international finance and banking in Asia

INTERNATIONAL FINANCE AND BANKING IN ASIA

What’s corporate finance?

Corporate finance = money as a need for business

Technical equilibrium (treasury constrain/vincolo di tesoreria), do we have enough money

in order to do what we wanna do? -> cash inflows & outflows

Cash outflows = when you have to pay something

Two things:

- Cash magnitude

- Cash time: when cash inflows and outflows

We look forward, we don’t look backward, in order to answer to the previous questions.

We have to focus on how big is the amount of money we will need in the future, when will

we need that amount of money and how long is the time we will need the money,

because in the financial market they will want to know.

If we have money to do what we want to do it’s ok, but if we haven’t the money we have

to enter in the financial market to get the money, if is not possible the company has to

modify the business plan.

What is relevant here is that if you think about a company, every decision the company

takes has an impact on cash flows.

Assessment (profitability constrain) is it the right way to use money…-> benchmark (prova

delle prestazioni)

The corporate finance circuit

Money are in capital and financial market.

Financial market is the place where money are.

Is not a physical market, it is formed by vary main organization like banking system that

are part of the market, banks get money from savors and lend this money to company.

We have also other main constructions like stock market, individual sails..

Money are looking for investment.

When a bank have some money, it have to choose to which alternative investments

opportunities give them.

If you are the manager of a company and you need money, in the market there are two

different main way:

Liabilities are obligations of the firm that require a payout of cash within a stipulated

period.

- debt: usually has a maturity, you have to repay the amount of money, you also have to

pay an interest 1 di 53

- equity: is a document that sure that you are the owner, but this document do not fix the

return that you get, because the return is a residual return.

You have to explain to bank why they have to give money to you instead to provide

money to alternative opportunities.

In financial market there is a really huge competitions between all the companies, you

have to convince bank to give you their investment.

Why the company is looking for money?

Because company is planning to use the money.

Company wants to make investment in assets.

The invested capital is made of two elements: fixed assets and non-cash working capital.

Liabilities is how they get the money.

Assets is how they use the money.

All this invested capital which make the company works should produce other money.

We can use that money use to payoff.

You have to show that your payoff is better/works than the alternative opportunities.

Company is nothing else that the way to let the money works.

If you ask money the question is how you will use the money, you will be in the position to

payoff?

The specificity of the payoff are:

- The magnitude of the payoff (how)

- Timing of the payoff (when)

- Finance (the promise to payoff someday in the future).

This means that payoff of investment is not sure, it’s risky. You get money and you have

the expectations of future return.

There are no business without risks.

In the market there are many type of investors and different investor are looking for

different companies.

The company have to understand which is the best market to get in touch with.

Corporate finance basic principles

1. Look at Cash flows rather than Profit and Losses

Time is relevant in finance – it is relevant the moment money get in/out the company not

the one when the accounting system takes care of an event

First we have to understand which are the relevant cashflows and what is their origin

2. Look forward more than back

- Expected future cashflows are those affecting the sustainability of 2 di 53

corporate business plan and programs

- The past is relevant only because of the future impact of past choices (and so future

cashflows)

Knowing the past could be helpful when forecasting the future

3. Make future cashflows comparable, considering:

- Time: the moment they happen (1 Euro today is different from 1

Euro tomorrow)

- Risk: related to future cashflows (1 Euro to be paid by a trustworthy individual is

different from 1 Euro to be paid from a wanted killer)

Only this way it become possible to estimate the profitability of any decision

Everything is finance

To manage the money of the company means to regulate all the cash inflows and

outflows.

Every decision taken by the company has a cash impact.

So Corporate Finance is strictly related to all the others management functions of the

company.

The role of chief financial officer (CFO)

He/she takes care of:

Real assets;

• Financial assets (securities);

• Financial and capital markets;

• Investment decisions (capital budgeting);

• Financing decisions.

•

The role of financial markets and institutions

1. Financing (companies)

2. Liquidity (for investors)

3. Risk management

4. Information

The role of banks as financial institutions

1. Savings mobilization

2. Time to market hedging 3 di 53

3. Management of payments

4. Speed up economic development

Chinese banking system

Restructured from 2004:

- reformed and recapitalized the four major state-owned banks;

- developed those medium-sized commercials (some listed on the stock exchange,

others held by large local groups);

- allowed market access to foreign banking institutions (thanks also to the country's

entry into the WTO in 2001).

Banks in China:

Central Bank: People’s Bank of China ̈

• Big four:

• - Industrial and Commercial Bank of China (ICBC)

- Bank of China (BOC);

- China Construction Bank (CCB);

- Agricultural Bank of China (ABC).

