VALUE VS VOLATILITY
CFO Asia's third annual Performance 100 ranking of Asia's top wealth creating companies reveals how top companies are gathering strength, even in tough times.
By Tom Leander

Our annual ranking of Asia's best companies - scored according to their respective economic value added (EVA) and market value added (MVA) figures - this year earns a double take. Can that be Chunghwa Telecom coming in at number 9? The Taiwanese company's share price slipped by almost half in 2001 as it cast about for subscribers to a much delayed ADR issue. Number 1 China Mobile is looking a little less lustrous: its share price slumped 28 percent when it released its interim figures, which showed robust but slowing subscriber take-up and average revenue per user.

SK Telecom (#7) and Korea Telecom (#11) are likewise suffering as they prepare their CDMA (code division multiplication access) mobile services for a public indifferent to a clunky wireless multimedia offering that lacks content and software.

Despite the violent lurches in the markets, the ranking still provides a remarkable report card of value creation in Asia. The internal elements that have always made companies climb high on the ranking - such as efficient use of capital, sound investment strategy, control of costs, and transparency - continue to work their way into Asia like a tree through stubborn granite, and the investor retreat from the boom sectors of tech and telecom has not reversed the trend.

These are the qualities that create shareholder wealth as reflected in the Performance 100 (P100), and they have been popping up in unlikely places. In China, most notably. This is the first year that the CFO Asia P100 has included data from all 1,080 listed companies in China. Some 20 of them have made it onto the ranking, with Baoshan Iron and Steel (#19) as the front runner. Created as a publicly listed company in February 2000, Baoshan is 70 percent owned by the Chinese government.

Despite the lack of shareholder-friendly ways associated with large, state-owned Chinese companies, its CFO Jia Xianlin insisted on codifying shareholder-friendly principles under economic value added, a metric devised by Stern Stewart, at the company's first meeting as a public enterprise.

Under Jia's EVA management style, accountability for management of capital was imposed all the way down to the steel workers in the boiling foundries. In Jia's view, this is the prime reason Baoshan has surpassed such admired companies as Hong Kong's Li & Fung (#22) and Hong Kong-listed Legend (#25).

How They Pan Out

The P100 list offers three hard-and-fast tools to pry open a window on an Asian company's ability to deliver wealth to shareholders. The most important is market value added.

To arrive at an MVA calculation, US consultancy Stern Stewart adds up all the capital that investors have put into a company, including shareholders' equity and debt, as well as physical assets, and subtracts that figure from the market value. This straightforward, cash-in versus cash-out calculation shows whether a company has made or lost money with the capital investors have devoted to it.

What MVA does so effectively is smash the illusion of wealth that market cap creates. Compare Via Technologies, number 38, to Winbond, number 79, two Taiwan-based chip powerhouses (see CFO Asia, "Going Global," July 2000). The collapse in demand for Taiwan's exported chips and the growth of the chip market in China have affected them equally. Their market caps are roughly comparable. But Via has used only US$500 million in invested capital to create US$2.5 billion in MVA. Winbond has pumped US$2.7 billion in capital into its businesses, but created only US$1.2 billion in MVA.

Look to company strategy to understand why. Both companies operate with a low-cost base. Via's managers decided to fight tooth and nail against Intel, the US chip giant, winning a chip-design theft lawsuit that allowed it into one of Intel's coveted markets, and to invest US$300 million to buy the US chip designer Cyrix. The moves effectively opened Via to two new markets. They continue to see demand rise despite declining chip sales.

Winbond has had less luck. It invested heavily to build a 12-inch-wafer fab based on its calculation that last year was the trough in the industry's business cycle. With the economy still languishing, it looks like Winbond raised capital and invested that money too early to earn its projected return. Winbond's bets may turn out to be good ones yet, but investors have fled.

Will they come back? Look to the company's EVA for the answer. EVA is a measure of internal company value, providing a definition of true profitability. Like MVA, it focuses on the use of capital.

To arrive at EVA profits, subtract a charge for the cost of capital - including equity capital as well as interest on debt and other charges - from after-tax operating profits. An EVA number shows how companies perform given the true costs of their investments quarter-by-quarter and year-by-year. But the number is not absolute. A company may invest one year, causing negative EVA in the current period, with the goal of increasing EVA in the future - a process amply demonstrated in the case of Winbond.

