Asia’s best managed companies: Euromoney

Euromoney, January 2010

Asia’s best managed companies have come out of the financial crisis in better shape than their peers, and that’s no surprise: in most cases they went into it in better shape too. Prudent gearing, transparency, good governance and clear strategy have characterised these leaders, rewarded in this month’s Euromoney Asia’s Best Managed Companies poll, for years.

That’s not to say things have been easy for any of them. Take CapitaLand, for example. For many years the favourite Singapore blue chip among Asia portfolio managers, this time last year its whole approach to business was being questioned. “As global liquidity tightened and real estate transaction volumes dried up, analysts were raising concerns that our business model – which focuses on capital recycling and capital productivity – was broken,” recalls Olivier Lim, group chief financial officer at CapitaLand.

“What they forgot was that all real estate businesses need to recycle capital. We just articulate it and execute it diligently as a business strategy and this gives us more financial flexibility than others across market cycles.”

That was of little comfort when CapitaLand’s share price fell more than 70% from its highs in a shade over a year; its many listed satellites fared worse still. “Whilst we were very confident of our business model and viewed the dislocation as part of the cyclical nature of the real estate business – albeit more severe than a normal recession – it was difficult to convince the investment community,” says Lim. “Partly I suspect they were facing their own business model stresses with the loss of AUM from large redemptions and falls in portfolios values. They saw no light at the end of the tunnel during the crisis.”

But Lim and his team put the building blocks in place to weather the storm and flourish when it passed. Seeing trouble ahead it divested over S$9 billion of property assets and reinvested only S$4 billion over a two year period heading into the financial crisis. Some of this, such as the sale of an iconic tower in Beijing, looked like a forced or panicked sale at the time; in fact, it proved to be a great deal in that the price it raised would have been unthinkable only months later. By the time the crisis hit in earnest, CapitaLand had built up a cash reserve of over S$4 billion, with a low gearing ratio. It slowed business development; it bolstered itself with a S$1.3 billion long-dated convertible in mid 2008; it pulled in another S$1.8 billion in a pre-emptive rights offer in February 2009, heavily oversubscribed. And investors have continued to back it in the capital markets, first with a seven-year S$1.2 billion convertible in July, the largest and longest tenor convertible for an Asian listed issuer at the time.

And finally, in a move that would have seemed implausible a year ago, it launched an IPO of another listed satellite, CapitaMalls Asia, with a placement 2.5 times oversubscribed and a public offering 4.9 times subscribed. “We patiently built this capital-intensive business over the last seven years,” says Lim. “We polished it, and gave it its own access to the capital markets so it can aggressively take advantage of its first mover position in Asia.” The funds allow CapitaLand to recycle capital, rebalance the portfolio and put the money into business units.

At Infosys, the challenges were rather different. Infosys has no debt whatsoever: 60% of its balance sheet is cash and cash equivalents. So there was no need to navigate the perils of refinancing in debt or loan markets, or to keep bond investors happy. That clearly helped. “It was a lot of comfort for investors,” says V Balakrishnan, Infosys’s CFO, in Bangalore. “People realise cash is God in that kind of environment: companies with a lot of cash can fulfil their strategy much better than anyone else.”

But Infosys had other headaches to deal with. “Today, 98% of our revenues come from outside India: we are a global company based out of India,” says Balakrishnan. “The majority of our revenues [66%] come from North America. Anything happening in the large economies around the world will have an impact on our revenues.” Infosys guidance at the end of the last quarter forecast revenues could decline 1 to 1.3% year on year, although the company has been insulated by the growing interest in moving IT services offshore to countries like India, as a way of cutting costs: hence recession has in some measure helped part of Infosys’s business.

Infosys is perhaps known best for its efforts in corporate governance, taking the best ideas from around the world and implementing them at home. Ideas like independent boards, bifurcating roles for CEO and chairman, committees for investor relations and risk management, are more common in Asia now but they have been standard practice at Infosys from the start. “We clearly believe that we are not the owners of this company,” says Balakrishnan. “We are only managing the investors’ money. They are the owners.” Infosys has a long track record of getting bad news out early. “All the bad news has to get to the market. Good news can wait,” he says. Transparency is a by-word at Infosys, which gives its annual results against the GAAP requirements of six different countries, several in their local languages, as well as additional but un-required information such as land and human resource valuations.

