cy toks: 2015

Five S that spells success for investor relations

When it comes to investor relations (IR), it is always a debatable topic if it is a profession that is science or art-centric. Given the amount of financial figures our consultants crunch during the quarterly earnings season, it is hardly fair to disregard our flair for art as we craft investment thesis and carefully establish the right corporate positioning for our clients.

The financial market of Singapore remains largely sceptical about the importance of IR and how it can truly value add one’s company and help unlock shareholder value. That being said, the onus should fall on IR professionals as we consistently seek to reinvent yardsticks of success.

Let us explore the five “Ss” which have led to some of my client's success in enhancing their market value:

1) Substance

· Understanding our clients’ business ecosystem and comprehensive suite of offerings

· Going beyond basic messaging to shape the substance of our clients’ businesses

2) Science

· Carry out detailed and extensive analysis of our clients’ financial performance

· Generate financial models supplemented by research algorithms and automated analysis methods

3) Story

· Extracting the relevant information that would appeal to our target audience of analysts, investors and media

· Assembling the right mix of data and refining the investment story to make it compelling

4) Simplicity

· Keeping our messages simple but succinct to deliver only the essence of information

· Complexity compromises speed so keep communication understandable by the laymen

5) Speed

· Staying adjacent to the pace of our clients’ industry developments with our sector-focused practice

· Real time responsiveness to crisis situations and stakeholders’ queries

These five “Ss” form the basic parameters for some of our IR consultants who have achieved success in enhancing shareholder value for their clients. We however believe in staying dynamic to consistently revolve ourselves and adopting the best IR practices to customise the framework relevant to each and every of our client.

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, by CY

Economy

Rise of the evil twin - Quantitative Tightening

It is surely not an overstatement to say that the financial markets suffered carnage over the last few weeks as testified by the sharp spike in VIX, a popular measure of the implied volatility of S&P500 index options and of course a “sea of red” across most investors’ portfolios.

What is really causing this state of uncertainty and panic in the market? The commodities slump and discussion involving Greece are somewhat passé topics though the devaluation of Chinese yuan and depressed oil prices still seem to hoard headlines. If we transported ourselves in a time machine to post-2008 financial crisis, we would find ourselves entering an unprecedented era of quantitative easing (QE) where central banks embarked unconventional monetary policies by purchasing financial assets and increasing money supply in the financial ecosystem. Fast-forward seven years later to the economy of today, we might see the rise of QE’s evil twin, Quantitative Tightening (QT).

Drawing lessons from the 1997 Asian Financial Crisis (AFC), foreign central banks such as China and Japan have accumulated vast quantities of foreign reserves over the last decade, particularly in the form of US Treasury debt. This presumably helped emerging economies to mitigate currency shocks as witnessed in 1997 AFC where large stockpiles of foreign reserves allowed banks to intervene any free-falling action on their national currencies with buy-back options on open market. The accumulation of foreign reserves also prevented undesired appreciation against the Greenback as QE was introduced alongside zero interest rate policies.

Since late 2014, oil prices nosedived to sub-$40 per barrel or in perspective, a six-year low in August 2015. The gradual decline in oil prices has led to a reduced investor’s appetite for US Treasury debt from oil producing nations such as Saudi Arabia. Typically, these countries recycle their excess profits into USD to prevent their national currencies from appreciating on the back of strong oil prices.

Over the last three months, China was believed to have disposed some US$143 billion worth of US Treasury debt as the sell-off in the Chinese stock market initiated a flight of financial assets across all classes. While some foreign brokerages predict the phase of liquidating US Treasury debt to persist, the real flip side of it is the upward pressure on yield rates. This surely does not bode well given that the Fed is also expected to announce its first rate hike either in September or sometime in 2015.

The catalyst for greater dismay is the Fed’s intention in allowing the existing US Treasury debt to mature without a roll-over. While this is executed in good faith of shrinking the exploding balance sheet, in excess of US$4.5 trillion, it would be extremely challenging given the current headwind led by foreign central banks selling US Treasury debt extensively.

While it has been established that QE involves the buying of US Treasury debt thereby pushing up bond prices and driving down yields, the reverse mechanism of liquidating US Treasury debt by foreign central banks should be viewed as the evil twin named QT.

As we sit on the side-lines speculating the timing of the rate hike, the global economy seems to face another rising problem with QT. Could we potentially see QE4 instead of a rate hike? You never know.

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, by CY

Corporates

M&A - deal or no deal?

Dell hit the headlines of all business media recently with their proposed $67 billion takeover of EMC, making it one of the largest leveraged buyout deals in history. The chip-maker is not alone in the merger and acquisition (M&A) scene as Western Digital similarly announced a $19 billion deal to buy out SanDisk yesterday. With a slew of M&A activities happening, is this corporate action indeed useful for companies seeking growth beyond a certain critical mass?

