Asiainfo, the US-incorporated and Nadaq-listed telecommunications and software solutions provider founded by Chinese Internet legends Edward Tian and James Ding, has had a topsy-turvy few months. Following a $126 million IPO in March 2000, the company suffered the consequence of the Internet slump, and its share price fell from a high of over $100 to a low of just over $3 in March this year. Since then, however, the stock has kicked back up to almost $11 dollars before falling on news the company made a SARS-induced loss of $1.1 million in the second quarter. Here veteran CFO Ying Han discusses the company’s balance sheet management plans are for the coming year.
Internet companies have long been famous for looking at equity financing, rather than debt financing. Historically, that was thanks to a very high share price on the back of a bull market. But despite the strong recovery in your share price in recent months, it's still well below your historical high. In contrast, interest rates in China, and even more so in the US are very low. Has this in any way influenced you views on debt financing?
Ying Han:Actually, the new situation hasn't really affected much at all. There are a number of reasons for this. Firstly, we have only spent some 40% of the $126 million we raised in the US in 2000. Secondly, the China operation of Asiainfo, which is 100% owned by the US-incorporated entity and hence a foreign entity in China, focuses on software development, rather than hardware and equipment. This not that capital-intensive compared to the operations of an oil company or telecoms company. Thirdly, thanks to our positive cash flow and the IPO proceeds, we have about $130 million in cash to draw on.
How did you initial capitalization come about, I mean for the China operation?
We received a cash injection from our parent company, around $13 million, and so far we have not had to draw upon any more. At the beginning, we also used a guarantee letter from our US bankers to borrow in China. But we quickly paid that back.
So you finance your operations mainly from your cash flow and bank loans?
Yes, our positive internal cash flow is sufficient for our working capital needs. As for bank loans, we do indeed have lines of credit to Chinese and overseas banks. These credit lines are used both for issuing Letters of Guarantee when bidding for large projects and for daily working capital needs
Which part of the company generates the bulk of the cash flow? The US company that you say is responsible for selling equipment, or the China operation which provides the software and services?
The software portion on the mainland generates the most cash flow. In the year of our listing, 50% of our gross revenue was reported there in the US, so it's certainly a real company. But that's changing. Our business focuses more and more on software solutions within China. The engineers and the software intellectual property all operate here under local regulations. Basically, we are a total solutions provider with our own software, plus some third-party equipment that is supplied by our US holding company.
Given the two entities, how do you ensure against currency risk? How do you reconcile the currency needs of your mainland operations with the US operations?
We make sure the two differently denominated cash flows, that is the RMB cash flow and the US dollar cash flow don't mix! The holding company ships equipment to the China customers and pays the vendors in US dollars after being paid by the mainland customers in US dollars as well. The mainland entity of Asiainfo sells a different kind of product, namely the software and services solution, and bills in RMB. That means we avoid currency risk. This is the system we have been operating under for years.
Internet and tech companies used to be famous for using their share price to grow non-organically. That's obviously attractive, since it's like printing your own money. Is that still an option for you? Or would you prefer to finance an acquisition by leveraging the current low interest rates?
Debt is definitely not something we consider right now, despite low interest rates, given our healthy cash flow and the cash pile we have in the US. On the other hand, it's clear that our share price is no longer as powerful as it once was to finance takeovers. If you take our last big acquisition as an example, Bonson Information Technology Holdings Ltd. in early 2002, which is a leading developer of wireless telecommunications software and solutions. we paid two-thirds in cash and one-third in shares, namely $32.7 million and just over one million shares of the company's common stock. And how was that balance between cash and shares struck?
Through negotiation! Generally, we don't have any fixed rules. The nature of the transaction depends on the both the valuations of the Asiainfo and of the target, the requirement of the target, the integration plans for the target etc.
What are feelings on using cash versus shares going forward?
It depends on a lot of issues. It depends on what the target company wants for a start, and the future value they ascribe to our shares.
How about equity issuance? Do you feel the need to tap the markets this year?
Not in the short term. We have more than sufficient capital on hand, due to our very low debt levels, internal cash flow and the unspent proceeds of our IPO. Of course, if we use a huge amount of cash to acquire a company the situation might change, but that's not likely in the short term.