A TOUCH EXOTIC
By Adam Zagorin
FUJITSU HEADQUARTERS Tokyo 1996 REVENUES $36.32 billion STOCK CLOSE 9/8/97 $12.23 P/E RATIO 30.5
Tadashi Sekizawa, the soft-spoken 65-year-old president of Japanese computer giant Fujitsu, was puttering around the garden of his modest Yokohama home late last month, catching some well-deserved rest. He had canceled a vacation in July, when Fujitsu suddenly acquired, for $878 million, the 58% share it did not already own of Amdahl, a U.S. computer firm. After that Sekizawa, a former telecommunications engineer, could focus on weeding his beloved rows of basil, coriander and mint. Wherever he is these days, Sekizawa seems to be cultivating growth.
Fujitsu is often called Japan's answer to IBM. Not only is the company Japan's foremost computer manufacturer, but its woes and dramatic rebound also bear a striking resemblance to Big Blue's travails of the early '90s. Fujitsu was caught off guard when demand shifted from mainframes to low-cost PC networks and workstations, just as the Japanese economy headed into its worst slump since World War II. In 1993 the company announced its first loss since it was publicly listed in 1949.
Sekizawa had no choice but to act fast. First, he ordered cutbacks: over three years, the parent-company work force fell from 55,000 to 46,800, largely through attrition. Meanwhile, Fujitsu began churning out PCs at reduced prices. The move nearly tripled the company's market share; in volume terms, sales rose eightfold, to 2 million units, between 1993 and last year. In the process, Sekizawa had to change a lot of corporate thinking. "People in the company who had experience with mainframes thought PCs were just toys," says he. "This was the hardest attitude to change." To counter lower profit margins, Sekizawa emphasized computer maintenance and services.
For individual users, Fujitsu in September 1995 began operating WorldsAway, a virtual community, complete with shopping and conversation groups. It has 80,000 members outside Japan and 20,000 for the domestic version. The cyberhangout made news a while ago, when a Beverly Hills, Calif., priest married a man sitting with a laptop in nearby Venice Beach to a woman logged on in Hollywood. "I don't like just working out theories on paper," stresses Sekizawa. "We have to help solve customers' problems."
Sekizawa has already solved Fujitsu's biggest problem, its anemic cash flow. Sales this year are expected to rise from $36.3 billion to $45 billion, with a 95% hike in profits, to $770 million. The stock suddenly took off at the beginning of this year, rising more than 40% at its August peak. Now that's a green thumb. --Reported by Sebastian Moffett/Tokyo
SIHL HEADQUARTERS Hong Kong 1996 REVENUES $284.3 million STOCK CLOSE 9/8/97 $5.85 P/E RATIO 30
Wall Street loves blue chips, but 1997 is turning out to be the year of "Red Chips," companies based in mainland China and listed on the Hong Kong stock exchange. And though Hong Kong stocks have been on the move--the Hang Seng index rose 36% between Aug. 23, 1996, and Aug. 26 a year later--Red Chips have blasted far past that, for a hike of nearly 250% in the same period.
Among the hottest of the newcomers is Shanghai Industrial Holdings Ltd., a conglomerate that owns businesses in and around Shanghai, the place China's rulers firmly intend to be the nation's economic centerpiece. By Sept. 8, just 18 months after it was first listed in Hong Kong, SIHL shares had risen more than 520%.
SIHL operations are concentrated in three major areas: infrastructure, automobile parts and cigarettes. About half of 1997 earnings are expected to come from such things as the toll highway leading from Hongqiao international airport to Shanghai's inner ring road, and the North-to-South Elevated Expressway cutting through downtown. About 20% to 30% will derive from a joint venture that makes chassis, front suspensions, rear axles, steering and shock absorbers for the Shanghai Volkswagen Automotive Co. The third revenue stream is produced by Nanyang Bros. Tobacco Co., a Hong Kong manufacturer of the popular Double Happiness cigarettes, which last year had sales of $141.6 million. Responsible for as much as 80% of SIHL profits in 1996, Double Happiness will contribute only 20% to 30% this year. The decline is actually good news. It stems not from a fall-off in cigarette sales but from the company's broad diversification.