It may be categorised that successful companies that derived growth from M&A focused on three key aspects:

Preserving or enhancing business momentum, particularly in organic growth
Executing more deals; through a systematic and disciplined approach to more deal discovery
Translating each deal into more top and bottom line growth

In order for a successful M&A to be executed, it first needs to be aligned with accelerating growth. While this sounds like common sense, identifying the deal archetypes and rationales marks a much complex affair. So what entails?

Expansion of customer base

This can help improve scale of offering, reach new geographies or refine value proposition from greater market share
Existing and new customer opportunities would be a crucial parameter
A classic example is the combination of various travel sites such as TripAdvisor and Expedia under the broad umbrella of IAC

Complementing gaps in product offerings

Undertaking a new company that addresses a gap in existing product or service offering helps strengthen value proposition and sharpens competitive edge
This is evident in Salesforce’s acquisition of Jigsaw to offer automated processes in its data collection processes

Speed to adjacency

It is common for companies (particularly Technology companies as it is a fast-evolving industry) to pursue M&A opportunities in adjacent markets to expand beyond their core offering
Adobe and Oracle for instance are serial adjacency acquirers where the key to success is the ability to understand core differentiators in targets

Successful M&A initiatives should be robust and build on the Group’s core business. The combination of organic and inorganic growth should align the deal rationale with companies’ pressing growth challenges. This inherently allows companies to survive amidst the dynamic and competitive industry landscapes and deliver shareholder value. Conversely, M&A can stifle or disrupt growth should integration fails or occurs episodically.

What do you say - deal or no deal?

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, by CY

Investor Relations

Making IR relevant with design thinking

With rapid economic progression worldwide, it is imperative for us to stay relevant and in line with developments especially within the capital markets. This is only possible if we stay actively engaged with our clients and race toward a solution or objective together. While this more often than not involves an iterative process of failing and learning fast, one key aspect to success is to uphold the mind-set of design-thinking.

Design-thinking is about constantly innovating one-self or even work-processes with a focus on the end-user or objective. Applying it to the context of our professional capacity in investor relations (IR), it is imperative for us to truly understand what is in the best interests of our clients as we provide our counsel to solving their problems with a combination of creative and analytical thinking.

Having successfully assisted several companies to grow their valuations by more than 100% over a 12-month period, I often like to adopt a “fly on the wall” approach which is carried out through a two-tier design-thinking strategy. This allows a 360-degree perspective of the various factors that will determine the outcome and has been proven to be effective.

Tier-1 (Client-focused)

As a professional solution provider, we have to first understand the objectives or problems faced by our clients

This could range from seeking strategic investors to fund their expansion plans to enhancing shareholder value through share price improvement

Tier-2 (Output-focused)

While we devise a customised plan to assist our clients achieve their objectives, we have to first identify the key channels that would impact the outcome. We then align ourselves in their perspective positions to design-think what would suit their interests and address their concerns.

i. Analysts

Driven by fundamentals, it is important to assess the company from a few

angles such as valuations, macro and micro-economic conditions

ii. Investors

Be it strategic institutional investors or the retail counterparts, the underlying

concern is always on the returns

iii. Media

Crafting the relevant and palatable pitch to ensure that the key messages in

any corporate development are being communicated

In a perfect economic market such as Singapore, it would be assumed that all information and factors are effectively reflected in the company’s share price. There are unfortunately various variables that upset this hypothetical statement such as lack of information and understanding by investors of a particular company.

While design-thinking complements and sets the foundation of a successful IR programme, it more importantly inculcates the culture to have a holistic approach by looking through the lenses of various components. This also promotes a shift in general perception that an IR consultant is indeed different from a PR consultant with the former focusing on financial literary then communication.

As we progress with our clients, it is paramount that we adopt an open mind-set to embrace changes and innovative thinking. In the complex financial market that we live in today, the traditional “one-size-fits-all” approach is almost obsolete. While design-thinking may have set us apart today, we continue to reinvent our work processes to stay relevant with industry developments.

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, by CY

Corporate Communications

Top 10 IR strategies for companies in a bear market

As the investment community gets increasingly sophisticated with easy access of financial information, it is paramount for companies to differentiate themselves, be it the products and services they provide or the public perception they establish, in order to attract interests from both the analysts and investors.

The recent oil price rout for instance, set alarming headlines almost every other morning when I log in to the various newswire apps on my smartphone. Overwhelmed with synonyms such as crisis and turmoil, it is no surprise that the relevant sectors suffer from massive sell-off.

