corporate financial_17june
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Objectivity
IntegrityExcellence
3Standard & Poor’s
string of corporate financial scandals in recentyears has put the spotlight on the reliability ofcompanies financial reporting.
However, putting aside issues of corporate financial reporting
malpractice, experience has shown that publicly listed
companies often attempt to tailor their financial results to
reflect more closely the hopes and expectations of the stock
market. While companies are expected to follow generally
accepted accounting practices, these accounting standards tend
to be general, with numerous exceptions and options.
The purpose of this report is to help creditors negotiate the
labyrinth of different accounting practices and focus on what
really matters in evaluating the economic and financial health of
a company. We have reviewed the financial disclosure standards
of corporations rated by Standard & Poor's in Greater China,
and commented on the following key issues:
• Specific accounting policies that materially impact financial
results,
• Unusual accounting practices, and
• Areas that require analytical adjustments so that meaningful
comparisons can be made among companies.
We found that most of the rated companies in Greater China
either use or provide reconciliation of their financial statements
to international accounting standards or U.S. generally accepted
accounting practices. Nevertheless, we believe a significant
number of accounting issues still require analytical adjustments
to better portray credit risk.
One of the most common problem areas is not fully reflecting
the leverage of a company by moving debt off balance sheet to
joint ventures and associated companies. The current accounting
standards for consolidation are clearly lacking, or at least their
implementation is. There is surely something inadequate in an
accounting rule, or the way it is interpreted by companies and
their auditors, that in some instances permits companies to shift
off balance sheet the debt of associated companies over which
they have control and a majority beneficial interest.
Other popular accounting techniques frequently used by
companies to enhance reported financial results are profit
smoothing, both as it relates to deferring and amortizing 'lumpy
profits' and boosting flagging income with one-time gains, and
inappropriately capitalizing expenditure.
This report also tackles the importance of cash flow analysis.
Recent large corporate failures have reinforced the value of cash
flow analysis. Standard & Poor's believes that a company's
ability to meet financial obligations, particularly over the near
term, is more clearly recognized when looking at the cash flow
statement rather than the income statement. A close review of
several examples suggests that analysis of cash flow patterns
can often reveal a level of debt servicing capability that is
completely different from that which might be apparent from
observing reported earnings.
We hope you find this report valuable. Standard & Poor's is
committed to providing the financial community with accurate
and timely analysis, and to advancing transparency in financial
markets.
Introduction
A
John BaileyDirectorCorporate and Infrastructure Ratings
'
Corporate FinancialDisclosure inGreater China
4 Standard & Poor’s
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
CommentariesCash Flow Analysis Gets Fresh Attention in Turbulent Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Spotlight on Greater China Corporate Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Company Specific CommentariesAES China Generating Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Airport Authority Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Aluminum Corp. of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12ASAT Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Beijing Datang Power Generation Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Cathay International Water Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Cheung Kong (Holdings) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Cheung Kong Infrastructure Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13China Mobile (Hong Kong) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14China National Offshore Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14China Petroleum & Chemical Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Chinese Estates Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Chinese Petroleum Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Chunghwa Telecom Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15CITIC Pacific Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15CLP Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15CLP Power Hong Kong Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16CNOOC Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Compal Electronics Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Far EasTone Telecommunications Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17GH Water Supply (Holdings) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Hongkong Electric Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Hongkong Electric Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Hongkong Land Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Hon Hai Precision Industry Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Hopewell Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Huaneng Power International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Hutchison Whampoa Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Hysan Development Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Jardine Strategic Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Kerry Properties Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Kowloon Canton Railway Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Kowloon Motor Bus Co. (1933) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Macronix International Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21MTR Corp. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Panva Gas Holdings Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 PCCW-HKT Telephone Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Ritek Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Road King Infrastructure Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Shanghai Baosteel Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Sino Land Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Sun Hung Kai Properties Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Swire Pacific Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Taiwan Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24United Microelectronics Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Wan Hai Lines Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Wharf (Holdings) Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Key Ratings in Greater China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
DefinitionsGlossary of Financial Ratio Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Rating Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ContactsStandard & Poor's Corporate Analysts Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Standard & Poor's Asia-Pacific Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Standard & Poor's Affiliate Network in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Table of Contents
Table 1Compal Electronics Inc. Cash Flow Statement(NT$ mil.) 2002 2001 2000 1999 1998 1997 1996
Net income 7,919 5,403 5,983 5,398 4,871 3,398 1,159
Funds from operations 9,461 6,597 6,730 5,940 5,162 4,017 1,388
Working capital movement (4,118) 3,053 (4,318) (96) (149) (1,027) 379
Operating cash flow 5,343 9,650 2,412 5,844 5,013 2,990 1,767
Capital expenditure (6,579) (2,017) (9,537) (9,230) (3,213) (3,969) (791)
Free operating cash flow (1,236) 7,633 (7,125) (3,386) 1,800 (980) 976
5Standard & Poor’s
Cash Flow Analysis Gets Fresh Attention in Turbulent Market
John Bailey, Hong Kong (852) 2533-3530
he financial community puts too much emphasison the reported earnings generated by corporatemanagement.
Standard & Poor's believes that prudent financial analysis
should focus on fundamental cash flow evaluation, as cash is
ultimately the only way a company can pay its bills, service its
debt, and provide returns to its shareholders.
Earnings Are An Abstract ConceptWhen companies announce their earnings, they are reported on
an accrual basis, reflecting costs and expenses 'matching'
concepts, and not based on cash receipts. For example: when a
property company recognizes revenue on a percentage-of-
completion basis, it may book a sale in one year but not receive
payment until the following year or several years later. Similarly,
companies reflect a depreciation charge on fixed assets as an
expense to be allocated against revenue, where the cash for this
expense was paid in previous years when the underlying asset
was acquired. Conversely, companies have to make new
investments to replace obsolete equipment, but these
investments are not reflected in the reported earnings.
What is included in earnings is also arbitrary. As shown in
recent years, reported earnings can be easily manipulated
through aggressive accounting policies. Xerox Corp., for
example, recently restated US$6.4 billion in revenue dating
back to 1997. Then there was MCI, formerly WorldCom Inc.,
which inflated its earnings by capitalizing and deferring rather
than expensing about US$3.9 billion of its leased network
access costs, which had previously been treated as an expense.
Earnings also ignore changes in working capital and do not
consider the amount of required capital reinvestment. This can
be a particularly important issue for companies that have short
asset lives, such as companies in the technology sector.
Measuring Cash FlowWhen calculating a company's level of operating cash flow or
funds from operations, Standard & Poor's starts by adding
depreciation and amortization, and other non-cash items to net
income. Next, capital expenditure and cash dividends paid are
subtracted, while working capital movements are included to
arrive at discretionary cash flow. Finally, we take into account
the cost of acquisitions, proceeds from disposals, and eliminate
changes in financial investments and other miscellaneous uses of
cash to arrive at prefinancing cash flow. Prefinancing cash flow
represents the extent to which a company must use net external
financing to build up its cash balances.
Ratios employed by Standard & Poor's to capture the
relationship of cash flow to debt and debt service include:
• Funds from operations/total debt,
• Free operating cash flow+interest/interest,
• Total debt/discretionary cash flow (debt payback period),
• Funds from operations/capital spending requirements, and
• Capital expenditure/capital maintenance.
Where the long-term viability of a company is more assured, i.e.
a company with a higher rating, there can be greater emphasis
on the level of funds from operations and its relation to total
debt. Focusing on debt service coverage and free operating cash
flow becomes more critical in the analysis of a weaker company.
Non-investment grade issuers typically face near-term
vulnerabilities, which are better assessed through free cash flow
ratios.
Case StudiesConsider the case of Compal Electronics Inc., a leading
notebook computer manufacturer based in Taiwan. The cost of
expanding production capacity and upgrading technology
requires continual investment for the company to remain
competitive. Over the past eight years the company has spent
about Taiwan dollar (NT$) 30 billion on property, plant, and
equipment. Account receivables grew to NT$21.5 billion in
2002 from NT$2.1 billion in 1996, and inventories rose by
NT$7 billion over the same period.
T
Corporate FinancialDisclosure inGreater China
6 Standard & Poor’s
On first impression Compal has shown relatively strong
earnings performance since 1996. The company's net income of
NT$7.9 billion in 2002 covered interest expense by an
attractive 27.3x. However, in reality, the company has been
consuming cash, and free operating cash flow is highly volatile.
Net cash (as defined by funds from operations) provided by
operating activities was NT$33 billion between 1996 and 2002,
while net cash used in investments was NT$35.3 billion. To
finance the shortfall, the company used cash deposits and issued
equity securities. While net income peaked in 2002, free
operating cash flow was at its highest in 2001.
A simple EBIT/interest analysis would have ignored these
balance sheet changes and would not have recognized the cash
consumption patterns. EBIT-based ratio analysis will reflect the
relative stability and strength of earnings, but will not reflect the
considerable volatility in cash flow and the variable and
essentially non-discretionary capital expenditure. The cash flow
ratios provide a much more meaningful description of the
company’s financial performance in recent years.
Another good example that underscores the importance of
tracking cash flow is PCCW Ltd. The company has restructured
its operations in recent years, an exercise which has significantly
distorted its earnings. PCCW Ltd. reported a net loss of Hong
Kong dollar (HK$) 7.76 billion for the year ended Dec. 31,
2002, compared with a net profit of HK$1.34 billion in 2001.
However, the results included a write down of HK$8.26 billion
on its interest in Reach Ltd., a struggling undersea cable venture
with Australia's Telstra Corp. Ltd. In contrast, PCCW Ltd.'s
funds from operations was HK$5.2 billion in 2002, up 67%
year on year. Despite the hefty loss, PCCW Ltd.'s cash flow
patterns show a more robust level of debt service capability.
Cash Flow Is No PanaceaCash flow analysis offers creditors and analysts a clearer insight
into the true sources and applications of funds before they are
changed by subjective accounting judgments and sometimes by
window dressing. Large and/or inconsistent gaps between
operating income and operating cash flows usually warrant
further investigation. Nevertheless, cash flow analysis has its
own limitations and should not be used without caution. Issues
to be mindful of:
• In practice, the calculation of operating cash flow does not
follow a standard process and if a company wants to
manipulate the figures it has plenty of options. Off-balance-
sheet activities and material details hidden in notes can be as
much of a problem for cash flow analysis as it is for accrual-
based accounting.
• Flows of cash tend to be lumpy because they lack the
smoothing effect of accruals.
• Some cash flow ratios make no provision for the replacement
cost of assets or future commitments without which the
ability to repay debt may be impaired.
• Cash flow does not take into account qualitative information
about the nature of a company's financial flexibility. Access
to committed bank lines, cash balances, and saleable assets
can be crucial factors in assessing a company's financial
strength.
Despite these limitations, the use of cash flow measurements is
still a good basis to arrive at like with like comparisons and offers
an opportunity to complement the strengths and weaknesses of
traditional income statement and balance sheet analysis.
Liquidity and Financial FlexibilityCash flow does not take into account qualitative
information about the nature of a company’s liquidity and
financial flexibility. The ability of a company to manage its
liabilities to mitigate funding and refinancing risk, and
maximize near-term cash generation in times of stress, are
key credit issues. Gradual erosion in a company's
fundamentals can ultimately lead to liquidity problems.
Even a company with a solid business position and
moderate debt use, can, when faced with sudden adversity,
experience a liquidity crisis.
Key issues to consider when looking at liquidity
management include:
• What is the company's debt maturity profile and level of
cash holdings?
• What is the company's ability to sell saleable assets or
non-core businesses?
• Does the company have the ability to delay or cancel
capital expenditure?
• Does the company have committed undrawn bank lines?
• Does the company have restrictive covenants or rating
triggers that can block access to additional funding, or
even accelerate the repayment of existing debt.
• What are the currencies of issued debt, and is it fixed or
floating debt? How does the currency of debt compare
with the currency of the company’s assets and liabilities?
