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China Development Financial (2883-TW)
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Bryan Hsu

China Development Financial Holding Company (2883-TW) through its two large subsidiaries, China Development Industrial Bank (CDIB) and Grand Cathay Securities Corporation, offers financial services to individuals and institutions. China Development Industrial Bank (CDIB) provides direct investment, overseas direct investment, corporate banking, project finance and trust businesses. The Grand Cathay Securities Corporations handles capital markets, fixed income securities, derivatives, private wealth management and brokerage services. It is the only company that has investment banking as part of its core operations in Taiwan. [1]

For the fiscal year of 2008, CDFHC reported a loss of $45 million USD, significantly lower than 2007's revenue of $477 million USD.[2] CDFHC suffered a total loss of $222 million USD in net income in 2008; a complete 180 degree turn from 2007, when it made $241 million USD in net income.[3] In terms of assets, CDFHC's assets took a $2.8 billion USD plunge, falling from $11.9 billion USD to $9.1 billion USD from 2008 to 2007. [4] The losses have been attributed to the subprime lending and US housing market crash which resulted in the 2008 Financial Crisis and CDFHC's own exposure to toxic CDO's . The company, while dealing these financial issues, came under fire in May from the Federal Supervisory Committee in Taiwan, because it was discovered that the President, Angelo Koo, had made $4.5 million USD illegally at the expense of shareholders.[5]

Company Overview

Contents

CDFHC was created through a share swap with China Development Investment Bank (not be confused with China Development Industrial Bank) in 2001. [6] Today it has over 2000 employees in branches in every major city in Taiwan, China and Korea. [7] Through its two subsidiaries it has financed many of Taiwan's largest technology and industrial companies such as the Pan-Acer Group, parent company of Acer (2353-TW) , as well as Formosa Plastics Group, the largest private company in Taiwan. [8][9]

Business and Financial Metrics

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2008 Total Revenue and Income By Percentage By Segment
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2008 Total Revenue and Income By Segment
CDFHC Metrics and Financials (Millions USD) 2008 2007 2006 2005 2004
Total Revenue-$45[10]$477[10]$658[11]$530[11]$484[12]
Total Income-$222[13]$241[13]$465[14]$329[14]-$149[15]
Total Assets$9,061[16]$11,415[16]$11,624[17]$8,768[17]$8,137[18]
Total Liabilities$5,491[16]$6,967[16]$6,592[17]$4,674[17]$4,437[18]
Total Share Holder Equity$3,570[16]$4,448[16]$5,032[17]$4,095[17]$3,700[18]
Return on Total Assets (after income tax)-2.16[19]2.09[19]5.95[20]5.30[20]-2.80[21]
Profit MarginN/A50.44[19]89.15[20]88.01[20]-70.47[21]

All aspects were rising, up until 2006. Total revenue rose 9.5% and 24.2% from 2004-2005 and 2005-2006 respectively.[22]This solid growth in revenue was held up by the incoming revenue of the banking department which made up 65%, 77%, and 80% in 2004, 2005, and 2006 respectively.[23] The banking department was realizing its largest gains during this time period between 2004 and early 2006 because they were helping some of Asia's largest companies through underwritings and IPO's such as Chi Mei Optoelectronics, Eva Airlines, Far Eastone, and Prime View Corporation.[24]

Total income was also on the rise, growing 320% and 41% from 2004-2005 and 2005-2006 respectively. The leap from negative income to positive income from 2004-2005 was a consequence of CDIB buying $332 million USD in government bonds in 2004, which in accordance to their accounting methods were written down as operation costs. [25] Hence on paper, CDFHC recorded a loss in income in 2004. In 2005, the purchase of government bonds in 2004 was no longer required to be recorded as cost and was thus transferred to the assets column (which grew by $332 million USD), alleviating the added operational "cost" of the previous years purchase. [26]

The turning point began when the housing market began to slow down and even began to fall in 2006. [27]. China Development Financial was estimated to have around $369 million USD in exposure to CDO's of which $138 million USD were directly linked to subprime loans.[28] With the subsequent burst of the housing market and resulting 2007 credit crunch, CDFHC saw it's assets began to deteriorate and revenue fall. The largest falls came in the noninterest revenue column. CDFHC lost 50% ($124 million USD) more in 2008 than in 2007 in the valuation and sale of financial assets and gains on available-for-sale assets fell $215 million USD; consequently, noninterest revenue went from a $370 million USD gain to a $126 million USD loss for 2008. [29] Though total operating expenses actually went down, from $205 million USD to $162 million USD, because of the large losses in revenue mentioned above, CDFHC's total income fell in 2008 to -$222 million USD. [29]

