For some companies, tackling the rising value of the renminbi is the central challenge occupying their treasury operations. But for VST Holdings, a distributor of information technology products and components in Asia, the climbing currency is welcomed with open arms.
William Ong, chief financial officer and executive director at VST, which generates more than two-thirds of its revenue in mainland China, shapes the company’s business model using what he calls a “3-in-1 solution”. The solution has three components -- deposits, loans and non-deliverable forwards (NDF) -- and enables the company to hedge its renminbi exposure. “We settle our transactions [in China] in renminbi and deposit it with a bank at a fixed rate for one year. Similarly, because we buy our stock in US dollars, we withdraw a US dollar loan at a one-year fixed rate. Simultaneously, we enter into an NDF, locking the renminbi and US dollar exchange rate for one year.”
By doing this, Ong makes a profit and an instant gain when he makes a currency exchange. Because the deposit interest rate is non-negotiable, the interest rate of the loan taken out in US dollars has been the “only determining factor of whether we gained 1% or up to 3% in the past”. This method is becoming more popular among Hong Kong companies which also generate large proportions of their revenues in the mainland. Even without such solutions, Ong notes that shifting renminbi from China to Hong Kong and then converting to US dollars to pay vendors is “a natural flow”.
VST distributes IT products and components to resellers, retailers and corporate customers in six countries in Asia-Pacific: China (including Hong Kong), Indonesia, Malaysia, the Philippines, Singapore and Thailand. China, however, accounts for 66% of revenue. The company has master distribution agreements with many major vendors such as Intel, AMD, Seagate, Western Digital and Hitachi for components and hard disks, and with HP, Lenovo, Dell, Acer, Samsung and Apple for finished IT products. “75% of our business is in distribution. If you go to any computer mall or some of the major retailers it is likely that the products they sell will have a VST logo on it,” said Ong.
Just under a quarter of VST’s business is driven from corporate customers. “At the corporate level, we come in at the implementation stage by offering system integrators, hardware, software and even servers for IT departments,” Ong said. An additional 1% of the business is focused on providing maintenance and training services, mainly to corporate customers.
VST’s success boils down to efficiency and the fact that it is dealing with fast-selling computer products, which pose a low risk in an age where technology is dominant in every part of our daily lives. “The shelf life of any IT product is around a couple of weeks to just over a month. You will still see certain models in shops for quite a long time, but actually the majority will already be out of date,” said Ong.
Looking ahead, Ong is taking a gradual approach to centralising VST’s treasury, but acknowledges that this won’t be an easy task, as the process also needs to be coordinated with its banks. “Some banks may be quite strong in Hong Kong, pretty good in Southeast Asia but weak in China. Similarly, many of the Chinese banks are very established in the mainland and have a good presence in Hong Kong, but are undeveloped in Southeast Asia,” said Ong. “If a bank can provide the best in service for all our needs in every country that we operate in, then maybe we will say yes to that solution. But even then there is an element of risk; we don’t like putting all of our eggs in one basket.”