Thinking in retrospect with my investor relations (IR) hat on, I performed a cross-sector IR audit and analysis on more than 700 companies listed on the Singapore Exchange and discovered that most of the lacklustre-performing companies maintained a relatively low presence within the investment community. Fulfilling the barest minimum in terms of IR commitments, some companies do not even publish press release on their corporate developments or quarterly results announcements. While this may sometimes be a conscious decision by the management due to certain circumstances, we believe that consistent two-way communication with company’s stakeholders, even during the down cycles, can truly distinguish a sterling company. When the uptick for the business eventually returns, such companies would be well-positioned to benefit.

Having experienced various market cycles, we highlight 10 IR strategies to help companies differentiate themselves in a bear market:

1) Maintaining visibility

When everyone chooses to remain low-key, take charge and lead by providing insights of the industry’s landscape to the market. While most investors stay on the sidelines in a bear market, it is important to remain in their investment radar.

2) Acknowledging the problems

Upholding investors’ confidence and trust ensure sustainable growth for the company. Instead of glossing over a set of poor financial results, take ownership and acknowledge the problems, followed by defined strategies to address them.

3) Focus on the balance sheet

When investors value companies on their growth prospects, the income statement matters but in a bear market where survival is key, the balance sheet becomes the focus. Discuss the size and nature of assets and liabilities or even the company’s cash position.

4) Do not over-commit

Management may sometimes stretch themselves thin by committing excessively in financial performance to the investment community. Avoid doing this as failure to deliver results will discredit management. Instead, lay realistic assumptions for the market to build their own financial projections.

5) Share the long term perspective

While next quarter’s top and bottom line is important knowledge for investors and shareholders, it is imperative to share the long term perspective of the company to align their investment interest.

6) Fact-driven presentations

All qualitative statements should be well supported by quantitative means to ascribe credibility to management. The objective is to provide data for the market to execute their own evaluation.

7) Consistent messaging

Companies should speak with one voice only so make sure that all communication to the investment community and media are well-coordinated between your IR representatives and the management. Having multiple responses to the same query not only confuse the audience but also diminish the impact of a holding statement.

8) Be prepared at all times

Surrounded by myriad issues that include political and regulatory changes, professional IR representatives should prepare anticipative questions and propose answers for the management to stay vigilant to any likely queries.

9) Quash the rumours

The sensitivity to information, true or false, heightens in a bear market so it is important to monitor the chatter around the company and quash any rumours instantaneously with facts.

10) Forget the share price and sell your story

Nothing matters more than understanding a company beyond its financial books in a bear market. Knowing where the company stands today and its plans for the future will dictate where it will be when the industry recovers.

Some might find it a cliché but the old saying “What goes down must come up” has an interesting relevance in the financial markets. For every sell trade executed, there is a buyer on the other end who has a different opinion from the seller, so the question is, are you doing the right thing in a bear market to empower your investment audience?

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, by CY

China

Two-sided perspective of the robust Chinese market

Following a 13.3% correction in the Shanghai Stock Exchange Composite Index (SSE) this week, the largest weekly decline since 2008, headlines across major dailies now post phrases such as “drop amid fears of equity bubble” and “China sell-off intensifies”. The market sentiment has taken an almost 180 degree change from early June where the chatter was centred on SSE achieving 7-year highs and on track to chart new historical peaks.

While Part I of my article discussed about some of the key reasons that fuelled the rally in Chinese equities – expectations of easing, liquidity boost from government policies, asset rotation and margin-lending expansion are but some of the drivers. It is common knowledge that a euphoric market sentiment is one that should not be undermined.

The discussion on whether we are headed for an equity bubble bust or the correction in Chinese equities being a near-term phenomenon continues as we move on to analyse some of the pros and cons of a robust Chinese equity market.

Pros:

Occurrence of financial reform – As Chinese equity market is dominated by on-shore retail investors, asset rotation by means of channelling more household savings into equities helps reduce overall reliance of corporate funding on banks and shifts the burden onto the equity market.

Economic rebalancing towards consumption-led growth – The Chinese government has repeatedly signalled their intention to achieving a GDP growth of at least 7%, led by consumption. Driven by technology innovation and domestic consumption, the rally in the Chinese markets has certainly created wealth for most investors to fuel consumption.

Improving valuations facilitate corporate financing opportunities – Corporate debt to equity should decline going forward, reducing the economy’s reliance on debt financing and inherently lowers overall economic risk. The improving or rich valuations of companies will be prime for a series of corporate financing opportunities such as IPOs, secondary placements.

Encourage M&A opportunities to enjoy PE arbitrage – The comparatively higher PE multiple enjoyed by Chinese companies may be an advantageous weapon for them to carry out inorganic growth opportunities through M&A with a target on companies trading at much lower valuations and earnings accretive. This is opportunistic for companies seeking to expand vertically or horizontally across the supply chain.

Lower cost of funding – Particularly for the private sector, equity financing becomes a viable channel of financing as cost of funding becomes relatively cheaper. This helps ease the financial constraints experienced largely by small and medium-sized private companies.