SIHL's dazzling performance is one lure for investors, but an even bigger one is the company's reputation for guanxi, or political connections. They emanate from SIHL's parent, known as SIIC, or the Shanghai Industrial Investment (Holdings) Co., with interests in more than 200 businesses around the world. SIIC is owned by the Shanghai city government. Not to be ignored is the fact that China's State President, Jiang Zemin, is a former mayor of Shanghai. "The name of the game in China is relationships," explains Kent Rossiter, a senior investment analyst at Nikko Securities Co. (Asia). "Shanghai Industrial's connections are fantastic."
Underlining that fact, one of the company's public relations videos highlights endorsements from Jiang, Vice Premier Zhu Rongji and Shanghai mayor Xu Kuangdi. SIHL's chairman, Cai Lai Xing, 55, an economist, helped prepare Shanghai's economic blueprint for the 21st century, and managing director Zhuo Fu Min, 45, was involved in reforming the city's state-owned enterprises. Zhuo nonetheless downplays political connections as the key to the company's success. Says he: "SIHL makes investments based purely on business."
That may be true, but skeptics are worried that the company is expanding so fast into so many unrelated fields that it could become increasingly difficult to manage. To avoid becoming a victim of its own success, SIHL has begun hiring executives from Merrill Lynch, Credit Lyonnais and other major foreign companies--capitalists at the service of communist- owned capitalism. --Reported by Lynne Curry/Hong Kong
MOSENERGO HEADQUARTERS Moscow 1996 REVENUES $2.677 billion STOCK CLOSE 9/8/97 $1.60 P/E RATIO 7.48
In the bitter cold and darkness of a Russian winter, Muscovites depend on Mosenergo, the capital's principal supplier of heat and electricity, to survive. It's a relationship that has also weathered virtually every kind of political storm during the 20th century, and even earlier. "We provided warmth and light under 'our little father the Czar,' and when 'our people' [the communists] came in," says Sergei Rumyantsev, Mosenergo's deputy director general. "Now we do it under the democrats, because they need us as well. We have nothing to do with politics."
Known as the Electrical Illumination Co. when it was established in 1887, Mosenergo is ensconced on the banks of the Moscow River across from Red Square and the Kremlin. It has already made history as the first Russian-registered company to sell securities in the U.S. in the post-communist era. In 1995 Mosenergo issued $22.5 million worth of American Depositary Receipts, or ADRs, in a private placement on Wall Street handled by Salomon Brothers. Two years before the U.S. offering, and after 70 years of exclusive state control, Mosenergo officially gained the status of a public company in Russia. Unified Energy Systems of Russia, a state utility, is the firm's principal shareholder, with a 49% stake. Foreign investors own 35.3%; other Russian companies, individuals and employees of the vast enterprise own the rest.
As business and political conditions in Russia have improved, the company has flourished as a flagship of the new Russian capitalism. Mosenergo stock has shown a steady advance this year; last year's net profit was $548 million, an increase of $19 million. The company's value is still intimately tied to its quasi monopoly of energy production and distribution across the country. Not only is Mosenergo the only electricity supplier to more than 16 million people in the Moscow region, but it furnishes more than 80% of their heat as well. The company owns 21 electric power stations, with a generation capacity of 14,690 MW. Demand for Mosenergo's services is unlikely to diminish anytime soon.
But the company still faces many challenges. The most formidable: nonpayment of utility bills by its electricity customers, a cash-flow challenge that Rumyantsev calls "a 24-hour-a-day headache." Yet Mosenergo is not alone in this agony: being stiffed by customers is common for Russian utilities and other businesses in the brash new age of no-holds-barred capitalism. If anything, the company may be less plagued than others, since its center of operations is in Moscow, where business is booming and power consumers are presumably more flush.
Another potential pain for Mosenergo shareholders was narrowly avoided last spring. Boris Nemtsov, Russia's reformist First Deputy Premier, personally intervened to block a planned limitation of shareholders' voting rights as well as a new stock issue that would have substantially diluted the holdings of foreign investors. Infringement of the rights of minority shareholders has been a recurrent problem in Russia, and one that President Boris Yeltsin's free market-oriented government continues to battle.
