Bank of America Merrill Lynch CFO Outlook 2014 Asia

2014 CFO Outlook Asia
A Survey of Chief Financial Officers
Wellspring of Growth
Optimism is driving a new age
of growth in Asia

2014 CFO Outlook | 32 | 2014 CFO Outlook
Wellspring of Growth
About the survey 2
Welcome letter 5
Key findings from the 2014 survey
Top findings infographic 6
Key learnings summary 8
Part 1 - The big picture: Regional overview and trends 10
Case study: PLDT: Innovation to combat margin pressure 17
Part 2 - Risk: High, but manageable 18
Risk infographic 19
Case study: DBS: Managing resources and performance strategically 30
Part 3 - Growth: Going organic 31
Case study: Siam Cement’s sweet spot 42
Part 4 - M&A: The lure of the Southeast 43
M&A infographic 44
Case study: China Resources Enterprises: M&A to the core 53
Part 5 - Finance: Cash is king — and risk is ever present 54
Case study: Owens Corning: Impatient with China, but wanting to believe 60
Conclusion: The consequences of growth 62
Contents
About the survey
In January 2014 The Economist Intelligence Unit surveyed 639
financial officers from companies across a range of industries in
12 countries and territories in Asia (Australia, China, Hong Kong,
India, Indonesia, Japan, Malaysia, the Philippines, Singapore,
South Korea, Taiwan and Thailand). Respondents included chief
financial officers, financial directors, senior vice-presidents
of finance, treasurers and those with other senior finance-
function titles. Half the respondents were from multinational
corporations and half from companies with operations in only
one country. All multinational companies that participated
have global annual revenues of at least US$500m; all local
companies have revenues of at least US$100m.
NB: Although several questions are repeated from the 2013 CFO
Outlook Asia, the methodology for 2014 differs in that unweighted
survey data is used in this year’s report. Unweighted data from the
2013 survey is also used for comparative purposes, meaning results
cited for that year may differ from the 2013 publication, which used
data weighted by nominal GDP. Other methodological changes have
also been applied. For certain questions respondents could pick more
than one answer, meaning responses may not always add up to 100%.
The EIU also conducted in-depth interviews with a number of
CFOs across Asia. Our thanks are due to all interviewees and
survey respondents for their time and insights.

Welcome to the Bank of America Merrill Lynch
2014 CFO Outlook Asia.
This report is the third edition of an annual survey that combines the thoughts and
insights of over 600 CFOs and other senior financial executives in Asia Pacific, with
more than half representing corporations with annual revenues of US$1bn and above.
We have updated the survey questions to reflect current themes and market concerns,
while keeping relevant questions from last year to capture trends. Read about the
perceptions and expectations of key financial decision makers in terms of revenue and
profit, financing, key financial and operational risks, and M&A vis-à-vis organic growth.
On behalf of Bank of America Merrill Lynch, I want to thank all the senior financial
executives who took time to participate in the survey and for sharing their thoughts
with us. I hope you will find this report insightful and informative.
Steven Victorin
Head of Asia Pacific Corporate Banking
& Global Corporate Banking Subsidiaries
Bank of America Merrill Lynch
Welcome

…but margin pressures are buildingConfidence in the region abounds...
2014 CFO Outlook Top Findings
The big picture
More CFOs expect
revenues will grow in
2014 than in 2013
But fewer CFOs
expect profits
will grow
2014:
76%
2013:
65%
2014:
60%
2013
72%
2013:
72%
2013:
65%
2014:
76%
2014:
60%
7 percentage
points
Margin gap
2013
16 percentage
points
2014
Expect revenues will grow Expect profits will grow
China and the West fall from grace:
Southeast
Asia:
41%
India/
South Asia:
40%
Emerging
Southeast Asia:
36%
M&A focus will be strongest on:
China
North America
Western Europe
1st
4th
5th5th
11th13th
2013
2014
Main goals for MNCs’ Asian operations:
Business expansion: organic growth preferred
Innovate in new business lines: 42%
Invest to grow revenues: 44%
Expand into new countries: 46%
of CFOs say they
will use surplus
cash for organic
expansion
51% 45%
Operational
efficiencies
41%
Improvement of
working capital
management
Technological
advances/
automation
Focusing on fundamentals to improve profitability:
Margin pressure is driving a focus on core
disciplines—and technology:
A drop in planned capital expenditure
increases:
49%
24%
will spend it on
M&A
plan to raise capex
2013:
46%
2014:
35%
Note: All figures are percent respondents from 2014 CFO Outlook Asia survey unless otherwise indicated.
Figures may not round to 100 either due to rounding or because respondents could select multiple answers.
Ranking of target M&A markets
and bank loans
remain top
financing choice
of companies will
decrease long-term debt
weighting in 2014
41%
57% Bank loans
Internal sources or
self-funding
Malaysia Taiwan India
67% 67% 63%
Metals and miningPharmaceuticalsManufacturing
Many are seeking to reduce long-term
debt; most will rely on bank lending
Bank borrowing appetite highest in:
Finance: focus on banking relationships, internal strength
64%66% 61%
29%
Selecting as greatest financial risk
Concern over financial risks growing...
Risk: dangers discounted
2014:
35%
2014:
30%
2013:
22%
No opinion/disagree
Negative impact
expected
Agree
Positive impact or
no impact
The end of quantitative
easing in the US will cause
major problems in Asia
59% 41%
Currency volatility Liquidity
13% 87%
…but a minority are worried about
US “tapering” and political change
Political changes:
an opportunity rather
than a risk?
2013:
16%

Confidence in the region abounds
More than three-quarters of Asia’s finance chiefs (76%) expect
revenues to grow this year, up from 72% in 2013. This figure
far outpaces expectations for sales growth in the US 2014 CFO
Outlook (54%) and is an endorsement of resounding confidence
in the region’s business prospects, despite an abundance of
macroeconomic and market risks.
“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.”
Robert van der Zalm, CFO, Noble Group
Optimism is tempered by margin pressures
The proportion of CFOs in Asia that expects profits to grow
is also very high, yet has fallen to 60% from last year’s 65%.
The “value gap” between those who expect revenues to rise
and those who expect profits to rise is 16 percentage points,
up from 7 last year—suggesting that 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.”
Chris Young, Chief Financial Advisor, Philippines Long
Distance Telephone Co
CFOs are looking to technology and
efficiencies to raise profitability
Pressure on margins is driving Asia’s CFOs to focus on raising
profitability through core disciplines like operational efficiencies
(picked by 45%) and better working capital management (41%).
But a greater proportion, 51%, say they will seek to build
profitability through the use of technology and automation,
such as customer relationship management programmes, better
management and supervision of supply chains and forecasting.
Financial risks are the top concern, while a
minority are worried about US tapering
36% of Asia-based CFOs say financial market risk is their single
greatest concern in 2014, compared to 22% in 2013. A minority
(41%) agree that the end of quantitative easing in the US will
lead to major problems in Asia. Many CFOs interviewed for this
report feel that markets have discounted the effect of tapering.
“[Tapering] will offer some respite for the inflow
of liquidity into Asia and may be a good thing for
Asian countries with strong fundamentals.”
Chng Sok Hui, CFO, DBS
Currency volatility and liquidity are driving
financial concerns
Among financial risks, currency volatility is seen as the most
serious (picked by 35%, up from 22% in 2013) while liquidity
is in second place (30%, up from 16%).
Political change is seen as an opportunity
rather than a risk
Just 13% of CFOs are worried that political change in their
home countries this year will have a negative impact on their
business; 38% across Asia expect a positive impact. Political
risk is shrugged off in Thailand (where just 10% are worried),
while majorities in Indonesia (57%) and India (53%) are
optimistic about the impact of elections this year.
“Political parties across the spectrum have
supported the growth of IT and IT-enabled services
industries, and we expect this to continue in the
future as well.”
Abraham Mathews, CFO, Infosys BPO
Key learnings from the 2014 survey
Organic growth preferred, but Southeast
Asia is top M&A target
Organic growth is the number-one way CFOs intend to use
surplus cash, while just 24% will spend it on M&A. Some 62%
of CFOs say that they do not have M&A plans in 2014, around
the same proportion as in 2013. Of those that do, the most
popular market is Southeast Asia—ranked first in 2014 from
second last year.
“[In Southeast Asia] there are interesting
investment opportunities, but asset values are still
high. Some companies have been taking on a lot of
leverage. Some will have to deleverage, and assets
that are not on the market at the moment, will be,
reasonably, given time.”
David Nicol, CFO, Metro Pacific Investments
M&A: China and the West fall from grace
Just 15% of CFOs in Asia with M&A plans this year pick Greater
China as a target market, with its ranking falling from first in
2013 to fifth. Western markets are also out of favour, with just
6% focusing on Western Europe for deals this year and 4% on
North America.
“[In China] you can still make good money,
but not quick money.”
Frank Lai, CFO, China Resources Enterprises
Multinationals have a value edge
A substantially higher proportion of multinational CFOs
(66%) say they expect profits to grow in 2014, compared
to CFOs from local companies (54%). This is despite similar
expectations for revenue growth in each group—suggesting
local companies will face even tighter margin pressure this year.
“For eight years, our ambition has been to grow in
the region. We have invested and expanded. This
region should be growing for another 20 years.”
Chaovalit Ekabut, CFO, Siam Cement Group (SCG)
Many seek to reduce long-term debt;
most will rely on bank lending
Some 41% of CFOs say their companies are likely to adjust their
capital structure to decrease the weighting of long-term debt.
In terms of the type of financing, bank loans are the stand-out
preference, picked by 57%. For many, internal funding sources
are greatly preferred to any other means of finance. Meanwhile,
around a third of CFOs (31%) expect capital costs to rise. Just
35% plan to raise capex, down from 46% in 2013.
“We’re uniquely advantaged compared to
businesses that require capital to sustain growth.
We believe it will become increasingly harder to
access capital and at a higher cost.”
Huiping Yan, CFO, Home Inns

Part 1
The big picture: Regional overview and trends
CFOs are confident that revenues will grow, but earnings might not follow suit.
There is optimism about economic growth across the region—particularly
among manufacturers.
A mandate to grow, but margin pressures are building
Chief Financial Officers in Asia are embracing a growth agenda. Some 76% of the
639 CFOs and finance leaders that responded to this year’s survey say that they
expect their revenues to grow, up from 72% last year (Figure 1.1). That figure shows
Asia’s finance leaders are far more optimistic than their counterparts in the US, just
54% of whom expect top-line growth this year (according to the US edition of this
survey, published in March).
Figure 1.1: Good to grow
Do you expect your company’s revenues/profits to grow, contract or stay the same year-on-year?
% respondents expecting growth in revenues; change year-on-year in percentage points.
2013 Change Y-O-Y2014