7Standard & Poor’s
Spotlight on Greater China Corporate Financial Disclosure
John Bailey, Hong Kong (852) 2533-3530; Raymond Woo, Hong Kong (852) 2533-3526; Paul Coughlin, Hong Kong (852) 2533-3502
he recent accounting fiascos at MCI, formerlyWorldCom Inc., Enron Corp., Ahold N.V.,Adelphia Communications Corp., and many
other large corporations, have placed considerable focuson the reliability of company accounts and the auditfunction.
Today's accounting standards are, in general, flexible in the way
expenses, revenue, assets, liabilities, and even cash flows are
reported. The combination of this flexibility in reporting and
the pressure on managers to perform—in accordance with
measures prescribed by market analysts—can give rise to
accounting practices that can distort the financial and credit
strength of companies. However, in exercising this flexibility, it
should not be inferred that corporate management is necessarily
doing something illegal or immoral; in most cases it is just
following normal accounting practices. Nevertheless, it is clear
that for some company accounts, adjustments are needed if a
more transparent representation of the company's credit
strengths is to be obtained.
A lot has been said about the quality of accounting disclosure in
the U.S. and Europe, but the issues are equally, and in some
cases even more, relevant in Asia. In an attempt to throw more
light on these issues, Standard & Poor's has completed a survey
of the financial disclosure standards for all the companies it
rates in Greater China. The survey primarily focuses on the
following key themes:
• Specific accounting policies that materially impact financial
results,
• Unusual accounting practices, and
• Areas that require analytical adjustments to allow for a
meaningful comparison among companies.
Here we describe some of the more common issues when
analyzing companies in Greater China.
Non-Consolidated AssociatesPerhaps the most common form of financial distortion is the use
of non-consolidated associates and affiliates. Many of these
entities are effectively controlled by the group holding company
but are not included in the consolidated statement of assets and
liabilities because they are usually under the 50% consolidation
threshold. Standard & Poor's believes this can lead to an
overstatement of credit protection measures and an
understatement of underlying gearing.
For example, Cheung Kong (Holdings) Ltd.'s 49% interest in
Hong Kong-based conglomerate Hutchison Whampoa Ltd. is
accounted for in Cheung Kong's books using the equity method
of accounting. This means that a proportionate share of
Hutchison Whampoa's net assets and bottom line earnings are
reflected in the group's financial accounts, while its debt is
excluded from the group's balance sheet. Similarly, Hutchison
Whampoa's equity base is counted for gearing purposes in its
own accounts and part of it is counted again in the accounts of
Cheung Kong. This 'double leveraging' of equity and earnings
fundamentally distorts the comparisons between Cheung Kong
and other companies with conventional structures, and
overstates the degree of creditor protection implied in the
company's published financial statements.
Table 1 shows what Cheung Kong's leverage and coverage
ratios would be if Hutchison Whampoa were fully consolidated.
While Cheung Kong is shown to be a substantial and strong
company, clearly its underlying gearing is higher than it initially
appears.
Other notable examples of non-consolidated group companies
include Jardine Strategic Holdings Ltd.'s 41% interest in
Hongkong Land Holdings Ltd., one of Hong Kong's major
property companies, Wheelock & Co. Ltd.'s 48% interest in
Wharf Holdings Ltd., a major Hong Kong conglomerate, and
Swire Pacific Ltd.'s 46% interest in Cathay Pacific Airways Ltd.
T
Table 1Cheung Kong (Holdings) Ltd. Consolidation
Cheung Kong including Cheung Kong includingHutchison on an equity Hutchison on a fully
method basis (2002) consolidated basis (2002)*
Equity (HK$ mil.) 172,681 306,805
Debt (HK$ mil.) 21,873 201,270
Debt to capital ratio (%) 11.2 39.6
Pretax interest coverage ratio (x) 18.8 8.0
*Standard & Poor's consolidation estimate. Excludes off-balance-sheet liabilities.
Corporate FinancialDisclosure inGreater China
8 Standard & Poor’s
Jointly Controlled EntitiesIn a similar fashion, partnership and joint ventures are also used to
shift debt off balance sheet. A good example of this can be found
in Cheung Kong Infrastructure Holdings Ltd. (CKI). The company
has a 50/50 shareholding in three highly leveraged Australian utility
companies together with its affiliate Hongkong Electric Holdings
Ltd. If these companies were fully consolidated, Standard & Poor's
estimates that CKI’s ratio of debt to capital would increase to 43%
in fiscal 2002 from 24%. It is remarkable that the Australian
utilities remain unconsolidated given the obvious majority
beneficial interest and control that CKI enjoys.
Property companies in Hong Kong are also significant users of
jointly controlled entities, sometimes in partnership with related
companies. In many cases, disclosure about the nature of these
ventures is relatively poor. Sino Land Co. Ltd., for example, has
about 35% of its total assets in joint venture property
developments and rental property investments. Sometimes
companies provide financial support to such joint ventures,
such as guarantees and shareholder loans. CITIC Pacific Ltd.,
for example, guarantees some of the debt of its associated
companies. If these guarantees were included in the total debt
figure, CITIC Pacific's ratio of total debt to capital would
increase to 22% in 2002 from 19%.
Earnings ManagementCompanies sometimes use profit smoothing techniques to
reduce fluctuations in reported earnings. Consider MTR Corp.
Ltd. (MTRC), one of Hong Kong's major transport companies.
The company receives large up-front cash payments from
property developers that are recorded as deferred revenue and
brought to income over the term of a property development,
despite the fact that these payments are unconditional and not
contingent on the successful completion of the property
projects. While the company has not overstated or understated
profits, over the long term, this treatment camouflages the true
volatility in its operational performance.
Similarly, CLP Holdings Ltd. and Hongkong Electric Co. Ltd.
use the adjustment mechanisms allowed by the Scheme of
Control Agreement that governs the earnings of electricity
companies in Hong Kong to smooth earnings. Fuel costs above
or below projections are debited or credited to a fuel clause
recovery account, which insulates the company from reporting
the impact of fuel price volatility in its income statement.
Likewise, a development fund, which is made up of the
difference between the company's revenue from regulated
operations and permitted returns, is recorded as a deferred
revenue reserve that can be used to smooth profits.
Profit smoothing is also evident in the property sector. A
considerable number of property development companies
report profit on presold projects as they are built, rather than
when units at the projects are sold or when payment is received.
While this method of reporting earnings is a normal accounting
practice, the key point is that it introduces a gap between cash
flow and reported profit. Moreover, if the company fails to
finish the project or the purchaser walks away from its presale
commitment, the reported profit and related retained earnings
would prove to be illusory.
Capitalized ExpenditureExpense and cost capitalization trends should be closely
monitored and analyzed. Accounting standards often provide
management with discretion in determining whether to expense
or capitalize certain costs. Interest costs and certain other
overhead costs associated with development projects are
frequently capitalized. Some companies apply a liberal
interpretation to other expenses such as technology license fees,
research and development costs, and administrative overheads.
Standard & Poor's observes that MTRC has a significant
amount of capitalized expenditure. In recent years, the company
has capitalized a large portion of its interest costs related to the
funding of its new rail extension projects. In 2002, MTRC
capitalized about Hong Kong dollar (HK$) 618 million, or
12% of pretax earnings. When the capitalized amount is added
back to the interest expense figure, the company's ratio of
EBITDA interest coverage falls to 2.3x in 2002 compared with
3.5x if capitalized interest were excluded (see table 2).
Table 2 MTR Corp. Ltd. Capitalized Interest Costs
2002 2001 2000 1999 1998
Reported interest expenses (HK$ mil.) 1,153 896 1,209 1,349 690
Capitalized interest costs (HK$ mil.) 618 1,026 793 377 458
EBITDA interest coverage (x) 3.5 4.5 3.2 2.6 4.8
EBITDA interest coverage including capitalized interest (x) 2.3 2.1 2.0 2.0 2.9
9Standard & Poor’s
Power project developers in mainland China provide an
additional example of cost capitalization. Huaneng Power
International Inc., an independent power producer, capitalized
a large amount of previously incurred interest costs during the
construction of new power plants. Likewise, AES China
Generating Co. Ltd. had a relatively large amount of capitalized
interest in 2001, amounting to about 50% of its reported
interest expenses.
While capitalising expenditure is a generally accepted accounting
practice, it should be understood that reported interest coverage
ratios might fall dramatically once the relevant capital
expenditure programs are completed. For companies with
continuous capital expenditure programs, this accounting policy
leads to an inflated, or at least very positive view of profit.
Operating LeasesThere are several problem areas in how some accounting rules
treat long-term operating leases. Finance leases are reflected on
balance sheet, in that both the asset and related liability is
shown in the accounts. However, if a company operates the
same asset under an operating lease, there is no recognition of
the liability associated with this revenue-generating asset. It is
important to note that recording operating leases off balance is
perfectly acceptable under most general accounting standards.
Nevertheless, this can distort the true representation of
economic reality, and certainly prevents 'like with like'
comparisons between companies that own their assets and those
that choose to lease them.
Standard & Poor's analysis includes an adjustment for long-
term operating leases, with the assets and related liabilities put
back on the balance sheet. This is done by capitalizing the
discounted value of the future lease payments and allocating the
annual minimum lease payments to interest and principal. In
addition, depreciation expense figures are adjusted to reflect a
depreciation of the asset capitalized. Under most accounting
systems, companies disclose future operating lease
commitments, although the level of detail can vary. Not only are
ratios of debt to capital affected, but also interest coverage
ratios, operating margins, and return on capital.
Operating leases are used significantly in the transport
sector.Taiwan-based shipping company Wan Hai Lines Ltd., for
example, had capitalized operating lease adjustments of Taiwan
dollar (NT$) 21.5 billion in 2002, which was 60% more than
its reported debt figure. Table 3 illustrates how the leverage and
interest coverage ratios change once the ratios are adjusted for
operating leases.
One-Time GainsNon-recurring items flowing through the accounts should
warrant further investigation of earnings quality. Boosting
profits with one-time gains, such as gains from selling assets,
sale-leaseback arrangements, reversing earlier provisions, or
implementing accounting changes, is common among
companies that want to present overly positive financial results
or understate the inherent volatility in the business.
For example, Taiwan-based United Microelectronics Corp.
(UMC), the world's second-largest chip semiconductor
company, reported a better-than-expected upturn in 2002
profit, despite very difficult market conditions. When the
figures are closely examined, it is clear that almost all the profit
came from gains made from the sale of assets, while the base
operations were barely profitable (see table 4).
2002
Reported debt (NT$ mil.) 13,336
Capitalized operating leases (NT$ mil.) 21,517
Debt to capital (%) (lease adjusted) 65.1
Debt to capital (%) (unadjusted) 41.6
EBITDA interest coverage (x) (lease adjusted) 7.6
EBITDA interest coverage (x) (unadjusted) 21.2
Table 3 Wan Hai Lines Ltd. Operating Lease Adjustments
Table 4 United Microelectronics Corp. Gains From Asset Sales(NT$ mil.) 2002 2001 2000 1999 1998
Operating income (loss) 112 (6,412) 47,543 4,074 312
Gains on disposal of investments 8,473 2,347 588 3,737 1,165
Gains on disposal of fixed assets 66 186 373 191 -
Profit after tax 7,072 (3,157) 50,780 10,498 4,407
Corporate FinancialDisclosure inGreater China
10 Standard & Poor’s
Similarly, Hysan Development Co. Ltd., a property company in
Hong Kong, has also benefited from one-time gains. Following
a drop in rental income and the absence of property sales in
1998 and 1999, management tried to smooth out the rapid
decline in earnings with gains on the sale of shares in China
Mobile (Hong Kong) Ltd. Table 5 shows that the fall in earnings
is significantly more pronounced if profits from the sale of
investments and property disposals are excluded.
