working capital report southeast asia 2019...orking aital eort southeast asia 2019 4 sea industry...

Working Capital ReportSoutheast Asia 2019

Working Capital Report | Southeast Asia 2019

2

Understanding Working CapitalCash is the life blood of business. Cash tied up in the working capital cycle (which comprises receivables, inventory and payables) can be a drag on business and lead to liquidity pressures. Businesses in Southeast Asia (“SEA”) are under-performing their international peers on working capital management; reducing their global competitiveness. Effective working capital management can release cash which can be used for operations, expansion, capital expenditure, deleveraging and dividends.

The Working Capital Cycle

ReceivablesOrder-to-cash

The process of contracting with customers through to selling

goods and eventually collecting cash for the goods delivered

InventoryForecast-to-fulfil

The process of converting raw materials into finished goods, including the ownership of the

goods until they have been sold

PayablesProcure-to-pay

The end-to-end process, from contracting with suppliers to

receiving products/services and ultimately paying

Manufacturing example

Collect cash

Sell outputs

Finished outputs

Receive inputs

Order inputs

Customer terms (+ delay to pay)

Inventory holding period

Productiontime

Supplier terms (+ delay to pay)

Order leadtime

Days Inventory

Days Payables

Days Sales

Working Capital Funding Requirement / Cash Lock Up


3

SEA Working Capital Performance Listed public companies in Southeast Asia have a relatively high working capital investment when compared to the global average; 55 Days Working Capital (“DWC”) in 2019. Singaporean companies were able to tighten up their working capital investment in 2019 unlocking USD5.6b through a 6 day reduction in their DWC. However Indonesian companies required an additional USD4.0b in working capital funding due to an 8 day increase in DWC.

Working Capital in Southeast Asia

Vietnam97 DWC +4 days

Thailand86 DWC +3 days

Indonesia90 DWC +8 days

Philippines49 DWC -1 day

Malaysia113 DWC -3 days

Singapore84 DWC -6 days

Globalaverage55 DWC

DWC - Days Working Capital= (Accounts Receivable + Inventories - Accounts Payable) / Revenue x 365 days

Data Sample Quick Stats

6 Countries USD214b NWC

24 Industries Source: Cap IQ

2,260 Public Companies July 18 to June 19


4

SEA Industry PerformanceMining companies achieved a 19 day reduction in DWC, releasing USD1.7b in cash, driven by a 7 day reduction in Days Sales Outstanding (“DSO”) and a 15 day increase in Days Payable Outstanding (“DPO”). Agricultural companies saw a 27 day increase in DWC, requiring USD2.3b in additional funding, driven by increasing DSO and Days Inventory Outstanding (“DIO”).

Change in Days Working Capital, CQ2 2018-CQ2 2019

-19

-12

-11

-8

-6

-6

-2

-2

-1

0

1

2

3

3

3

3

3

4

5

7

8

17

22

27

A de

crea

se in

DW

C in

dica

tes

an

impr

ovem

ent i

n w

orki

ng c

apita

l pe

rfor

man

ce, i

.e. i

ncre

asin

g ca

sh r

elea

se

An in

crea

se in

DW

C in

dica

tes

a de

terio

ratio

n in

wor

king

cap

ital

perf

orm

ance

, i.e

. inc

reas

ing

cash

lock

up

Avg:2Source: Capital IQ, Deloitte analysis

NWC

Mining $3.3b

Furniture & Wood $1.3b

Oil & Gas $14.2b

Industrial Machinery $3.6b

Construction Materials $5.6b

Industrial Chemicals $10.5b

Public Utilities $11.2b

Steel & Metalworks $9.2b

Retail $5.0b

Mechanical Engineering $16.2b

Transportation $2.1b

Consumer Goods $1.9b

Construction $17.0b

Computers & Electronics $7.7b

Palm Oil $13.8b

Services $4.7b

FMCG $22.8b

Paper & Printing $3.4b

Telecommunications $3.8b

Health $2.9b

Clothing & Textiles $2.3b

Other $41.8b

Hospitality $2.6b

Agriculture $7.2b


5

SEA Industry BenchmarkingWe have analysed the working capital performance of over 2 thousand public companies around Southeast Asia.

You can use these benchmarks to assess the working capital efficiency of your own business or portfolio company using the Working Capital Health Check on the following page.