On the brighter side, Mosenergo recently became the first Russian firm to submit to an independent, outside financial audit, conducted by the U.S. firm Arthur Andersen. Such transparency has prepared the way for a $150 million Eurobond issue planned for this fall. "Our investors like our openness," says Rumyantsev. Especially if their voting rights remain undisturbed. --Reported by Andrei Polikanov/Moscow
ALCATEL ALSTHOM HEADQUARTERS Paris 1996 REVENUES $27 billion STOCK CLOSE 9/8/97 $134.16 P/E RATIO 15.9
For Alcatel Alsthom, France's giant telcom, energy and transport group, 1995 is a year best forgotten. If only shareholders could. The combination of deregulation and bloat from large mergers converted a $28 billion powerhouse into a gigantic blown fuse. So why is Alcatel a fascinating stock to watch? In the past 12 months the company, which makes everything from telephone switching equipment to high-speed passenger trains, has begun to turn itself around in dazzling fashion.
The nadir came in March 1995 when Alcatel's chief executive officer Pierre Suard resigned after charges that he overbilled for transmission equipment sold to France Telecom, the country's telephone monopoly and a major customer. Suard had once been been hailed for his achievements at Alcatel. In 1993 he rang up record profits of $1.27 billion on sales of $28.4 billion. But what he won on salesmanship, he lost on administration. Unable to control corporate sprawl, he stumbled as a wave of deregulation was revolutionizing the telephone industry. As rivals raked in cash, Alcatel's 1994 profit was halved.
Alcatel's board screamed for help to Serge Tchuruk, then ceo of Total, the French oil company, who has turned out to be the rescuer of their dreams. Tchuruk ordered 30,000 jobs cut over three years, sold off nearly $2 billion in assets and investments and cut costs $2.2 billion. The largest restructuring in French history led to a rebound in just one year: 1996 profits hit an impressive $450 million.
The next step will be harder. Alcatel has bet heavily on storming the mobile-phone market. There will be tough competition from the likes of Siemens, Motorola and Nokia. The French government is considering whether to let Alcatel take a controlling stake in Thomson, France's largest defense and electronics company. Their union would create Europe's largest defense contractor and put France in a stronger position to weather the contraction in military spending after the cold war. Shareholders see that as a real peace dividend. --Reported by Bruce Crumley/Paris
IRSA HEADQUARTERS Buenos Aires 1996 REVENUES $39 million STOCK CLOSE 9/8/97 $42.75 P/E RATIO 15.5
In the Abasto neighborhood of old Buenos Aires, where the tango was born at the turn of the century, a giant renovation project is under way. At a cost of $120 million, a new residential housing complex is going up along with a huge shopping mall built inside the shell of the city's old central market. When completed next year, the development will house some 2,000 people and bring back to life a once flourishing but now nearly derelict area of downtown Buenos Aires.
Behind the dramatic renovation is a major new force in Argentine real estate: Inversiones y Representaciones S.A., better known as IRSA, a company that has made its mark on the financial markets in the past six years. IRSA's shares trade on the Buenos Aires bolsa, but they are also listed as the only Argentine real estate play on the New York Stock Exchange. IRSA's American connection is gold plated: much of the firm's capital comes from U.S. hedge-fund billionaire and philanthropist George Soros. IRSA's president and CEO, Eduardo Elsztain, 37, met Soros in 1990 in New York City, where the younger man, who was tending a $10 million portfolio of Argentine-owned properties, had moved for a year.
After a series of meetings with Soros' analysts, Elsztain finally won an audience with the legendary investor, who quickly signed up as the company's most important backer. As Elsztain says, "The final decision to go ahead was taken by George himself."
