asean champions

thecorporatetreasurer.com2 corporate treasurer OctOber / nOvember 2015

AseanchampionsAs the Asean Economic Community’s formation draws near, The Corporate Treasurer asked some of the region’s leading financial lights for their views on its potential.By Ann Shi

thecorporatetreasurer.com OctOber / nOvember 2015 corporate treasurer 3

asean champions

I t has been a year since we last spoke to the region’s highest-profile treasurers about their outlook on the Association of Southeast Asian Nations

(Asean). They were keen to talk up the opportunities the bloc offers, but as the December deadline looms over the creation of the Asean Economic Community (AEC), the tone seems to be more measured as the theory now turns to practice.

The Corporate Treasurer spoke recently with Mohamad bin Derwish, treasurer at Malaysia’s national telecom champion Telekom Malaysia (TM), about the company’s domestic growth strategy and the difficulty of obtaining business licences abroad.

We also spoke to Jose Teodoro K. Limcaoco, managing director and treasurer at the Philippines’ oldest conglomerate Ayala, about the overseas ventures it made this spring.

Wan Chun Shong, group treasurer of Tan Chong Group, outlined the conglomerate’s expansion strategy with a special view on Cambodia, Laos, Myanmar, and Vietnam, while Fuad Rizal, treasurer at Garuda, talked about the risks of an “open skies” policy.

We also got the views of PTTEP’s CFO Penchun Jarikasem on the need for a more cohesive energy policy, and her fears that most small companies have little idea about what the AEC will mean for them. n


Telekom Malaysia: Talking to the 600 million

Since the 2008 demerger of its mobile and international operations arm, TM International, which later changed its name to Axiata, TM has focused its attention on its core fixed-line telecom business.

“Over 90% of TM’s revenue streams [now] come from the domestic market,” said Mohamad bin Derwish, TM’s treasurer and general manager of corporate finance, who added that despite what the free-trade potential the AEC might offer, home is where the

major focus will stay. That is not to say TM has no ambitions

to go regional, or even beyond. As Dervish sees it, the long-awaited AEC provides an opportunity to access a market of more than 600 million consumers.

The company has signed agreements with Thailand’s Symphony Communication and Cambodia’s Telcotech to install a 1,300km-long submarine cable system. Once finished, the system will link up the three countries, with further access to Laos, Myanmar and Vietnam through

terrestrial links.The system is expected to be ready for

commercial services by the end of 2016. And in March 2014, TM partnered with regional and global telecom players for laying a cable system that connects Asia, Africa and Europe.

Even though Asean countries are becoming more integrated, barriers remain for companies looking to grow regionally. The willingness of other nations to grant telecom licences to outsiders is an issue. Every country has different regulations on telecom entry and services, but greater connectivity across the region should be on the AEC’s agenda, Derwish said.

“I hold an open heart to expand into other countries in the region, but first, I need to see how opened-up they can be.”

sound of silenceFor now, with most of its business in Malaysia, it makes sense that TM’s treasury management is centralised at its headquarters in Kuala Lumpur, said Derwish.

This means TM can have group-level visibility on the use of funds, flow of receivables and payments across different operations in the group, he added.

Derwish is also “holding an open heart” to the Malaysia government, it seems. Despite its treasury location, TM has not applied for government tax incentives for operating a treasury centre in Malaysia – the rules for eligibility are heavily skewed to foreign corporates.

According to Derwish, one of the conditions for the treasury management centre’s (TMC) tax benefits is having at least 80% of the TMC’s revenue generated from offshore markets. This is geared to encourage foreign multinationals to set up their TMCs in Malaysia.

Initiated three years ago, the licence offers a 70% tax exemption on income from treasury activities such as realised FX gains; no withholding taxes on interest payments on borrowings by TMCs; and full exemptions from stamp duty on all the loans executed by TMCs.

“We are talking to the government now [about] broader TMCs tax incentives [for companies whose revenue mainly relies on domestic market] to attract more applications,” said Derwish.


asean champions

At Ayala’s annual stockholders’ meeting in April, its chairman, Jaime Augusto Zobel de Ayala, said the group is strongly interested in investment opportunities in Asean. His younger brother Fernando Zobel de Ayala added that some business expansion efforts by group companies in Asean have made much progress already.

The 181-year-old conglomerate, with core interests in real estate, telecoms, utilities and banking, has hiked its capital expenditure to around P185 billion ($4.15 billion) for this year, up from P160 billion in 2014. A significant portion is likely to go to Southeast Asia. At present, overseas businesses only account for around 10% of Ayala’s revenue, according to Fernando.

Its real estate arm, Ayala Land, acquired

Tan Chong’s ride into the Asean

Building Ayala’s Empire

An integrated market with great growth potential and a large population base will appeal to most chief executives, especially those highly reliant on sales volume. The automotive industry is a case in point.