Policy banks:

• - Agricultural Development Bank of China (ADBC);

- China Development Bank (CDB);

- Export-Import Bank of China (Chexim)

Second-tier Commercial Banks (n. 14)

• City Commercial Banks (n. 138)

• Rural Commercial Banks (n. 27)

• Foreign Banks (less than 2% of total loans)

•

Foreign banks

Foreign banks are now gaining market share:

Many subsidiaries are able to offer a large number of services to foreign companies, not

• only in foreign currencies, but also in the local one (once they have obtained a license -

only 8 today).

An overseas bank can establish in China a Chinese law bank, which is able to provide

• retail services to local citizens and SMEs, (which are still excluded from the branches of

foreign banks).

In recent years, some large foreign credit groups have acquired minority (always only

• minority) shares in Chinese banks.

Working efficiency of the system

- For some years now it is possible to open off-shore accounts by a non-resident

company, even though the cumbersome preliminary phase, the difficult management of

the relationship, and the nature of the relationship do not recommend opening. 4 di 53

- The financial products and services available in the People's Republic of China are not

very sophisticated, yet sufficient to meet the needs of that market.

- Local banks are all trustworthy, and for domestic market operations, having an

undeniable territorial supremacy, they are winning.

- Foreign banks today are a viable alternative, being closer to the foreign investor's

mentality and operation.

- The greatest difficulties are still caused by the bureaucracy that accompanies daily

activity. It is always advisable to use the qualified advice provided by the European

banks present in China.

Annual report analysis in a financial perspective

The financial content of the annual report

The Asset and Liabilities statement shows where financial resources were obtained and

where they have been allocated.

The Profit and Losses statement measures the income generated through such

resources.

Company production cycle

In accounting is relevant the economic cycle.

In corporate finance is relevant the monetary cycle. The monetary cycle depends on other

corporate policies (purchasing, production, sales).

Financial relevance of some definition:

The Production Cycle of a company 5 di 53

- At the beginning the company has to buy the raw material, pay the raw material,

transform the raw material

in order to produce the final products, then finished products are sold, clients buy the

product and the

company get the cash inflow.

So we have different moment for accounting that are relevant for finance. Basically as

long as you buy the raw material in the accounting system we can see that the company

is suffering a cost. But if you pay the raw material with a sort of delay you have no

financial impact. Because you have no cash outflow. (This is usual in the B2B business,

usually you buy something but you don’t pay immediately, you can pay whit a given delay,

days months.. it depends)

- Suppliers payment

- Enter into the production process, the company has to pay the cost (has to pay

the energy, salary and

wages to workers and these are cost)

- Once you have produced the final product you sell it, this means that you invoice

it to your client, this is

very relevant for the accounting system because this is the moment the company has

revenue. (relevant for the revenue but not for the financial point of view because if your

client do not pay you immediately you will cash the money with a given delay and so the

moment which is relevant for finance happen later maybe days months later. In the

production cycle we have other sub cycles — one is the economic cycle (starting from the

moment i buy the raw material ending in the moment i sell the product) in the conosci

cycle i have revenues .

Another sub-cycle is the cash cycle, which starts form the moment i pay my supplier

(cash outflow) and then ends in the moment i have cash inflow. I have cash outflow before

having the expected cash inflow. In order to run the business i need money i need the

financial market which give me the money i need first to pay my supplier then to pay the

energy etc.. and then to wait for the cash inflow due to the payment i will get from my

client. So time is relevant.

Which are the elements producing the difference between the economic cycle and the

cash cycle?

Basically are these three elements. Three elements: debt, inventors, credit.

1. Debt to our supplier. So the amount of money that we have to pay to our suppliers, we

don’t pay at the beginning, we pay the amount of money with delay. So it means that we

have the debt.

2. Inventories, depending on how long is our (production cycle) transformation cycle, how

long time passes (it depends on how the company is organised, how frequently I buy raw

material etc..) the dimension of the inventors of the company depends form different

factors.

3. Credit to clients, it depends from the delay in payment that I practice to my clients. It

6 di 53

depends from the business, It depends from the uses inside the business. It also depends

forma commercial policy of each company.

The evidence on the financial impact of the decision taken by different functions of the

company.

The dimension of the inventories (it’s not something decided by finance itself) it depends

on how efficient is the operation management of the company.

Also the credit is affected by marketing decisions. It’s not only a decision depending from

finance.

All this kind of decisions taken by the company have a financial impact, they have an

impact on the dimension of what a company need. And they have an impact on the time

of these financial needs. Any decisions produce an impact on this situation and so it

produces a financial impact. This means that the CFO has to provide different amount of

money depending on the decisions you have taken.