Write-Downs, Restructuring, AndImpairment ChargesStandard & Poor’s observes that companies often use special
charges to artificially boost future operating profit. By
overstating restructuring and impairment charges, usually
during market downturns, a company can inflate future
earnings by lowering the holding costs on investments and
writing off future normal operating expenses. In the future,
increased gains would be recognized upon the disposition of the
assets, lower depreciation or amortization charge, or 'non cash'
reversals of the provision. Property companies in Hong Kong
have been particularly aggressive in writing down assets in
recent years, which is understandable considering the depressed
Table 5 Hysan Development Co. One-Time Gains(NT$ mil.) 2002 2001 2000 1999 1998
Rental income 997 1,132 1,241 1,405 1,833
Gain on property sales – – – 483 1,136
Gain on sale of investments – – 294 166 (439)
Profit from operations 927 1,067 1,475 1,995 2,908
Profit from operations excluding investment gains 927 1,067 1,181 1,829 3,347
Net profit 544 600 850 1,204 1,139
Table 6 The Cost of Employee Bonus Shares in Taiwan(NT$ mil.) Net income 2001 2000 1999 1998
Taiwan Semiconductor Manufacturing Co. Ltd. Taiwan GAAP 14,483 65,106 23,527 14,389
U.S. GAAP (21,975) 21,740 13,884 1,249
United Microelectronics Corp. Taiwan GAAP (3,157) 50,780 10,498 4,407
U.S. GAAP (23,247) 27,134 4,747 (69)
market conditions. However, if these charges are overly
conservative, future earnings are likely to be distorted.
Stock Compensation BenefitsAccounting for employee shares and options is one of the more
contentious accounting issues today. Although these charges
form part of an employee's compensation, there is usually no
real cash cost to the company. Even though the cash flow
implications are neutral, they still need to be carefully
considered when doing comparative ratio analysis.
Employee share compensation is not generally significant in Asia,
but certain industries face substantial exposure. In particular, they
are prevalent in technology companies in Taiwan, where companies
pay out large numbers of employee bonus shares. These are free
shares, which have no lock-up period. Table 6 highlights the
significance of these unrecorded expenses on two of Taiwan's largest
technology companies, Taiwan Semiconductor Manufacturing Co.
Ltd. and UMC. It also shows that there would be a significant
impact on earnings if the market value of the employee bonus shares
was passed through the income statement, as allowed under
U.S. generally accepted accounting practices (U.S. GAAP).
11Standard & Poor’s
This is primarily an issue for shareholders, whose interests are
diluted and who consequently bear the cost in earnings per
share, rather than a direct concern of creditors. However, if
shareholders are no longer willing to bear these costs, or if
changes in accounting standards make it harder to hide these
costs, creditors must consider whether the company can afford
to retain key staff without bonus shares or whether they need to
boost cash salary payments.
Asset RevaluationsThe inclusion of revaluation reserves in equity needs to be
carefully scrutinized. In Taiwan, mainland China, and Hong
Kong, periodic revaluation of fixed assets is permitted. It is not
that the values are necessarily wrong, but they can create
problems with international comparisons because some
countries, such as the U.S., do not generally permit any upward
revaluation of real estate assets. When analyzing debt leverage
and return on asset ratios, a company's revaluation policies, and
the related amounts, must be valued carefully to allow for
meaningful comparison.
In Hong Kong, for example, revaluation reserves are significant
contributors in bolstering property companies' capital positions.
This, to some extent, helps to explain the low gearing levels that
have been characteristic of most Hong Kong property companies.
If revaluation reserves were deducted from shareholders' equity to
make them more comparable with U.S. companies, Hong Kong
property companies would show reduced capital and higher
leverage ratios than at present. Table 7 illustrates how different
the leverage ratios would be for some of Hong Kong's major
property companies if asset revaluation reserves were excluded.
Users of financial information should take great care in
familiarizing themselves with the corporate reporting practices
of the companies they are analyzing. The ability to distinguish
between conservative and liberal accounting practices, and
differences in accounting standards are essential aspects of
credit analysis. This report reflects on a variety of accounting
issues, some simply require an awareness, as they are industry
specific, some need to be recast for analysis, and others are
highly misleading and hard to justify.
Table 7 Revaluation Reserves for Selected Property Companies in 2002 — Hong KongCompany Net debt to capital Net debt to capital
(includes asset (excludes assetrevaluation reserves) (%) revaluation reserves) (%)
Chinese Estates Holdings Ltd. 32 48
Hysan Development Co. Ltd. 22 32
Jardine Strategic Holdings Ltd. 29 35
Sung Hung Kai Properties Ltd. 14 20
Swire Pacific Ltd. 16 22
Wharf (Holdings) Ltd. 29 49
Accounting In Mainland China—Is It Real?Although mainland China's accounting system has achieved
some success in moving towards accounting
standardization, the quality of domestic financial statements
is still a long way from meeting international standards. The
country's accounting profession is in its infancy and there is
a shortage of well-trained auditors. Professionalism takes
time to form. However, the root causes of mainland China's
accounting problems are structural. Historically, accounting
in mainland China has been used as a tool to meet official
targets rather than a real recording of financial performance.
This has put pressure on state-owned-enterprises to report
stable sources of tax revenue and avoid reporting
embarrassing losses. In this system, the reporting of asset
write-downs is difficult and full disclosure of off-balance-
sheet liabilities, such as schooling and health care facilities,
is lacking. The absence of institutional shareholder pressure
also removes any incentive to incorporate full disclosure in
published financial accounts.
Corporate FinancialDisclosure inGreater China
12 Standard & Poor’s
Company: AES China Generating Co. Ltd. (AES Chigen)
Credit rating: B+/Stable
Analyst: Raymond Woo
Accounting standard: U.S. GAAP
Reporting currency: US$
AES Chigen's financial disclosure is relatively good, although some adjustments need to be made for capitalized interest. In 2001,
capitalized interest amounted to US$6.7 million, which is relatively large at about 50% of the reported interest expense of US$13.1
million. However, with the completion of the Yangcheng power project, capitalized interest dropped to about 10% of the reported
interest expense of US$17.6 million in 2002. The company consolidates all its joint ventures, except for its 25% interest in the
Yangcheng power project, which is dealt with on an equity accounted basis. As the Yangcheng power project reached full
commercial operation in 2002, AES Chigen's earnings from affiliates increased substantially to US$26 million in that year from
US$2 million in 2001. In 2002, the company reversed a large provision on uncollectible accounts related to minimum offtake
compensation and arbitration awards, which amounted to US$15.2 million.
Company: Airport Authority Hong Kong (AAHK)
Credit rating: A+/Stable (foreign currency), AA-/Negative (local currency)
Analyst: Raymond Woo
Accounting standard: H.K. GAAP
Reporting currency: HK$
No adjustments to AAHK's financial ratios are required, although a significant accounting policy change has been noted. The
company changed its depreciation policy in fiscal 1999/2000 by extending the life of some of its fixed assets. This resulted in a net
reduction in depreciation charges of about Hong Kong dollar (HK$) 538 million in 2000, which in turn increased AAHK's net
income. EBIT for fiscal 1999/2000 was HK$291 million, but would have been negative under the previous depreciation policy. The
company has relatively low contingent liabilities relating to committed capital expenditure. AAHK has no equity accounted earnings.
Company: Aluminum Corp. of China (Chalco)
Credit rating: BBB/Stable (foreign currency)
Analyst: Huiyi Qu
Accounting standard: H.K. GAAP
Reporting currency: RMB
Chalco's accounts are relatively straightforward, although some adjustments need to be made for capitalized interest. In 2001,
capitalized interest stood at Chinese renminbi (RMB) 78.4 million, or 14% of the company's reported interest expenses. As with
most Chinese companies, the interpretation of consolidated group statements is quite complex as a result of limited availability of
financial information on the parent company. Clearly, creditors need to be aware of the relationships between companies in the
group to fully appreciate the company's credit risk. The parent company operates at a loss and depends on Chalco to fund most of
its welfare obligations. Chalco amortizes its mining rights and expenses its environmental expenditure in accordance with industry
practice.
Company: ASAT Holdings Ltd. (ASAT)
Credit rating: B/Negative
Analyst: Huiyi Qu
Accounting standard: U.S. GAAP
Reporting currency: US$
ASAT's accounts are fairly straightforward and only minor adjustments in calculating the company's financial ratios are required.
Standard & Poor's usually excludes non-cash extraordinary charges, including write-offs and impairment charges, when calculating
ASAT's operating income and interest coverage ratios. During the nine months ended Jan. 31, 2003, non-cash extraordinary charges
amounted to about US$63 million. Frequently writing down impaired assets as a result of rapid inventory obsolescence is a standard
practice in the semiconductor packaging and testing industry. Inventory items more than one year old are written off and long-term
assets are regularly reviewed.
13Standard & Poor’s
Company: Beijing Datang Power Generation Co. Ltd. (Beijing Datang)
Credit rating: BBB/Stable (foreign currency)
Analyst: Mary Ellen Olson
Accounting standard: IAS
Reporting currency: RMB
Beijing Datang's accounts require only minor adjustments. All project joint ventures are fully consolidated and there is only a small
amount of capitalized interest and operating leases. About 70% of the company's Chinese renminbi (RMB) 7.9 billion in debt is at
the subsidiary level. In compliance with IAS 32, which requires that derivatives be marked to market, Beijing Datang reported a
RMB240 million charge on an interest rate swap in 2002. This charge reduced the company's profit in 2002, although it did not
affect its cash position. If interest rates increase, Beijing Datang can reverse the charge against income. Like most Chinese
companies, financial information from the parent company is relatively weak.
Company: Cathay International Water Ltd. (Cathay)
Credit rating: CCC/Negative
Analyst: Raymond Woo
Accounting standard: IAS
Reporting currency: US$
Financial disclosure by Cathay is relatively poor. The way in which the company recently changed its year-end balance date to June
30, 2002 from Dec. 31, 2001 is not considered standard practice. The change meant important audited financial information was
not available at a time when the company was undergoing financial difficulties.
Company: Cheung Kong (Holdings) Ltd. (Cheung Kong)
Credit rating: A-/Negative
Analyst: Renee Lam
Accounting standard: H.K. GAAP
Reporting currency: HK$
When it comes to considering Cheung Kong's financial profile, Standard & Poor's fully consolidates Cheung Kong with its 49%-
owned associate, Hutchison Whampoa Ltd. (Hutchison). If Hutchison were consolidated, Cheung Kong's ratio of total debt to
capital would increase to 40% in 2002 from 11%. Standard & Poor's also adjusts Cheung Kong's reported EBITDA ratios by
including cash dividends from associates but excluding equity earnings. Cheung Kong recognizes revenue and profit from property
developments only upon completion. This is more conservative than the more commonly used percentage-of-completion method,
but could result in more cyclical earnings. Income patterns for companies in the property sector vary depending on management's
choice of a particular revenue recognition policy. The company also makes individual provisions on development properties rather
than the standard industry practice of provisioning on a portfolio basis. Capitalized project interest costs are significant. Cheung
Kong's ratio of EBITDA net interest coverage fell to 11x from 19.6x in 2002, after adjustments for capitalized interest.
Company: Cheung Kong Infrastructure Holdings Ltd. (CKI)
Credit rating: A-/Negative
Analyst: Raymond Woo
Accounting standard: H.K. GAAP
Reporting currency: HK$
CKI has a significant amount of off-balance-sheet debt. In particular, the company does not consolidate its investments in Australian
power utilities Powercor Australia LLC, ETSA Utilities Finance Pty. Ltd., and CitiPower I Pty. Ltd., even though the Cheung Kong
group has effective control over them. In equal partnership with its effectively controlled affiliate, Hongkong Electric Holdings Ltd.
CKI owns 50% of Australian distribution companies ETSA Utilities, CitiPower, and Powercor. Standard & Poor's estimates that
CKI's 2001 ratio of debt to capital would have increased to about 43% from 24% if these power utilities had been consolidated.