The low car ownership rate across Asean, coupled with the region’s increasing purchasing power constitutes a natural growth engine, according to a June report by consulting firm Frost & Sullivan, which predicts Asean’s automotive sales will grow to 4.5 million units in 2020, from 3.5 million in 2013. Tan Chong Motor Holdings (Tan Chong), one of the oldest listed automotive companies in Malaysia, is priming itself to take advantage.

“[AEC] envisages offering ‘a single market and production base’ that enables economies of scale and phased-out tariffs. The landscape is conducive for auto players to produce a specific model in one country and distribute it throughout Asean, to achieve higher productivity and cost efficiency,” said Wan Chun Shong, Tan Chong’s group treasurer.

The auto company is betting on Cambodia, Laos, Myanmar and Vietnam (CLMV), to yield the best returns. Wan told The Corporate Treasurer that total industry volume (TIV), an indicator for the sales of new motor vehicles, typically soars

when GDP per capita hits $3,000. GDP per capita in the CLMV lags far

behind the $4,300 of the Philippines, the poorest member of the six major Asean countries. Myanmar and Cambodia had around $1,600 and $2,300 respectively in 2012, according to the International Monetary Fund.

“[Among the CLMV], Vietnam shows the greatest potential, as its GDP per capita is expected to reach $3,000 in 2018, and as its motorcycle owners look to upgrade to entry-level cars,” said Wan.

The group identifies three key development phases in the CLMV: Adaptation (market entry) until 2015; stabilisation in 2016 and 2017; and growth from 2018 onwards. In each country, Tan Chong aims to grab a minimum of 5% TIV when a new venture stabilises.

To establish first-mover advantage, Tan Chong built its first overseas vehicle assembly plant in Da Nang, Vietnam in June 2010, establishing a strategic foothold in the country and access to the local market. The plant rolled out its first Nissan Sunny model in June 2013.

As Myanmar opens its doors to foreign investors after years of isolation, Wan believes it can be the next growth driver for the region. Putting its money where its mouth is, Tan Chong will soon set up an assembly plant in the Bago region, 50 miles north-east of Yangon.

The company plans to take a “conglomerate approach” to venturing offshore. With interests in heavy

machinery, cosmetics, undergarments and tourism, after it establishes a foot in the door with its motor offerings, the other business divisions will march in.

Go-slow implementationThe vision is smooth, but reality tends to deliver a bumpier ride. Issues, including cultural differences, entry barriers and financial incompetence, constitute an obstacle. Each country has “unique constraints”, said Wan.

For example, Laos and Cambodia still adopt docket prices for vehicle importation, instead of the actual invoice price. This creates inconsistency – tax is lower based on docket price and higher on invoice price.

Malaysia’s approval permit, an import licence designed to protect the local car industry from parallel importers, places a non-tariff barrier to cross-border trade; and almost every other Asean member has its own version as well. In the auto industry, a separate licence for each new brand a company intends to trade, produce, or distribute, is required.

Myanmar has a business law on equity requirement that restricts trading business. And “you can’t make US dollar payments in Myanmar as the country is under US sanctions”, Wan added.

“Conglomerates will not enjoy the real benefits of AEC unless [all] the Asean members are ready to [fully] liberalise their markets. Until then, set realistic expectations and remain resilient.”


a roughly 9% stake of $43 million in Malaysia’s MCT Consortium in April, followed by call-option agreements with two MCT shareholders in May to increase the stake to around 33%. In Myanmar, the developer is talking to the country’s major retailer City Mart for a residential JV.

Its water distribution division Manila Water, which also operates projects in Vietnam and Myanmar, is now eyeing franchises in Indonesia and elsewhere, according to its CEO Gerardo Ablaza.

Another two major businesses of Ayala, Globe Telecom and Bank of the Philippine Islands, are looking to launch mobile-banking services for low-income families

he said. “When conglomerates consider their Asean ambitions, they should ask themselves how easy it is to alter their banking relationships.”

Limcaoco noted the regulators are putting together an Asean banking integration framework, which is expected to allow a licenced bank in one country to also operate in another Asean member country. “It will be exciting if [well-designed and] fully implemented,” he said.

Labour mobility is another important factor, Limcaoco added. He believes a true AEC should mean that a professional with a given licence can practice in other countries in the region.

PTTEP: Fuel growth with centralisationAsean does not have enough energy resources to support its growth – eight out of 10 Asean countries are highly dependent on imported oil. Thailand’s petroleum giant PTT Exploration and Production (PTTEP) sees this as an opportunity to tackle a big market gap.

PTTEP has been investing in Myanmar for more than two decades. To date, PTTEP has eight E&P projects in Myanmar, one fifth of its 40 projects in 11 countries internationally, which include five in Indonesia and Vietnam.

In the first six months of this year, Asean contributed 93% of PTTEP’s total average sales volume, or 20% excluding Thailand.

Add low oil prices, these figures could get bigger, as the petroleum group has a $3 billion cash war chest, of which a significant portion is primed for new investment in Southeast Asia.