Figure 1.2: A profitable year?
Do you expect your company’s revenues/profits to grow, contract or stay the
same year-on-year?
% respondents expecting growth in profits;
change year-on-year in percentage points
All the CFOs in Asia interviewed for this report have strong
confidence in the region’s growth prospects, though most use
the measured tones appropriate for the CFO’s role as custodian
of the balance sheet and monitor of risk. Frank Lai, CFO of
China Resources Enterprises, puts it this way: “You can still
make good money, but not quick money.”
In fact, robust growth prospects pose a challenge for
companies in their quest for value. The proportion of CFOs
that expect profits to grow declined to 60% in the 2014
CFO Outlook Asia survey, from last year’s 65% (Figure 1.2),
suggesting that even as revenue expectations soar, it is
getting tougher to grow profits.
Strong growth markets tend to be hobbled by the search for
profits, as companies pour more into the cost of sales to gain
market share, adjust pricing amid higher competition, and face
higher costs.
Causes vary according to sector and market, but margin
pressure is a commonality. In 2014, for example, 84% of
respondents in Japan expect revenues to grow, while 57%
expect profits to grow, a difference of 27 percentage points.
That gap has expanded substantially from last year, when it was
only seven percentage points. The difference in South Korea
between revenue and profit expectations amounts to
36 percentage points this year; last year it was only four points.
In China, the difference this year is 19 points, up from 13 points
in 2013 (Figure 1.3).
The trend is not universal, though. In Thailand, the difference
in 2014 is 13 points, tighter than the 17 points recorded in the
2013 survey. Meanwhile, this year Singapore and Malaysia are
the only two countries with a negative margin gap—that is,
where more CFOs expect profits to rise than expect revenues
to rise.
Figure 1.3: The margin gap
Difference between proportion expecting revenue and profit growth in percentage points
Optimism about growth across the region
Despite the pressure on margins—and taking into account the diversity of economic
cause and effect in each market and sector across Asia’s enormous geographical
spread—buoyancy about the Asian growth story is undeniable.
Expectations that revenues will grow are highest in Japan and Thailand, both at 84%,
and South Korea, at 82%. Optimism about Japan has been one of the most notable
trends in Asia in recent months, given excitement about “Abenomics”—the economic
policy pursued by the prime minister, Shinzo Abe, who took office in December 2012.
CFOs there appear confident that top-line growth will continue.
When it comes to the bottom line, though, in general more CFOs in Southeast and
South Asia than in other subregions expect growth this year. Some 71% of CFOs in
Thailand expect profits to grow, while in India, the figure is 72% (see box). Both are
well above the median of 60% for all CFOs polled in Asia. By contrast, the number
of CFOs that expect profits to grow is below that average in Japan and South Korea,
where the results are 57% and 46%, respectively.
20132014

India: Hope for a year of change?
What explains the relatively bullish outlook for India? Some
72% of survey respondents—or a larger proportion of CFOs
and finance leaders than in any other country—expect profits
to grow this year. This is despite a turbulent year in 2013,
when exasperation with the slow pace of reform and the
country’s susceptibility to capital flight were both exposed.
With a general election underway and more solid economic
data coming in confidence has returned, but problems remain.
Despite these obstacles, CFOs in the country are sure of their
companies’ ability to produce profits.
“In India, change is driven through wide consensus, and since
getting consensus across the spectrum is not easy, change is
slow. This is reflected in infrastructure growth as well,” says
Abraham Mathews, CFO of Bangalore-based business process
outsourcing giant Infosys BPO.
Yet, he says, “The outlook for growth continues to improve,
though at different rates in different industries.”
Mr Mathews is sanguine about political change in India this
year. “Political parties across the spectrum have supported the
growth of IT and IT-enabled services industries, and we expect
this to continue in the future as well.”
Like Mr Mathews, Indian CFOs are putting stock in their
companies’ ability to build value in textbook ways, preferring
this over mergers and acquisitions or buying market share by
slashing prices. Some 58% of India’s CFOs say that they
will utilise surplus cash for organic expansion (the highest
proportion among all the other countries surveyed, bar 60% in
Indonesia). Forty-eight percent of CFOs in India say they will
invest cash to grow revenues.
“In India, change is driven through wide
consensus, and since getting consensus
across the spectrum is not easy, change
is slow. This is reflected in infrastructure
growth as well,”
In comparison, only 22% of India-based CFOs say they will
use excess cash for acquisitions. A conservative approach
to managing financial operations also seems a factor. A
high proportion of CFOs in India say they intend to improve
profitability through better working-capital management (59%),
technological advances and automation (62%), and operational
efficiencies (68%). Infosys is an exemplar of this conservative
approach: it has no long-term debt, Mr Mathews says, and
prefers to finance growth by tapping its cash buffer.
How does a company grow without turning to the debt capital
markets? By culture, organisation and process. Improving
performance in all these areas falls directly under the
CFO’s remit. “It means doing the right things to ensure growth,
despite obstacles that persist in markets. That can only be done
with discipline,” says Mr Mathews. It seems the mantra for all
CFOs in this year’s survey.
Manufacturing to stay profitable;
less so mining
The generally optimistic outlook across Asia is reflected in
key industry sectors, to varying degrees. Expectations that
revenues will grow are highest in manufacturing (83%),
metals and mining (81%), and pharmaceuticals (75%). In
manufacturing, expectations that profits would grow are
strong, at 69%. In pharmaceuticals, they are just at the
median of 60%. But the metals and mining sector is the least
optimistic: just 50% see higher profits this year than last year
(Figure 1.4).
The strong result in the manufacturing sector is not hard to
explain. Broadly speaking, manufacturing has undergone quiet
but substantial change in the region. The region’s development
has favoured diversification of markets and encouraged the
discovery of lower-cost centres of production. Ten years
ago, China was commonly called the “factory of the world”.
It still holds that mantle, but import demand from many of
China’s key customers has declined over time, and support for
manufacturing for export is no longer a cornerstone of China’s
economic policy.
Because of rising costs in China, supply chains have shifted
throughout Southeast Asia. Political differences between
Japan and China—as well as rising China costs—have provided
an incentive for Japanese manufacturers to extend supply
chains throughout Asia, such as Japanese car manufacturers’
investment to expand facilities in Thailand over the past
decade. Trade pacts have reduced tariffs. Meanwhile, private
consumption growth is accelerating all over Asia as new
markets blossom. The World Bank projects private consumption
to grow in East Asia and the Pacific by 7.7% in 2014, up from
7.3% in 2013.¹
In the metals and mining sector, the situation is fundamentally
different. The world’s miners of benchmark commodities, such
as iron ore, thermal coal and coking coal, project long-term
price drops in all three materials. Moreover, mining majors
in Australia (and their counterparts like Vale in Brazil) have
invested billions in expanding capacity over the past five years.
As a result, each is ramping up supply. They will have to sell
more—and at today’s lower prices—to sustain the same level
of profits.
Figure 1.4: Great expectations
Do you expect your company’s revenues/profits to grow,
contract or stay the same year-on-year?
% respondents expecting growth, 2014
¹World Bank, Global Economic Prospects—East Asia and the Pacific, 2014.
Available at http://www.worldbank.org/en/publication/global-economic-
prospects/regional-outlooks/eap
ProfitsRevenues

Confidence in scale: Asia’s bullish
multinationals
Geographical diversification, it turns out, inspires confidence.
A higher proportion of CFOs from multinationals (66%) than
those from local companies (54%) say they expect profits to
grow in 2014. Moreover, CFOs at multinational companies
(MNCs) express that confidence despite similar expectations for
revenue growth (78% vs 74%).
This confidence is born from scale. Many multinationals have
the ability to diversify against higher operating costs by moving
some services to lower-cost markets—as, in one example,
many manufacturers have moved operations to Vietnam or
Bangladesh. Moreover, multinationals with a global presence
have a natural hedge across a variety of currency exposures,
allowing them to manage risk more effectively than in a single-
currency environment.
This confidence is also reflected in findings on capital
expenditure expectations. Some 41% of CFOs at MNCs in
Asia expect capex growth, versus 30% of those at local
companies. A greater number of MNC CFOs (51%) also plan to
improve profitability through operational efficiencies over their
local counterparts (40%), suggesting a confidence that best
internal practices can be applied effectively across different
geographies.
Moreover, multinationals with a global
presence have a natural hedge across a
variety of currency exposures, allowing
them to manage risk more effectively
than in a single-currency environment.
Meanwhile, financial market risk is named as the single most
important concern for 2014 by 32% of MNC CFOs, versus
40% of local finance chiefs, suggesting that hedging options
for MNCs via treasury centres and global bank relationships
somewhat mitigate this concern.
The bullish view of MNCs in Asia is reflected in their M&A
plans, as well. More MNC CFOs (31%) say that their company
plans to use surplus cash for acquisitions than those from local
companies (18%), About the same proportion (32%) of MNC
CFOs indicate that M&A is one reason for plans to alter their
capital structure this year. Likewise, 8% of MNC CFOs indicate
that their companies plan major transformational deals in 2014;
a small figure, but far larger than the 1% of local company CFOs
that have similar plans.
The Philippine Long Distance Telephone Co (PLDT) is what
analysts call a national play: it is a benchmark stock in the
Philippines and a business that touches the lives of millions of
users, serving as a symbol of the nation’s economic wellbeing.
It is the largest and most diversified telecommunications
company in the Philippines. It has three major business
segments—wireless, fixed and others—and operates an
extensive fibre-optic network as well as wireless, fixed line,
broadband and satellite networks.
“What we have in common with Singtel,
with telcos in Korea, with NTT in Japan
is that we are all adjusting the business
models to become more efficient,
coming up with ways to mitigate the
impact on our margins.”
PLDT’s principal shareholder is Hong Kong-based First Pacific,
led by Philippines investor Manuel V Pangilinan. First Pacific
began its investment with a 17.5% stake in PLDT worth
US$745m in 1998. A year later, PLDT forged a strategic
partnership with Japan’s NTT Communications Corp, a
subsidiary of Nippon Telephone and Telegraph Corp, and also
bought a Philippines mobile phone service provider, Smart
Communications.
First Pacific fortified its interest in PLDT by appointing
Chris Young to turn around the company’s financial position,
which had faltered in the 1990s, leading to continued losses,
especially in the wake of the Asian financial crisis of 1997.
Mr Young, a long-time employee with experience overseeing
finance in other First Pacific investments, joined the company
in 1998 just as it bought Smart, a move that supported PLDT’s
bottom line amid declining revenues from fixed-line services.
Today, the variables have changed and PLDT is experiencing
declining revenue growth in its mobile businesses, looking
instead to its data businesses as a new staple for value. But
there are challenges.
“In the telco sector, sadly, there’s margin pressure,” says Mr
Young. “We are going through a significant change,
Case Study
PLDT: Innovation to combat margin pressure
Chris Young, Chief Financial Advisor, PLDT
moving away from the business of voice and SMS towards
one where data use is growing rapidly for the corporate and
the consumer. It’s a shift in revenue mix causing some margin
pressure across Asia—and the world.
“The cost for us to provide data for customers is higher: the
margins are a bit lower than for traditional voice. The difference
is that people tend to spend more on data.”
“What we have in common with Singtel, with telcos in Korea,
with NTT in Japan is that we are all adjusting the business
models to become more efficient, coming up with ways to
mitigate the impact on our margins.”
“Fortunately, our market is growing. We’re the largest provider
to the largest corporations here. And large corporations
are growing, due to the success of the business process
outsourcing industry in the Philippines, and an expansion of
bank communication facilities.”
But PLDT can’t rely on that growth alone, Mr Young says.
“The shift in revenue mix demands a new business model,
and telcos have never been strong on innovation,” he says.
PLDT’s solution: spending more on research and development,
innovation centres, and hiring employees with backgrounds
outside the traditional telecommunications career track.
“To succeed,” says Mr Young, “we’ve got to understand what’s
going out there, how people’s ideas and habits are changing.
And we have to be part of that innovation.”

