Major financial index

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the HWL expanding its investments on Watsons ,and benefited by its strong cash flow supporting that allowed the HWL could endure the 2008 economic crisis.

Overall speaking, its stock performance was falling behind the market, shown in the Chart 3 among the last ten years. Even focusing on the interval between the 2003 with the year 2008, the total growth rate of the Hang- Seng index was 130%, but only almost 30% for HWL. In fact, apart form the 3G business, other core business performed very well, especially the Retails. However, the loss of the telecommunication offsets all these good performance, which let its stock price underestimated by the market. After years investing on the 3G telecommunication, the cost is gradually dropping along with the time that no more expenditure will need to install in the future. Hence, the market has turned its original negative attitude to positive side and started remarking buy-in recommendation to the HWL. The HWL has finally regained its glory after all these years’ efforts.

2.2.2 Major financial index

In order to figure out the stories behinds the stock price, we must go through some major financial index, which can help us realize its management capability on Risk and Operational and ability of generating profits.

Risk Ratio(HK, Millions)

Chart 4 The Risk Ratio Index

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Inherited form the style of Li Ka-shing , HWL tends to plan how to avoid the risk before thinking of the great expansion , and it has become part of its corporate culture. Before the year 2002, its Debts/Equity ratio is in a perfect range between 0.27 with 0.28 that even under 0.4, which is the ideal parameter widely believes. This situation made a turn in year 2002, it suddenly rise 50% to 0.42, which is closed to the average standard, but still shocked the market by having that drastic deterioration. After that, the number kept rising to the record highest level 1.02 and got better in 2006, which was the first drop and stopped the four consecutive years hiking up. Nevertheless, in 2007, the ratio went back to 1.0, gladly it did not last long and improved in the next two years.

We can easily attribute the poor performance between the years 2002 to 2007 to its expansion on the 3G telecommunication. The need of capitals not only sucked up resources of the HWL, also pushed up its debt ratio. It also reflected on its Financial Risk index (Risk Fin=

EBIT/DEBTS), after heading to the highest point in 2002, the ratio had sudden drop and remain a low level in three consecutive years. Either of the Debts or Financial index ratio had honestly reflected the impact caused by its expansion activity happened at that time, or demonstrated the big crisis that HWL were facing. Tracing back to that history, we would like to know how the HWL dealt with this issue that may lead us to learn its expansion strategy.

Hence, we should look at the Risk InV index (Formula= the disparity of EBIT in two consecutive years / the disparity of resource EBIT in two consecutive years), which means how much

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profits earned form its annual investment. In other words, we need to realize if the company could create more value through its expansion.

It was surprised that the 3G -telecommunication loss, only made a bad look in years 2003 to 2005 by having negative EBIT growth ratio and then got better after consecutive years. Even in year 2004, the ratio was positive by having the strong contribution from other core business. Thereby, we can have a short conclusion that although the HWL `s expansion became a huge burden of the corporation, but the crisis would be hard to knock it down, especially it had the continuing support with other core business which made its business fluctuation lower than a single business company.

Cash Flow Ratio (HK, Millions)

The cash flow turns to be the most important issue to the company’s management. Even if a company has a profits in account but lacks of cash, it may get bogged down in the liquidity risk, like, without money to pay the bill, supplier, loan and so on so forth and all those may directly cause the bankruptcy to the company. Besides, except the concern form liquidity, we care much more on its capability to creating the positive value for the company and it will reflect on the FCF index.

If a company can bring more free cash flow (FCF) into the company, which means it has more stakes to do the further investments and has Chart 5 The Cash Flow Index

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the potential to create more value, more importantly, it also represents that company has the optimistic return on its investments and no need to worry about the cash flow risk as well.

