ON THE LOOKOUT
How corporate strategy became central to the finance role at Hysan Development.
By Jennifer Lee

When Michael Moy, CFO of property investor Hysan Development in Hong Kong, looks out the window of his 50th floor office he can take in almost all of Causeway Bay - and stunning evidence of the power of foresight. Seventy-five years ago, the Lee family, which owns 42 percent of Hysan, bought virtually all of the teeming neighborhood from Jardine Matheson, and then gradually built it into the shopping and business center it is today.

No wonder, then, when the Lee family hired Moy they stressed that his ability to look ahead would be essential to his job. In short, Moy is responsible for the development of Hysan's strategic direction, not just the plan one or two years in the future, but five and ten years down the road. To do this, he goes beyond the numbers, from developing a broad perspective of Hong Kong's future, down to the nitty gritty of Causeway Bay's retail and office prospects.

Like Moy, a growing number of Asian CFOs have found that their jobs include the development of strategy. Across the board, the role has expanded to include oversight of IT, HR and a host of other responsibilities. Strategic development adds a new level of responsibility, calling on finance directors to make hypotheses about where a company is headed far beyond the duration of financial plans used for budgets. It also demands a detailed enough understanding of their company's operations to make changes that will prepare the company for that future.

Because CFOs bring a knowledge of finance, tax and accounting to the table, they may be the management committee members best equipped to make certain strategic decisions. James Haybyrne, CEO at consultancy Strategic Thinking Group in Hong Kong, says: "The CFO manages the capital, the 'fuel supply' of any strategy, and must present a credible case as to why money should flow to the strategy of the firm."

To be sure, the corporate scandals in America have prompted critics to warn that when CFOs guide the board in corporate strategy, it can lead to the kind of fraud uncovered in the Enron and Worldcom cases. But it can just as easily be said that CFOs' involvement in strategy furnishes a check against fraud and wild schemes, and that the CFO is better placed than any corporate officer to understand the impact of major moves on the balance sheet over the long term, and therefore well suited to assess them and propose new ones.

Best Laid Plans

This, in any event, is why Peter TC Lee, Hysan's managing director, hired Moy. He spent his first year-and-a-half in the job on strategic planning, taking control of the corporate planning department. Moy, who graduated from Wharton in the US with a joint degree in finance and strategy, has used his experience as the numbers man at Hysan to help construct its long-term strategy, often influencing make-or-break decisions.

The HK$1.4 billion-a-year (US$179 million) Hysan empire covers much of Causeway Bay, the district on Hong Kong island where most locals go to shop. Until now, however, Hysan has focused on prime office leases, competing with the more established Central district. Reviewing the numbers back 15 to 20 years, Moy determined that the retail property portfolio creates more value than any other rental stream. Retail, which currently accounts for 24 percent of Hysan's total portfolio and contributes 35 percent of the company's revenues, is planned to increase to 55 percent of revenues over the next several years.

As Moy describes it, a move toward retail is the only logical choice. "If you take the present value of the rental stream and the capital value appreciation, it actually exceeds Grade A office, so it creates more value," he says. "And if you look at the volatility, through the standard deviation of those two cashflow streams, [retail] is lower than A grade office, so having retail is like having your cake and eating it too. It's very steady income and it creates a lot of value."

Moy also notes that the heavy foot traffic in Causeway Bay leaves no excuse for vacancy. "One of these little noodle shops, on a per-square-foot basis, is one of the most expensive in the world. There is always someone willing to plunk down a business and give it a go," he says.

For Moy, the other attraction to retail was that it requires more specialized skills to operate, and as such forces Hysan to think of packaging its property in ways that offer value, not shelf space. "We want to build around that as our competitive advantage, rather than continue to do mostly offices, because office is more a commodity type of product," he says.

The goal, of course, is to establish Causeway Bay as a stable shopping mecca, not a flea market where tenants change every year. What Hysan wants to avoid is a "dead mall", he says. "Most landlords would build a concrete structure, hire a property agency and say, 'Bring me some tenants, ones that pay the most, and preferably ones that pay by autopay,'" says Moy. "We've gone one step further by trying to identify not only which retailers are hot at the moment, but to identify enduring market segments," he says.

Mixed Business

This doesn't mean that Hysan will abandon commercial leases in Causeway Bay. Moy considered what type of office tenants would work best as well. He found companies that wanted to be in a district like Causeway Bay are those that are consumer-oriented. Japan's Sony, for example, has a product demonstration center, a retail service center, and it therefore made sense that their offices be in Causeway Bay as well. US insurance provider Manulife also wanted to maximize its retail customer interface, and so is based in Causeway Bay.