Industry Benchmarks

400

200

0400

200

0

400

200

0

DPO

DIO

DSO

74

57

40

118

81

54

246

169

10387

66

42

95

62

34

101

72

47

67

44

27

102

50

29

78

56

34

47

27

12

130

92

67

131

79

53

62

35

23

135

78

27

38

25

16

135

65

38

101

75

49

92

65

42

31

14

6

101

68

42

136

90

49

168

93

53

80

53

28

74

39

23

107

77

51

120

73

40

158

86

59

159

114

70

102

72

46

143

90

55

136

50

13

62

16

7

102

67

48

161

88

42

82

42

24

65

48

29

109

73

46

33

13

4

139

57

25

40

8

0

159

94

6415

7

0

18

7

1

55

19

5

212

122

69

142

44

7

177

80

45

149

57

27

62

28

6

66

39

21

89

53

34

85

59

39

87

43

21

65

39

24

82

51

23

78

38

24

111

48

17

67

39

22

117

59

42

125

69

31

102

48

23

95

61

17

55

25

11

75

44

27

109

52

26

73

40

22

80

35

17

86

49

30

160

93

50

125

58

23

158

66

25

130

59

36

Agric

ultu

re

Clot

hing

& T

extil

es

Com

pute

rs &

Ele

ctro

nics

Cons

truc

tion

Cons

truc

tion

Mat

eria

ls

Cons

umer

Goo

ds

FMCG

Furn

iture

& W

ood

Hea

lth

Hos

pita

lity

Indu

stria

l Che

mic

als

Indu

stria

l Mac

hine

ry

Mec

hani

cal E

ngin

eerin

g

Min

ing

Oil

& G

as

Oth

er

Palm

Oil

Pape

r & P

rintin

g

Publ

ic U

tiliti

es

Reta

il

Serv

ices

Stee

l & M

etal

wor

ks

Tele

com

mun

icat

ions

Tran

spor

tatio

n an

d lo

gist

ics

Source: Capital IQ, Deloitte analysis

Median Upper quartile Lower quartile


6

Working Capital Health Check Calculate your company’s working capital metrics using the formula below and compare the performance with the benchmarks for your industry on the previous page. How much cash could you unlock with the right working capital management strategy? We look at some of the levers to optimise working capital (and size some of the industry opportunities) on the following page.

Working Capital Health Check

Understanding Working Capital Lock-up Taking Debtors as an example, assume: (a) your Accounts Receivable total USD20m; and (b) your Days Sales Outstanding is 150 days (i.e. it takes 5 months to collect debtors).

The OpportunityAccelerating collections by just 1 month (20% reduction in collection time) would release ~USD4m in cash for your business. What would you do with that money?

The CostAssuming the business has a cost of capital of 7%; that 1 month additional lock-up in receivables is costing the business an additional USD280k p.a.

Notes 1. Your Accounts Receivable management is more efficient if your Company DSO is lower than the Industry Benchmark. 2. Your Inventory management is more efficient if your Company DIO is lower than the Industry Benchmark. 3. Your Accounts Payable Management is less efficient if your Company DPO is lower than the Industry Benchmark.

Working Capital Formula

My Company Industry Benchmark

NotesCalculate your Company's Working Capital Days

Insert industy benchmarkfrom Chart above

Days Sales Outstanding [insert formula result for

your company][insert from industry

benchmark from page 5]1

DSO = Accounts Receivable

––––––––––––––––––––––––Revenue

x 365

Days Inventory Outstanding [insert formula result for



DIO = Inventory

––––––––––––––––––––––––COGS

x 365

Days Payables Outstanding [insert formula result for



DPO = Accounts Payable

––––––––––––––––––––––––COGS

x 365


7

Illustrative Levers + Opportunities There is a significant opportunity to increase the global competitiveness of Southeast Asian companies through working capital optimisation. Here we demonstrate how tactical, operational and strategic adjustments to a company’s debtor collections, inventory and payables management can yield material cash results …fast! We can help your business to understand the potential for cash release and help develop and implement plans to realise results.