The HWL is widely known for its conservation on cash flow management by always having the abundant cash reserved in case of any possible coming risks. Just like the chart 5 shows, before the year 2002, its working capital (Account Receivable + Inventory- Account payable)remained in a very low standard , which means the good control on account receivable and its inventory and ensure all the profits in profits can successfully turned into the real cash. However, the situation had the change in year 2003 but still acceptable until another sudden hiking in year 2007, which was the beginning of the global economic crisis and the number remains high until now. That may explain why for all these years, the market researchers widely downgrade the performance of the HWL and its stock price fall far behind the market.

The same condition happened on its financial operation (FinAct), before the year 2002, the HWL continually refund its debts annually.

However, with the need of its expansion on 3G telecommunication, its financial action hiked up from the year 2002 to 2004 and had sudden drop in 2005, which implied the new phase of the company that the need of cash had finally has reduction. With two consecutive year’s growth from year 2006 to 2007, the HWL also refunded a great deal of debts in year 2008 and 2009 that was a great achievement, especially at the most difficult moment. Hence, we can still have a positive attitude on that performance. After all, it represented a very good sign

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that company started making sufficient money, which was able to refund the loan.

Speaking with its capability of making money, out of questions, the FCF (Free cash flow) index is the key reference. Before the year 2001, the HWL has reserved the abundant FCF, which convinced the HWL stepping into the 3G business development. However, after the year 2001, the HWL went the turning point in year 2002, and it lost almost 24 billion at free cash flow in that year, though it got better in 2003, but another big loss occurred in 2004, which lost around amazing 227 billion. That is no wonder that the market was very pessimistic during that time and its stock price remained in a very low level. However, as we have mentioned, it seems that situation had change since year 2005 by having its FCF turning to be positive and only slightly drop in year 2006, apart from the systematic risk happening in 2008, its free cash flow had growth gradually, which shows its capability of making more real money now and after. Meanwhile, this good performance recall the confidence of the market investors, also revived its spiritless stock price for a very long time.

Management Ratio (HK, Millions)

After only concentrating on the single index, now we move further to overlook its overall performance, which is also the transcript of its Chart 6 The Management Index

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management. Here we list the four major indexes, which can elaborate its capability on utilization of its resource (RORES), the efficiency of the management (EBIT/GP) (See Chart 5), the sustainability of the risk (Cash/SGA) and creation of the company’s value (EV/SH)(See Chart 6).

In fact, as the other index we have talked about, its average return of the resource was around perfect 8%, but it had consecutive drops between the years 2003 with 2006 and gradually turned around. Except the recession year 2008, it had gone back to the level of 5% to 6%.Like wise, its EBIT/GP ratio(See Chart 5) shows the same tendency, the had time appeared from the year 2003 and lasted three consecutive years to 2005 and back to good in 2006. Among that, the Cash/SGA also stayed in a very high level even in the period. It explained a very crucial factor that the HWL always prepares the sufficient bullets for any possible coming challenges and it well never let any expansion push it to the danger condition.

By over viewing all these data, it also inspires us that the business allocation must play a very important role while its expansion, and provided the support in time. That is how the HWL can still kept high EBIT/GP ration around average 18 % at the hard time and never went to be negative. From the aspect of the value it created, although the EV/SH dropped from year 2003 to 2005, but there was still 74 at the worst time and hiked back to 154 in 2005 and growth gradually.

Although its stock did not reflect this outstanding performance right away, but this achievement impressed the market recently and made its stock price rebound in the near trading days.

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Besides, from the chart 7, we can verify the prior ideology once again, even in the expansion stage, its overall EPS still remain on the range between 2.74(HKD)to 3.36(HKD).Especially, it started a new phase since year 2006 and had a great performance in 2007 with the EPS 7.18(HKD). Although the sudden impact in 2008, which lowered its EPS to 2.97 (HKD), but it recovered very soon and went back to 3.32 in the year 2009, in which its growth rate only dropped in 2008, other than that, the company kept growth even its expansion was carrying on at the same time.

More importantly, for investors, the HWL turns to be a safe long-term target by issuing the stable dividends each year. Form the side of the investment, the good thing is that its future cash flow is rather stable and easy to predict, however, it also hard for making any speculations.

Chart 7 The Profits and Dividends

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