Many Asian companies have responded to the economic downturn by slashing back communications budgets across the board. Investor relations programs are falling by the wayside as executives conclude that trying to convince investors that their companies are a good buy when all around them is crumbling is a waste of time.
Never strong investor relations practitioners in the first place, many Asian companies believe that no message can move global fund managers off the sidelines in this time of crisis. The general feeling is that every company in the region has been painted with the same Asian brush and that it’s pointless investing in IR until the good times roll once more.
Luckily not everyone in the region holds such a pessimistic view of the function. There are a growing number of companies that are redoubling their efforts to stand out from the crowd. They understand that now is the time to hit the road to reinforce the corporate strategy and the IR function is more critical than ever before in this new environment. Fund managers may be selective, but they like bargains. At the same time, specialized funds are arriving on the scene to pick stocks. Attracting these investors and keeping existing shareholders informed on developments is an integral part of the IR initiative for companies around the region.
No-one can blame global investors for being gun-shy about Asian markets. It is estimated some $1.5 trillion of wealth has evaporated due to the devaluation of currencies and plummeting asset prices. It is unclear how much foreign investors have lost of this astounding sum, but the losses must run into many billions of dollars. Meanwhile, if investors are listening to the leading analysts they are not hearing any positive news. Many are predicting the worst is yet to come, and it could take years before the crisis subsides.
Still, some companies have come out fighting and used the downturn as an opportunity in investor relations terms. Roadshow expenditure across Asia is well down during the first half of the year, but a few companies have been hopping on and off of planes to the US and Europe in recent times, intent on telling their story to value-pickers.
Thanks for the memory
Macronix is one company that had to change its capital markets program to suit the Asian crisis. The company is Taiwan’s largest producer of memory chips and integrated technology solutions. After an extensive global roadshow, Macronix postponed its $300 mn secondary ADR issue. With Macronix stock falling steeply on the Taipei market and the dilution factor growing by the day, company president Wu Miin-Chyou decided that the valuation was just not good enough.
‘It is not that we cannot raise capital,’ says Wu. ‘It’s only a question of coming up with the right financial product. In May we went to the market with a $150 mn convertible that sold with no problem. We just feel our company is valued at more than the present perception. Our idea is to raise the least expensive capital for the company. In the past the international market has been the best place to go and it’s important as a means of raising name awareness in the global arena. We cannot ignore the tremendous capital pools available in Taiwan, but a huge discount is normally demanded with regards to equity. While investors in these two markets are quite different, we make sure the IR message is unified.’
With a market capitalization of $2 bn, Macronix has pursued an aggressive international program. In 1996 Macronix became the first Taiwanese-registered company with a US listing via a $180 mn ADR offering. Since then, the Nasdaq-listed company has floated two convertible bond issues to raise an additional $320 mn. Wu believes that Macronix must visit investors every six months in both good times and bad. Face-to-face meetings are set up with institutional investors and company status is updated. Last year, Macronix hired GCI, a US-based IR consultant, to handle regular information releases.
The basic premise of the IR message is to underline the company’s position as an international provider of leading-edge technologies and integrated solutions with a strong service culture. Wu notes that his job with investors is made more difficult due to the fact that most view Taiwan as a manufacturing center good at putting products together, rather than as a developer of products. Even though Macronix is the ninth largest producer of flash memory chips, and a tough competitor against the likes of Intel and AMD, it’s tough to reverse perceptions.
‘Every six months we reinforce the message that we are delivering on our objective of building a market leading technology development company,’ says Wu. ‘We’re being affected by the Asian crisis, but it’s not just a crisis for Asia. This will become more of a worldwide affair. Asians are buyers of US technology and, if they cannot buy, it’s only a matter of time before US tech stocks are affected. At the moment, it’s hard for us to make a good case. Investors are more focused on the fundamentals of the Asian crisis and the course of the Taiwanese currency than whether we are a better performer than US companies. Still, when that perception changes investors will remember us first due to our commitment to keeping them informed.’
Come fly with us
China Southern Airlines has a new rallying cry at its corporate headquarters in Guangzhou. ‘Investor communications’ is seen as crucial during the region’s difficulties. Considered by some analysts to be the Asian airline industry’s most undervalued stock, CSA management is eager to attract global investors. Despite the worst market conditions ever encountered by the Asian aviation industry, the company has not been shy of getting out to explain how it perceives the situation. Indeed, the management team recently took to the road to deliver its message to US and European institutional investors.
‘The last year hasn’t been easy for anyone, and we’re not immune to the downturn,’ says Yu Yan En, CSA chairman. ‘Sentiment toward Asia has soured, and the airline sector is the most hurt. Economic turmoil precipitated an erosion in air traffic, and no airline escaped the consequences. Global investors don’t distinguish between the region and China. In terms of value China is well-positioned, and within China we are number one. We want investors to look at our strengths, growth record and response to market conditions. We’ll open up any lines of communication to explain why we are Asia’s best airline value stock.’