That, in turn, creates a satellite system - the ad agencies, market research agencies, and all those who do business with the Sony's and Manulife's, says Moy. In short, Hysan's strategy is two-pronged: do more retail, which provides maximum return, and maximize the yield that Hysan can expect from its office portfolio. "Both our retail and office sides are about understanding segments: who wants what, and what can we provide them. This is really at the heart of how we create value," says Moy.

Moy's confidence in retail is not just based on the numbers, however, but also on creative thought as a former management consultant at McKinsey, and in particular, his vision of Hong Kong and its role in relation to China. He turned to former colleagues at the consulting firm, who asked some fundamental questions. 'What is the future of Hong Kong? Did Hysan still like Hong Kong going forward? And did they still like real estate?

"We believe China will be like the US in the sense it will have multiple major cities. Why should there just be Hong Kong and Shanghai and nothing else? So the question is, what is Hong Kong going to be?" he asks. "Well, it could be the gateway for logistics for southern China. It is also a center for financial services, so it has similar characteristics to New York. And we could also be an entertainment center," he says.

Given the outlook that the Hong Kong economy will not perish as doomsayers predict, Moy and his team concluded that Hong Kong will in fact continue to flourish, and with it, so will retail spending. "When you look at retail spending it has a direct correlation to personal consumption, so retail can also be vibrant still," he says.

Value Planning

And how has the strategy paid off in terms of creating shareholder value? Moy says while the property sector in Hong Kong is currently in a slump, investors appreciate Hysan's approach in getting out of it. "They like that we're going deeper," Moy says, "looking at how value is actually created, rather than leaving it to the marketplace."

At South China Brokerage in Hong Kong, analyst Jeff Yau agrees. "Retail property assets in Causeway Bay are very good assets," says Yau. He adds: "Hysan is placing a strong emphasis on its retail strategy, which will bring a very good return in the long run, although it is suffering in the short term from poor performance in the office sector."

To Moy, it is perfectly logical for strategic planning to fall under the CFO's watch. Finance planning should go hand-in-hand with a company's strategy. "I come from the school that asks how much real value in terms of share price have you created for your shareholders?" he says. "We looked at the investments that the new strategy called for, the improvements in operations that it called for, and made a number of projections based on our understanding of the industry, in terms of profit margin and new business created," he says.

Strategy setting is also helping Moy in that most basic of CFO roles: capital raising. Moy can now plan the company's financial future with more precision, and for a longer term. At the moment he uses a ten-year planning horizon.

"We developed an understanding of how much capital we need to invest," says Moy. He adds: "We're looking at three to four major redevelopment projects, so we have an idea what the capex looks like and what the operating cashflow generation looks like, based on a number of assumptions on the rental business, so then the gap is new funding required."

He commissioned investment banks UBS Warburg and Deutsche Bank to help Hysan understand its liability management - risk from currency and interest rates - and how best to construct the liability side of their balance sheet. "We then had an indication of what is an optimum capital structure that would result in the lowest cost of capital, because basically if you discount a stream of cashflow with your cost of capital, that's your present enterprise value," says Moy.

Today, Moy is pretty satisfied with the direction his company is taking. "After two-and-a-half years, I've gone through the strategy, I've gone through the balance sheet and the capital structure, so now feel I have a reasonably comfortable grasp of where we are going," he says.

So do the capital markets. In giving Hysan a triple B-plus rating for its US$200 million international bond issue early this year, credit rating agency Standard & Poor's said: "Hysan is increasing its focus on the retail sector, which currently contributes more than 30 percent of its rental income. The company plans to enlarge the size of its retail space through redevelopment of some older buildings. Standard & Poor's expects this to provide a better quality, less volatile income stream for the company over the long term." Hysan's gearing ratio currently stands at 21 percent. Yau at South China Brokerage says the company has sufficient operating cashflow to meet its capex requirements and "a very comfortable debt level."

To be sure, the role of the CFO as strategic planner is not yet demanded of all; many CEOs prefer to carry the burden of strategic direction themselves. "CFOs with broad knowledge and perspective can make contributions to strategy," says David Li, managing director of Chinese shipping conglomerate China Merchants in Hong Kong. "Whether they actually contribute or not is on an individual basis. If they like it, they can do it," says Li. What hinders the CFO from coming forward? The open-mindedness of the CEO. "You may have a fancy title like head of corporate planning, but if the CEO is not open-minded, it's all pointless," says Moy. And why shouldn't they be? After all, if the CEO and CFO share in accountability, they might as well share in the strategy.

Jennifer Lee is a contributing editor at CFO Asia based in Hong Kong.