CKI's total proportionate share in off-balance-sheet debt, most of which is non-recourse, amounted to about Hong Kong dollar
(HK$) 11.9 billion at the end of 2002, which compares with total on-balance-sheet debt of about HK$12.6 billion. Standard &
Poor's also adjusts CKI's interest income in calculating net interest coverage ratios, since a substantial portion of such interest
income is related to shareholders' loans extended by CKI to its Australian utility investments.
Corporate FinancialDisclosure inGreater China
14 Standard & Poor’s
Company: China Mobile (Hong Kong) Ltd. (China Mobile)
Credit rating: BBB/Positive (foreign currency)
Analyst: Huiyi Qu
Accounting standard: H.K. GAAP
Reporting currency: RMB
China Mobile has substantial operating lease commitments, which amounted to Chinese renminbi (RMB) 14.7 billion at the end of
2002. Standard & Poor's considers these as additional debt obligations and adds the debt-equivalent value of these leases to the
company's debt figure when calculating the leverage ratio. In addition, lease adjustments are also made to the interest and
depreciation expense figures. On a lease-adjusted basis, China Mobile's EBITDA interest coverage decreased to about 30x from 40x
in 2002. Standard & Poor's notes that it is difficult to accurately assess the financial strength of the consolidated group, because of
limited financial disclosure by China Mobile's parent company, China Mobile Communications Corp.
Company: China National Offshore Oil Corp. (CNOOC)
Credit rating: BBB/Positive (foreign currency)
Analyst: Huiyi Qu
Accounting standard: P.R.C. GAAP
Reporting currency: RMB
No adjustments to CNOOC's financial ratios were required, although it was noted that there is some off-balance-sheet debt in the
45%-owned Nanhai Petrochemical project and the 33%-owned Guangdong Liquefied Natural Gas project. CNOOC's share of
debt in these two projects is about Chinese renminbi (RMB) 10 billion, which is relatively small compared with the overall size of
the company. In comparison, CNOOC's net cash position was about RMB25 billion at the end of 2002. Parent company accounts
are relatively transparent.
Company: China Petroleum & Chemical Corp. (Sinopec)
Credit rating: BBB/Stable (foreign currency)
Analyst: Huiyi Qu
Accounting standard: IAS
Reporting currency: RMB
An interesting element of Sinopec's accounts is a Chinese renminbi (RMB) 36 billion shareholder loan from its parent company,
Sinopec Group. The loan has strong equity characteristics, since its term is 20 years and no interest payments are required. If it were
treated as equity, Sinopec's net debt to capital would strengthen significantly to 20% from about 34% at the end of fiscal 2002. As
with most state-owned enterprises in mainland China, information about the parent company is relatively poor. The parent operates
at a loss and relies on dividends from Sinopec to maintain its operations. The company uses the successful efforts method to account
for its oil and gas exploratory costs, and amortizes its proven reserves on a unit of production method, which is standard practice
in the oil and gas industry.
Company: Chinese Estates Holdings Ltd. (Chinese Estates)
Credit rating: B+/Negative
Analyst: Renee Lam
Accounting standard: H.K. GAAP
Reporting currency: HK$
Like most Hong Kong property companies, Chinese Estates revalues its investment properties yearly. This can cause problems when
making international comparisons because some countries do not permit upward revaluation of assets. If asset revaluation reserves
were excluded from the equity base, Chinese Estates' ratio of net debt to capital would have increased to 40% from 32% in 2002.
Chinese Estates recognizes revenue and profit from property developments on a completion basis. Income patterns for companies
in the property sector vary depending on management's choice of revenue recognition policy. Chinese Estates uses the equity method
to account for investments in associates. While the amount—at less than 9% of total assets—is relatively small, these investments
accounted for 25% of the company's annual average pretax losses in 2001 and 2002. In calculating the company's EBITDA,
Standard & Poor's excludes equity earnings but includes cash dividends received from associates.
15Standard & Poor’s
Company: Chinese Petroleum Corp. (CPC)
Credit rating: A+/Stable
Analyst: Tony Tsai
Accounting standard: H.K. GAAP
Reporting currency: NT$
Some adjustments need to be made to CPC's financial ratios for capitalized interest. Capitalized interest amounted to Taiwan dollar
(NT$) 568 million in 2002 and NT$516 million in 2001. As a general practice, CPC regularly revalues its fixed assets and records
any increase as capital surplus. The last time CPC revalued its assets was in 2001. CPC revalued its property assets in 1996 and
1997, resulting in a NT$69.6 billion increase in equity. The company's ratio of debt to capital would have increased to 21% in
2002 from 16% if these revaluations were not included. Standard & Poor's also notes that inventory revaluations are recorded as
non-operating income or losses and not as a cost of sales.
Company: Chunghwa Telecom Co. Ltd. (Chunghwa)
Credit rating: AA-/Stable
Analyst: Tony Tsai
Accounting standard: Taiwan GAAP
Reporting currency: NT$
Chunghwa Telecom's accounts do not require any analytical adjustments when the company's financial ratios are calculated.
Because the company is a government-owned enterprise in Taiwan, its employees are granted an annual cash bonus equivalent to
four and a half months' salary if the budgeted profit is achieved. Chunghwa changed its accounting year to December from June in
1999 in line with Securities Exchange Commission requirements.
Company: CITIC Pacific Ltd. (CITIC)
Credit rating: BBB-/Stable
Analyst: Raymond Woo
Accounting standard: H.K. GAAP
Reporting currency: HK$
As a holding company, share of profit from associated companies constitutes a significant portion of CITIC's earnings. Standard &
Poor's adjusts CITIC's EBITDA and EBIT ratios by including cash dividends from associates, while excluding equity earnings
because of their potential non-cash nature. In 2001, the company reclassified intangible assets of Hong Kong dollar (HK$) 3.6
billion as goodwill subject to a maximum amortization period of 20 years under transitional accounting rules. This resulted in a
deduction in retained profit of HK$1.2 billion on Jan. 1, 2001. CITIC has modest contingent liabilities in the form of guarantees
on associated companies' debt, which amounted to about HK$1.9 billion in 2002. Standard & Poor's estimates that the company's
ratio of total debt to capital would have increased to 22% from 19% in 2002 if these guarantees were treated as debt.
Company: CLP Holdings Ltd. (CLPH)
Credit rating: A+/Stable
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
The accounts of CLPH and its subsidiary, CLP Power Hong Kong Ltd. (CLP Power) are a challenge to credit analysts despite the
relatively straightforward nature of the company and its operations. CLPH's reported debt excludes the debt obligations of its
jointly controlled entities, associated companies, and other off-balance-sheet obligations. Standard & Poor's adjusts CLP Power's
accounts and financial ratios to include these items. As a result, CLPH's ratio of debt to capital rises to about 55% compared with
20% before the adjustments, while its ratio of funds from operations interest coverage falls to 5x compared with 28x. CLPH's
acquisition of an 80% interest in Powergen's Asia-Pacific power generating assets in 2001 was subjected to surprising off-balance-
sheet accounting treatment. Despite a clear majority interest, and, in Standard & Poor's view, effective control, the auditors did not
require consolidation of this investment. As such, a significant amount of debt was not reported in the 2002 accounts. This should
be corrected with the publication of the 2003 accounts, where CLPH's additional investment may result in the full consolidation
of these assets.
Corporate FinancialDisclosure inGreater China
16 Standard & Poor’s
Company: CLP Power Hong Kong Ltd. (CLP Power)
Credit rating: A+/Stable
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
CLP Power's audited financial accounts understate materially the level of gearing implicit in the company's operations. CLP Power's
40%-owned affiliate, Castle Peak Power Co. Ltd., (CAPCO) provides most of its electrical power, and CLP Power is obligated to
meet CAPCO's costs and return on equity. CLP Power and CAPCO are effectively a single economic entity. As such, Standard &
Poor's consolidates CAPCO, including Hong Kong dollar (HK$) 11.8 billion in debt, into CLP Power and CLP Holdings Ltd. for
the purpose of analysis. In addition, Standard & Poor's added HK$6.7 billion reflecting commitments by CLP Power and CAPCO
to purchase nuclear power and natural gas to CLP Power's debt profile. As a result, CLP Power's adjusted debt to capital increased
to 54% from 24% in 2002, and its adjusted funds from operations interest coverage decreased to 8.3x from 30x before the
adjustments were made.
A scheme of control agreement (SCA) with the Hong Kong government also allows the company to smooth its earnings. CLP
Power's tariff mechanism allows for a fuel adjustment account, a rate reduction reserve, and a development fund. Fuel costs above
or below projections are debited or credited to a fuel clause recovery account, which insulates the company from fuel price volatility.
The development fund is the difference between SCA revenue and the company's permitted return. Use of the development fund
can replace changes to base tariff rates and help smooth profits. The rate reduction reserve is generated through an 8% interest
charge on the sum of the average balances of the development fund and the special provision account, which is rebated to customers.
CLP Power's development fund had a balance of HK$3.4 billion, while the company's rate reduction reserve account had a balance
of HK$458 million at the end of 2002.
Company: CNOOC Ltd. (CNOOC Ltd.)
Credit rating: BBB/Positive (foreign currency)
Analyst: Huiyi Qu
Accounting standard: H.K. GAAP
Reporting currency: RMB
The only adjustments made to CNOOC Ltd.'s financial ratios were for a small amount of operating lease commitments. The
company uses the successful efforts method to account for its oil and gas exploratory costs, and amortizes its proven reserves on a
unit of production method, which is standard practice in the oil and gas industry.
Company: Compal Electronics Inc. (Compal)
Credit rating: BBB-/Stable
Analyst: Jonathan Lee
Accounting standard: Taiwan GAAP
Reporting currency: NT$
Compal's method of accounting for employee bonus shares is a notable feature of the company's accounts. Under Taiwan GAAP,
the value of such bonuses is based on the par value of the issued common shares in a company. Under U.S. GAAP, the fair value of
issued common shares is included in expenses. Compal's net income would fall if such bonuses had been calculated in accordance
with U.S. GAAP. However, the employee stock bonus is a non-cash item and does not affect the company's cash flow protection
measures.
17Standard & Poor’s
Company: Far EasTone Telecommunications Co. Ltd. (Far EasTone)
Credit rating: BBB-/Stable
Analyst: Tony Tsai
Accounting standard: Taiwan GAAP
Reporting currency: NT$
Far EasTone capitalizes major improvements and interest expense incurred for telecom construction, while expensing maintenance
and repair costs. Standard & Poor's adds back capitalized interest, which amounted to Taiwan dollar (NT$) 175 million in fiscal
2002, to interest costs when calculating the company's interest coverage ratios. Far EasTone treats promotional expenses, including
commissions and cellular phone unit subsidies, as marketing expenses in the year in which service to the subscriber is activated. The
company states its property and equipment at cost. These are depreciated using the straight-line method over eight years in
accordance with standard industry practice.
Company: GH Water Supply (Holdings) Ltd. (GH Water)
Credit rating: BB+/Stable
Analyst: Raymond Woo
Accounting standard: H.K. GAAP
Reporting currency: HK$
GH Water's accounts are fairly straightforward although the company does have some relatively large off-balance-sheet
commitments. Capital commitments for the renovation of GH Water's water projects amounted to about Chinese renminbi (RMB)
4.7 billion in 2002. This compares with the company's total assets of about RMB21.2 billion and total debt of about RMB15.4
billion in 2002. The company's principal asset is a 30-year operating right for a major water project that supplies water to Hong
Kong, which is amortized over a 30-year period.
Company: Hongkong Electric Co. Ltd. (HKE)
Credit rating: A+/Stable
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
Under a scheme of control agreement (SCA) with the Hong Kong government, HKE's tariff mechanism allows for a fuel adjustment
account, a rate reduction reserve, and a development fund. Fuel costs above or below projections are debited or credited to a fuel
clause recovery account, which insulates the company from fuel price volatility. The development fund is the difference between
SCA revenue and the company's permitted return. Use of the development fund can replace changes to base tariff rates and help
smooth profit. HKE's development fund had a balance of Hong Kong dollar (HK$) 138 million, while the company's rate reduction
reserve account had a balance of HK$9.6 million at the end of 2002. Neither HKE nor its parent company, Hongkong Electric
Holdings Ltd., maintains cash balances against these reserves, and the reserves are viewed as a way of offsetting potential earnings
below those mandated by the SCA.