“We would be looking at acquisitions, with a primary focus on producing or near-to-production assets in Southeast Asia,” said PTTEP’s CFO Penchun Jarikasem.

On this front, Jarikasem believes centralisation is the key to supporting its growth. Increasing the company’s treasury management efficiency, improving yield by being the single point of investment, and gaining greater bargaining power with financial institutions, are all part of the plan.

The company decided in mid-2013 to utilise a treasury centre to concentrate liquidity and cash as the first step in 2014.

With two cash pools – one in US dollars and the other in Thai baht, containing between $700 million and $3 billion, depending on operating cash flow projection – and a Thailand-based treasury centre in operation since 2014, it has implemented an intra-group liquidity structure through automated inter-company cash pooling and sweeping.

PTTEP’s treasury team estimates the structure has saved the group about $300 million overall minimum working capital requirement on a daily basis, as multiple accounts are pooled together to increase liquidity and free up idle cash.

Jarikasem is generally positive about the opportunities AEC can bring to a

company like PTTEP, but “time is the key challenge”.

aec iGnoranceThe AEC will “make our investments in the region more flexible through improvements in logistics, transport facilitation, as well as free flow of labour”, she said.

But not everyone appears to know this. Jarikasem cited a recent report from Asian Development Bank, which claims that less than one-fifth of Asean businesses are ready for the transition to the AEC, highlighting a lack of awareness and understanding – especially among SMEs – of what the AEC really entails.

Unsurprisingly, PTTEP would like to see a more coherent policy on the region’s energy supply chain and a regional energy security plan that promotes the investment and trade of energy resources, given the region’s shortness in energy. On this front, Jarikasem is hoping the two key initiatives targeting the region’s energy supply chain – Trans-Asean Gas Pipeline (TAGP) and Asean Power Grid (APG), which were mandated back in 1997 – can deliver progress on building up energy interconnections in the region.

To date, six of the 16 planned APG interconnections have been built, with 3,489MW power purchase achieved. Similarly, the TAGP has commissioned a total of 12 bilateral gas pipeline interconnections projects, with a total length of 3,377km.

in the region, especially in Myanmar.

cross-border bankinGWhile there has been a lot talk about the 2015 deadline as a watershed, Asean “has been quite open for many years in terms of trade”, Ayala’s managing director and treasurer, Jose Teodoro K. Limcaoco, told The Corporate Treasurer.

People have a greater awareness of the development of inter-Asean trade but Limcaoco thinks the governments should be focusing on liberating “the regulated businesses” rather than “the pure trade”.

The regulated businesses, such as banking or insurance, have real potential,


asean champions

Garuda flies to the ‘Asean Open Skies’Earlier this year Garuda Indonesia’s CEO, Arif Wibowo, publicly stated his opposition to full liberalisation of air services markets in Asean. He said it would create an “un-level playing field” as foreign carriers serving Indonesia clearly have significantly more to gain, with Indonesia being the biggest airline market in Southeast Asia.

He was referring to the Asean Open Skies policy, a scheme to bring about greater regional connectivity between aviation markets. It came into effect in January 2015 and is scheduled to be fully implemented by this year end as part of an AEC initiative.

Also speaking as chairman of the Indonesia National Air Carriers Association, Wibowo said Indonesia’s tax regime, airport inefficiencies and high fuel costs would make local airlines less competitive than their Southeast Asian counterparts, especially those from Singapore, Malaysia and Thailand.

But despite opposition, Indonesia’s national flag carrier has decided to fly into the “open skies”, however fierce the competition will be. Its low-cost arm Citilink is applying for permits to operate more international flights bound for other Asean countries, according to Wibowo.

“The AEC will make our investments in the region more flexible through improvements in logistics, transport facilitation, as well as free flow of labour”

The Corporate Treasurer spoke to Fuad Rizal, treasurer at Garuda, who said: “The Asean region is now the top priority” in terms of offshore flights. Approximately 20% of Garuda’s revenue comes from overseas operations, of which up to 80% is from Asean (excluding Indonesia).

For the planned AEC, Rizal views the initiative to waive entry visa requirements for travellers among the 10 nations as positive for its revenue growth prospects.

“Applying for a visa is a cost,” Rizal said. If all Asean countries drop visa requirements, it would stimulate tourism between Asean members.

He added the carrier currently operates

direct flights to Thailand, Malaysia and Singapore, in addition to code-shares with Vietnam Airlines, Philippines Airlines, Myanmar Airways International, and Royal Brunei Airlines.

This footprint makes sense, as the most profitable sector for Garuda lies in business travel. People are more likely to go to Singapore and Malaysia for business, and Vietnam, and the Philippines for leisure.

In a defence of its heartland, Garuda intends to increase international destinations from 25 in 2015 to 27 in 2016. It also plans to increase its domestic destinations from 65 in 2015 to 73 in 2016.

asean champions

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