Part 2
Risk: High, but manageable
Across the region currency volatility and concerns over China’s slowing economy stand
out as primary worries. US “tapering” and political risk aren’t seen as major concerns.
Slowing economies pose problems:
23%worried about slowing
growth in
home markets
33%worried about slowing
growth in
overseas markets
Most worried
40%
Malaysia
37%
Taiwan
35%
India
Thailand
India
Indonesia
35% 30%
20%
15%
Currency
volatility
Liquidity risk Interest rate
movements
Counterparty
risk
13%14%
16%
22%
Politically optimistic, even in:
Negative
impact
Positive
impact
10% 39%
14%
13%
53%
57%
Volatility in financial markets driving focus
on hedging currencies:
48% hedging recognised FX assets and FX liabilities
41% hedging expected FX exposures
28% hedging net investment FX exposures
23% hedging interest rate exposures
20% hedging commodity exposures
Just 3% are not hedging any risks
Yen and US dollar: greatest exposures,
most hedged:
21%have
significant
exposure
in yen
20%hedge against
adverse
movements
in yen
24%have significant
exposure to US$
23%hedge against
adverse movements
in US$
¥ ¥ $ $
RISK
Concern over financial risks growing...
2014
2013
No opinion/disagree
Negative impact
expected
Agree
Positive impact or
no impact
The end of quantitative
easing in the US will cause
major problems in Asia
59% 41%
Political changes:
an opportunity rather
than a risk?
13% 87%
…but a minority are worried about
US “tapering” and political change

Financial worries rising but “tapering”
already factored in
CFOs in Asia see financial market volatility as the key risk to
their business, reflecting the currency shifts that began in
2013 with Abenomics and the gradual reduction of quantitative
easing by the United States Federal Reserve. The impact
of these events still reverberates throughout Asia and adds
volatility to currency, equity and fixed-income markets.
However, most CFOs see risks associated with the so-called
“tapering” of Fed asset purchases as discounted in the
region’s markets. Only a minority (41%) agree that the end
of quantitative easing in the US will lead to major problems
in Asia, while 59% have no opinion or disagree. Moreover, all
the CFOs interviewed for this report feel that markets have
factored tapering in.
“Tapering has to come, because it reflects expectations of
recovery of the US economy,” says the CFO of Singapore’s
DBS bank, Chng Sok Hui. “Our view is that the US will pace
quantitative easing a bit more.” For Asian central banks,
Ms Chng says, continued tapering will call for “good policy
coordination”. In general, however, she believes that the
tapering “will offer some respite for the inflow of liquidity into
Asia and may be a good thing for Asian countries with strong
fundamentals.”
One effect of tapering, Ms Chng adds, is that local customers
“seem to think a rise in borrowing costs is imminent, and they
are trying to lock in their funding costs.”
In Shanghai, Lawrence Lau, Asia CFO of US manufacturing firm
Owens Corning, says, “I don’t worry about Fed tapering at night.
I’m much more concerned about the uncertainties in China as
various structural reforms take place. As a CFO my concern is
how that translates to impacts on fundamental operational and
financial performance of the company in the mid to long term.”
And in Thailand, “we keep an eye on it, but we’re not overly
worried,” says Krailuck Asawachatroj, CFO of Thai energy,
transport and fertiliser conglomerate Thoresen Thai Agencies.
Figure 2.1: Financial risks dominate
Which broad category of risk is your greatest concern for the year ahead?
% respondents
Figure 2.2: More worried than before
Which subcategory of financial risk is your greatest concern for
the year ahead?
% respondents, all countries
These responses reflect an underlying view across the survey
that all categories of risk—from operations to regulation to
financial markets—can be mitigated, understood and factored
into the daily drive for opportunity.
Notwithstanding the confident attitude towards the impact of
tapering, survey respondents display a heightened awareness
of financial market risk. Some 36% of Asia-based CFOs say
that it is their single greatest concern in 2014, compared to
22% in 2013 (Figures 2.1 and 2.2). The highest percentage
of CFOs showing this concern is in South Korea, where 47%
name financial market risk as the greatest threat facing their
companies, followed by Japan (43%) and Taiwan (40%).
Currency volatility a key risk
Looking deeper into the components that contribute to
financial risk, currency volatility is the major concern among
CFOs in many countries, for reasons as distinct as these
varied markets. Some 70% of respondents in Indonesia regard
currency volatility as a primary concern (Figure 2.3). 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.
Back then, Indonesian companies with a high component of
US dollar debt encountered greater and greater difficulties
servicing that debt. In 2013, the currency posted its biggest
annual decline against the US dollar since 2000, a fall
exacerbated by Indonesia’s yawning current account deficit.
Wider-than-usual swings in recent years in Singapore’s
currency explain the 55% of CFOs in that country naming
currency volatility as their primary concern. The Singapore
dollar strengthened against the US dollar for several years
after the global financial crisis, with a negative impact on
some Singapore businesses. Because of Singapore’s status as
international centre for businesses in which receivables are
typically in US dollars (from shipbuilding to fuel oil), companies
with payables in Singapore dollars felt the pinch. While tapering
has weakened the currency against the US dollar, easing this
vexing situation, wariness of sharp turns in currency markets
remains heightened.
In contrast, fewer CFOs in South Korea (22%) and Hong Kong
(25%) see currency volatility as a primary risk. The South
Korean response reflects local confidence in the fundamentals
underlying the nation’s economy—a hefty current account
surplus, small budget deficit and substantial foreign-exchange
reserves. Hong Kong’s dollar is pegged to the US dollar, so is
underexposed to major fluctuations.
Figure 2.3: Currency worries
Currency volatility is the greatest financial concern for the year ahead
% respondents.
20132014
Operational risk
Macroeconomic risk
(eg, slowing GDP growth)
Regulatory/compliance risk
Financial market risk
(eg, currency volatility)

Hedging in a more volatile world
The focus on currency volatility has shaped CFOs’ hedging
preferences. Twenty-four percent of Asia’s CFOs say they have
significant exposure to the US dollar, while an almost equal
amount (23%) hedge against adverse movements in the dollar
(Figure 2.4).
The strengthening of the US dollar comes as no surprise to
CFOs as the Federal Reserve winds down its asset-buying
programme, but volatility is expected in dollar markets
throughout the year. Projected US growth and improving
fundamentals are encouraging a relative “flight to quality” back
to US markets, but uncertainty exists over the Fed’s stance on
interest rate policy.
Likewise, 21% of CFOs say that they have significant exposure
to the Japanese yen, while 20% say they are hedged against
adverse movements in the yen. The yen is regarded as among
the most risk-sensitive of currencies this year, as indications
arise that the government’s fiscal stimulus and monetary
easing policy may be losing momentum.
There is considerable uncertainty about a hike in April of
Japan’s consumption tax, which may take the wind out of
Abenomics’ sails.
Other factors have added volatility to Asian currencies,
shaping CFOs’ points of view. Even some of those countries
with closely managed exchange rates have surprised markets:
China’s authorities, for example, engineered a sudden and
sharp decline in the value of the renminbi against the US dollar
in late February, followed by a sharp rise in early March.
Reflecting concerns about currencies, about half of the CFOs
in the survey (47%) acknowledge that they are hedging
against recognised FX assets and FX liabilities, while 41% are
hedging against expected FX exposures and 28% are hedging
net investment FX exposures (Figure 2.5). In contrast, less
emphasis is being placed on hedging against exposure to
interest rate risk (23%) and commodity price volatility (19%).
Figure 2.4: Feeling exposed
What are your main foreign currency exposures and are you hedged against
adverse movements in them?
Figure 2.5: Hedge trimming
What types of risks are you currently hedging?
Liquidity a rising concern
Concerns about liquidity are highest in South Korea, where 49%
of CFOs cite this as the single greatest financial risk facing their
companies (Figure 2.6). The result from South Korea reflects
the high level of leverage in major conglomerates in the nation,
some of which have gearing ratios of 200% or above. Liquidity
concerns at large companies have been flagged by the nation’s
central bank.
Liquidity concerns are also significant in China, cited by 40%
of CFOs based there. A spike of interbank lending rates in
December—followed by an earlier similar spike in June 2013—
exposed banks’ own concerns about asset quality throughout
the banking system. The concerns are partly based on banks’
exposure to the so-called shadow banking market, in which
wealth management products have been marketed by trust
companies through commercial banks. The instruments have
proliferated, and uncertainty still exists over their credit quality,
the extent that businesses have relied on these off-balance
sheet debt instruments for funding, and the degree of exposure
to investors.
“Stability in China’s banking system is an ongoing risk that
we monitor,” says Frank Lai, the CFO of China Resources
Enterprises, a major state-owned conglomerate that is listed
in Hong Kong.
Figure 2.6: Needing a drink?
% respondents ranking liquidity as greatest financial concern for the year ahead
Hedged?Significant exposure?