Any decision need to be financially sustainable, every decision produce an impact on the

dimension of the financial need. On the moment the cash flow will happen it means that

every decisions have a financial relevance. What you have to do is to verify every time if

every decisions you are going to take are sustainable from a financial point of view.

Example of a new company that start managing a single business cycle.

First step: So I start, I create my company what i need is to buy plant (maybe a very

sophisticated one, maybe a very simple one). I need money to buy the plant. The

entrepreneur pays some equity. The money the company needs to buy the plant are taken

on the market, part as equity part as debt. This is a choice of the financial manager.

When I start the business what I have to do is to buy the raw material. So the asset

liability statement grows in dimensions because in the asset side I have my plants and I

also got the raw material. Where do i get the money to pay the raw material? Basically i

got some credit from my supplier so what I have here is pay tradable which is something I

have to pay to my supplier of the raw material.The asset liability statement changes little

by little during the business cycle dynamic. New voices appear or disappear during the

process The second step is: pay the supplier. To pay my supplier I need money (moment

relevant for the cash cycle) , so what appear in the asset liability statement? The Dept

respect to the banking system.

Third step: (production) Then I transform the raw material that little by little become final

product.

In the asset side we have two effects, the first one is the value of the plants. The second

effect is that we have a big amount of final product, the value has grown up due to the

cost of transformation that the company has sustained in order to transform the raw

material into final product.

In the liability side doesn’t happen anything of equity or debt but we need money to pay

all the transformation costs, we have to pay salaries energy, so the company has to get

money somewhere in order to pay all these transformation costs. The amount of debts to

banks is growing up together with the growing value of the final product respect to the

7 di 53

starting value of the raw material. But the difference is only due to the cost the company

has sustained for the transformation process (that are basically the cost of energy and

salaries) . The fourth step: is how the company sell the final product to the clients. So the

final product disappear, is shipped to the client and what appear is the tray perceivable, is

the credit, the amount of money that we have invoiced to our clients and that they will pay

in the future (in case we sell without an immediately cash payment). We agree for a delay

in payment in this case. The value of the tray perceivable is bigger than the value of the

final product. Because the price i practice to my client is bigger that the cost of

production. So I have a marked up which is the profit margin. Is the difference between

the price i practice to my client and the cost of producing the final product. In fact in the

liability side what we have is exactly what we have previously, so the equity amount of

money, long term debt, short debt to bank plus the profit margin (which is

shared between corporate tax —that depends on the legislation of the country — and net

profit.

Fifth step: Once that my clients pay the amount of money they have to pay, the trader

receivable became cash because I get the cash inflow (the final moment of the business

cycle and also the final one of the cash cycle) so I get money and I can use money to pay

back something. In the example i have an amount of cash and I use it to pay part of the

long term debt and the debt to the bank (short term debt) which disappear and I still have

to pay taxes depending on which is the enumeration of the government, and I still have

the net profit (maybe I have to pay dividend to the equity holder).

We can divide our asset liability statement into two parts. The higher part is quite stable,

very little changes during the dynamic of the business cycle. The lower part is really

dynamic and it’s really directly affected by the moment of the business cycle the company

is living. So we know that the asset liability

statement shows us the money and how use the money, but we know that sometimes we

need money because we have to get the plant we need (A sort of permanent need of

money) sometimes we need money because we are running a business cycle and in

certain moment of the business cycle we are lack of money. So we have the CFO to get

some money from the market, from the banking system, in order to face the treasury

constrain.

It becomes useful to think of the reclassification of the A&L (assets and liabilities)

statement according to this logic: 8 di 53

The SP then becomes a kind of four tiles puzzle.

Every business decision directly affects the size of a tile.

At least one of the other must adapt to ensure the equilibrium.

The financial approach to A&L: When

you approach the capital and the financial market, the market looks first on your asset

liability statement. The market has to understand why you need money. This is the first

thing you have to answer to the market. Because thinking about the corporate finance

when you ask money to the market the first question coming out from the market is “why

do you need money?” The second one is

“are you able to pay a return to that money? Show how is it possible”

Any time you take a new decision you modify the dimension of one of these four tiles. So

this means that almost one of the other tiles has to react.

It’s not always finance that has to provide money. There are other solution. Ex. Surplus

asset can be sold. In this way there is no necessity to ask money from the market.

Other example: Modifying the working capital —> If the working capital reduces this

means that you can use this amount of money to buy new assets. You can also use

money to pay the dept.

The financial equilibrium is a mix of choices between these 4 management areas. The

equilibrium comes out looking together at