Capital market liberalisation - The launch of the Shanghai-Hong Kong Stock Connect is the first mutual market access initiative adopted by the Chinese government. While this has been instrumental in driving inflow of foreign funds into the Chinese equities, more importantly it is a step forward for China to move up the capital market value chain of becoming an international equity platform.

Cons

Potential equity bubble – Given that a large part of the rally in Chinese equities is driven by margin financing, which now stands at a towering US$350 billion, there is an underlying risk of defaults built by expectations and hype.

Contagion effect of rising margin debt to hurt banking system – While the margin debt of China seems manageable presently; it remains a risk as it links the banking system to stock market volatility. In order to fund loans to retail investors, brokers borrowed in the interbank market. As such, volatility in the market may cause defaults to occur and cause a chain reaction as the system is now more exposed to the brokerage industry.

Diversion of capital to equity market speculation – Although a somewhat less prevalent trend, there is observation that Chinese companies are diverting capital into the speculative equity market to generate quick and attractive returns. As these companies struggle with profitability from their core businesses in a slowing economy, this has been a strategy adopted by some. As a result, corporate profits become largely dependent on the equity market’s movement, hence affecting the volatility of earnings. In the event of a market reversal and a sluggish economy, earnings may suffer a double-blow.

Until more tangible consequences are experienced, the debate lingers about whether we are at the brink of an equity bubble bust or are we on the way to scale new highs. With no lack of positive takeaways from a robust market, it leaves little incentives for the market to head otherwise and this may be seen by Chinese regulators working their means to keep the outlined risks under control. The primary agenda for a bullish equity market remains that it will help facilitate structural reforms and revive the private sector to creating sustainable growth for China.

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, by CY

China

Waltzing to the Chinese bull market

Three years ago when I was on my trading desk in Hong Kong, the Shanghai Stock Exchange Composite Index (SSE) breached the iconic 2,000 points support level for the first time since 2009 and everyone thought a bear market for the Chinese equity market had emerged. Until about a year ago, that statement remained valid only to be surprised by a series of measures that transformed the equity market landscape in China.

Headline phrases that previously read searches for the bottom are now saying clinches fresh seven-year peaks and this is no wonder as the SSE outperformed all major indices worldwide to achieve a remarkable year-to-date (ytd) performance with a return of 42.8% as of end May 2015. Similarly, the return on Shenzhen Stock Exchange Composite Index (SZSE) ytd almost doubled at 97.8%. To put things in perspective, China’s closest neighbour, Hong Kong’s Hang Seng Index (HSI) recorded 17.2% returns while Dow Jones Industrial Average (DJI) and S&P 500 Index (S&P500) managed just 1.1% and 3.2% returns respectively over the same period.

Many would agree that the Chinese market remains weighed by the property downturn due to cooling measures enforced by the government, factory overcapacity due to weak export demand and escalating local debt. With softening growth in China’s economy as GDP growth is estimated at just 7% for 2015, market expectations are high that the central bank will further implement both monetary and fiscal easing measures to drive growth.

Further to easing expectations that fuel the rally in Chinese equities, there are more tangible developments. The People’s Bank of China lowered the reserve requirement ratio (RRR) by 100 basis points to 18.5% in April 2015. Additional RRR cuts were applied to financial institutions that are supporting the agriculture sector as well as small and medium businesses. While a RRR cut falls within expectations, the magnitude of the reduction surprised the market as it reinforced the central bank’s policy priority in supporting economic growth and more importantly to boost liquidity.

In addition, the market expects further reform announcements on state-owned enterprise (SOE) this year. As SOEs account for around 60-80% of the A-Share and H-Share indices, any positive reforms would serve as a catalyst for re-rating in SOEs.

Particularly for the A-Share market, the launch of the Shanghai-Hong Kong Stock Connect in November 2014 exposed the largely domestically driven China A-Share globally. With growing expectations of Shenzhen-Hong Kong Stock Connect and even MSCI to possibly include China A Shares in its upcoming annual market classification review, SSE and SZSE will most likely attract more fund inflows.

Dominated by onshore retail investors, the Chinese A-Share market may continue to see greater optimism despite regulatory changes on leverage and short-selling to curb rising margin debt. This is largely due to asset rotation by these retail investors who have grown increasingly cautious about real estate, wealth management products and bank deposit, hence developing a penchant for the equity market.

With the SSE trading at 7-year high of 5,131 points at point of writing, it may not be too long till we waltz to an all-time high of 5,903 points set in 2007.

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, by CY

Pages

cy toks

Five S that spells success for investor relations

Rise of the evil twin - Quantitative Tightening

M&A - deal or no deal?

Making IR relevant with design thinking

Top 10 IR strategies for companies in a bear market

Two-sided perspective of the robust Chinese market

Waltzing to the Chinese bull market

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