Figure 2.7: Keeping an eye on the markets
Which category of risk is your greatest concern for the year ahead?
% respondents
Meanwhile, some 43% of Taiwan’s CFOs cite liquidity risk as
a concern, a result reflecting the degree to which Taiwanese
businesses rely on operations and sales in China.
Breaking the survey results down by industry shows, perhaps
unsurprisingly, that concern over financial market risk is highest
among banking-sector CFOs, cited by 46% as the greatest
financial risk they will face this year (Figure 2.7). Banks’ chief
concern is the credit quality of their clients—and the value of
on-balance-sheet instruments in their own portfolios. Concern
over currency volatility is highest among manufacturing
company CFOs, cited by 42%, but here it reflects the upset to
costs that currency fluctuations can cause for manufacturers
with receivables in weakening currencies across Asia’s markets.
Political change an opportunity rather
than a risk
To a surprising degree CFOs in Asia see political change in 2014
less as a risk than an opportunity. Several major political shifts
are afoot in the region, starting with the national elections in
India this year. Indonesia faces a change of president. China’s
government, meanwhile, is only a year into the term of the fifth
generation of Communist Party leaders. The Bo Xilai scandal
that culminated in a showcase trial in 2013 was the precursor
of a thorough and on-going anti-corruption campaign,
embroiling foreign and local companies alike.
Nonetheless, across the region just 13% are worried that
political change in their home countries will have a negative
impact on their business this year; 38% expect a positive
impact. Political risk is shrugged off in Thailand (where just
10% are worried), while majorities in Indonesia (57%) and India
(53%) are optimistic about the impact of this year’s elections.
In China some 89% of CFOs feel that political change will either
have no impact (61%), slight positive impact (27%), or major
positive impact (1%) on their businesses this year (Figure 2.8).
Figure 2.8: Political risk in Asia—no big deal
How significant an impact on your business will political changes in
your country of residence have in 2014?
% respondents
The results in India reflect generally positive business opinion about this year’s
national election—with Narendra Modi, the front-runner to become prime minister,
lauded for the economic achievements seen in Gujarat during his tenure as chief
minister of the state.
Optimism also surrounds the candidacy in Indonesia’s presidential election of Jakarta’s
popular governor, Joko Widodo. Thailand, meanwhile, is amid a fractious challenge to
the nation’s government that has been disrupting daily life in Bangkok for months. In
that country a full 90% believe that political change will have either no impact (52%),
a slight positive impact (19%) or a major positive impact (19%) on their business
this year.
Slight positive impact No impact
Major negative impact
Major positive impact
Slight negative impact
Operational risk
Macroeconomic risk
(eg, slowing GDP growth)
Regulatory/compliance risk
Financial market risk
(eg, currency volatility)

Figure 2.9: Other things to worry about
% respondents picking political unrest as primary operational/enterprise risk
“The growth rates throughout Asia are still strong, despite
some slowing, and have been for some time. This tends to take
precedence over concerns about local market political risk,”
says Robert van der Zalm, CFO of Noble Group, a Hong Kong
supply-chain solutions company. “Remember that 7% growth
in China now probably equates to 14% growth 10 years ago.
That’s massive.”
Responses assessing risk from political change reflect
conditions specific to each country—and those countries
in which businesses are heavily invested. Of any CFOs in
Asia, those in Japan and India are most likely to cite political
unrest as their foremost operational risk, cited by 36% and
32% respectively (compared to an average of 26% across the
region—Figure 2.9). In Japan, this is likely to reflect the high
level of direct investment Japanese multinationals have in
politically volatile countries like Thailand and concerns over the
potential disruption of supply chains there. In India, meanwhile,
despite the general optimism a good deal of uncertainty still
surrounds the forthcoming election.
Perhaps most surprisingly just 20% of CFOs in Thailand believe
political unrest is a primary operating risk. The relatively
tranquil result from Thailand (only the Australia and Taiwan
responses were lower, at 12% and 17% respectively) comes in
the face of declining GDP growth in 2013 largely due to civil
unrest. For the full year, GDP growth stood at 2.9%, according
to the state planning agency. Growth in the final quarter of
the year slowed to just 0.6% compared to the previous three
months as anti-government protests intensified. In contrast,
GDP growth in Thailand for all of 2012 stood at 6.2%, despite
continued recovery from devastating floods in late 2011.
Many multinationals in Thailand are sanguine about the
domestic political environment, for the time being at least.
“We have a natural hedge against disruptions in Thailand
because much of our business is overseas,” explains Krailuck
Asawachatroj of Thoresen Thai Agencies. “Since two of our
major businesses are in energy and shipping, our receivables
are primarily in US and Singapore dollars. Our exposure in Thai
baht is limited.”
Slowing economies pose problems
Slowing growth in respondents’ home markets is the biggest
macroeconomic concern for CFOs in Malaysia (cited by 40%),
Taiwan (37%) and India (35%—Figure 2.10). Malaysia’s economy
posted 4.7% GDP growth in 2013, down from 5.6% in 2012.
The economy is predicted by the Organisation of Economic
Cooperation and Development (OECD) to average 5.1% growth
between 2014-2018. This is a robust figure compared to many
emerging economies, but the slowing rate of growth reflects
a need to improve productivity as the economy expands. In
common with Thailand and other nations in the Association
of Southeast Asian Nations, the OECD says, Malaysia faces a
“middle income trap” in which structural reforms are needed to
accomplish a shift from growth based on investment to growth
based on productivity.
India’s Central Statistics Office, meanwhile, projected that
the nation’s growth would hit a decade low of 4.5% for the
fiscal year 2012-2013 ending in March, attributed partly to
slowdowns in the construction and mining sectors.
The figure for Taiwan comes despite three years of strong
GDP growth, with good prospects emerging as export demand
picks up in US and Europe. But Taiwan’s high reliance on
exports has created awareness among CFOs—and economic
policymakers—of the economy’s vulnerability and a need to
expand domestic markets.
Figure 2.10: Macro risks at home and abroad
% respondents selecting as greatest macroeconomic risk for the year ahead
Slowing growth in home marketSlowing growth in overseas markets

Figure 2.12: Not so bad after all
How significant an impact on your business will stricter regulation of financial
instruments have in 2014?
% respondents
Surprise, surprise: bankers
welcome tighter regulation
At first glance, one of the more curious results from this
year’s CFO survey springs from the assessment by financial
services CFOs of the impact of stricter regulation of financial
instruments (referring to such measures as the 2010 US
Dodd Frank Wall Street Reform and Consumer Protection Act
and the Basel III capital adequacy rules that began coming
into force in January 2013). A significant majority of financial
services CFOs (65%) say that stricter regulation will have a
positive impact on their businesses, while 25% believe it will
have no impact (Figure 2.12).
Perhaps the result isn’t so surprising, though. Many financial
services CFOs in the region regard compliance as a necessity
and a basic good that will provide uniform transparency and
help stabilise markets. This view may be more prevalent in
Asia than in other regions, in part due to precautionary rules
already in place in some jurisdictions. For example, Chng
Sok Hui, CFO of DBS in Singapore, notes that conforming
to higher standards of compliance is simply a corollary of
being a Singapore-based institution, as the nation’s monetary
authority has a higher requirement of capital adequacy than
the Basel III rules seek to impose.
Another banking-sector CFO interviewed for this report
suggests an alternate angle for the positive response:
as US banks grapple with the structures of the complex
Dodd-Frank law, local banks in Asia may be proving more
nimble in meeting some customers’ needs. Moreover,
disclosure requirements in new regulations make pricing more
transparent, allowing customers to assess the position of local
banks versus global banks, sometimes to the advantage of
the former.
Figure 2.11: Industry concerns
% respondents selecting as greatest macroeconomic risk for the year ahead
Meanwhile, more CFOs in China are concerned over slowing
growth overseas (47%) than their compatriots in other
countries. Similarly, both Hong Kong and Singapore CFOs
(each 42%) see slowing growth in overseas markets as a main
concern. These figures suggest that a reliance on exports,
long a staple of the Asian growth story, is still very much an
economic driver in the region.
Looking at industry sectors, a higher proportion of CFOs
in banking (39%) think that slowing growth in their home
market is a primary risk than their colleagues in other sectors
(Figure 2.11). Doubtless this reaction links to sensitivity in the
banking sector about the effect slower growth will have on the
credit quality of domestic corporate and retail clients. CFOs
among real estate companies, meanwhile, are by far the most
concerned over slowing growth overseas (which is cited by 48%
as the primary macroeconomic risk, compared to an average for
the whole sample of 33%) reflecting the industry’s reliance on
foreign investment.
Slowing growth in home marketSlowing growth in overseas markets
Slight positive impact No impact
Major negative impact
Major positive impact
Slight negative impact

The question of whether finance acumen needs to be imported
or can be learned at the coalface of Asian markets prompts
predictable answers. Most CFOs in the region think that while
Western schooling and business experience is helpful, it is
not mandatory. Many companies are taking matters into their
own hands by developing their own talent pool, or as the chief
executive of Singapore’s DBS bank, Piyush Gupta, has put it,
“growing our own timber”.
There is perhaps no better example of this ethos than Chng Sok
Hui, who became CFO of DBS in 2008 and has been a career
banker at the financial institution. Ms Chng joined DBS in 1983
and held many positions there, including group head of risk
management, prior to her appointment as CFO. Among many
other public-service positions Ms Chng also previously served
as vice chairman of the risk management committee of the
Association of Banks of Singapore. Not incidentally, she was
awarded a DBS scholarship.
The cross-fertilisation of risk and finance expertise has given
Ms Chng an opportunity to establish a strategic corporate
treasury function anchored on a stewardship model, as well as a
performance-management system that plays out through every
aspect of the bank’s business.
“The key question is how do you get
the recorded revenue attributed to the
people who have the global or local
relationship with the customer?”
“As the CFO, I have leveraged the corporate treasury function
to entrench a strategic capital and balance sheet capability
for DBS. This has fundamentally changed how DBS functions,
bringing into acute focus how scarce corporate resources are
to be holistically managed and allocated in close partnership
with business units through a revamped funds transfer pricing
framework for loans and deposits,” she says.
Ms Chng set up the corporate treasury function at DBS
shortly after she was named CFO. The idea was to centralise
the treasury function to gain what Ms Chng calls a strategic
view of the entire balance sheet, not just day-to-day funding.
Case Study
DBS: Managing resources and performance strategically
Chng Sok Hui, CFO, DBS
Treasury functions were formerly part of the bank’s Treasury
and Markets division. Under the restructuring, they were
placed in DBS’s six key regional markets—from Hong Kong to
India—reporting to the local CFOs and also to the bank’s group
corporate treasurer, who reports to Ms Chng. The structure
allows the bank to use its strong funding capability to support
funding needs across the organisation, and manage the balance
sheet as a whole.
As CFO, Ms Chng was also instrumental in setting up a metrics-
driven system of accountability through every country, product
group and customer segment. “Finance has stewardship of this
score card,” she says, “which ultimately determines how we
conduct our business reviews, setting objectives quite specific
to business lines, product groups and countries.”
Building a system of revenue attribution to promote internal
collaboration and connectivity has been another key initiative
spearheaded and supported by the finance function, with the
goal of aligning the bank’s business units as one team and one
face to the customer.
“The key question is how do you get the recorded revenue
attributed to the people who have the global or local
relationship with the customer?” says Ms Chng. DBS has
developed a management information system with a capability
to establish that link. The technology infrastructure “supports
the measure not just of returns, but also risk at the granular
level, to form a view that the revenue we make for a given
amount of risk is an appropriate rate of return.”
Finance under Ms Chng is also the steward of a strategic cost-
management programme, with the goal to “do it better, do
it smarter”. In 2013, Ms Chng says, the programme delivered
savings exceeding 4% of the cost base.
Part 3
Growth: Going organic
CFOs across Asia show a distinct preference for organic growth as new markets open
and customers become more sophisticated. Margin pressures are driving a focus on core
disciplines—as well as technology—to grow profits

