In a survey of some 639 Asia-based CFOs conducted by Bank of America Merrill Lynch, just over half of respondents say they planned to grow their company profits through the use of technology and automation in areas including customer-relationship management programmes, supply-chain management and forecasting.
This marks a stark turnaround from last year’s survey, in which respondents ranked operational efficiencies as the top priority to increase profitability, with improving working capital management ranked second and technological advances third.
“CFOs this year seem more willing to take risks to invest in potentially money-saving technologies as the economic outlook brightens,” states BAML in its 2014 CFO Outlook Asia report and survey.
|Source: Bank of America Merrill Lynch|
Robert van der Zalm, CFO, Noble Group, says growth rates throughout Asia “are still strong, despite some slowing, and have been for some time … Remember that 7% growth in China now probably equates to 14% growth 10 years ago. That’s massive.”
Margin pressure in Asia is driving this need to increase efficiency savings, despite more than three quarters (76%) of Asia CFOs expecting revenues to grow this year.
However, BAML says the “value gap” between those who expect revenues to rise and those who expect profits to rise is 16 percentage points – up from seven points last year – suggesting it is “getting tougher to extract value” out of revenue growth.
“We are going through a significant change ... a shift in revenue mix causing some margin pressure across Asia – and the world,” says Chris Young, chief financial adviser, Philippines Long Distance Telephone Company.
Interestingly, the push to grow profits through processes and systems is outpacing plans for capital expenditure, one of the traditional avenues of company growth.
According to the survey, the proportion of CFOs who forecast capital expenditure growing this year (35%) is 11 percentage points lower than the proportion that said the same in 2013.
A greater proportion (47% this year compared with 34% in 2013) see capital expenditures staying the same, which means expenditure on new technology is likely to be netted out by efficiencies realized elsewhere, says BAML.
While improving working capital management has been relegated as a priority this year, some 41% of CFO respondents still say this was one of their main focuses to increase profitability.
For this to happen, companies need to avoid a situation in which working capital is growing at a quicker rate than revenues.
“We have a tight focus on using internal resources to grow,” says Suryanarayanan S, director of finance and joint CEO of Ecu-Line, a logistics and less-container-load shipping company. “We manage our working capital efficiently and plough as much cash freed from working capital back into the business.”
Across Asia, the overriding priority of CFOs this year is to re-invest and grow organically, with 48% of survey respondents planning on deploying excess cash to fund this type of growth. Only 24% say they would use cash for mergers and acquisitions, of which the focus is to do deals within Asia itself.
There is a distinctive trend for companies in larger economies – China, Japan and South Korea – mulling acquisitions in southeast and south Asia, but eschewing M&A in north America and Europe.
“We plan to grow organically across all our markets in Asia,” says Lawrence Lau, Shanghai-based regional CFO for US manufacturing company Owens Corning. “We’re looking for acquisitions, too, when the right opportunities arise, but we see big opportunities for organic growth in the region.”
|Source: Bank of America Merrill Lynch|
The reasons for the focus on organic growth underscore the broad optimism about Asian growth this year, but also reflect expectations of about a third of CFOs that capital costs will rise as a result of tapering by the US Federal Reserve, which could eventually play out in higher funding costs for companies across Asia.
“Tapering has to come, because it reflects expectations of recovery of the US economy,” says Chng Sok Hui, CFO of Singapore’s DBS Bank. “Our view is that the US will pace quantitative easing (QE) a bit more.”
One effect of tapering, says Chng, is that local customers “seem to think a rise in borrowing costs is imminent, and they are trying to lock in their funding costs.”
According to the survey, some 41% of respondents believe the end of QE will lead to substantial problems in Asia, but all CFOs feel markets have factored or priced tapering in already.
However, juts over a third of CFOs say that financial markets risk is their single greatest concern this year, and currency volatility is the main concern there followed by liquidity and commodity price risk.
Some 70% of respondents in Indonesia, for example, consider currency volatility as the primary concern. Indeed, the rupiah’s decline against the US dollar in 2013 was reminiscent of, if not as severe as, the Asia-wide currency collapse of 1997.
In addition to managing financial market risk, Asia CFOs are focusing on reducing long-term debt exposure and on cash wherever possible. When asked about their financing plans, some 41% of CFOs say they will likely adjust their capital structure to decrease long-term debt. South Korean conglomerates in particular will need to do so because they are among the most highly leveraged companies in Asia.
CFOs have a tricky juggling act here because it is not just a matter of avoiding excess leverage, but also relying on cash-flow to fund projects, and ensuring that the debt they do have is with businesses that offer strong, reliable long-term returns.
“How do we manage our balance sheet?” says Frank Lai, CFO of China Resources. “You can’t follow the economic trend. Over the last five years you’ve had periods of China bank liquidity flooding you up to the ears. Then you’ve had periods of no liquidity at all.
"If you dance with them, then your finance strategy changes all the time.”
He adds: “But we can’t. We are planning for the longer term. The next best thing I can do is manage my balance sheet carefully by squeezing all my debt to replace what we regard as passive assets with active assets.”
Lai says he prefers using cash from divestments to fund growing businesses over debt, and says he will not tap equity markets again until he deals with the “inefficiency in my own share structure by selling non-core assets”.