Survey Result(Southeast Asia)

Illustrative Cash Release Levers(Not exhaustive)

Opportunity(Potential Release)

Tactical Operational Strategic

Debtors

ConstructionDSO: 169 days highest across all industries

Prioritised collections drive A 7-day (4%) decrease in DSO would release USD802m

Early payment discounts

Invoice financing

Inventory

Textiles DIO: 122 days highest across all industries

Re-pricing to accelerate turnoverA 10-day (8%) decrease in DIO would release USD142m

Reduce minimum stock quantity

Rationalise (less profitable) SKUs

Payables

AgricultureDPO: 28 days one of the lowest across all industries

Request and vouch original invoicesA 3-day (11%) increase in DPO would release USD124m

Renegotiate terms for early payment discounts

Rationalise supplier base and seek volume discounts


8

Deloitte Value Creation Services Working Capital Optimisation is just one of the tools utilised by our expert Value Creation Services team who combine M&A and Restructuring skillsets with Private Equity techniques to rapidly drive up earnings and cash generation.

Value Creation Scenarios

M&A event driven: enhanced VALUE CREATION

1

transformation: step VALUE CREATION

2

turnaround: VALUE re-CREATION

3

1 Mergers & Acquisitions Enhancing M&A opportunities to create value through:

• Due Diligence (com, fin, tech, ops)

• 100 Day Plan

• Integration and Separation

2 Transformation Optimising existing businesses to drive up profits through:

• Performance Improvement

• SG&A Cost Reduction

• Working Capital Optimisation

• Strategic Sourcing

• Asset Efficiency

3 Turnaround Restructuring businesses in special situations:

• Cash and Liquidity Improvement

• Restructuring Strategy

• Implementation Support (PMO)

• Chief Restructuring Officer / Advisor

• Managed Exit; fix, sell, close …for underperforming subs / divisions


9

Basis of preparation Source DataThe financial data has been sourced from the S&P Capital IQ database of the available financial information of entities with primary listings on the Singapore, Malaysia, Indonesia, Thailand, Philippines, Hanoi and Ho Chi Minh stock exchanges for the calendar quarters between July 2017 and June 2019.

Industry ClassificationsWe have classified the companies in the dataset into 24 industries based on their Standard Industrial Classification (SIC) codes and corresponding major industry groups.

For the purposes of our analysis, we have excluded companies in the Real Estate, Finance and Insurance industries.

Limitations This communication contains general information only. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. We have not audited or sought to verify the Source Data and make no representations as to accuracy or completeness.

Basis of calculations

Days Inventory Outstanding (“DIO”)

DIO = Inventory––––––––––––––––––––––––––––

Cost of Sales

x 365

Days Payables Outstanding (“DPO”)

DPO = Accounts Payable ("AP")––––––––––––––––––––––––––––

Cost of Sales

x 365

Days Sales Outstanding (“DSO”)

DSO = Accounts Receivable ("AR")–––––––––––––––––––––––––––––

Revenue

x 365

Days Working Capital (“DWC”)

DWC = Inventory+AR−AP––––––––––––––––––––––––

Revenue

x 365

Net Working Capital (“NWC”)

NWC = Inventory + AR − AP


10

Key contactsReport AuthorMatt Becker Partner, Financial Advisory Singapore T: +65 8332 1977E: [email protected]

Edy WirawanFinancial Advisory LeaderIndonesia T: +62 21 5081 9200E: [email protected]

Fang Li Wei Financial Advisory LeaderMalaysia T: +60 3 7610 8865E: [email protected]

Aye ChoFinancial Advisory Services LeaderMyanmar T: +951 230 7365E: [email protected]

Soo Earn Keoy Regional Managing Partner Southeast AsiaT: +65 6216 3238E: [email protected]

Thavee ThaveesangsakulthaiFinancial Advisory LeaderThailand T: +66 (0) 20340000 E: [email protected]

Phong LeFinancial Advisory LeaderVietnam T: +84 28 3521 4080E: [email protected]

Diane Yap Financial Advisory Philippines T: +63 2 581 9053E: [email protected]


11

Notes

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms and their affiliated entities are legally separate and independent entities. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax & legal and related services. Our global network of member firms and related entities in more than 150 countries and territories (collectively, the “Deloitte organisation”) serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 312,000 people make an impact that matters at www.deloitte.com.

Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of DTTL. Members of Deloitte Asia Pacific Limited and their related entities, each of which are separate and independent legal entities, provide services from more than 100 cities across the region, including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.

© 2019 Deloitte Southeast Asia Ltd

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