Figure 3.2: Cash to buy
% respondents who plan to use surplus cash for acquisitions in 2014
Confidence to grow but concerns
about costs
Across Asia, CFOs pick organic growth as their preferred
method of expansion for 2014. When asked how they intend
to deploy excess cash, 48% choose organic growth this year
(Figure 3.1). In contrast, only 24% say they will use excess
cash in mergers and acquisitions (Figure 3.2. M&A trends
are examined in Part 4). Indeed, “organic expansion” remains
the top priority for usage of surplus cash in every country
and region surveyed, with the exception of Taiwan (where
companies are marginally more likely to prioritise increasing
cash reserves). This is a far more uniform response than in 2013
(Figure 3.3).
“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—and we’re
making the most of them.”
By nation, CFOs in Indonesia, where consumer markets are
rapidly developing, are most likely to say they will use excess
cash to grow organically (cited by 60%). Using cash to grow
organically is also on the agenda in India (58%), Japan (56%)
and Hong Kong (48%). In each of these places the proportion
of CFOs intending to use cash for M&A is decidedly smaller,
with 10% of Indonesians citing M&A, followed by 22% in India,
25% in Japan and 29% in Hong Kong. In China, too, where
asset values are high and domestic markets are expanding, the
preference for using cash for organic growth (52%) over M&A
(24%) is pronounced.
The reasons for the focus on organic growth are both positive
and negative. They underscore the broad optimism about Asian
growth this year, but also take into account that many CFOs
(31%) see capital costs are on the rise (Figure 3.4). One reason
may be that many CFOs believe that tapering by the US Federal
Reserve will eventually play out in higher funding costs across
Asia (a key risk examined in Part 2). In an environment with
positive prospects for local-market growth and rising funding
costs, growing organically—increasing output and enhancing
sales—is the obvious option.
Figure 3.1: Cash to grow
% respondents who plan to use surplus cash for organic expansion in 2014
NB: Six options were 1. Acquisitions; 2. Increase cash reserves; 3. Organic expansion; 4. Ours is trapped, so unsure; 5. Return cash to shareholders; 6. Other
Figure 3.3b
Ranking of “acquisitions” among six options:
Figure 3.3a Changing priorities
How will your company use surplus cash in the coming year?
Ranking of “organic expansion” among six options:
Figure 3.4: Costlier capital
Over 2014, the cost of capital will…
“Internationally, we will extend the business,” says Huiping
Yan, CFO of China-based Home Inns, a fast-growing owner
of economy hotels in China. “We’ve started looking in the
Asia-pacific region, such as Indonesia, where current market
conditions are very similar to the Chinese market ten years
ago. There is a demand for a network of economy hotels that
consistently provides quality service to travellers from small
and medium-sized businesses. Taiwan is another market where
we want to be able to serve inbound Chinese visitors as well as
catch the attention of local customers. But remember, we are
not acquiring. We are exporting our branding and know-how,
through a master agreement or a joint venture.”
Country 2014 2013
Australia 1 3
China 1 1
Hong Kong 1 1
India 1 1
Indonesia 1 1
Japan 1 4
Malaysia 1 1
Philippines 1 1
Singapore 1 1
South Korea 1 2
Taiwan 2 2
Thailand 1 1
Total 1 1
Country 2014 2013
Australia 2 1
China 2 3
Hong Kong 3 2
India 4 3
Indonesia 4 4
Japan 2 5
Malaysia 2 2
Philippines 5 3
Singapore 2 3
South Korea 3 3
Taiwan 3 4
Thailand 4 4
Total 3 3
DecreaseIncrease
Stay about the same as previous year

More adventurous, but no easier to grow
The preferred means to grow organically vary. For CFOs in
the region, when asked for what purpose they would consider
financing this year, 28% said they would do so to expand
outside their current country or countries of operation, with the
strongest results coming from Australia (40%), Singapore (39%),
Taiwan (33%) and Japan (33%; Figure 3.5). These markets are
more mature than the faster growing economies of Southeast
Asia, meaning the best options for both organic and M&A-driven
expansion are likely to be elsewhere.
In line with this result a smaller proportion of CFOs in the
Philippines (23%), Indonesia (10%) and Thailand (10%) say they
are seeking finance for expansion outside current markets.
CFOs here aren’t less adventurous, necessarily; they just have
much to do in the markets where they operate currently. When
asked if they are considering financing for expansion inside their
current country or countries of operation, finance leaders in the
Philippines (47%), Indonesia (53%) and Thailand (48%) have a
much more robust response (Figure 3.6).
Figure 3.5: We’ve done all we can here...
% respondents considering financing for expansion outside current country/
countries of operation in 2014
Figure 3.6: Home is where the value is
% respondents considering financing for expansion inside current country/
countries of operation in 2014
In these same countries, the preference for considering
financing for expansion at home compared to last year is
growing. This is now the top priority for financing for CFOs
in the Philippines, moving up from third place last year. In
Thailand it is now in first place, versus second last year. CFOs
in Indonesia consider financing for this purpose their first
preference this year, as they did last year. Making the most of
opportunities for profitability in their own high-growth markets
is the clear priority (Figure 3.7).
Meanwhile, a preference for financing to expand outside
their countries of current operation has become dramatically
stronger in CFOs reporting in Singapore, where it moves to first
place from fourth, and most dramatically in Australia, where it
moved to first from eighth—in precisely those markets where
costs are high and economic growth is expected to be slower.
The result from Australia, where resources companies abound,
could also reflect expansion opportunities in M&A as low
commodity prices have reduced asset values in minerals and
mining operations throughout Asia (examined in Part 4).
None of this means that organic growth is getting easier.
“Markets are changing as they grow,” says Richard Beacher,
group financial controller of First Pacific, a Hong Kong-based
investment company that owns a majority share of Indonesia
food and agriculture giant Indofoods. “There’s an increase of
consumer spending power in Indonesia and across Southeast
Asia. New markets are opening, but competition is heating up
as well. It’s getting a little tougher to sell that pot of noodles or
bag of chips.”
Mr Beacher cites a double-digit rise in the cost of sales in some
product categories, saying that Indofoods has to go the extra
mile to gain new customers and retain existing ones.
“We’re bringing in cows to Indonesia for the first time,” he says.
“People want the real thing, not powdered skimmed milk.”
Figure 3.7a: Financing growth, inside and out
For what purpose are you currently considering financing?
Ranking of “Expansion within country/countries of operation”
among eight options:
NB: Eight options were: 1. Acquisition; 2. Capital expenditure; 3. Expansion within
country/countries of operation; 4. Expansion outside of country/countries of
operation; 5. Recapitalisation; 6. Refinancing; 7. Restructuring; 8. Working capital
Figure 3.7b
Ranking of “Expansion outside current country/ countries of operation”
among eight options:
20132014
20132014

Margin pressure driving focus on core disciplines
In this environment, pressure on margins (see Part 1) is driving CFOs to focus on the
classic disciplines of the job—better working capital management, gaining efficiencies
in operations and harnessing technology to improve performance.
Some 41% of all CFOs in the survey pick better management of working capital as a
means to grow profitability, ranking this third among all the ways in which a company
might expand the bottom line, compared to second last year (Figure 3.8). The figure is
highest in Malaysia (66%), India (60%), Japan (47%) and Indonesia (43%; Figure 3.9).
Cash typically becomes trapped in a company’s value chain during periods of high
growth, as companies invest to gain market share and grow revenues. Inventories
build, the time it takes to collect receivables increases and days working capital—an
accounting term describing how many days it will take a company to convert cash
caught in the system into revenues—balloons.
Figure 3.8: Core disciplines
How will you improve profitability in 2014?
Rank among options listed, all respondents
Rank 2014 2013
1 Technological advances Operational efficiencies
2 Operational efficiencies Improve working capital management
3 Improve working capital management Technological advances
4 Increasing capital expenditure Increasing capital expenditure
5 Headcount reductions Headcount reductions
6 Tax optimisation Tax optimisation
7 On- or off-shoring functions On- or off-shoring functions
Figure 3.9: Working working capital harder
Intend to improve profitability through improving working capital
management in 2014
% respondents
Avoiding a situation in which working capital is growing at a
quicker rate than revenues involves direct supervision by the
CFO and a sharp focus on processes.
“We have a tight focus on using internal resources to grow”
says Suryanarayanan S, director of finance of Ecu-Line, a
logistics company that has operations in 90 countries and has
acquired businesses in Europe and the US.
“We manage our working capital efficiently and plough as much
cash freed from working capital back into the business,” Mr
Suryanarayanan says. “But to ensure that we’re getting optimal
growth from our model, our goal now is to establish a single
system of integrated decision making across markets globally.”
Unifying processes and gaining efficiencies is a common goal
among the CFOs in the survey. The proportion of CFOs saying
they will build profitability through operational efficiencies
grew to 45% in 2014, with the figures highest in India (68%),
Thailand (65%), Singapore (55%) and Australia (52%; Figure
3.10). Overall, operational efficiencies rank second among CFOs
in Asia as a priority for improving profitability—compared to
first last year.
Figure 3.10: Efficiency drive
Intend to improve profitability through operational efficiencies in 2014
% respondents

