Turnarounds: How a CFO Helped Engineer a TV Miracle

In nearly three decades since he graduated with a bachelor’s degree in business administration and master’s in accounting from the University of Hawaii, Edmond Cheng Fong Ting has held finance posts in a grand total of 12 companies. He was CFO of four of them – Titan Petrochemicals, PSA International, Zoomlion Science & Technology and UTStarcom.
 
Today, 51-year-old Cheng is CFO of Hong Kong-listed TCL Multimedia Technology Holdings, the world’s fourth-largest maker of liquid crystal display (LCD) TVs (after Samsung, LG and Sony) and the LCD leader in China with 18% market share.
 
“I have 20 years’ experience working at Fortune 500 companies,” says Cheng, who has completed the EMBA Global Asia programme offered jointly by Columbia University, London Business School and Hong Kong University. “I have become familiar not only with the capital market in China but also Hong Kong and the US.”
 
Cheng spoke to CFO Innovation’s Pearl Liu about engineering a turnaround in TCL Multimedia, which had struggled after taking over the TV assets of France’s Thomson in 2004, advice to would-be CFOs, and other issues. Excerpts from the interview, which was conducted in Mandarin.
 
 
You’ve had a long and varied financial management career for someone who’s barely in his fifties.
I have 20 years’ experience working at Fortune 500 companies and I have been a CFO for more than ten years. With those years of experience, I have become familiar not only with the capital market in China, but also Hong Kong and US.
 
When I joined TCL Multimedia on 1 October 2011, we were not performing well. Our stock price was falling, at one point dropping to HK$1.65, which was already below our book value per share. It showed that the market knew little about the company and thus did not have confidence in us.
 
At that time, I said that our primary task was to build up investor confidence in the company and [focus on] the company’s future development. In the past 18 months, our stock price has climbed to HK$6. [Ed. note: TCL Multimedia closed at HK$7.16 on 2 May 2013, up more than 300% from 2011.]
 
How did the company engineer the turnaround?
I worked quite closely with our CEO, Charls Zhao [Zhongyao], to change the company’s business strategy. Charls put forward two key words: ‘speed’ and ‘efficiency.’ I cannot agree more because, in the TV industry, the product life cycle is becoming shorter and shorter. If we want to beat our competitors, we have to be much faster and more efficient. It’s very important.
 
We started to pay more attention to our spending. Excluding R&D, we lowered our costs by 0.4% in fiscal year 2012 [ending June 30]. The expense ratio [selling and distribution costs plus administrative expenses over turnover] fell to 13.7% in the first quarter of fiscal year 2013, from 14.9% in the first quarter fiscal year 2012.  
 
But we increased spending on R&D because we know that if we want to be competitive, we have to have good new products. The target is to allocate 1.5% [of sales] on R&D so we can launch introduce new products and add new functionalities. Our strategy is to save money on other areas and use the savings on R&D. 
 
With these strategies, we recorded profit [attributable to the owners of the parent company] of HK$911 million (US$117 million) in fiscal 2012, a jump of 101% from fiscal 2011.
 
[Ed. note: Profit attributable in the quarter ended 31 March 2013 was HK$196 million, up 18.8% excluding one-off gains in 2012; see chart below.]
 
Click image to enlarge
 
 
At 1.5% of turnover, R&D would have cost you HK$595 million (US$77 million) in fiscal year 2012. How do you balance spending and benefits?
If we do not launch new products and there’s not much difference between our current line-up [and those of the competition], we will not have pricing power . . . Innovation is the driver of good finance performance in the TV industry.
 
R&D needs to be focused, though. So we have created a committee tasked with making plans for new products and new functionalities that are in demand in the market to guide the R&D department’s innovations.
 
Because different markets may have different needs, we divide our R&D into different sectors for different markets, such as China and overseas. You have to know your customers’ taste. A new product without a market is really high cost with no profit.
 
We are also cooperating with Shenzhen CSOT, a high-tech company focusing on production of LED (light emitting diode) modules in which we have a 55% share, with Samsung owning 15% and the Shenzhen government 35%. CSOT’s fast-paced innovation – it recently developed the world’s largest 3D LCD touch screen, the 110-inch ‘China Star’ – helps us a lot in launching new products, giving us a head start over other companies in the industry.
 
What is the role of finance in all of this?
Mitigating risk is the most important thing. When you run your business globally, you have to deal with various risks in different countries. And the larger your business, the more risks you face and the more difficult it is to unwind risky positions. Preventive risk management is very important here.
 
Corporate finance is another important role, including the sourcing of financing. We have an advantage here. While we are listed in Hong Kong, we also have our parent company operating in China; we are connected to both Hong Kong and China.
 