Corporate FinancialDisclosure inGreater China
18 Standard & Poor’s
Company: Hongkong Electric Holdings Ltd. (HEH)
Credit rating: A+/Stable
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
Standard & Poor's made notable adjustments to HEH's financial ratios during the analysis process, primarily relating to the
company's equity accounting method. In equal partnership with its effective parent, Cheung Kong Infrastructure Holdings Ltd.,
HEH owns 50% of Australian distribution companies ETSA Utilities, CitiPower, and Powercor. In accordance with the practice of
equity accounting, HEH's holdings in these companies were not consolidated. Furthermore, since HEH's shareholders' equity in the
distribution companies is in the form of shareholder loans, the contribution from these utilities is booked as interest income. To
better reflect HEH's potential debt obligations because of the heavy debt burden of these utilities, Standard & Poor's performs an
analysis consolidating HEH's 50% interest in these three utilities. For 2002, the pro forma consolidated debt to capital ratio is
about 40% with funds from operations interest coverage at about 5x, compared with 22% debt to capital ratio and 11x funds from
operations interest coverage before the adjustments were made. Excluding intercompany loans, about 75% of HEH's debt
obligations represent HKE's borrowings.
Company: Hongkong Land Holdings Ltd. (Hongkong Land)
Credit rating: BBB+/Negative
Analyst: Renee Lam
Accounting standard: IAS
Reporting currency: US$
Since 2001, Hongkong Land has adopted IAS 40 and recorded its leasehold investment properties at depreciated historical cost.
The principle underlying IAS 40 is that leasehold property is accounted for as a prepaid expense and amortized over the life of the
lease, which implies that no revaluation is possible. Hongkong Land also publishes a supplementary set of accounts to show the
effect of asset revaluations. Net debt to capital was 24% as at Dec. 31, 2001, but if asset revaluations are excluded, net leverage
increases to 62%. Since 2002, Hongkong Land has amortized its rent-free tenant incentives over the life of the lease. Previously this
was done only for rent-free periods of more than six months. This creates potential for some profit smoothing, although it is usually
relatively small.
Company: Hon Hai Precision Industry Co. Ltd. (Hon Hai)
Credit rating: BBB/Stable
Analyst: Tony Tsai
Accounting standard: Taiwan GAAP
Reporting currency: NT$
A big issue for Hon Hai, as for many other high technology companies in Taiwan, is the company's use of employee bonus shares.
Under Taiwan GAAP, the distribution of employee bonus shares is treated as an allocation from retained earnings. Hon Hai is not
required to charge the value of the bonus to income. If the accounts were prepared under U.S. GAAP, the fair value of the common
shares issued would be shown as an expense in the income statement. In 2001, Hon Hai issued employee stock bonus shares
amounting to Taiwan dollar (NT$) 3.5 billion. Another interesting issue is the way the company accounts for its investments in
mainland China. According to government regulations, Hon Hai's investments in mainland China have had to be made through
offshore holding companies. Earnings from these companies are recorded in Hon Hai's quarterly accounts using the equity method
of accounting, but in the full year financial statements they are fully consolidated.
19Standard & Poor’s
Company: Hopewell Holdings Ltd. (Hopewell)
Credit rating: BB-/Stable
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
Hopewell's financial ratios are adjusted to take into account joint venture accounting. Hopewell's large and growing Delta Road's
division consists of several joint ventures with mainland China parties. Hopewell's turnover and EBITDA calculations include
interest income from joint ventures amounting to Hong Kong dollar (HK$) 202 million in fiscal 2002. The interest income is based
on Hopewell's loans to joint ventures and does not necessarily reflect a cash receipt. Therefore, calculations of EBITDA interest
coverage including non-cash interest income can differ materially from cash interest coverage figures. For example, in fiscal 2002,
EBITDA interest coverage was 0.4x compared with funds from operations interest coverage of 0.2x. Beginning in fiscal 2003,
interest income from joint ventures should decline significantly, reflecting shareholder loan repayments in fiscal 2001 and 2002.
However, cash flows will not be significantly affected because the cash receipts corresponding to the interest income included in
turnover have been negligible since the start-up of these joint ventures. Hopewell revalues its investment properties on a yearly basis,
but this does not make a material difference to debt leverage ratios.
Company: Huaneng Power International Inc. (HPI)
Credit rating: BBB/Stable (foreign currency)
Analyst: Raymond Woo
Accounting standard: IAS
Reporting currency: RMB
Although HPI's accounts are relatively straightforward, a broader view of the consolidated group is difficult to obtain because of the
limited amount of financial information available on the parent company, China Huaneng Group. All of HPI's power projects are
consolidated except for the company's minority interest in the Rizhao project. Standard & Poor's treats HPI's US$230 million convertible
bond issue as pure debt instead of separating it into equity and liabilities under IAS. In Standard & Poor's financial ratios, adjustments are
made for operating lease commitments and contingent guarantees. This weakens the ratios but only to a small degree. For example, after
making the adjustments, HPI's funds from operations interest coverage in 2002 would fall to about 11x from 12x, while the company's
funds from operations to net debt would decrease to about 64% from 66%. The company's off-balance-sheet commitments are modest.
As at Dec. 31, 2002, HPI had contracted capital commitments of Chinese renminbi (RMB) 2.7 billion in respect of coal purchasing,
renovation and construction of the third phase of its Dezhou project. This compares with total debt of about RMB12.4 billion.
Company: Hutchison Whampoa Ltd. (Hutchison)
Credit rating: A-/Negative
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
Standard & Poor's considers the financial profile of the fully consolidated Cheung Kong Group important in analyzing Hutchison's
credit. Hutchison's pro rata share of non-recourse debt held at associates and jointly controlled entities, contingent liabilities, and
operating lease commitments are taken into consideration in analyzing the company's financial profile. After adjustments,
Hutchison's funds from operations interest coverage ratio in 2002 would decline to less than 3x and the company's adjusted debt
to capital would near 50%.
One-time gains, derived principally from the sale of telecommunications investments, have played a crucial role in Hutchison's
financial results over the past few years. Such exceptional gains amounted to Hong Kong dollar (HK$) 1.5 billion in 2002, HK$3.1
billion in 2001, HK$25.7 billion in 2000, and HK$109.5 billion in 1999. By way of contrast, in its 2002 results, the company
recorded a HK$3.1billion revaluation deficit on holdings in Deutsche Telekom AG and Vodafone Group PLC shares. In accordance
with H.K. GAAP, the loss was recorded as an offset to equity and did not impact earnings.
Corporate FinancialDisclosure inGreater China
20 Standard & Poor’s
Company: Hysan Development Co. Ltd. (Hysan)
Credit rating: BBB/Negative
Analyst: Renee Lam
Accounting standard: H.K. GAAP
Reporting currency: HK$
Like most Hong Kong property companies, Hysan revalues its investment properties yearly with changes in market value reflected
in the company's asset revaluation reserves. It is not that the values are necessarily wrong, but problems can arise when making
international comparisons because some countries do not permit upward revaluation of assets. If asset revaluation reserves were
excluded from shareholders' equity, the company's net debt to capital would have increased to 32% from 22% in 2002. Hysan also
has a record of increasing profit with one-time gains from the sale of investments. With a drop in rental income and the absence of
property sales in 1998 and 1999, management tried to smooth out the rapid decline in earnings with gains on the sale of shares in
China Mobile. Standard & Poor's excludes these gains when calculating the company's EBITDA and EBIT figures.
Company: Jardine Strategic Holdings Ltd. (Jardine Strategic)
Credit rating: BBB+/Negative
Analyst: Renee Lam
Accounting standard: IAS
Reporting currency: US$
The Jardine group has an unusual cross shareholding structure. Jardine Strategic is 79%-owned by Jardine Matheson Holdings Ltd.,
which is 51%-controlled by Jardine Strategic. Standard & Poor's considers the financial profile of the overall group, including the
operations of Jardine Matheson, when analyzing the credit profile of Jardine Strategic. Also taken into consideration is the off-balance-
sheet debt in the group's 41%-owned Hongkong Land Holdings Ltd. This company is effectively controlled by Jardine Matheson, but
is not consolidated because it is under the 50% consolidation threshold. Standard & Poor's includes Jardine Matheson's proportionate
share of Hongkong Land's debt in calculating leverage and debt coverage ratios to obtain a better idea of the group's overall liability.
Ratio adjustments are also made for operating lease commitments. Compliance with IAS 40 has meant that the Jardine group has
recently started to record its leasehold investment properties at depreciated historical cost. Jardine Matheson's ratio of net debt to
capital would have risen to 39% from 35% in 2002, if asset revaluation reserves were excluded from equity.
Company: Kerry Properties Ltd. (Kerry Properties)
Credit rating: BBB-/Negative
Analyst: Renee Lam
Accounting standard: H.K. GAAP
Reporting currency: HK$
Kerry Properties' accounts are relatively straightforward, but information on the controlling parent company is less transparent.
Kerry Properties is 63%-owned by Kerry Holdings Ltd., which in turn is controlled by the Kwok family. Kerry Properties regularly
revalues some of its key assets, such as investment properties. Revenue from property developments is recognized on a percentage-
of-completion basis. The danger with this type of accounting method is that it recognizes profit before the cash is actually realized.
If cost overruns occur late in a project, a charge to earnings may be required to reflect lower actual profit. The company also shifts
costs to future periods by capitalizing interest. If capitalized interest is added back, the company's pretax net interest coverage ratio
would have dropped to 3.4x from 5.3x in 2002.
21Standard & Poor’s
Company: Kowloon Canton Railway Corp. (KCRC)
Credit rating: A+/Stable (foreign currency), AA-/Negative (local currency)
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
Standard & Poor's calculates KCRC's financial ratios on a gross interest (interest plus capitalized interest) basis to better reflect its
operating strengths. KCRC has recorded high levels of capitalized interest income and capitalized interest expense in recent years.
This is because KCRC typically prefunds project construction by investing project-related equity contributions and debt proceeds.
As a result, interest income has exceeded interest expense in each of the past five years. As KCRC's construction projects are
completed and contractors are paid, the company's cash level will drop while debt will increase. Interest expenditure is likely to
exceed interest income in 2003. KCRC also capitalizes staff costs associated with projects under development. Staff costs totaling
Hong Kong dollar (HK$) 914 million associated with projects under construction were capitalized in 2002.
Company: Kowloon Motor Bus Co. (1933) Ltd. (KMB)
Credit rating: A/Stable
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
No adjustments to KMB's financial ratios were required, although a significant accounting policy change was noted. In 2001, Kowloon
Motor Bus Holdings Ltd. and its subsidiary, KMB, changed their accounting policies in connection with employee retirement reserves
to comply with new accounting standards. This had the effect of increasing the company's capital base and lowering its reported
leverage ratio. KMB's ratio of debt to capital fell to 44% from 65% in 2001 after taking into account this policy change.
Company: Macronix International Co. Ltd. (Macronix)
Credit rating: B/Negative
Analyst: Jonathan Lee
Accounting standard: Taiwan GAAP
Reporting currency: NT$
Macronix capitalized interest amounting to Taiwan dollar (NT$) 364 million in 2002, compared with reported interest expense of
NT$1.17 billion. There are several differences between Taiwan GAAP and U.S. GAAP accounting standards that should be noted.
Under Taiwan GAAP, directly owned subsidiaries with total assets or total net sales of less than 10% of the company's
unconsolidated assets or sales are not consolidated. Royalty costs under local accounting standards are included in research and
development expenses, while under U.S. GAAP, these expenses would usually be accounted for as sales or administrative expenses.