Soros sank $10 million into the company, and his timing--as usual--was impeccable. In 1991 Argentina's battered economy turned around; an independent currency board has maintained a rock-solid one-to-one parity between the peso and the U.S. dollar, which in turn encouraged Soros to increase his investment; it totals around $250 million. Flush with cash, IRSA has been on a buying spree, investing in everything from a $50 million sports complex to major office buildings to $450 million worth of swank shopping malls. In the posh ski resort of San Carlos de Bariloche in the Andes, IRSA joined with Citicorp to buy the deluxe Hotel Llao Llao, with its spectacular view of Argentina's lake country.
At IRSA's corporate headquarters in a three-story, neoclassical-style building overlooking the Plaza de Mayo in central Buenos Aires, the atmosphere is relaxed. Since Elsztain snapped it up in 1991, the company has grown from three employees to 110. Under Elsztain's supervision, they handle property selection and investment decisions, turning over architectural and construction contracts to outsiders. So far, IRSA has focused mainly on urban property, but Cresud, the agricultural real estate company owned by the same principals, has invested in 850,000 acres of farmland around the country.
Business is booming. In fiscal 1997, IRSA brought in profits of $31.4 million. The stock has risen from $27.50 for 10 units in December 1994 to $43 today. IRSA, which had assets of only $150,000 when Elsztain founded it, is now worth close to $500 million. And future growth prospects seem as promising as the wanton look in a tango dancer's eye. --Reported by Uki Goni/Buenos Aires
PETROBRAS HEADQUARTERS Rio de Janeiro 1996 REVENUES $16.8 billion STOCK CLOSE 9/8/97 $223.24 P/E RATIO 8.6
When it was founded 44 years ago, Petrobras, Brazil's state-controlled oil company, was a vital symbol of national pride. "The oil is ours" was an oft-repeated slogan. Politicians embraced Petrobras as an indispensable, state-owned bastion against foreign ownership and domination. But now foreigners and locals alike can profit from Petrobras' dominance in one of the emerging world's most dynamic markets.
Petrobras, the world's 17th largest oil company, produces natural gas and petrochemicals as well as fertilizers. It earned $639 million last year. It dominates the market in Brazil, supplying 52% of domestic petroleum requirements. For years, as a state-owned monopoly, it was inefficiently run. But in 1995, a constitutional change liberalized the exploration, production and development of oil. The government was subsequently allowed to sell off more than 30% of Petrobras' common shares. Result: since 1995 the price of Petrobras stock has more than trebled, powered by higher operating cash flows.
The future could be even brighter. Only 30% of Brazil's proven oil reserves are developed, and Petrobras has first call on much of the rest. The volume of those reserves is expected to grow substantially as the company explores the vast Amazon Basin and oil pools off the Atlantic coast. Petrobras has become a leader in drilling deepwater, offshore wells in the so-called Campos Basin off the coast of Rio de Janeiro. Now the company is looking into joint ventures with 56 potential foreign partners, including Exxon, Shell and British Gas, which would allow expanded exploration around the country. In the next year the government is expected to sell off much, but not all, of up to $6 billion worth of stock to the public.
One reason for Petrobras' luster is the competence of its technical staff. After years of management turmoil and revolving-door leadership, the government appointed Joel Mendes Renno, 59, to the top job in 1992 and has let him stay the course. An engineer and former adviser to the government's Ministry of Mines and Energy, he is known as an efficient manager who allows department heads to function without interference.
Renno's talents will be tested as he faces the looming share sell-off. Nationalism runs high in Brazil, and many citizens oppose any auction of national patrimony. Government oversight is another perennial issue. Many important decisions about Petrobras are made not at corporate headquarters in Rio de Janeiro but at government ministries in Brasilia. In the past this has led to overstaffing and inefficiencies that could hinder the pace of future growth. "There has to be a change of mentality from being big to being more profitable," notes Ana Siqueira, an energy analyst with Icatu, a Rio de Janeiro investment bank. The best way to do that, it appears, would be to bring in more shareholders. --Reported by Daniela Hart/Sao Paulo
With reporting by SEBASTIAN MOFFETT/TOKYO; LYNNE CURRY/HONG KONG; ANDREI POLIKANOV/MOSCOW; BRUCE CRUMLEY/PARIS; UKI GONI/BUENOS AIRES; DANIELA HART/SAO PAULO