Figure 3.11: Strength through technology
Intend to improve profitability through technological advances/
automation, such as forecasting, CRM,
supply chain management in 2014
% respondents
A focus on better technology
Under these circumstances, a dramatic rise in demand for
the tools to realise gains from financial and commercial
operations has emerged. Some 51% of CFOs in 2014
say they will seek to build profitability this year through
efficiencies gained through use of technology and
automation, customer relationship management (CRM)
programmes, better management and supervision of supply
chains and forecasting (Figure 3.11). In 2013, although
technology was ranked second place overall in terms of
priorities to improve profitability, it was often subordinate
to simple operational efficiencies (Figure 3.12). CFOs this
year seem more willing to take risks to invest in potentially
money-saving technologies as the economic outlook
brightens.
CFOs in China (67%) in particular are focused on capturing
growth potential through better use of technology and
systems, as are their colleagues in India (62%) and
Taiwan (60%).
Figure 3.12a: Shifting priorities to improve profitability
How will you improve profitability (2014)?
Select strategies only, rank among seven options
CFOs in mature north Asian markets are putting less of an
emphasis on this option, with 32% of CFOs in Japan and 38% in
South Korea indicating plans to grow profitability through use
of technology. In these markets, investments in legacy systems
have already been made and new technology expenditures are
harder to justify—while saturation means many of the easy
gains have already been made.
The push to build profitability through processes and systems
is outpacing one traditional avenue of growth. The proportion
of CFOs in the region who forecast capital expenditure
growing this year (35%) is 11 percentage points lower than the
proportion that said the same in 2013 (46%; Figure 3.13). A
greater proportion (47% this year, compared to 34% last) see
capital expenditures staying the same. This means expenditure
on new technology is likely to be netted out by efficiencies
realised elsewhere. This isn’t an easy job in the region’s faster-
growing markets, with the overriding priority on growing
organically.
“Organic growth remains a real opportunity now in Asia,” says
Mr Beacher of First Pacific, “but only as long as you’re moving
as fast as the market.”.
Figure 3.12b
How will you improve profitability (2013)?
Select strategies only, rank among seven options
NB: Options listed were: 1. Headcount reductions; 2. Improve working capital
management; 3. Increasing capital expenditure; 4. On- or off-shoring functions;
5. Operational efficiencies; 6. Tax optimisation; 7. Technological advances
Figure 3.13: Capex caution
Do you expect your company’s level of capital expenditures to be higher, the
same or lower than last year?
% respondents
2014
2013
Same Lower N/AHigher
Operational efficienciesTechnological advances
Headcount reductionsImprove working capital management
Operational efficienciesTechnological advances
Headcount reductionsImprove working capital management

In telecoms, making the most
of Asian growth
CFOs in Asia’s telecommunications industry (55%) are most
intent on devoting excess cash to organic expansion, followed
by oil and gas (50%), and banking and pharmaceuticals (both
49%; Figure 3.14). With national regulatory barriers in many
Asian markets increasing the difficulty of cross-border M&A
opportunities in the telecommunications industry, making the
most of growth in existing operations becomes the natural
focus. Moreover, a growing demand for data services over voice
and texting services is opening new opportunities to expand
corporate and consumer customer bases (see, for example, the
case study in Part 1).
The response from oil and gas CFOs reflects expected gains on
recent investment in offshore exploration and production in the
region, with many projects expected to come online or increase
output throughout the region this year. In pharmaceuticals,
sales of newer drugs are accelerating as economic growth
elevates more people into the middle class, meaning they can
now afford to spend more on health remedies.
Meanwhile the banking sector, which has expanded rapidly
throughout the region since Asia’s recovery from its currency
crisis 15 years ago, is now seeking to consolidate those gains,
establish niches and win customers through more focused
application of service offerings.
Figure 3.14: Industries growing internally
% respondents who plan to use surplus cash for organic expansion in 2014
In pharmaceuticals, sales of newer drugs
are accelerating as economic growth
elevates more people into the middle
class, meaning they can now afford to
spend more on health remedies.
Figure 3.15: Technology paying off
% respondents intending to improve profitability through technological advances/
automation, such as forecasting, CRM, supply chain management in 2014
Building profitability by automation is on the agenda for
telecommunications companies (60%), manufacturers (58%)
and metals and mining firms (57%; Figure 3.15). Data collection
capabilities in the telecoms sector open up opportunities for
sales gains through customer relationship management tools.
Building efficiencies in manufacturing, particularly as companies
expand in new markets, requires investment and sound use
of new technology, as well as eking efficiencies out of supply
chains. With new capacity coming on line in the coal and iron
ore industries worldwide, just as prices for these commodities
are in decline, the world’s major mining companies are now
relying on investment in tools that will enhance value across
their operations.
Building efficiencies in manufacturing,
particularly as companies expand in new
markets, requires investment and sound
use of new technology, as well as eking
efficiencies out of supply chains.

Some 71% of CFOs from Thailand in the 2014 survey say that
one of their focuses of M&A activity this year will be on the
emerging Southeast Asian economies of Cambodia, Laos,
Myanmar and Vietnam. SCG, with US$13.4bn in annual sales
one of Thailand’s largest industrial conglomerates, has been
exploring the “frontier” markets of these four nations for many
years. In doing so, it is setting the groundwork for expansion
via organic growth or M&A.
“We have business in many parts of the world, but our main
focus is Southeast Asia,” says Chaovalit Ekabut, CFO. “For
eight years, our ambition has been to grow in the region. We
have invested and expanded. This region should be growing for
another 20 years.”
SCG, Mr Chaovalit says, focused on investing in both its home
nation and Southeast Asia during the region’s long recovery
from the 1997 Asian currency crisis “when we weren’t seeing
projects at all. So now that the economy is fully recovered, and
many countries are investing to develop infrastructure, this will
stimulate other investments and a second wave of growth.”
SCG increased its investment in Indonesia in 2012 with two
major commitments. First in February of that year it bought
a 100% stake in Boral Indonesia, a ready-mix concrete maker,
from Australia-based Boral, valued at US$135m. It has since
committed US$356m to building a new plant, with completion
scheduled for 2015.
The investment, one of many, is aligned with SCG’s ambition
to establish growth industries throughout Southeast Asia as
the Association of Southeast Asian Nations (ASEAN) rolls out
its plans for a regional “Economic Community” based on trade
liberalisation. The most recent target is for the completion
of this bloc in 2015—although there is still some doubt as to
whether ASEAN’s 10 member countries will meet the deadline.
As for the emerging Southeast Asian nations, SCG has been
laying the groundwork for years. “We’ve been in Cambodia for
20 years, and we have had a small business in Myanmar for a
long time,” says Mr Chaovalit. “Having the presence is a way to
understand what you don’t know about the market, but at a size
where the risk is manageable.”
Case Study
Siam Cement’s sweet spot
Chaovalit Ekabut, CFO, Siam Cement Group (SCG)
“We do most of our financing through
debentures, and most of this borrowing
comes from retail investors in the local
market. They have a four-year term, and
when the term is up, we have a 90%
resubscription rate.”
In September 2013 the company announced it would spend
US$386m on a cement plant in Myanmar, scheduled for
completion in 2016. But as the country only passed a foreign
investment law in 2012, legal boundaries are still being debated
and established. “Not everything is clear at the moment,” says
Mr Chaovalit. “But remember, we’re doing cement, a material
that the nation needs to develop. We’re quite optimistic.”
Bolstering the company’s region-wide expansion is a strong and
reliable funding base in Thailand. Although common, this year’s
survey suggests the preference for tapping bank lending is not
universal—nor is the perception that the cost of capital will rise
this year (68% of those responding believe it will stay the same
or decline). For his part, Mr Chaovalit says that the materials
giant prefers short- to medium-term debt, but from local and
loyal retail investors, rather than from banks.
“We do most of our financing through debentures, and most of
this borrowing comes from retail investors in the local market.
They have a four-year term, and when the term is up, we have a
90% resubscription rate,” Mr Chaovalit says.
Mr Chaovalit also believes that funding costs for major
companies like SCG in Thailand will not rise this year. “It
depends on who is borrowing,” he says. “If you are a real-estate
company and borrowing from a foreign bank, the political
situation in Thailand may make the bank more reluctant to lend.
But markets are still growing here, and there is confidence in
growth. Companies that are part of that trend have a lot of
choices in their banking.”
“At the moment, it’s better for the borrower here than for the
lender,” he adds.
Part 4
M&A: The lure of the Southeast
CFOs remain cautious about M&A but those that want to buy are looking to opportunities
in Southeast Asia to do so. Inbound deals to Greater China look likely to keep falling.

Do not plan to
undertake M&A in
2014
Have no plans
to sell
or divest assets
62%
Plan to
achieve
growth
goals
Plan to
acquire
technology
Plan to
acquire
intellectual
property
Plan
to enhance
production
capability
70%
34% 30% 30%
Acquiring the tools of growth:
M&A focus to acquire
technology strongest in: 55% 46% 41%
M&A focus to enhance
production capabilities
strongest in: 51% 45%
30%
TelecomsOil and gas PharmaceuticalsMetals and mining Real estateManufacturing
Southeast Asia:
45%46%49%52%
Emerging
Southeast Asia
(Cambodia,
Laos, Myanmar,
Vietnam):
39%40%41%48%
India/
South Asia:
38%41%47%56%
Taking the lead in South and Southeast Asia:
M&A
Who? Why?
Of those that will undertake M&A:
China and the West
fall from grace:
Targeted growth—with an eye for southeast asia
China
North
America
Western
Europe
1st
4th
5th5th
11th13th
2013
2014
Ranking of target M&A markets
Australia
South-east Asia
India/
South Asia
North
America
South
America
South Korea
Greater
China
Emerging SEA
– Cambodia,
Laos, Myanmar,
Vietnam
Japan
Western
Europe
Sub-Saharan
Africa
Eastern
Europe/Russia
Middle East/
North Africa
n 2014
n 2013
Where?
M&A focus will be
strongest on:
Southeast Asia:
41%
India/South Asia:
40%
Emerging
Southeast Asia:
36%
1st
2nd
2nd
3rd
3rd
7th
4th
8th6th
11th7th
12th
10th
13th
10th
8th
9th
9th
5th
1st
13th
4th
11th
5th
12th
6th
41%
Forget the West; go Southeast
In a year in which organic growth is the preferred mode of
expansion, a large proportion of CFOs (62%) say that they do
not have M&A plans in 2014—around the same proportion as
in 2013 (Figure 4.1). The reasons are many: volatility in Asian
markets as tapering plays out in the US; a perception that
funding costs will rise; major elections in Indonesia and India
and civil unrest in Thailand; slowing growth and debt woes in
China; and a sense that this is a year to lock in gains derived
from both strong domestic growth and more efficient—and
therefore more productive—operations.
Nevertheless, for those that do have M&A plans, 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
and eschewing M&A in North America and Europe. CFOs in
Japan show a strong preference for Southeast Asia (47%) and
India (47%), but none indicate North America and only 7%
are eyeing deals in Western Europe. Likewise, CFOs in China—
despite several big deals unfolding at the very beginning of
2014—show an attraction for Southeast Asia (50%), less of an
interest, but still a significant one, for India (27%),
but zero interest for North America and very little (3%) for
Western Europe.
For all CFOs in the survey, an unambiguous preference for
Southeast Asia has emerged. “Southeast Asia is where
the best growth story may exist right now,” says Mr Lau of
Owens Corning.
Figure 4.1: M&A caution
% respondents who do not plan to participate in M&A in 2014