Busines Segments

Bank Department(-19% of Revenue, -53% of Income)

Bank Department (Dollars in Thousands USD) 2008[30] 2007[31] 2006[32] 2005[33] 2004[34]
Net Interest Revenue$77,902$98,615$61,121--
Net Noninterest Revenue-$90,733$335,072$464,591--
Net Revenue-$12,831$433,687$525,712$536,856$315,309
Operating Expenses$79,540$95,998$105,121--
Total Income-$116,997$311,677$415,538$342,601-$138,839

The main activity of the bank is direct principal investments. As of 2007 $2.6 billion USD have been invested in 335 different companies. [35] Aside from principal investments, China Development Industrial Bank (CDIB) also provides trust services, institutional banking services, structured finance, such as mergers and acquisitions, as well as equity derivative and principal trading. [36][37][38][39]

The banking segment of CDFHC is the largest segment of the company, bringing in 92% of the total revenue in 2007. However, because of the accumulating effect of toxic CDO's and credit crisis, the banking department turned it's first loss after three years of positive earnings. The sharpest decline came in noninterest revenue which fell nearly $426 million USD from 2007-2008. This decline in noninterest revenue can be attributed to the weakening of the New Taiwanese Dollar (NTD) in relation to the USD, which has made losses greater and revenue smaller from 2006 to 2008.[40] Another area of large decline occurred with the massive depreciation of assets because of the immediate effect the housing burst and credit crisis had on CDFHC's current holdings. With depreciation being multiplied by the effects of a weakening NTD, the banking department suffered losses in 2008.

Securities Department(20% of Revenue, -17% of Income)

Securities Department (Dollars in Thousands USD) 2008[30] 2007[31] 2006[32] 2005[33] 2004[34]
Net Interest Revenue$21,686$20,664$21,815--
Net Noninterest Revenue-$6,277$17,312$137,772--
Net Revenue$15,409$37,976$159,587$172,110$172,349
Operating Expenses$66,762$88,356$85,047--
Total Income-$42,350-$56,135$72,536$56,628$45,743

Grand Cathay Securities Corporation is the securities and brokerage arm of CDFHC. GCSC main line of business is capital markets. Grand Cathay provides companies with underwriting services in an effort to raise long term capital. [41] Grand Cathay also provides full line of brokerage and wealth management services, capturing 1.99% of the brokerage market share in 2007. [42]Within fixed income securities, particularly government bonds, GCSC has become ranked first among all security firms in 2007 with a trading volume exceeding NT$5.02 trillion ($157 billion USD).[43] With 3.04% of the market share in derivatives trading in Taiwan, GCSC has a solid grasp on the derivatives market, allowing it to bring in a steady low risk stream of income for shareholders. [44]

The losses for the 2007-2008 fiscal years were due in part to the subprime lending crisis, as well as the fall in stock markets around the world toward the beginning of 2007. The loss in noninterest revenue can be attributed to a fall of nearly 50% in brokerage fees. [45] Grand Cathay's losses can also be tied to the near failing of Taiwan Cosmos bank, of which Grand Cathay is its biggest creditor holding $9.8 million USD worth of Cosmos Bank convertible financial debentures. [46]

Other Department(-61% of Revenue, -30% of Income)

Other Department (Dollars in Thousands USD) 2008[30] 2007[31] 2006[32] 2005[33] 2004[34]
Net Interest Revenue-$18,686-$11,977-$8,929--
Net Noninterest Revenue-$29,292$17,293-$16,230--
Net Revenue-$47,978$5,316-$25,159$372,212$47,739
Operating Expenses$63,561$20,778$18,328--
Total Income-$62,172-$14,965-$44,153-$21,495$26,585

According to the organization chart for CDFHC, the other departments are those not under the two main subsidiaries but under the main offices of CDFHC which would include human resources, finance department, corporate strategy and planning, corporate communications and operations and technology.[47]These main back offices produce little in the way of products and services for customers, but play an obvious and important role in the overall governance of the holding company.