Most of the company's production equipment is depreciated on a five-year straight-line basis.
Company: MTR Corp. Ltd. (MTRC)
Credit rating: A+/Stable (foreign currency), AA-/Negative (local currency)
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
MTRC's financial profile is relatively complex and requires significant adjustments. It is important to note that the company
receives large up-front cash payments from property developers that are recorded as deferred revenue and brought to income over
the term of a property development. While the company has not overstated or understated profit, over the long term, this treatment
camouflages the true volatility in the company's operational performance. Standard & Poor's excludes cash from property
developments in calculating MTRC's funds from operations and reclassifies it as cash from investments. This enables a better
assessment of the ongoing profitability of MTRC's rail lines on a stand-alone basis. MTRC capitalizes costs associated with the
construction of new rail projects. Shifting these costs to the balance sheet as capitalized expenses artificially boosts headline
earnings. In fiscal 2001 MTRC began reporting on a consolidated basis, including investment in subsidiaries.
Corporate FinancialDisclosure inGreater China
22 Standard & Poor’s
Company: Panva Gas Holdings Ltd. (Panva)
Credit rating: BB+/Stable
Analyst: Raymond Woo
Accounting standard: H.K. GAAP
Reporting currency: HK$
In analyzing the creditworthiness of Panva, Standard & Poor's reviews the financial strength of the parent company, Sinolink
Worldwide Holdings Ltd. All of Panva's operating joint ventures are consolidated. Panva recognizes revenue from gas connection
contracts on a percentage-of-completion basis. Standard & Poor's makes adjustments for the company's operating leases. Panva's
ratio of EBITDA interest coverage in 2002 declined to 47.6x from 61.5x after it was lease adjusted. Panva has some off-balance-
sheet obligations, principally capital commitments, which amounted to Hong Kong dollar (HK$) 87.6 million in 2002.
Company: PCCW-HKT Telephone Ltd. (HKT)
Credit rating: BBB/Positive
Analyst: Huiyi Qu
Accounting standard: H.K. GAAP
Reporting currency: HK$
In analyzing the creditworthiness of HKT, Standard & Poor's also reviews the financial strength of the parent company, PCCW Ltd.
It also takes into consideration the company's off-balance-sheet debt in the group's 50% joint venture, Reach Ltd. In 2000, PCCW
Ltd. wrote off Hong Kong dollar (HK$) 172 billion in goodwill arising from its acquisition of HKT. This reduced PCCW Ltd.'s
equity base to negative HK$14.9 billion under H.K. GAAP. In contrast, under U.S. GAAP, where goodwill can be amortized, PCCW
Ltd. would have shown a positive HK$127 billion equity base. This can distort the income statement and requires the analyst to
focus more on the group's cash flow trends. Capitalized interest is relatively small and does not negatively affect ratio calculations.
Company: Ritek Corp. (Ritek)
Credit rating: B+/Negative
Analyst: Jonathan Lee
Accounting standard: Taiwan GAAP
Reporting currency: NT$
Under Taiwan GAAP, Ritek's directly owned subsidiaries with total assets or total net sales of less than 10% of the company's
unconsolidated assets or sales are not consolidated. However, the company's major investment in RiTdisplay Technology Co. Ltd.
has been consolidated since 2001. Ritek amortizes its copyrights, including recording production fees for issuing compact discs, over
a two-year period based upon the estimated production quantity of finished goods.
Company: Road King Infrastructure Ltd. (Road King)
Credit rating: BBB-/Stable
Analyst: Mary Ellen Olson
Accounting standard: H.K. GAAP
Reporting currency: HK$
Road King's financial statements do not provide a complete picture of the company's credit profile. Most of the company's
operations are held in off-balance-sheet joint ventures. With the exception of the Qijiang project, all of Road King's projects follow
the equity method of accounting, even when they control more than 50%. This means that only a proportionate share of the joint
venture's net assets and bottom line earnings are reflected in the group's financial accounts, while its debt is effectively excluded
from the group's balance sheet. Toll income, net of joint-venture operating expenses and depreciation, is recorded as profit from
joint ventures. In the cash flow statement, income from most of these joint ventures is not classified as operating cash flow but as
cash from investing activities in the form of dividends received and loan repayments. Standard & Poor's treats all dividends and
loan repayments from infrastructure joint ventures as part of funds from operations.
23Standard & Poor’s
Company: Shanghai Baosteel Group (Baosteel)
Credit rating: BBB-/Stable
Analyst: Huiyi Qu
Accounting standard: P.R.C. GAAP
Reporting currency: RMB
Baosteel's financial statements are prepared according to P.R.C. GAAP. No major adjustments were made to the company's
financial ratios, although it is recognized that the quality of accounting information in mainland China does not meet international
standards. The reporting of fair value information and write downs can sometimes be difficult. Off-balance-sheet liabilities of
uncertain quantities, such as subsidized housing, schooling, or health care benefits, can further reduce the transparency of financial
statements. Investments, over which Baosteel has control, even if its ownership is less than 50%, are consolidated. For example,
36%-owned Meishan Ltd., over which Baosteel has full control, is fully consolidated.
Company: Sino Land Co. Ltd. (Sino Land), (Guarantor of Golden Million Finance Corp.)
Credit rating: BB/-- (Golden Million Finance Corp.)
Analyst: Renee Lam
Accounting standard: H.K. GAAP
Reporting currency: HK$
Sino Land's accounts are not particularly transparent. There is a lot of off-balance-sheet debt in jointly controlled entities. Sino Land
keeps about 35% of its assets in joint ventures, and information on the private businesses of the controlling shareholder is limited.
To avoid understating debt, Standard & Poor's includes its share of debt incurred by associates in calculating the company's
leverage and debt coverage ratios. With the exception of Sino Land's hotel properties, the company revalues its investment
properties yearly with changes in market value reflected in its asset revaluation reserves. This can sometimes cause problems when
making international comparisons because some countries do not permit upward revaluation of assets. If the asset revaluation
reserves were excluded from shareholders' equity, the company's net debt to capital would have increased to 28% from 24% as at
Dec. 31, 2002. Sino Land recognizes revenue and profit from property developments only upon completion. This is a more
conservative revenue recognition method, but it can result in more cyclical earnings than if the company used the percentage-of-
completion method. About 18% of total interest expense was capitalized over the past few years.
Company: Sun Hung Kai Properties Ltd. (SHKP)
Credit rating: A/Negative
Analyst: Renee Lam
Accounting standard: H.K. GAAP
Reporting currency: HK$
SHKP's investments in associates and jointly controlled entities are equity accounted. Standard & Poor's adjusts SHKP's EBITDA
ratios by including cash dividends from associates and excluding their equity earnings because of their potential non-cash nature.
Like most property companies in Hong Kong, SHKP revalues its investment and hotel properties yearly with changes in market
value reflected in the company's asset revaluation reserves. This can sometimes cause problems when making international
comparisons because some countries do not permit upward revaluation of assets. If the asset revaluation reserves were excluded
from shareholders' equity, the company's ratio of net debt to capital in fiscal 2002 would have increased to 20% from 14%. The
company also capitalizes a significant amount of interest. For 2002, EBITDA to net interest coverage would have dropped to 11.4x
from 17.7x if capitalized interest were included.
Corporate FinancialDisclosure inGreater China
24 Standard & Poor’s
Company: Swire Pacific Ltd. (Swire)
Credit rating: BBB+/Negative
Analyst: Renee Lam
Accounting standard: H.K. GAAP
Reporting currency: HK$
Standard & Poor's includes Swire's share of debt liabilities in 46%-owned Cathay Pacific Airways Ltd. when calculating the
company's leverage and debt coverage ratios. Cathay Pacific is effectively controlled by Swire but is not included in the consolidated
balance sheet because the shareholding is slightly less than the required threshold of 50% consolidation. If Cathay Pacific is
consolidated, Swire's 2002 leverage ratio rises to 30% from 17%. Like most companies in Hong Kong, Swire revalues its investment
properties yearly with changes in market value reflected in the company's asset revaluation reserves. This can sometimes cause
problems when making international comparisons because some countries do not permit upward revaluation of assets. In 2002,
Swire's ratio of net debt to capital would have increased to 22% from 16% if asset revaluation reserves were excluded from the
equity base. Capitalized interest is significant. The EBITDA to net interest coverage ratio would have dropped to 6.6x from 10.4x
in 2002 had capitalized interest been included. Swire adopts a percentage-of-completion method in recognizing revenue and profit
from property developments.
Company: Taiwan Power Co. (Taipower)
Credit rating: AA-/Negative
Analyst: Tony Tsai
Accounting standard: Taiwan GAAP
Reporting currency: NT$
Several key adjustments need to be made when calculating Taipower's financial ratios. Standard & Poor's capitalizes the company's
power purchase agreements and adds-back capitalized interest. Capitalized interest was significant in 2002 at Taiwan dollar (NT$)
4.143 billion, compared with total interest expense of NT$12.525 billion. Standard & Poor's notes that Taipower depreciates its
fixed assets over 20 years, compared with 30 years for U.S. utilities. Accelerated depreciation can result in lower net worth and
deflate earnings. Taipower sets aside reserves in a sinking fund for decommissioning nuclear plants. Pension liabilities are currently
under provided for but the company has started to accelerate its provisioning to prepare the company for possible privatization.
Taipower plans to make a further NT$2 billion in provisions per year between 2003-2005 for pension commitments.
Company: United Microelectronic Corp. (UMC)
Credit rating: BBB/Stable
Analyst: Tony Tsai
Accounting standard: Taiwan GAAP
Reporting currency: NT$
A big issue with UMC is the company's use of employee bonus shares. Under Taiwan GAAP, the distribution of employee bonus
shares is treated as an allocation from retained earnings and is not charged to the income statement. These are free shares, which
have no lock-up period. Even though the cash flow implications are neutral, they still need to be carefully considered when doing
comparative ratio analysis. If the market value of employee shares were reported as an operating cost, UMC would have recorded
a loss in 2002. Capitalized interest amounted to Taiwan dollar (NT$) 551 million in 2002, but this had only a minor affect on the
way interest coverage ratios were calculated. Machinery and equipment is depreciated on a straight-line basis over five years, which
is standard industry practice. UMC's research and development costs are expensed and not capitalized. The company also has
treasury stock, which is deducted from shareholders' equity.
25Standard & Poor’s
Company: Wan Hai Lines Ltd. (Wan Hai)
Credit rating: BBB-/Stable
Analyst: Daniel Hsiao
Accounting standard: Taiwan GAAP
Reporting currency: NT$
Wan Hai uses operating leases quite readily. In 2002, the company capitalized operating lease commitments of Taiwan dollar (NT$)
21.5 billion, which was 60% higher than its reported debt figure. Wan Hai's ratio of EBITDA interest coverage in 2002 fell to 7.6x
from 21.6x after it had been lease-adjusted. Under Taiwan GAAP, directly owned subsidiaries with total assets or total net sales of
less than 10% of the company's unconsolidated assets or sales are not consolidated. As a result, Wan Hai Lines (America) Ltd. and
Yi Chun Steamship Agencies Sdn. Bhd. are not consolidated even though the company owns more than 50% of their voting stock.
Wan Hai depreciates its Taiwan registered vessels over 18 years plus one year of residual value.
Company: Wharf (Holdings) Ltd. (Wharf)
Credit rating: BBB/Negative
Analyst: Renee Lam
Accounting standard: H.K. GAAP
Reporting currency: HK$
Assessing the credit strength of Wharf involves several analytical accounting interpretations. Standard & Poor's views Wharf in the
context of the credit profile of its parent, Wheelock & Co. Ltd. While Wheelock owns slightly less than 50% of Wharf, and hence
does not consolidate Wharf in its accounts, Standard & Poor's is of the opinion that Wheelock effectively controls Wharf and that
their affairs are closely aligned. Joint ventures between Wheelock group members and inter-group transfers of assets reflect its
economic integration. Standard & Poor's considers that full consolidation of Wharf and Wheelock better reflects the credit profile
of the group, although different fiscal year-end dates make consolidation challenging. Accordingly figures are only approximate.