Japan strengthens Southeast ties;
Thai horizons broaden
The response from CFOs in Japan underscores the strength
of the nation’s appetite for buying Southeast Asia assets. The
depreciation in emerging market Asian currencies that started
in the second half of 2013—with the largest drops in India and
Indonesia—has afforded cash-rich Japanese firms the firepower
to buy into Southeast Asia, where production costs are still
cheap and consumer markets are still expanding. It appears
to have wiped away reservations about buying foreign assets
during a period when the yen has been weakening.
Japan was the world’s largest M&A investor into Southeast
Asia in 2013, with a 48% share of total inbound deals, worth
US$11.1bn. Mitsubishi UFJ Financial Group launched one of
the largest deals in Asia in 2013, with its US$5.5bn purchase
of a 76% stake in Thailand’s Bank of Ayudhya from GE
Capital. Small-cap deals, too, were on the agenda of Japanese
companies, which launched 15 deals alone into Southeast
Asia collectively worth US$400m, targeted into industrial and
chemicals sectors.
In key markets in Southeast Asia itself, CFOs have a strong
M&A agenda, with respondents from Malaysia (45%), Indonesia
(43%) and Thailand (43%), signalling their interest in this mode
of expansion in the region.
Ongoing political concerns aside, the Thai M&A scene—both
inbound and outbound—is one of Asia’s brightest. Thailand saw
some of the largest deals in Southeast Asia in 2013, led by Thai
company CP All’s US$6.2bn bid to buy a majority stake in Thai
retailer Siam Makro from SPV Holdings of the Netherlands. CP
All, which owns Thailand’s Seven-11 chain and is led by tycoon
Dhanin Chearavanont, plans to invest up to US$276m in 2014
to build market share following the acquisition. It also projects
revenue growth of 15% this year, endorsing the view that high
goals for organic growth can still be achieved in Thailand.
Some 41% of the CFOs polled say their companies are focusing
on M&A in Southeast Asia—making it the most popular location
for companies across Asia (Figure 4.2). The finding is in line
with recent M&A trends into the Southeast region. Inbound
activity—strong for several years—was down somewhat in
2013, with 376 inbound deals totalling US$64.9bn, representing
a decline of 15% in deal value compared to 2012. But CFOs’
preference for the region this year (see box) is encouraging
news for prospective dealmakers in Southeast Asia.
The strongest responses from CFOs saying they are considering
Southeast Asia for M&A come from Australia (52%), China
(50%), and Japan (47%). In Australia, where metals and mining
is a major industry, companies are looking to invest in resource-
rich Southeast Asia, where lower commodity prices this year
have driven asset values down. China’s hunger for outbound
M&A is a feature of this year’s global M&A scene (see box), and
Southeast Asia’s strong regional growth story is attractive for
cash-rich Chinese firms.
Figure 4.2: Piling in to Southeast Asia
% respondents with M&A plans focusing on region in 2014
What a difference a year makes:
China falls from grace
CFOs’ preferences for M&A target markets within Asia have
changed over the past year. Ranking 13 global target markets by
preference in 2014 compared to 2013, Southeast Asia moves up
to first position this year from second, while India/South Asia
moves up to second position from third. Emerging Southeast
Asia climbs from seventh place to third—reflecting in part
greater excitement about the most recently opened market in
the region, Myanmar (Figure 4.3).
Greater China, by contrast, moves down to fifth place from
the top position in 2013. China’s inbound M&A story has been
declining for some time. The slowing of China’s economic
growth, higher labour costs and uncertainty about China’s
political transition have all contributed to a dwindling appetite
for deal-making.
“Structural corrections that persist in China, coupled with the
rising opportunities in other regions in Asia, make us think if we
should diversify our portfolio a bit and to leverage on growth
opportunities in these areas such as the Southeast,” says Mr
Lau of Owens Corning. “The huge issue is that costs keep
rising—all low-end production is moving to nearby countries
such as Vietnam. Meanwhile, a lot of growth is happening in
Southeast Asia; we have more confidence in going there and
looking for opportunity.”
Regulatory hurdles in China can be high as well, particularly
in telecommunications, internet, media and financial services.
Deal approvals are generally slower than in the US or Europe
(for businesses that aren’t considered a national security issue).
For instance, in 2011, Nestle of Switzerland’s purchase of
China’s Yinlu Foods Group took seven months for regulatory
approval, which had to be obtained on the national and local
level. In contrast, China-based Shuanghui International Holdings
US$4.7bn buyout of US-based Smithfields Foods took about
four months for US regulators to rubber-stamp. (Shuanghui
International recently changed its name to WH Group.)
Foreign inbound M&A into China totalled US$31bn in 2013,
below the US$33.6bn averaged over the past five years.
Inbound deals dropped in number, too, to 540 in 2013 from 831
in 2012. Will it be this way forever? Mr Lau sees opportunity
emerging as reform keeps pace. “There’s an opportunity going
forward in industrial consolidation in China,” he says. “It will
be more possible to find good quality assets, at much more
reasonable multiples.
“Structural corrections that persist
in China, coupled with the rising
opportunities in other regions in Asia,
make us think if we should diversify our
portfolio a bit and to leverage on growth
opportunities in these areas such as the
Southeast.”
Emerging SEA – Cambodia, Laos, Myanmar, VietnamSouth-east Asia

“There’s an opportunity
going forward in industrial
consolidation in China,”
he says. “It will be
more possible to find
good quality assets, at
much more reasonable
multiples.”
Figure 4.3: Favoured regions
Rank
2014
Rank
2013
Change
South-east Asia 1 2 1
India/South Asia 2 3 1
Emerging SEA - Cambodia, Laos,
Myanmar, Vietnam
3 7 4
South Korea 4 8 4
Greater China 5 1 -4
Middle East/North Africa 6 11 5
Sub-Saharan Africa 7 12 5
Japan 8 10 2
South America 9 9 0
Eastern Europe/Russia 10 13 3
Western Europe 11 5 -6
Australia 12 6 -6
North America 13 4 -9
”Outbound M&A from China is another story, with spectacular growth in 2013 of 31%
over the previous year to a record US$68.7bn. This year outbound M&A is off to a
full-throttle start with two major deals announced by computer manufacturer Lenovo,
to buy IBM’s low-end server unit for US$2.3bn followed by the US$2.9bn purchase of
Google’s Mobility unit. The biggest outbound deal from Asia in January was Japan’s
Suntory Holdings US$13.6bn acquisition of spirits company Beam, producer of Jim
Beam and Maker’s Mark bourbons.
Asia-wide, however, CFOs’ preference for outbound M&A from Asia to mature markets
appears to be dropping. Ranked by preference, North America drops from fourth
place to last position this year. Western Europe falls to 11th position from fifth, and
Australia to 12th from sixth.
Early days for emerging Southeast Asia
M&A scene
Enthusiasm this year for high-growth emerging markets in
Southeast Asia—Cambodia, Laos, Myanmar and Vietnam—is
strong. Thailand seems to have the strongest interest in its
high-growth neighbours, with 71% of CFOs in the country
saying their companies plan to focus M&A activity within at
least one of the four nations (Figure 4.2). In one example of the
enterprising atmosphere for M&A developing in Thailand, local
telecom group True Corp PCL said in early March 2014 that it
intends to take on a foreign partner in the second half of the
year to expand in Southeast Asia, a sign of the ambition of Thai
firms to grow in neighbouring countries.
A large proportion of CFOs in Australia (49%), too, are at least
looking into acquisitions in emerging Southeast Asia, a result
that dovetails with the interest by metals and mining CFOs in
general in the area (41%)—the second highest after financial
officers in the telecoms sector.
M&A for Cambodia, Laos, Myanmar and Vietnam is still
very much an emerging-markets play, in which fast growth
is expected as governments sell assets to raise funds and
create growth through more private ownership. GDP growth in
Myanmar is projected by the Asian Development Bank to reach
6.8% this year, up from 6.5% in 2013; in Cambodia, 7.5% from
7.2%; in Laos 7.7% in 2014 up from 7.6% in 2013. In Vietnam,
where the economy is larger, growth will be more moderate but
still substantial, at 5.5% in 2014 from 5.2% in 2013. Growth
expectations for 2014 exceed those in other ASEAN nations
with the exception of the Philippines, but growth there is
expected to decline to 6.1% this year, from 7% in 2013.²
The advantage of tapping these markets through M&A is
powerful. To take one example, growth in the telecoms sector
in Myanmar will be assured because currently usage of mobile
phones is very low, as it is estimated that over 90% of the
population don’t own the gadgets. But regulatory hurdles are a
factor that can undo M&A ambitions as governments grapple
with the new experience of swinging doors open to foreign
investment. For example, Myanmar passed a new foreign
investment law in 2012, but there remain significant issues of
interpretation and consequently deal flow has been small.
“There’s a limit to what we can do in a highly regulated industry
in markets where the buyer of the service is government-
controlled, as remains the case in markets that are opening in
Southeast Asia,” says Richard Beacher, chief financial controller
of Hong Kong-based First Pacific, a principal investor in
Philippines Long Distance Telephone Co (PLDT).
PLDT was not included on a preferred bidding list of 12
companies to gain licenses to provide telecommunications
services in Myanmar last year, due largely to the government
stipulation that the acquiring telco should already have
overseas services, which PLDT lacks. The eventual winners
were Norway’s Telenor and Qatar Telecom. The runners up,
who will replace the winners if they are unable to meet
stringent post-selection requirements, were France’s Orange
and Japan’s Marubeni.
David Nicol, the CFO of Philippines-based public private
partnership Metro Pacific Investments, co-owner of power
distribution businesses, toll roads and transportation assets,
believes that it is a good time to start investigating Southeast
Asian markets for acquisitions, but that it may still be too early
to take the plunge.
Throughout Southeast Asia there are “interesting investment
opportunities”, Mr Nicol says, “but asset values are still high.
Some companies have been taking on a lot of leverage. Some
will have to deleverage, and assets that are not on the market
at the moment, will be, reasonably, given time.”
“For now,” he says, “we’re keeping our powder dry.”
²Asian Development Bank, Outlook 2013 Update. Available at http://www.adb.
org/sites/default/files/pub/2013/ado2013-update.pdf

