges had high praise for NatSteel, saying the US$1.8 billion-a-year electronics manufacturing and services group had one of the most comprehensive reports around, important for a business that is evolving so quickly. All the important ratios asset turnover, leverage, revenue by shipment and by location, and return on average productive asset are right up front. Further, these ratios are shown in easy-to-read charts on the left-hand pages of the first 14 pages of the report. A quick flick through these can provide investors with a snapshot of what exactly they are buying into.

Indeed, Chay's work is aimed directly at the growing class of small investors. As he points out, this category can only increase with the advent of on-line trading. "At the end of the day, it is not the design, but the message which counts ... and that should be about the company's future prospects," says Chay.

At the other end of the scale is the extraordinary lavish production each year by First Pacific, the Hong Kong-based conglomerate which is used to winning awards for its annual report. However, the CSFB judges were quick to point out that First Pacific was not awarded first place in Hong Kong for its existential cover design and magazine-quality photos. They liked First Pacific's open approach to disclosure. As the company's COO and finance director, Michael Healy, describes it, the annual report is a major part of his job. First, he and his team develop "the book" after scores of meetings with analysts and investors. "That way we can anticipate the information that will be useful to them," he says. This includes a complete divisional breakdown, even including debt exchange losses and interest cover, for each division. "You can tell within ten minutes from a company's annual report whether it has an open management style," says Healy.

More Than a Book

Indeed, Healy's annual report fits this bill precisely, serving as part of the company's open approach to investor relations year-round. Mindful that the market hates surprises, First Pacific announced it had taken a US$60 million foreign exchange loss for the first half of 2000 and also included a set of sensitivity analyses on exchange rates so that investors could plug in their own assumptions and draw their own conclusions on the final profit. The result was that the share price immediately rose by 12 percent. "Conditions were volatile, and the scale of the potential losses were huge, so if we hadn't warned the market who knows how it would have reacted. We didn't have a lot of FX losses in 1999, but we were aware there might be some in the current year, so we felt we should announce them even though some of the positions might have reversed," he says.

NatSteel's Chay is less convinced that the rewards of disclosure are quite that quantifiable. "I think it's a matter of timing. If the market receives bad news earlier rather than later, it just says thanks and dumps the stock anyway." NatSteel Electronics was the first electronics company to divulge the effects of an industry-wide component shortage after a major earthquake shook Taiwan. For that, Chay had to stand back and watch the company's share price be savaged. Yet CSFB's Winston Lim in Singapore thinks differently. He points out that the company's share price recovered faster than others in the sector, showing that bad news announced quickly is better tolerated by the market.

Other winners in our list are pushing the boundaries of the annual report. Transport analysts, for example, heap praise on Singapore Airlines (#3, Singapore) for the monthly updates they get via email on a whole range of valuable operating statistics. These contain figures on capacity, traffic, passengers and freight carried and load factors everything they need to build a capable model and assess performance. They provide cashflow including ten years of historical data. And, claims Hilton, all of the data is relevant for ensuring accurate cashflow and earnings estimates. "While the sticky part is always assessing the revenue line, the monthly operating data means that cost of fuel and flying hours can be worked out," says CSFB's transport analyst, Peter Hilton. Singapore Airline's divisional vice-president of finance, Ng Sim Hee, believes strongly in transparency, which he says means the share price is subject to less manipulation. The annual report, along with the monthly updates, means that both big and small investors can have access to all the operating statistics, he says.

Other companies have impressed the judges because they are not only moving towards US GAAP, they have adopted it wholesale. A prime example is Hong Kong's largest bank, HSBC (#2, Hong Kong), a subsidiary of UK-based HSBC Holdings, which supplies analysts and shareholders with a 190-page US filing. This kind of detail is not a requirement in Hong Kong, but the parent also has to comply with the US SEC. Says HSBC deputy CFO, Andrew Williamson: "We have disclosed quite a lot to be consistent with the holding company. Where the parent has done things in a particular way, we have tended to follow them deliberately so analysts can look at the parent company and see the breakdown in a consistent format."

Thailand's Total Access Communications (TAC) (#1, Thailand), the US$418 million-a-year telecoms provider, has also embraced GAAP standards but for different reasons. With domestic bond markets still embryonic, TAC has had to look to the US for funding. As a result, the company had to put its books into the format that US investors demand. Thailand is a difficult story to sell but the emerging markets story does appeal to specialist US investors. To help the company produce its winning accounts, TAC also appointed an audit committee comprised of external directors.

Although Malaysian companies do not normally distinguish themselves in terms of transparency, Tangjong (#1, Malaysia), the US$505 million-a-year gaming, power generation and property company, stands head and shoulders above the rest. This is because of its openness about segmental breakdowns and intercompany transactions, say analysts. According to Lim Bian Guan, CFO, this does mean higher costs. "We fully articulate our performance irrespective of cost or regulations as we have a wide range of shareholders many are non-Malaysian who support us. Therefore we release whatever information is useful to them, in a way they understand." As for the extra trouble and expense, he says: "We feel the benefits far outweigh the cost."

HSBC's Williamson agrees that higher disclosure boosts costs. But he points out: "Even if we published the slimmest possible annual report we would still have to collect the same data." The challenge comes in providing good analysis. "Investors want more data, but it has to be produced to a high standard and that is difficult," he says.

"You can prepare masses of information internally, but you do it to a different standard than you do for external consumption. As long as management accounts are 90 percent accurate, you have no major problems. Once they are released to the outside world, they have to be perfect so the work involved is greater." His view in a nutshell is: "The more you communicate, the more you need to communicate."

And that is a problem. The more information companies release, the more they can camouflage and obscure its meaning. "Companies will always attempt to put their own slant on everything, putting their information in the best possible light. So once you give out information you need more accounting standards to make them consistent," says Williamson. Indeed, regulators across Asia have taken this on board and, over time, it will no longer be unusual for Asian companies to be meeting international accounting standards. But as the winners of these awards have learned, only those companies that consistently do the best job on disclosure, transparency and clarity will continue to win with the most important audience of all - their shareholders.

Elizabeth Fry is a business writer based in Sydney