Focus on a Wheelock group consolidation makes a significant difference to credit measures. Interest coverage drops to 3.9x from
5.6x, based on results for the financial year ended Dec. 31, 2001 for Wharf and results based on the financial year ended March
31, 2002 for Wheelock.
The issue of consolidation also raises an interesting study in contrasts. Wheelock, with its 48%-ownership and control of Wharf,
does not consolidate Wharf. While Wharf, in recent years, has consolidated the very profitable Modern Terminals Ltd. (MTL) in
which it has increased ownership to 55%. The difference in the ownership interest in both cases is modest. A more substantial
difference between the two situations is the presence of significant minority shareholders in MTL and, it is understood, the
requirement for all parties to consent to major decisions. In short, Wheelock would appear to exert more influence over Wharf than
Wharf does over MTL. It is perhaps coincidental that consolidating Wheelock and Wharf weakens the latter's credit measures;
while consolidating MTL materially improves credit measures.
Aside from the issues relating to consolidation, analysts need to be conscious that Wharf revalues its investment and hotel properties
yearly, with changes in market value reflected in the company's asset revaluation reserves. As with other property companies
Standard & Poor's considers credit measures both incorporating and excluding the revaluations. In 2002, the company's net debt
to capital would have increased significantly to 49% from 29% if asset revaluation reserves were excluded. Wharf adopts the
percentage-of-completion method in recognizing revenue and profit from property developments, which means there will be some
variance between cash flow and profit measures. Another Standard & Poor's adjustment, which is common among credit analysts,
is to include capitalized interest in interest expenses when calculating the company's interest coverage ratios. Wharf's EBITDA to
net interest coverage ratio would have increased to 10.4x from 8.9x in 2002 if capitalized interest were excluded.
Corporate FinancialDisclosure inGreater China
26 Standard & Poor’s
Foreign currencyCompany credit rating Outlook Business
Key Ratings in Greater China
Ratings as at June 2003.
China and MongoliaAluminum Corp. of China Ltd. BBB Stable AluminumChina Mobile (Hong Kong) Ltd. BBB Positive TelecommunicationsChina National Offshore Oil Corp. BBB Positive Chemicals and PetroleumChina Petroleum & Chemical Corp. BBB Stable Chemicals and PetroleumCNOOC Ltd. BBB Positive PetroleumHuaneng Power International Inc. BBB Stable PowerBeijing Datang Power Generation Co. Ltd. BBB Stable PowerShanghai Baosteel Group BBB- Stable SteelGH Water Supply (Holdings) Ltd. BB+ Stable WaterPanva Gas Holdings Ltd. BB+ Stable Gas DistributionAES China Generating Co. Ltd. B+ Stable PowerErdenet Mining Corp. B Stable MiningCathay International Water Ltd. CCC Negative Water
Hong KongAirport Authority Hong Kong A+ Stable AirportCLP Holdings Ltd. A+ Stable PowerCLP Power Hong Kong Ltd. A+ Stable PowerHongkong Electric Holdings Ltd. A+ Stable PowerHongkong Electric Co. Ltd. A+ Stable PowerKowloon-Canton Railway Corp. A+ Stable Transportation (Rail)MTR Corp. Ltd. A+ Stable Transportation (Rail)Kowloon Motor Bus Holdings Ltd. A Stable Transportation (Bus)Sun Hung Kai Properties Ltd. A Negative PropertyCheung Kong (Holdings) Ltd. A- Negative PropertyCheung Kong Infrastructure Holdings Ltd. A- Negative InfrastructureHutchison Whampoa Ltd. A- Negative DiversifiedHongkong Land Holdings Ltd. BBB+ Negative PropertyJardine Strategic Holdings Ltd. BBB+ Negative DiversifiedSwire Pacific Ltd. BBB+ Negative DiversifiedHysan Development Co. Ltd. BBB Negative PropertyPCCW-HKT Telephone Ltd. BBB Positive TelecommunicationsWharf (Holdings) Ltd. BBB Negative DiversifiedCITIC Pacific Ltd. BBB- Stable DiversifiedKerry Properties Ltd. BBB- Negative PropertyRoad King Infrastructure Ltd. BBB- Stable Road InfrastructureGolden Million Finance Corp. BB N.A. PropertyHopewell Holdings Ltd. BB- Stable DiversifiedChinese Estates Holdings Ltd. B+ Negative PropertyASAT Holdings Ltd. B Negative Semiconductor
TaiwanChunghwa Telecom Co. Ltd. AA- Stable TelecommunicationsTaiwan Power Co. AA- Negative PowerChinese Petroleum Corp. A+ Stable PetroleumHon Hai Precision Industry Co. Ltd. BBB Stable ElectronicsUnited Microelectronic Corp. BBB Stable SemiconductorCompal Electroncis Inc. BBB- Stable ElectronicsFar EastTone Telecommunications Co. Ltd. BBB- Stable TelecommunicationsWan Hai Lines Ltd. BBB- Stable ShippingQuanta Computer Inc. BBB- Positive ElectronicsChi Mei Corp. BB Negative Petrochemical/ElectronicsRitek Corp. B+ Negative ElectronicsMacronix International Co. Ltd. B Negative Semiconductor
27Standard & Poor’s
Glossary of Financial Ratio Definitions
atios are helpful in broadly defining a company sposition relative to its rating category.
However, caution should be exercised when using ratios for
comparisons because of differences in business environments and
financial practices. While the absolute levels of ratios are
important, it is equally important to focus on trends. Below are the
definitions for some of Standard & Poor's key financial ratios.
Total debt includes current and non-current debt, secured and
unsecured debt, subordinated debt, bank overdrafts, loans,
finance lease liabilities, redeemable preference shares, non-
recourse debt, debenture stock, promissory notes, convertible
notes, and bills payable (non-trade).
Equity consists of paid-up capital, capital reserves, long-dated
subordinated loans, perpetual subordinated notes, unappropriated
profits and minority interests, less treasury shares. Subordinated
convertible notes and bonds are excluded from equity.
Total capital is total debt plus equity.
Permanent capital is equity,
adjusted for provisions for
deferred tax and future tax
benefits (where appropriate),
plus total debt.
Operating income is
operating profit, adjusted for
non-operating items (where
appropriate), before tax
expenses, interest expense,
and interest income.
Earnings before interest andtax (EBIT) is operating profit
plus interest income, but
before tax and interest
expenses.
Earnings before interest, tax, depreciation, and amortization(EBITDA) is EBIT plus depreciation and amortization.
Gross interest expense is interest expenses plus capitalized
interest.
Funds from operations (FFO) is defined as operating profit after
exceptional items but before tax expenses, plus depreciation and
amortization less income tax paid, and is adjusted for non-cash
items and net losses or gains on the sale of assets.
Operating Lease Adjustment where applicable, financial ratios
are adjusted for operating lease commitments. Standard &
Poor's operating lease model improves the comparability of
financial ratios by considering de facto assets and liabilities,
whether they are accounted for on or off the balance sheet. The
specific nature of a company's lease obligations (for example:
term, asset type, residual values, matching customer leases, and
contracts) often requires several subjective analytical decisions.
The operating lease model establishes parameters that serve as
a starting point for such decisions.
In capitalizing non-cancelable operating lease commitments, a
present value is calculated by discounting future lease
commitments at a standard discount rate, currently 10%. This
method converts a stream of payments tied to temporary assets
to a debt-financed purchase of property, plant, and equipment.
Standard & Poor's reallocates the average of the current and
previous year's minimum first-year lease commitment to
interest and depreciation.
• Interest expense, which is the average of the current and
previous year's present value multiplied by the interest factor
(10%); and
• Depreciation, which is the
remainder of the average
lease commitment.
Each ratio is then adjusted
according to the following new
values:
• Operat ing margin i s
adjusted by adding both the
additional interest and
additional depreciation
expenses back to operating
income;
• EBIT interest coverage is
adjusted by adding the
additional interest expense
to both EBIT and gross
interest;
• EBITDA interest coverage is adjusted by adding the
additional interest expense to both EBITDA and gross
interest;
• FFO-to-total debt is adjusted by adding additional
depreciation to FFO and the present value of operating leases
to total debt;
• Return on permanent capital is adjusted by adding the
additional interest expense to EBIT, and adding the average
present value of the current and previous annual operating
lease commitments to permanent capital; and
• Debt-to-capital is adjusted by adding the present value of
operating leases to total debt in both the numerator and
denominator.
R
Operating margin (%) =Operating income x 100
Sales
Pretax interest coverage (x) =EBIT
Gross interest
EBITDA interest coverage (x) =EBITDA
Gross interest
FFO-to-total debt (%) =FFO x 100
Total debt
Return on permanent capital (%) =
EBIT x 100
Average of current and previous years' permanent capital
Total debt-to-total capital (%) =Total debt x 100
Total capital
'
Corporate FinancialDisclosure inGreater China
28 Standard & Poor’s
Rating Definitions
Standard & Poor s credit rating is a currentassessment of the ability of an obligor s overallfinancial capacity (its creditworthiness) to pay
its financial obligations.
Ratings are based on current information furnished by the borrower
or debt issuer or from data obtained by Standard & Poor's from
other sources which it considers reliable. Standard & Poor's does
not perform an audit in connection with any credit rating and
may, on occasion, rely on unaudited financial information.
Long-Term Issuer Credit RatingsAAA An obligor rated 'AAA' has EXTREMELY STRONG
capacity to meet its financial commitments. ‘AAA’ is the highest
Issuer Credit Rating assigned by Standard & Poor's.
AA An obligor rated 'AA' has VERY STRONG capacity to
meet its financial commitments. It differs from the highest rated
obligors only in small degree.
A An obligor rated 'A' has
STRONG capacity to meet its
financial commitments but is
somewhat more susceptible to the
adverse effects of changes in
circumstances and economic
conditions than obligors in higher-
rated categories.
BBB An obligor rated 'BBB' has
ADEQUATE capacity to meet its
financial commitments. However,
adverse economic conditions or
changing circumstances are more
likely to lead to a weakened
capacity of the obligor to meet its
financial commitments.
Obligors rated 'BB', 'B', 'CCC', and 'CC' are regarded as having
significant speculative characteristics. 'BB' indicates the least
degree of speculation and 'CC' the highest. While such obligors
will likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB An obligor rated 'BB' is LESS VULNERABLE in the
near term than other lower-rated obligors. However, it faces
major ongoing uncertainties and exposure to adverse business,
financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial
commitments.
B An obligor rated 'B' is MORE VULNERABLE than the
obligors rated ‘BB’, but the obligor currently has the capacity to
meet its financial commitments. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitments.
CCC An obligor rated 'CCC' is CURRENTLY
VULNERABLE, and is dependent upon favorable business,
financial, and economic conditions to meet its financial
commitments.
CC An obligor rated 'CC' is CURRENTLY HIGHLY-
VULNERABLE.
Plus (+) or minus (-) The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
C A subordinated debt or
preferred stock obligation rated 'C'
is CURRENTLY HIGHLY
VULNERABLE to nonpayment.
The 'C' rating may be used to
cover a situation where a
bankruptcy petition has been filed
or similar action taken, but
payments on this obligation are
being continued. A 'C' also will be
assigned to a preferred stock issue
in arrears on dividends or sinking
fund payments, but that is
currently paying.
SD and D An obligor rated 'SD'
(Selective Default) or 'D' has failed
to pay one or more of its financial
obligations (rated or unrated)
when it came due. A 'D' rating is
assigned when Standard & Poor's believes that the default will
be a general default and that the obligor will fail to pay all or
substantially all of its obligations as they come due. An 'SD'
rating is assigned when Standard & Poor's believes that the
obligor has selectively defaulted on a specific issue or class of
obligations but it will continue to meet its payment obligations
on other issues or classes of obligations in a timely manner.
