Results Euromoney Best Asian Company Methodology 2006
THE RISE OF Asia’s economies thus far has been principally a story of trade and manufacturing, with services becoming the key growth driver in the region’s more developed markets. Start a small import-export business or a factory making consumer goods in a country where the economic tide is rising rapidly and it is not too difficult to make money and grow. As savings pools and foreign exchange reserves expand, increased liquidity inflates asset prices, providing easy money for real estate speculators and stock traders.
Defining what constitutes a well-managed company in Asia, therefore, is not altogether straightforward: it depends how you measure it. With many companies in the region profiting from the asset inflation story, sound management practices and attention to protecting the interests of all shareholders through strong corporate governance principles often take a back seat. Research undertaken over the past three years by CLSA and the Asian Corporate Governance Association (ACGA) demonstrates a clear link between investors’ appetite for risk and their interest in how well a company is being managed.
“The performance of stocks and markets with high levels of corporate governance negatively correlates with risk appetite,” writes Amar Gill of CLSA in CG Watch 2005. “When liquidity enters markets it raises risk appetite and effectively reduces risk premium. This leads to a re-rating of poorer-quality names – the opposite of when liquidity is heading out.”
Companies that can prosper across the business cycle and that consistently produce solid returns are those that win out in the end and are most likely to produce consistent long-term returns for shareholders. To do that, these firms have often faced significant business challenges. The companies that consistently topped the short lists of Euromoney’s 2006 best-managed companies in Asia poll are no exception.
Tipping point
When the incumbent telecommunications carrier in the Philippines, Philippine Long Distance Telephone Company, undertook a strategic review of its business eight years ago, management, led by chairman Manny Pangilinan, faced a critical decision. PLDT was a legacy fixed-line business in a developing economy rapidly moving towards cellular technology adoption. The industry was entering what PLDT describes as a “tipping point”, where mass adoption of new technology would leave “legacy businesses” behind. PLDT, management realized, had to change or die.
The company began investing heavily in its GSM technology, spending $2.7 billion to build out a network that now covers 99% of the country’s population. PLDT managed this change while reducing debt levels and improving earnings per share.
Pangilinan describes PLDT’s transformation as one from an infrastructure play to a marketing and customer-centric company. Now, he says, the company faces another tipping point, as 3G networks spur wireless broadband and mobile and video commerce. PLDT plans to spend an additional $1 billion over the next three to four years to upgrade its technology as part of a strategy that it dubs “broadbanding the future”. Although management has said that this will put earnings growth under pressure, the market has rewarded the strategy: PLDT shares have risen 36% over the past 12 months.
The story behind another of Asia’s best managed companies, Bharti Telecom, could scarcely be more different, yet is no less impressive. Bharti Telecom’s key operating subsidiary is Bharti Airtel, formerly known as Bharti Tele-ventures and part of Bharti Enterprises of India. Established in 1995, Bharti Airtel has executed a flawless strategy to become the fastest-growing and largest mobile, broadband and telephone services business in India, with more than 27 million customers.
In addition to its founding Mittal family, Bharti Airtel attracted several high-profile investors at the outset, most notably private equity firm Warburg Pincus, which invested $292 million between 1999 and 2001 for an 18.5% stake. It is estimated that by the time Warburg Pincus had exited its entirely, it had earned more than $1 billion profit from the investment. Part of its divestment made way for Vodafone, which bought a 10% stake in Bharti Airtel in October 2005.
Biting the bullet
Real estate has been a favourite business activity for Asian entrepreneurs. Although asset price inflation has flattered the books of many property companies, three firms stand out for their quality of management: Hong Kong’s Sun Hung Kai, CapitaLand of Singapore and Ayala Land of the Philippines (Ali). They have unique histories, yet all three have demonstrated quality management and strategic vision that has ensured that their businesses prosper across business cycles.
SHK, controlled by the Kwok brothers, is one of Hong Kong’s leading property development and investment businesses, widely recognized for the quality of its real estate developments and of its management. SHK scores consistently strongly on regional corporate governance surveys.