In a recent report looking at the Asian aviation industry, Goldman Sachs research analyst Jean-Louis Morisot states: ‘On every measure at our disposal, CSA is the region’s least expensive airline stock. The most bearish scenarios for the economy and currency have been priced into the stock.’ Morisot highlights CSA’s domestic leadership position and opportunities related to industry consolidation. He also points to a depressed valuation based on a 31 percent discount to book value, 6.8 times 1998 estimated earnings, and a 1998 Ebitda multiple of 4.9 times.
CSA began its capital market experiment in 1997 when it raised $720 mn in what was then the largest listing of a PRC state enterprise on the New York and Hong Kong stock exchanges. Ranked first among PRC airlines in terms of passenger traffic volume, size of fleet as well as scheduled flights, CSA’s focus is on domestic business. Yet, CSA stock has taken a pounding, hovering around HK$1, down from the issue price of HK$4.75. While most PRC managements avoid dealing with embarrassing market declines, CSA decided on a more proactive route.
The message to investors is that CSA is dealing with the turmoil by devising a strategy to reduce international market exposure while increasing efficiency in the domestic arena. ‘Our management team is reacting to the current climate,’ says CFO Liu Wen Bo. ‘At first we plan to reduce exposure to international business by adjusting the routing. We’re taking a close look at core domestic business to raise efficiency and increase revenue streams. We will build shareholder value, while changes on the operational front are one way we intend to maintain profitability.’
To gain investor attention, CSA is playing the airline consolidation story to the hilt. With state enterprise reform moving into high gear, opportunities abound. The days of endlessly supporting money-losing airlines with government guaranteed bank loans are over. This will impact the capital raising efforts of state airlines, and will speed industry reform. There are now some 30 airlines and many are too small to compete. CSA has already absorbed four airlines into the fold, and just purchased a 60 percent stake in Guizhou Airlines.
‘In this environment the fittest survive,’ concludes Yu. ‘A characteristic of those that do survive will be the entrepreneurial drive and commercial sense of management. This is something CSA is known for. In addition, we cannot deny the advantage of being the country’s best capitalized airline at a time when financial resources are at a premium. There’s no doubt that we expect to take advantage of this tremendous opportunity.’
Steely-eyed approach
One of the few Asian companies to raise equity capital so far in 1998 is Pohang Iron and Steel Co (Posco), the second largest steel producer in the world. The South Korean steel giant went to market in May with a $100 mn global depositary receipt issued in London and New York. Priced at an 8 percent discount to Posco shares already listed on the NYSE, the issue was snapped up at the $13 initial price and punters pushed the stock to $16 by the end of the first trading day.
The Posco success was an important indicator that Asian companies with strong fundamentals can float equity issues even under the most difficult economic conditions. Posco re-opened the depositary market on a day that the Seoul index declined by five percent, hitting an eleven year low. To make matters worse, as the secondary offering came to market the media was producing in-depth coverage of Korean labor unrest and the Japanese economic slow-down. Meanwhile, the Posco share price had dropped in Seoul from its high of W54,000 to W40,000, and the company faces production declines for the first time ever.
‘Investors believe in the Posco message and the underlying corporate strategy. They’ve stayed with us throughout the Asian Crisis,’ says Jae Ku Cho, head of international finance and investor relations at Posco. ‘When Korean foreign investment limits were recently raised from just 2.5 percent to 30 percent for any one company, the total demand for our incremental increase was 70 times the amount available. That shows a tremendous desire among foreign fund managers to own Posco – and to hold it long term. Our goal of offering investors information in a clear and transparent form at high speed seems to be paying off.’
With some $960 mn of stock and nearly $3 bn of foreign debt outstanding, Cho places a great emphasis on IR. There are six staff members in his finance department, and assignments are broken down into equity, debt, bank loans and other areas. Each IR staff member is trained in the function and is responsible for communicating with a target group. They also collect information for marketing, production and other financial activities. The entire department can handle questions from any stakeholder and support the overall roadshow process.
One reason Posco has maintained investor loyalty is its discerning attitude toward fund managers. As Cho points out, on the recent global roadshow Posco was approached by many institutional investors eager to pick up large stakes. However, Cho turned down requests on the basis that investors were short-term minded traders. Posco studied the investment strategies of potential shareholders and placed its shares with those that had a profile of long-term holders of stock.
‘IR should be more of a focus for top management in Korea,’ concludes Cho. ‘I believe this attitude is changing very quickly. With growing involvement of foreigners both in management and as strategic partners there will be more focus on the needs of investors. One day there will be a major shift in thinking and IR activities will rise more rapidly to the forefront.’