Our relationship with banks [in both markets] is quite good. They support us not only when we do well, but also when we face challenges, such as the difficult time [experienced in 2011]. I always say transparency and healthy communications is key [in sourcing financing]. But this could not be achieved in one or two days; it’s a long-term partnership.
 
Another area where finance can contribute is mergers and acquisitions. a well-organised M&A can bring huge gains, although I’m not saying that we are planning [an M&A deal at this time].
 
Speaking of M&A, TCL took over the television assets of French giant Thomson about ten years ago, but it seems it was not very successful.
The company did struggle after the Thomson transaction in 2004. Regardless of how other people think about this M&A, however, I believe it’s a necessary process for us to undergo. We must learn to deal with situations like this sooner or later, because stepping out [globally] is an important part of our business strategy.
 
Since 2011, we’ve already built up a very experienced management team and sales channels overseas. We are the pioneer in the industry [in China]. With all the experiences, good or bad, we are more mature than our competitors.
 
What are some of the lessons from the Thomson deal?
We learned the importance of a complete plan, one that details the required preparations before the transaction, and how to manage the integration after the deal is completed.
 
You must be very clear about your plans before the M&A, not after. I think many cases that have not gone smoothly due to the lack of pre-planning. A deal is agreed to even before the buyer knows how to integrate the acquisition. This cannot be good.
 
I think that to shun M&A because you are afraid of the risks is not logical. Every business activity actually has its risks; running a firm is already risky. If you are afraid of these, then why not just put the money in the bank, which is definitely with the lowest risk, and off course smallest profit.
 
Why is TCL Multimedia going overseas? Isn’t the Chinese market big enough for you?
Going outside is one of our strategies, which I strongly believe is a step that many Chinese enterprises must take. The reason is the demand. People always talk about the fact that 25% of the TV market is here in China and that it is the largest market. But you can also say that 75% of the TV market is out there in the rest of the world.
 
Our overseas segment is now quite significant. It is comprised of four groups: OEM, emerging markets, North America and Europe. Both OEM and emerging markets have made profits for years. Our target this year is for North America and Europe to become profitable as well.
 
We will start selling to three new emerging markets this year. The first is Indonesia, which is home to 240 million people and has huge potential consumer purchasing power. Another is Pakistan, a country that enjoys a good trade relationship with China. The third is Africa, where we see fast economic growth and big youth populations. Young people are the main TV consumer group.
 
Expanding overseas poses new challenges for finance, though.
There are a lot of challenges for our finance team. First is front-end risk management, including receivables and inventory management.
 
We implemented an enterprise resource planning (ERP) system this year to strengthen this part. An ERP system is important, especially when your business is expanding. We need real-time information to make the correct decision and lower the risk.
 
For example, I now know the exact number of TVs that have been sold and the price point in whichever city is covered by the ERP system. I no longer need to wait for 30 or 40 days. We are well on the way to moving from [reactive] management to [proactive] management.
 
Talents management is another challenge. We have been sending our own people from China to our offices overseas. But we have realised that it is also good to hire more local talents because they are more familiar with the local culture, with the local business patterns.
 
This is particularly true in finance, where standards and regulations differ from one country to another, for example in taxation. As our company heads to MNC status, we need to deepen and diversify our finance [management bench].  
 
What advice would you have for other CFOs in globalising companies like TCL Multimedia?
To me, the first and most important thing is [mastery of] cash management, because liquidity plays such a big role in a company’s healthy development.
 
In our company, we need to pay special attention to hedging. For example, in 2012, 40% of our [unit] sales came from overseas, making currency risk a big challenge for finance. We used to hedge about 50% [of our foreign currency exposure]. Last year, we successfully made it 70%.
 
The second [expertise to cultivate] is tax planning, which is quite important for MNCs like us. We had some good results last year as we managed to bring the effective tax rate to 7.7%.
 
We should also bear in mind that success cannot be achieved by the CFO alone. I we have an excellent finance team supporting me. It’s our role as CFO to make sure to keep these finance talents, who are in high demand in China.  
 
Next is communication with board members. The board is the backbone of corporate governance and we should support them with the finance analyses so they can make the correct decisions. And with their years of experience of the business, board members can be a big help to finance. It’s a mutual thing.
 
The last thing, but which I believe is the most important, is that as a CFO, you have to know your company and be familiar with the industry. CFOs nowadays are not only about numbers. We should be able to discover the problems behind the numbers, the impact these numbers have on the business. We should never separate finance from the business.
 
How important is compensation in attracting and retaining finance talent?

I believe salary is definitely a deciding factor. You have to offer a competitive package in order to attract good talent and retain them. Without it, it’s very difficult, to be honest. Of course, other things like career path, freedom at work and training programs are also important.  

 

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