Chen Zhao Nian is responsible for the daily management and operations of Hong Kong-listed Chu Kong Petroleum and Natural Gas Pipe Holdings, China’s largest manufacturer of longitudinal submerged arc welded (LSAW) steel pipes for energy companies. Her formal title is Executive Director, but her remit can be described as those of the COO.
When the Finance Boss Is the 'Child of the Owner'
That acronym, of course, stands for Chief Operating Officer – or ‘Child of the Owner,’ as some wags put it. “I’m the daughter of the boss, but I did not start in the position where I am now,” the 36-year-old Chen explains good-naturedly. She was first hired as a finance team member in Chu Kong Pipe, the company that her father, Chen Zhao Hua, founded in 1993.
Chen Zhao Nian (pictured) spoke to CFO Innovation’s Pearl Liu about finance management at Chu Kong Pipe, which reported turning a profit of RMB310 million (US$49 million) on revenue of RMB3.9 billion (US$626 million) in 2012, her working relationship with the CFO and other issues. Excerpts from the interview, which was conducted in Mandarin:
It must be a bit difficult for you as the daughter of the chairman to be working in the same company as he is.
That is exactly the reason why I chose to work from the bottom when I first came as a fresh graduate in 2002 [with a master’s in accounting from Leeds Metropolitan University in the UK]. I know myself, and I know that I was not qualified at that time to lead people.
I asked myself: If others come to me with questions such as whether we need to take out a loan from the bank or not, can I make a decision and do I know which bank and who to contact if we do need the funds? No. I needed to go through a process during which I could learn and get on well with others in the company. Be humble, always be humble.
I also know that I should never have a hand in things that I’m not in charge of, for example, sales. I’m not an expert in that area. Why should I tell the sales people what to do? I’ll only talk to them when it’s related to finance. For example, when it’s close to the end of a year, I may need to get updates on the orders to get a rough idea of the receivables and payables.
Our company is a family company but it does not mean that as the daughter of the chairman I can give any order I want to everyone.
Eventually, though, you were promoted to senior management.
After years of polishing, I was appointed, together with the CFO at that time [Hu Chung Ming], to take charge of the listing in Hong Kong.
Actually, in the beginning I felt that my father was not sure I would be able to do it, though he never told me so directly. I just told myself at that time that I will prove to him that I am qualified.
We started to prepare for the listing in November 2007 and got the approval of the HKEx the next year. Everything was ready and heading for success when the [2008-09] financial crisis swept the world.
We saw the markets turn gloomy. If we issued the IPO at that time, we would have needed to price too cheaply. I decided to postpone the listing. It was definitely a hard time for me.
You went through a trial by fire. What were the lessons you learned?
I realized that listing is not only about finance, about numbers, but also related to various areas, tedious processes and piles of documents.
You must be familiar with every line in your documents. Sometimes, the [listing committee] asked me to complete or re-file information. I told them exactly which document [contained the information] and on which day I delivered what they needed. You must have this confidence, which of course is based on your familiarity with your company.
It also during this time that anti-dumping became an issue in the US. We had to make sure that our company [would not be subjected to anti-dumping measures], which would have damaged our credit and negatively affect our listing in Hong Kong.
At the end of 2009, when the [global] economy was recovering, we resumed the listing process and finally issued the IPO in February 2010. I never felt tired during listing process, but fell ill on the day we celebrated going public.
The board appointed me as the executive director focusing on finance after that.
You are in charge of finance. How would you describe your working relationship with the company’s CFO?
Our CFO, Cammy Wong, and I are colleagues, and friends as well. We work together and exchange our ideas quite often.
When she joined us [in 2011], she as a finance professional was skilled with numbers, of course, but was relatively new to the [steel pipe] industry. At that time I took a little bit more involvement in the role. But now that she has gotten more familiar with the company and the business, I’d like to step back and give her more freedom.
I do not act like a boss and request her to do this and that. She knows the basic tasks, for example, financial reports and budget plans. These are in her control. If she or I have questions or any thoughts beyond that, we will discuss and solve them together.