It has not always been plain sailing, however. SHK management has shown its ability to tackle difficult trading situations and take tough business decisions. One example occurred during Asia’s dotcom frenzy. Like many other conglomerates, SHK had established its own technology business, SUNeVision Holdings. Listed on Hong Kong’s GEM market in March 2000 at a market value of $2.7 billion, the company was mauled by the market after the dotcom crash. SUNeVision’s market value fell to some $300 million amid mounting losses from technology investments and dotcom businesses.
SHK management quickly bit the bullet and in 2001 made sweeping strategic changes at its subsidiary. SUNeVision took $58 million of restructuring and other costs and refocused its business around its core iAdvantage data infrastructure business. The strategy paid off. Within a year, management had converted the operating loss of $15 million in 2000/01 into an operating profit of $2.3 million for the following financial year. SUNeVision has since reported three years of consistent profitability.
CapitaLand and Ali, in contrast, have remained more focused on property and property-related businesses. Formed from the merger between Pidemco Land and DBS land in 2000, CapitaLand has property and hospitality investments in nearly 20 countries worldwide.
CapitaLand is at the forefront of the development of new financing techniques for Asia’s real estate sector and was among the first in the region to adopt the use of real estate investment trusts. It has already sponsored three Singapore-listed Reits, including the first, CapitaMall Trust; CapitaCommercial Trust, Singapore’s first commercial Reit; and Ascott Residence Trust, a pan-Asian serviced residences Reit.
Ali, part of Ayala Corp, one of the Philippines’ oldest corporations, has prospered in a country fraught with political and economic difficulties, even during the Asian financial crisis. In the past five years, Ali has grown revenues and net income by compound annual growth rates of 17% and 12% respectively.
In the Philippines, Ali pioneered the concept of an integrated urban property development of international standards, adding value via a judicious mix of residential development and shopping centres. The company has almost single-handedly transformed Manila’s Makati business district.
Now, like CapitaLand, Ali is expanding into new areas of real estate and related financing. The company has launched a private equity strategy to establish a $200 million real estate private equity fund called Arch Asia Property Fund, billed by Ali management as “sponsored and anchored in Asia”. Ali and associates have seeded the fund to the tune of $75 million. The fund aims to invest in non-Japan Asia outside the Philippines and is already working on projects in Beijing, Macau, Shanghai and Thailand.
Ping An Insurance stands out from most Chinese state-owned enterprises for its strong corporate governance platform and clear management strategy. Ping An aims to use corporate governance as a key differentiator between it and other similar mainland Chinese companies. The company consistently scores highly for its corporate governance, according to the CLSA/ACGA’s CG Watch, ranking in the top quartile among all Chinese companies in its annual survey.
Validation of Ping An’s strategy came in the form of a major investment by HSBC, initially in 2002, which, following an additional investment, now holds a 19.9% stake.
Most banks in Malaysia are government-controlled and, increasingly, the government appears keen to consolidate its control of the country’s banking sector. That makes the performance of Public Bank all the more impressive. Founded 40 years ago by the current chairman, Malaysian Chinese Tan Sri Dato’ Sri Dr Teh Hong Piow, Public Bank has never reported a loss. The bank remains highly focused on an organically driven retail strategy that has made it one of Malaysia’s largest banks by assets and market value. Unlike its government-owned competitors, however, Public Bank boasts the lowest ratio of non-performing loans and among the highest returns.
Maintaining standards
Although the range of these best-managed companies is as diverse as the region itself, they have common characteristics that explain their success, including enlightened management teams that have adopted clear business strategies appropriate to their companies’ particular circumstances and markets, and the ability to execute that strategy efficiently. All of the management teams have demonstrated their commitment to the highest standards of governance and their determination to deliver value for all shareholders.
As Asia’s economic development shifts from one based on export-led growth through labour arbitrage and liquidity-driven asset inflation towards more service-based and consumer-driven markets, growth rates will slow and profitability will be harder to come by. It is then that the management attributes displayed by Asia’s best-managed companies will be in much demand and probably better appreciated.