Companies like Infosys say they thrive in the bad times because of good governance. “It helps a lot in difficult economic times, because in this environment what investors want is management who are credible, who are honest, so they won’t see any shocks like they saw with Enron.” India had its own equivalent of Enron this year with the fraud around software services group Satyam. “But it you look at Indian stocks on the day the news about Satyam broke, they all went down – except Infosys. Investors want good corporate governance.”

The company that swept the board in this poll was China Telecom, winning not just in its own country but most regional titles too. Part of the increase in voter support for China Telecom may be because of its realisation of a long-term strategic goal. “Near the end of 2008, we successfully completed the acquisition of a mobile business in China and became a full service operator,” says chairman Wang Xiaochu. Wang talks of integration synergies between mobile, wireline and internet services, while rapidly expanding the mobile business. “Although these have brought short term pressure to our profitability, we firmly believe that they will significantly enhance the company’s future sustainable development and value creation.”

Bringing a strategy to fruition is one thing, but investors want to be kept up to date with it too. Wang says the company has frequently updated investors on the strategy and its progress, and thinks this is one reason investors have trusted and supported the company despite short term profitability pressure.

Alongside this, China Telecom has been a standard bearer for corporate governance and investor relations in China. Listed in both Hong Kong and New York, it has to adhere to requirements such as the Sarbanes Oxley Act and COSO Internal Control Framework, and uses these international standards “as our foundation of corporate governance,” Wang says. Five of the 14-strong board are independent, and the standing board committees only comprise independents. “We strongly believe that sound corporate governance can ensure management effectiveness, prosperous corporate culture, successful business development and a sustainable increase in shareholder value,” Wang says.

Other moves that have appealed to investors include holding the annual shareholder meeting in Hong Kong in 2005, despite being a mainland incorporated company, to have direct communication with public shareholders; monthly disclosure of operating metrics and quarterly disclosure of financials; and regular investor and press conferences.

China Telecom had a few advantages in the crisis. For one thing, China’s debt markets were basically fine throughout. “Given our solid fundamentals and the abundant capital liquidity in the domestic Chinese market, we did not experience funding challenges during the global financial crisis,” says Wang. This year it issued a RMB10 billion three-year corporate note. Additionally, Chinese telecoms was not one of the world’s danger areas in the financial crisis, although it did affect customer demand for services, especially on long distance voice service and business customers. Consequently the company shifted development emphasis to broadband and value added services, and promoted bundled services.

While most companies that featured well in our survey consider themselves innately conservative in their approach to risk, good management also means knowing when to act decisively. In the middle of the financial crisis, Fubon Financial bought ING’s Taiwan life insurance subsidiary, concluding the deal in February 2009. “We took advantage of the financial crisis by buying into some assets at a very reasonable price,” says Victor Kung, president of Fubon Financial. “That has given us the opportunity to emerge out of this crisis stronger than at the beginning.” But at the same time, Fubon knew when to stay away: it considered accessing the capital markets in support of a bid for Nan Shan, AIG’s Taiwanese unit, before deciding the pricing was too high (the business was bought by Primus instead). Investors will need to continue to trust Fubon’s judgement as it takes the lead in trying to take advantage of thawed relations with mainland China. “That is our main strategic focus right now,” Kung says.

The best companies learn from the bad times. “We learned a lot during the crisis,” says Kung. “We further strengthened our risk management systems and we have come out of this stronger than we used to be.” Like others who have been rewarded in this survey, Fubon has looked out for investors by getting bad news out quickly: Kung says it was the first Taiwanese institution to write down the value of its investment in Taiwan’s troubled high speed railway. Others have had to follow. “That boosted confidence in our investors, that we are serious about being transparent,” he says. “All this demonstrates to investors that they can have confidence in the management of the company: that we are working hard to make sure their investment is well taken care of.”