SEIZE THE DAY
CFOs need a sharp eye - and an appetite for risk - if they want to grab opportunities.
By Lotte Chow and Steven Crane

Boundless risk must pay for boundless gain." The British poet William Morris wrote those words more than a century ago, but they still ring true today. The current corporate landscape in Asia shows companies hesitating between expansion and stagnation or retrenchment and disaster. The outlook for the world economy remains blurred and good prospects are still scattered. To be successful, CFOs need to jump on an opportunity and take the risks that go with it.

Take Chua Sock Koong. Since March, the CFO of Singapore government-owned telecoms provider SingTel has been on the defensive, parrying accusations that she is overpaying for a pending US$7 billion acquisition of the Australian mobile phone company Cable & Wireless Optus. Her critics are wrong, she says. "People say that we overpaid but the control premium we'll pay is a fair price. This deal gives us scope and scale. We can't let short-term reactions distract our objectives."

That reaction was a stampede out of the stock by SingTel shareholders, pulling the share price down by 26 percent just days after the deal was announced. She attributes the drop to the technical structure of the deal, which gave punters a once-in-a-lifetime opportunity. But the shares have not recovered, and analysts bet it will stay humbled for a while. The investment is too risky, they say, for a company that is accustomed to state control. Australia is a mature telecom market; SingTel can only grow there by offering services it has little experience in, such as broadband and third generation mobile.

These will be costly investments, requiring nearly US$1 billion over the next 12 months alone, says John Barrett, a telecom analyst at Pyramid Research, part of The Economist Group. And to Chua, this means scaling down SingTel's cash pile, and even borrowing from the international bond markets - something it has never had a need to do. "Essentially, it's a double or nothing bet. There's great risk, but if successful, they'll reap double the benefits," Barrett says. Clearly, Chua has those rewards in her sights.

Chua's compatriot David Eaw, group CFO at SembCorp Industries (SCI), is in a similar state. Since 1998, Eaw has been helping the diversified company focus on its core businesses - ranging from marine engineering to information technology. His strategy includes expanding through acquisitions or alliances in the West.

Eaw's growth targets are ambitious. In the next two years, the CFO figures he must invest US$962 million to support his goal to triple turnover at SembCorp to US$7 billion by 2006. It's easy to set targets, but delivery is another matter. In March, SCI cancelled a US$165 million share placement to help his spending power, "due to poor market conditions," he says. However, Eaw is now looking at a convertible or straight bond issue. "Our expansion targets are not without basis," Eaw insists. "Whatever the market reaction, you're damned if you do and damned if you don't. We've set the roadmap and we're very much on track."

Seek and Some Shall Find

There is one factor working in favor of Chua, Eaw, and other CFOs who are prepared to hunt for funds in a difficult market. The expected economic downturn may be shutting off equity markets, but the Federal Reserve's successive interest rate cuts are making it cheaper to borrow funds. Act fast enough, and a CFO can do wonders to his balance sheet. "Because US dollar interest rates are at pretty attractive levels right now, we will see some issuers using the favorable environment as an opportunity to get good long-term financing," says Richard Stoddard, director and head of debt capital markets at Merrill Lynch in Hong Kong.

In fact, a number of CFOs have already acted. Hong Kong Land, for example, completed its first international bond issue in April. Hong Kong's subway operator Mass Transit Railway Corp (MTRC) launched a US$2 billion bond program, while Hong Kong-based conglomerate Hutchison Whampoa also grabbed a US$1.5 billion debt deal at a cheap 187 basis points above US treasuries. Soon, Korean provider SK Telecom will follow, as will China conglomerate Citic Pacific.

But judging from the names above, one can tell that not everyone is invited. "Good, strong investment grade credits will continue to outperform high-yield Asian credits, and investors will probably end up focusing more on the investment grade paper than on the sub-investment grade paper," says Stoddard. That's good news for SingTel, whose CEO Lee Hsien Yang thinks the company should get at least a double-A credit rating. But it's bad news for, say, its Philippine joint venture Globe Telecom.

The same is true of the equity markets. "It has been much harder to attract capital in the last six months," says Jim Hildebrandt, managing director for consulting firm Bain & Company in Hong Kong. "In the current market environment, straight equity deals are few and far between," adds Deutsche Bank Asia Pacific corporate finance head, Philip Crotty.

This attitude is in stark contrast to just 18 months ago, when rocketing share prices, bullish investor sentiment, and an influx of private equity funds were fuelling the corporate finance scene in much of Asia. This is due not just to the change in economic environment but to something more noteworthy to the capital-searching CFO. Aside from the global meltdown, one reason investors are more selective when it comes to Asian companies is a plain and simple reality check.

The burst of the high-tech bubble, as well as the spectacular default of Asia Pulp and Paper, one of the largest debt issuers among emerging markets, were both painful blows to investors and bankers whose trust in fundamentals were blinded by zeal. Nowadays, most would rather hear the words "long history of profits" and "low gearing" than they would "high growth potential". "You need to be in the right sectors to attract capital these days," says Johnson Cheung, analyst at financial advisory firm Global Chinese Research in Hong Kong.