Despite political uncertainty, India
still appeals
M&A into India and South Asia continues to be an attractive
story for CFOs in Asia, 40% of whom name the region as an
area of focus for their companies’ M&A plans. The strongest
preference comes from CFOs based in Hong Kong (55%),
followed by India itself (51%) and Japan (47%).
India seems to be getting more attractive to foreign buyers.
In 2013, inbound total deal value actually shrank by 20% to
US$14.3bn compared to 2012, but deal volumes by overseas
buyers climbed to 147, a record. Many of the deals from foreign
buyers targeted small-cap companies. Foreign acquirers appear
to be holding off until this year’s elections before matching
deals on the scale of the biggest deal in India last year:
Unilever’s US$3.5bn stake of 14.8% of Hindustan Unilever,
announced in April.
Buying in India often comes with unexpected operating and
regulatory risks. When asked whether he would consider an
M&A targeting India, Owens Corning’s Mr Lau says,
“We have operations in India, but unfortunately the economic
condition didn’t allow us to create tremendous value from
them yet. The political structure is challenging but we hope
to see improvements after the election. We will continue to
have a presence, but it’s going a little bit slower than originally
thought.”
India is the world’s second-largest telecoms market after
China, and a draw for the world’s M&A-keen global telecoms
companies this year. But new M&A rules recommended by the
nation’s Telecommunications Commission and passed by the
government in February 2014 now require companies buying
cellular assets pay a fee to the government, greatly raising the
acquirer’s potential total deal cost.
Figure 4.4: Intriguing India
% respondents focusing on India/South Asia for M&A activity in 2014
Buying the building blocks to grow
While a large proportion of CFOs in telecoms firms (52%) say their companies are
looking at Southeast Asia for buying opportunities, other tech and research and
development-reliant industries aren’t far behind. Some 49% of CFOs in metals and
mining companies said their companies would focus M&A activity on Southeast Asia
this year, followed by 45% in both oil and gas and pharmaceuticals (Figure 4.5).
Why are they buying?
As mentioned, the response in metals and mining illustrates why 52% of CFOs in
Australia named Southeast Asia as a key M&A destination target. Interest in the oil
and gas sector comes as energy demand grows (the International Energy Agency
predicts energy demand to expand in Southeast Asia by 80% by 2035³)
and exploration increases in offshore projects such as those in Vietnam, Indonesia
and Australia.
Figure 4.5: Industry insights
% respondents focusing on specified regions for M&A activity in 2014
³International Energy Agency, Southeast Asia Energy Outlook, September 2013. Available at: http://www.iea.
org/publications/freepublications/publication/SoutheastAsiaEnergyOutlook_WEO2013SpecialReport.pdf
South-east Asia
Greater China
Emerging Southeast Asia
India/South Asia

The heightened interest from pharmaceutical firms in the
region tracks expanded interest globally by big pharmaceutical
companies in M&A. Companies in the sector are looking to
fill what Ernst & Young calls their “growth gap”—the ability
to produce revenues at the pace of pharmaceutical market
demand. Meanwhile, their equity values are higher than in most
of 2013, when M&A activity was minimal.
A sizeable proportion of pharmaceutical sector CFOs (38%)
indicate that India, too, will be a target for M&A activity. India
is the world’s third-largest market for pharmaceuticals and is
expanding fast. Last year, pharmaceutical deals represented
the highest proportion of M&A market share at 20.1%, edging
out construction at 19.7%. Total volume for pharma and life
sciences deals in India in 2013 was US$4.2bn for 38 deals,
up 188% from the previous year. In contrast pharma deals in
Southeast Asia in 2013 amounted to only 2% of the entire M&A
market share, worth a combined US$1.3bn.
CFOs in these sectors are seeking to gain more than market
share in a new country, or the ability to tap markets where
organic growth can be supported by a rising middle class and
expanded consumption. They appear to be seeking processes,
technology and R&D that will help them grow in their other
markets as well.
When asked by sector what goals they had established for
M&A, the majority of respondents (70%) simply say it is to
achieve growth goals (Figure 4.6). But 34% say a primary goal
is to acquire technology, with the strongest responses from
telecoms (55%), manufacturing (46%) and metals and mining
(41%, Figure 4.6). Enhancing production capabilities is named
as a primary driver by CFOs in manufacturing (51%) and metals
and mining (45%).
Outside the Southeast Asia context—but in line with these
sectoral findings—Frank Lai, the CFO of Hong Kong-listed
conglomerate China Resources, argues that paying a little more
to buy assets with better operational capabilities is a good
defensive acquisition move in China.
Figure 4.6: Why buy?
What are the primary drivers of your merger or acquisition activities in 2014?
(NB: excluding “achieve growth goals”)
% respondents
Frank Lai, CFO of China Resources Enterprises, joined the
Hong Kong-listed retail arm of state-owned China Resources
in 2009 after working for one of several holdings in the latter’s
portfolio, including semiconductor maker CSMC. During his first
year the chief executive, Chen Lang (who joined the same year),
gave him an M&A challenge.
“When we first came in, we looked at the business—it was a
huge conglomerate, but for the shareholder, it didn’t seem to
give value; it had too many things,” Mr Lai recalls.
“We had an investment in the container port with Hutchison
Whampoa, franchise businesses with retailers Esprit and Calvin
Klein, a textile business, a beer joint venture [China Resources
Snow Breweries, with SAB Miller, started in 1994], other retail
businesses and we were even into pork—we were the largest
Hong Kong importer. And we had HK$10bn [US$1.3bn] worth of
investment property.”
“But our share price never traded. The shareholders looked at
us and didn’t know what we were doing. The new CEO brought
me in with a simple goal: to focus and restructure the company,
so we can show some form of core competence. Our investors
said to us: ‘We can invest, we don’t need you to do that for us.
What we need is to know you’re creating value.’”
“When we first came in, we looked
at the business it was a huge
conglomerate, but for the shareholder,
it didn’t seem to give value; it had too
many things,”
China Resources’ core competency, it turns out, is operating an
ownership stake in a China joint venture to extract maximum
value for both parties. After selling various units, the company
began to focus on expansion in China in the beverage business
via a 60-40 joint venture with Japan’s Kirin. The goal was to
bring together distribution and retail skills to grow in the China
market. China Resources was already selling a popular bottled
water product, C’est Bon, while Kirin is one of Japan’s most
popular beverage makers.
At the time of tie-up, the combined company’s annual sales
amounted to Rmb1.8bn (US$231m). In 2013 sales climbed
to Rmb6bn, ahead of the stated goal for the joint venture to
achieve Rmb5.8bn by 2015.
Next Mr Lai began negotiations (via China Resources’ joint
venture with SAB Miller) with the largest beer retailer in
Southern China, Kingway. The deal, in which the joint venture
purchased a 100% stake, closed in 2013 for US$851m. China
Resources Snow Breweries is now the biggest beer retailer in
China by far.
“In China, it’s important that one party has control,” says Mr
Lai. “In my own experience, 50-50 doesn’t work. You have to
establish who leads—but also make sure that both sides have
the long-term view. We’ve followed this strategy: in the joint
venture with SAB Miller, we own 51%; in Kirin, we own 60%; in
Kingway, 100%, and in Tesco’s China operations, we own 80%.”
The Tesco deal—China Resources’ most recent major
transaction, worth US$573.5m—reveals how their core
competency in joint ventures creates value: through the
melding of experience. The deal had strong attractions for
both sides. Tesco had struggled to establish international
business in the US, Japan and China. Through the tie-up with
China Resources—which merged Tesco’s 134 stores and 11
“Lifespace” shopping malls in China into its own 3,000-store
group of Vanguard supermarkets and convenience stores—
Tesco could retain its presence in the world’s second-largest
economy and Asia’s primary growth engine. China Resources,
in turn, gained access to Tesco’s global market knowledge and
operational acumen.
“[Tesco] is not growing as fast in China as local companies,”
says Mr Lai. “But in fact, they’re much more advanced. So they
suffered a little setback now. They’re a strong competitor. And
in an alliance with them, in ten years’ time we just grow with
them—and become much more competitive at a faster rate.”
Case Study
China Resources Enterprises: M&A to the core
Frank Lai, CFO, China Resources Enterprises
Acquire talentAcquire intellectual property
Enhance production capabilitiesAcquire technology
Industry consolidation

Part 5
Finance: Cash is king—and risk is ever present
CFOs have their eye on reducing leverage, tapping bank lending relationships, and relying
on internal funding as much as possible
Staying away from long-term debt, but
planning for the long term
For Asia’s CFOs this year, the risk-management instinct—in
the form of reducing long-term debt exposure and relying
on cash wherever possible—seems to be prominent. When
asked about their financing plans, 41% say that they will likely
adjust their capital structure to decrease weighting in long-
term debt (Figure 5.1). The strongest responses here come
from South Korea (57%) and China (49%). The explanation is
clear: some South Korean conglomerates are among the most
highly leveraged companies in Asia, while debt problems in
China’s banking system and corporate sector have already been
mentioned.
An aversion to long-term debt is not isolated to these markets.
It is also the case in the Philippines, one of the region’s
star performing economies, where structural reforms and a
sovereign rating upgrade in 2012 were precursors to strong
growth last year. “In the Philippines,” says David Nicol, CFO
of Metro Pacific Investments, “a lot of ten-year-debt reprices
five years from maturity. And, to put it bluntly, markets aren’t
sophisticated enough to allow companies to hedge risk
satisfactorily. It’s difficult to get a peso-dollar swap for three-
to-five years.”
Across the region CFOs interviewed for this report maintain
that caution is advisable, as is forward thinking. It’s not just a
matter of avoiding excess leverage, but relying on cash flow
whenever possible to fund projects, and making sure that the
debt they do have is aligned with businesses that offer strong,
reliable long-term returns.
“How do we manage our balance sheet?” says Frank Lai 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.
“But we can’t,” he adds. “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.”
Mr Lai says he prefers using cash from divestments to fund
growing businesses over debt, and says that he won’t tap equity
markets again until he deals with the “inefficiency in my own
share structure by selling non-core assets.”
Translation: use cash whenever possible, and when you do
take on debt, make sure it supports assets that will deliver
consistent long-term growth.
Figure 5.1: Lever down
How is your company likely to adjust its capital structure
in 2014?
Decrease weighting No change Don’t knowIncrease weighting

Bank of America Merrill Lynch CFO Outlook 2014 Asia

Bank of America Merrill Lynch CFO Outlook 2014 Asia

Recommended

Recommended

More Related Content

What's hot

What's hot (19)

Viewers also liked

Viewers also liked (6)

Similar to Bank of America Merrill Lynch CFO Outlook 2014 Asia

Similar to Bank of America Merrill Lynch CFO Outlook 2014 Asia (20)

More from The Economist Media Businesses

More from The Economist Media Businesses (20)

Recently uploaded

Recently uploaded (20)

Bank of America Merrill Lynch CFO Outlook 2014 Asia