The chipmaker's heavy expenditures on R&D and building the new fab are reflected in its US$127 million of negative EVA. But Winbond's improvement in EVA is US$67 million. If EVA continues to grow consistently, that success at creating value on the operational level will be reflected in a higher stock price and a higher MVA. So don't cry for Winbond yet.

Despite the usefulness of EVA, it cannot - nor can any metric - predict the future. It is possible, however, to tweak the numbers on this ranking to find how much the market expects a company to grow - and whether its current valuation is reasonable or crazy.

Future growth value (FGV), a metric we include for the first time this year, quantifies this intangible. Take a look at SingTel's FGV for an illustration, if SingTel were able to keep producing last year's net operating after-tax profits. Add these up, then apply a discount to this number using its current cost of capital.

The figure you arrive at - US$11 billion - is the market value SingTel would be able to sustain if it were able to maintain this level of profits indefinitely. But the current market value of SingTel is US$18.6 billion, or US$7.6 billion higher. This figure, its future growth value, which is best expressed as a percentage of market value, means that investors expect SingTel to grow 40 percent above its current valuation.

This may be possible, despite SingTel's struggles to create value through acquisitions. It's latest foray, buying Optus, the Australian telecom company, for US$7 billion, initially depressed its stock price, but analysts now see it as a good deal.

CFO Chua Sock Koong is a staunch defender of its slow, deliberate hunt for value-creating acquisitions. "Our position in making investments, whether it is in Malaysia or Hong Kong," she says, "is that we will only pay for sensible ones. We have a commitment to deliver value to shareholders and we didn't want to chase Hongkong Telecom to unreasonable valuations," she says, referring to the takeover battle in March 2000 that ended when Pacific Century CyberWorks nabbed the telecom for US$32 billion.

She adds that this was similar to the case in Malaysia for TimedotCom, a company that SingTel courted then backed away from. But even given her staunch stewardship, 40 percent improvement in profits in a saturated and increasingly competitive market will be hard to achieve. SingTel's next-door neighbor, Telekom Malaysia (#18), has to face a more rigorous expectation of growth, with a future growth value some 72 percent of its current market value. Given that the company's rapid entry into mobile telephony was a major driver of its share price, this valuation looks increasingly far-fetched.

What Drives Value?

"FGV," says Alan Thompson, head of Stern Stewart's Singapore office, "shows the height of the mountain management must scale to preserve the shareholder value implicit in the share price." He continues: "Management must take that implicit external contract and turn it into an internal contract with the company's employees."

That transfer of external expectations to internal priorities has been happening at last in the region's most important market. This is the first year that CFO Asia has included Chinese companies in its ranking of the top value creators in Asia. China would have been included before, but it was difficult to get reliable numbers for all of its listed companies. Oliver Hua, the head of Stern Stewart's Shanghai bureau, applies a caveat, saying getting reliable numbers is tough. "We could only work on the information the companies file, though well aware of how such information is often erroneous and un-audited," says Hua. He adds that: "The process seems to be evolving fast," referring to the greater push for transparency on the part of the China Securities Regulatory Commission.

It's evolving far from the regulatory level as well. At Baoshan, CFO Jia describes EVA as "one of the most scientific ways to measure a company's performance and it fits our aim to bring value to shareholders, customers and staff at the same time."

Among the metrics he uses to track this performance is to glean the amount of extra value workers can squeeze from raw materials during production. In the finance department, Jia has shaved basis points off his cost of capital by entering into factoring agreements with banks rather than taking out standard loans at prime rate plus. "In China," Jia says, "the discount rate for cashing in receivables is generally lower than the prime rate."

Given that Jia sees factoring - usually a practice adopted by distressed companies - as a vehicle for value creation, China clearly has a long way to go. "We have noticed a marked trend where mainland companies," says Hua of Stern Stewart, "while generally performing well in operational efficiencies - their profit margins, etc. are comparable to the rest of the world - usually exhibit terrible capital efficiencies." He adds: "Historically, a lot of local managers have been proud to show off huge assets and they still don't have the mindset to concentrate on reducing the amount of capital needed to generate profits." In response, Hua is advising China's companies to put the job of guiding wealth creation where it belongs. "With the CFO, naturally," he says.

Click here for Performance 100 chart (pdf document)

Tom Leander is Deputy Editor for CFO Asia. Additional reporting by Jasper Moisewitsch and Enid Tsui in Hong Kong.