Please see Standard & Poor's issue credit ratings for a more
detailed description of the effects of a default on specific issues
or classes of obligations.
Public Information (pi) Ratings
Ratings with a 'pi' subscript are based on an analysis of an
BBB
BB+ B
BBB- A-3
A-
A
A+ A-1
AA
AA A-1+
AA
AAA
BBB+ A-2
Ratings CorrelationsStandard correlations of short-term ratings
with long-term ratings is shown below.
A ''
29Standard & Poor’s
issuer's published financial information, as well as additional
information in the public domain. They do not, however, reflect
in-depth meetings with an issuer's management and are
therefore based on less comprehensive information than ratings
without a 'pi' subscript. Ratings with a 'pi' subscript are
reviewed annually based on a new year's financial statements,
but may be reviewed on an interim basis if a major event occurs
that may affect the issuer's credit quality.
Short-Term Issuer Credit Ratings A-1 An obligor rated 'A-1' has STRONG capacity to meet
its financial commitments. It is rated in the highest category by
Standard & Poor's. Within this category, certain obligors are
designated with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitments is EXTREMELY
STRONG.
A-2 An obligor rated 'A-2' has SATISFACTORY capacity
to meet its financial commitments. However, it is somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligors in the
highest rating category.
A-3 An obligor rated 'A-3' has ADEQUATE capacity to
meet its financial obligations. However, adverse economic
conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial
commitments.
Local Currency and Foreign Currency RisksCountry risk considerations are a standard part of Standard &
Poor's analysis for credit ratings on any issuer or issue.
Currency of repayment is a key factor in this analysis. An
insurer's capacity to repay foreign currency obligations may be
lower than its capacity to repay obligations in its local currency
due to the sovereign government's own relatively lower capacity
to repay external versus domestic debt. These sovereign risk
considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also
distinguished from local currency issuer ratings to identify those
instances where sovereign risks make them different for the
same issuer.
National Scale Credit RatingsStandard & Poor's national scale credit ratings provide an
opinion of the relative creditstanding of entities and specific
obligations in a given country.
National scale credit ratings differ from Standard & Poor's
global scale ratings in two important respects: (1) national scale
credit risk opinions are based on comparative credit risk
analysis of obligors in one country, instead of the broad
international comparisons used for global scale ratings; and (2)
unlike global scale credit risk opinions, national scale ratings do
not address direct sovereign risks.
National scale ratings are conveyed by symbols that distinguish
them from Standard & Poor's well-known letter-grade symbols
(eg: 'twAAA' for national scale ratings in Taiwan).
CreditWatchCreditWatch highlights the potential direction of a short- or
long-term rating. It focuses on identifiable events and short-
term trends that cause ratings to be placed under special
surveillance by Standard & Poor's analytical staff. These may
include mergers, recapitalizations, voter referendums,
regulatory action, or anticipated operating developments.
Ratings appear on CreditWatch when such an event or a
deviation from an expected trend occurs and additional
information is necessary to evaluate the current rating. A listing,
however, does not mean a rating change is inevitable, and
whenever possible, a range of alternative ratings will be shown.
CreditWatch is not intended to include all ratings under review,
and rating changes may occur without the ratings having first
appeared on CreditWatch. The ''positive'' designation means
that a rating may be raised; ''negative'' means a rating may be
lowered; and ''developing'' means that a rating may be raised,
lowered, or affirmed.
Rating OutlooksA Standard & Poor's Rating Outlook assesses the potential
direction of a long-term credit rating over the intermediate to
longer term. In determining a Rating Outlook, consideration is
given to any changes in the economic and/or fundamental
business conditions. An Outlook is not necessarily a precursor
of a rating change or future CreditWatch action.
• Positive means that a rating may be raised.
• Negative means that a rating may be lowered.
• Stable means that a rating is not likely to change.
• Developing means a rating may be raised or lowered.
For a full listing of definitions, go to our website at
www.standardandpoors.com. Select Credit Ratings, Credit
Ratings Criteria, Ratings Definitions.
Corporate FinancialDisclosure inGreater China
30 Standard & Poor’s
Standard & Poor’sCorporate Analysts Contacts
Asia PacificPaul Coughlin, Managing Director
ph: (852) 2533-3502, fax: (852) 2533-3599
Regional Practice Leader (Asia Pacific)
Hong KongJohn Bailey, Director
ph: (852) 2533-3530, fax: (852) 2533-3599
Team Leader (Greater China)
Mary Ellen Olson, Director
ph: (852) 2533-3539
Raymond Woo, Director
ph: (852) 2533-3526
Huiyi Qu, Associate Director
ph: (852) 2533-3503
Agnes Lee, Associate Director
ph: (852) 2533-3512
Renee Lam, Associate
ph: (852) 2533-3517
Hilda Chan, Senior Research Assistant
ph: (852) 2533-3519
Richard Pardoe, Editorial Manager
ph: (852) 2533-3531
MelbournePaul Stephen, Director
ph: (61) 3-9631-2070, fax: (61) 3-9650-6349
Team Leader (Australia & New Zealand)
Ian Greer, Director
ph: (61) 3-9631-2032
Craig Parker, Director
ph: (61) 3-9631-2073
Jeanette Ward, Director
ph: (61) 3-9631-2075
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ph: (61) 3-9631-2074
Parvathy Iyer, Director
ph: (61) 3-9631-2034
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ph: (61) 3-9631-2035
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ph: (61) 3-9631-2033
Mark Legge, Associate Director
ph: (61) 3-9631-2041
Peter Stephens, Associate Director
ph: (61) 3-9631-2078
Andrew Lally, Associate Director
ph: (61) 3-9631-2077
Laurie Conheady, Associate Director
ph: (61) 3-9631-2036
Paul Draffin, Associate Director
ph: (61) 3-9631-2122
Augusto Medeiros, Associate
ph: (61) 3-9631-2039
31Standard & Poor’s
Lucie Kistler, Rating Specialist
ph: (61) 3-9631-2072
Judy Cheung, Rating Specialist
ph: (61) 3-9631-2073
Adrian David, Rating Analyst
ph: (61) 3-9631-2079
George Tsengos, Senior Research Assistant
ph: (61) 3-9631-2043
SingaporeGreg Pau, Director
ph: (65) 6239-6303, fax: (65) 6438-2321
Team Leader (SE Asia)
Manggi Habir, Director
ph: (65) 6239-6308
Sharad Jain, Director
ph: (65) 6239-6340
Yasmin Wirjawan, Associate Director
ph: (65) 6239-6302
Ee-Lin Tan, Associate Director
ph: (65) 6239-6394
Erly Witoyo, Rating Specialist
ph: (65) 6239-6321
TokyoMichael Petit, Managing Director
ph: (81) 3-3593-8701, fax: (81) 3-3593-8571
Regional Practice Leader (Japan, Korea)
Daisuke Fukutomi, Director
ph: (81) 3-3593-8714, fax: (81) 3-3593-8571
Team Leader (Japan, Korea)
Mami Yoda, Director
ph: (81) 3-3593-8730
Team Leader (Japan, Korea)
Taiwan Ratings Corp. (Taipei)Chris Irwin, Director
ph: (8862) 2368-8053, fax: (8862) 2368-9169
Tony Tsai, Director
ph: (8862) 2368-8721, fax: (8862) 2368-9102
Daniel Hsiao, Associate
ph: (8862) 2368-8277 ext. 210
Jonathan Lee, Rating Specialist
ph: (8862) 2368-8277 ext. 207
Business DevelopmentAngela Hui, Director
Ratings Origination (Hong Kong)
ph: (852) 2533-3561
Denis O’Sullivan, Director
Ratings Origination (Melbourne)
ph: (61) 3-9631-2028
denis_o’[email protected]
Anthony Foo, Director
Ratings Origination (Singapore)
ph: (65) 6239-6368
Hiroshi Atobe, Director
Ratings Origination (Tokyo)
ph: (81) 3-3593-8576
Websitewww.standardandpoors.com
www.ratingdirect.com
Corporate FinancialDisclosure inGreater China
32 Standard & Poor’s
Asia-Pacific Offices
Hong KongSuite 3601, 36/F Edinburg Tower, The Landmark
15 Queen’s Road Central, Hong Kong
ph: (852) 2533-3500
fax: (852) 2533-3577
Lincoln Chan, Managing Directorph: (852) 2533-3505
MelbourneLevel 37, 120 Collins Street
Melbourne VIC 3000, Australia
ph: (61) 3-9631-2000
fax: (61) 3-9650-8106
Christopher Dalton, Managing Directorph: (61) 3-9631-2020
SeoulSuite 400, 8/F Leema Building
146-1, Soosong-dong, Chongro-ku
Seoul 110-140, Korea
ph: (82) 2-733-1021
fax: (82) 2-734-7345
JungTae Chae, Director & General Managerph: (82) 2-398-5830
Singapore30 Cecil Street, Prudential Tower, #17-01/08
Singapore 049712
ph: (65) 6438-2881
fax: (65) 6438-2321
Surinder Kathpalia, Managing Directorph: (65) 6239-6363
TokyoYamato Seimei Building, 19/F
1-1-7 Uchisaiwaicho
Chiyoda-ku, Tokyo 100-0011
ph: (81) 3-3593-9700
fax: (81) 3-3593-8691
Yu-Tsung Chang, Managing Directorph: (81) 3-3593-8724
Affiliate Network in Asia
JakartaPT. PEFINDO Credit Rating Indonesia
Atrium Mulia 2/F, Suite 205
Jl. H.R. Rasuna Said Kav. B10-11
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ph: (62) 21-252-5523
fax: (62) 21-252-5532
ManilaPhilippine Rating Services Corp. (PhilRatings)
18/F, Ramon Magsaysay Centre
1680 Roxas Boulevard
Manila 1000, Philippines
ph: (63) 2-525-8608
fax: (63) 2-525-8593
MumbaiCredit Rating Information Services of India (CRISIL)
4/F, Energy Group
Crisil House (Pinnacle Chambers)
121-122, Andheri-kurla Road
ph: (91) 22-691-3001
fax: (91) 22-691-3000
TaipeiTaiwan Ratings Corp. (TRC)
23/F, 100 Roosevelt Road, Sec. 2
Taipei, Taiwan R.O.C
ph: (8862) 2368-8277
fax: (8862) 2368-9169
Standard & Poor’s Asia-Pacific Offices
33Standard & Poor’s
Also Available
Greater China Corporate Report Card
Hong Kong PropertyReview 2002
Hong Kong InsuranceOutlook 2003
South and Southeast AsianCorporate Report Card
Taiwan Insurance Outlook 2003
Taiwan bankingOutlook 2003
China BankingOutlook 2003-2004
Analyst Directory 2003Asia
Greater China CreditStats2002
Corporate FinancialDisclosure inGreater China
34 Standard & Poor’s
Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices:36/Fl Edinburgh Tower, The Landmark, 15 Queens Road, Central, Hong Kong. Copyright 2002 by The McGraw-Hill Companies, Inc. Reproduction in whole or in partprohibited except by permission. All rights reserved. Officers of The McGraw-Hill Companies, Inc.: Harold W. McGraw, III, Chairman, President, and Chief ExecutiveOfficer; Kenneth M. Vittor, Executive Vice President and General Counsel; Robert J. Bahash, Executive Vice President and Chief Financial Officer; Frank Penglase, SeniorVice President, Treasury Operations. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility ofhuman or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any informationand is not responsible for any errors or omissions or the result obtained from the use of such information.
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This report and the ratings contained within it are based on published information as of June 17, 2003. Subsequent information may result in the assignment of ratingsthat differ from the ratings published here. Please call Standard & Poor's at (852) 2533 3500 for the most recent rating assigned.
Company Credit rating Analyst Comments
35Standard &Standard &
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