What are your expectations of the CFO going forward?
I expect more support when dealing with the banks, which is critical to a company’s financial position, as we all know. We currently have a specialist taking care of this. Cammy is coming along well. I hope that she can take the lead [with corporate finance], for example with bond issuance.
Our company is continuing to expand. We need a lot of information. For example, the regular budget report needs to be improved and made more complete. I would like to get more ideas from the CFO about how to improve financial management as the company grows. She can spot the flaws and provide the solutions to the board on her own initiative.
Why did Chu Kong Pipe decide to list in Hong Kong and not in China? Your principal place of business is in Guangzhou, after all.
We did think about becoming an A-share when considering our listing. Many consultants said the PE multiple [in China] is quite high.
But I had my own considerations. I believe that different markets fertilise different firms. The main reason for choosing to list in Hong Kong market is because 50% of our products are sold to international oil and gas companies. For those in the overseas markets, the Hong Kong stock market is considered more mature than those in China.
It’s more convenient for international investors to buy stocks listed in Hong Kong. Plus, I saw more potential financing opportunities in Hong Kong. The banks here are quite supportive, so we can find more opportunities and have more choices.
In 2011, the year after we listed, the cost of financing in China soared. I heard that some banks even doubled their lending rate. But the interest rate we got remained almost at the same level. Banks in the mainland have more confidence in companies like us that could get listed in Hong Kong. I believe it’s related to the more transparent information disclosure system here in Hong Kong.
Today we have very harmonious relationships with banks both in Hong Kong and China, which is a big help to our liquidity position.
Chu Kong managed to increase net profit last year by 34% despite the slowdown in the Chinese economy. How was this achieved?
Does the performance of the domestic economy and conditions in the steel pipe industry influence the company’s performance? Yes, of course. But you see red ink in the financial reports of companies in robust industries. Likewise, you see net profit by companies in slowing industries. We are one of the latter cases.
Compared with the other three [competing] companies, our advantage is that we do not just focus on the domestic market. We have 800 clients in 50 countries across the globe, which helps us mitigate the risk when the orders in one market are dropping, such as in China this year.
And our R&D effort is paying off. We paid a lot attention to research in the past years and it has eventually borne fruit. Deep water LSAW is an example. We are the only one that has this business in China. It brought us good revenue and relatively high profit rate in 2012.
Last year, we also got our first order from a nuclear power company. In the past, they all ordered from overseas, and now we can supply them as well.
R&D is not cheap. How does finance balance spending and making a profit?
People may think that the cost is too high as every year we spend more than RMB100 million on R&D. But I see the improvements in production capacity and increases in orders. Many orders are worth more than RMB1 billion, which balances the cost quite well.
The key is for us to draw a complete risk plan before we put our money in. I need to know that what I’m paying for is going to be in demand and when exactly my investment can be paid off.
It’s also very important to maintain a strong liquidity position when you are investing new projects and expansion. I believe we’ve done a very good job in this area. I’ve still got RMB1 billion in cash at the end of the year, even though we spent RMB1 billion in 2012.
One main reason is our good partnership with the banks, as I mentioned earlier. Last year, our credit lines in China totaled nearly RMB7 billion. We utilized just one third. This year we’re getting more support, especially from policy banks like the Export-Import Bank of China, which is offering us a two-year loan at 4.2% annual interest. The same is true with banks in Hong Kong as well, including Citi.
Some analysts say the private sector in China is being starved of bank financing because state-owned enterprises get priority in lending, but this is obviously not the case with Chu Kong Pipe.
The private sector now accounts for almost 60% of China’s GDP and 50% of tax revenues.
Both state-owned enterprises and private-sector companies have their own edge. SOEs may have strong internal controls and developed management systems, but they may not be that bold in terms of expansion.
Our industry is a telling example. Look at the financial performance of the other three steel pipe companies, which are SOEs. They are not as good as ours. I strongly believe that private-sector companies, including family companies like ours, can develop in a healthy manner.