Right Place, Right Time

That worked for Simon Kong. A few months ago, while pricing the IPO of his company Global Bio-Chem, Hong Kong's Hang Seng Index plunged 500 points. Kong, executive director for finance at the Hong Kong-based company, frantically called his colleagues. "Do you think investor sentiment will come around?" he asked. On the next day, the index slumped another 300 points.

Kong held his nerve. Launched on the 16th of March, the IPO was three times over-subscribed, raising US$39 million as targeted. Kong can now build a new production plant, beef up the company's sales and distribution network and repay some bank loans. "We were very pleased, considering the extremely volatile market conditions," says Kong.

The biochemical field, which applies sophisticated technology to convert natural materials into products such as fuel additives, is one of the hottest industries in the world, Cheung says. That's partly why investors snapped up Global Bio-Chem shares. In contrast, two China-based companies that tried to list in Singapore - People's Food Holdings and United Food Holdings - were under-subscribed during their first quarter listings. They have since seen their shares drift. Analysts blamed, among other things, the companies' lack of differentiation in the food sector for their performance.

Other crucial factors that worked in Global Bio-Chem's favor, according to Deloitte Touche Tohmatsu, which sponsored the deal, are its market niche and earnings record. With two production plants in China, the seven-year-old, US$168 million-a-year company makes corn-based biochemical products, which are used in feed stocks and food additives. The company is the leading manufacturer of refined corn products in China, with 90 percent of its output sold in the mainland. As China is one of the world's largest and fastest growing users of corn-based biochemical goods, Global Bio-Chem's growth potential is strong. The company improved profits to US$29.5 million on sales of US$154 million in 2000, from US$1.8 million on sales of US$128 million in 1997.

On a Clear Day

For finance managers in less attractive industries, there are other ways to attract investors' attention. Investors are beginning to looking beyond balance sheets and into more subjective criteria such as transparency and good governance. Increasingly, this is something a CFO must offer to be able to grab attention. To serve this growing demand for transparency, Standard & Poor's (S&P), the global credit rating agency, is forming a corporate governance rating system for Asian corporates. Says John Bailey, director at S&P in Hong Kong: "Because of the economic jitters and the risks corporates are now facing, investors are increasingly focused on governance issues on the offering documents, especially among high yield credits. For investment grade credits, especially in Hong Kong, there is a lot of liquidity out there."

To illustrate, investment bankers are practically begging the Hong Kong government to increase the allotment for institutional investors for the first share placement of the Mass Transit Railway Corp (MTRC) since its IPO last year. The share offer is expected in the second half of 2001. MTRC earned US$513 million in net profits last year, almost double from 1999. It is also well regarded in financial circles for its transparency, says Edward Chow, head of the corporate governance committee at the Hong Kong Society of Accountants.

The Urge to Merge

Failing to achieve transparency and credit-worthiness requirements, finance managers had better look harder for cash. And true enough, bankers say many companies are reassessing and scaling down fund raising plans. To be sure, many are still itching to sell shares and bonds, or borrow from banks, to raise funds.

"Merger and acquisition activity has declined, but many deals are still in progress and will need capital to complete," says Michael Berchtold, managing director at investment bank Morgan Stanley Dean Witter in Hong Kong. "Increasingly we are seeing companies looking to sell subsidiary assets, freeing up funds that will be channeled into core business areas," he says. "

Others are looking to merge with or acquire businesses in the region to increase scale and enhance their competitive position," he adds. "Although overall M&A deal volume is down, the number of larger and more complex domestic and cross-border mandates is going up, requiring companies to seek banks for advice. The catalyst is the region's growing focus on shareholder value."

Not surprisingly, deals are not just fewer, but also smaller. During the first quarter of the year, for example, equity issuance in Asia dropped 37 percent to US$12 billion from a year earlier, according to US-based Thomson Financial, which compiles capital market deals globally. Asian loan deals fell to 43, worth US$13.4 billion, in the first quarter of 2001, from 77 deals, worth US$25.1 billion, in the same period last year. International bond deals, including government issues, were more stable at 12 deals worth US$5 billion from 19 deals worth US$5.7 billion.

Aim Low

With investors' pockets getting deeper, CFOs and bankers should look for ways to increase the attractiveness of an issue - even if it means scaling down the fund raising goals. To accommodate the less-than-favorable market sentiment, Kong of Global Bio-Chem says he priced the offer at the low end of market expectations of HK$1.02 a share, giving the company a price-to-earnings ratio of four times.

The conservative pricing made Global Bio-Chem a few notches cheaper than other China plays and bio-chem stocks. Kong also lined up US-based food trader Cargill to buy a stake in the share issue, a move that helped boost investor interest in the company.

Bankers, for their part, are reasonably optimistic that the flow of funds into Asia will soon swell when investors realize that asset prices have bottomed. "We believe that the environment for equity issues will improve in the second half of the year as the combination of cheaper valuations, falling interest rates and more clarity on earnings provide the necessary foundations in the underlying market. Once these factors are in place, people will take a more positive view on primary market issues," says HSBC equity capital markets director for Asia, Colin Milton.

Until then, CFOs are proceeding with caution when it comes to expansion or merger plans. And with capital likely to remain selectively generous for some time, CFOs will need a sharper eye for opportunities and be willing, like SingTel's Chua, to take some risks.

Lotte Chow is contributing editor and Steven Crane is executive editor at CFO Asia. Additional reporting by Abe De Ramos.