Key Trends and Forces

Top Management Scandal To Hurt Company Image

The Federal Supervisory Commission on May 2, 2009 ordered China Development Financial Holding Company to remove Angelo Koo as president of CDFHC. He is indicted with insider trading and breach of trust during a hostile takeover attempt of Taiwan International Securities. [48] In the midst of the takeover, Koo bought shares of Taiwan International Securities at NT$9.82 a piece only to later sell them back to CDFHC at NT$14 when the takeover became public. Koo made more than NT$144 million or $4.5 million USD at the expense of CDFHC and its shareholders.[49] Nine others in top management positions, including the chairman of the board, Chan-Yi Lin, are suspects but have yet to be charged. Aside from Koo, the VP of CDFHC and President of CDIB, Lawrence Liu, has also been asked to be suspended for a year pending further investigation. The Federal Supervisory Commission has also suggested that several executive VP's and chief managers should be punished for the irregularities. [48] With top management tangled in scandal, the company has been placed in a holding pattern, hurting both its company image and shareholder trust. In such tumultuous economic times where high profile scandals, such as the Bernie Madoff scandal, have already shaken investor confidence in investment and wealth management companies, this scandal at CDFHC stands to significantly damage shareholder confidence, future investments and therefore future business.

CDO's and Subprime Mortages Mar Asset Quality

Macquarie Research estimates that China Development Financial Holding Company has around NT$11.8 billion ($369 million USD) in exposure to CDO's and around NT$4.4 billion ($138 million USD) in US subprime loans. [50]Although comparatively this is a relatively small amount to American companies, it will still hurt earnings for the next several years. As of September 30, 2008, China Development subsidiary China Development Industrial Bank has seen a loss of NT$548 million ($17 million USD) on those financial liabilities and assets linked to CDO's of US subprime mortgage loans.[51] During the nine months ended September 30, 2008 the cost of subprime mortgage loan related structured notes held by CDFHC's other subsidiary Grand Cathay Securities, totaled NT$158 million ($5 million USD). [51] The company's exposure to these "toxic" assets will hurt its balance sheets as well the overall quality of its current assets.

CDFH Ahead in Financing a Growing China

CDFHC took part in 193 underwriting exercises in the past twenty years, which represents a 15% market share, placing them first in the region for investment activity.[52] It has 335 direct investment portfolio companies as of the end of the 2007 fiscal year. [53] With major offices both in Hong Kong and Shanghai, CDFH is positioned to provide its investment services to both Taiwanese companies looking to do business in Mainland China, and Mainland Chinese companies seeking to expand. CDFHC already has stakes in 30 of the top 100 Taiwanese companies operating in Mainland China. [53] CDFHC has built a strong track record, helping major Asian companies such as Asustek (2357-TW) Computer, China Steel Chemical, Far Eastone, and Eva Airlines Corporation through initial public offerings and underwritings. [54] Since direct investment is a core part of the operations at CDFH, China Development will gain from its regional expertise as well as industry expertise accumulated over fifty years of investing in the Greater China region. [53]

Competition

  • Chinatrust Financial Holding Co. Ltd. (2891-TW) operates through eight subsidiaries. Naturally, its products and services are also split into eight categories as well: banking, securities, bill and bonds, insurance brokerage, venture capital, asset management, security services, and lottery.[55] Total pre-tax revenues for the 2007 fiscal year totaled $549 million USD. [56] Chinatrust Financial directly competes with CDFHC in the areas of investment banking (venture capital, underwriting, etc..) and security/brockerage. Chinatrust is a much larger umbrella conglomerate, able to pull resources from more areas than CDFHC giving it the advantage of size over the more investment focused CDFHC.
  • SinoPac Financial Holding Co. Ltd. (2890-TW) consists of three large subsidiaries and several smaller subsidiaries. SinoPac Holding's total assets exceed NT$1 Trillion ($31.2 Billion USD) and had $917 million USD in revenue for the 2007 fiscal year.[57] Like other financial holding corporations it receives a lion's share of its revenues from its banking subsidiaries, over 56% from its banking operations. [58] To compliment its banking services, SinoPac issues credit cards which make for a majority of the remaining source of revenue for SinoPac.[58]
  • Mega Financial Holding Co. Ltd. (2886-TW) consists of eight subsidiaries. Revenue for the 2007 Fiscal year was $626 million USD.[59] It is notable that 80% of Mega's revenue come from Mega International Commercial Banking alone. [59] Due to a majority of its revenue coming from banking, Mega Financianal Holding Co. has focused a majority of its resources in this area, opening branches in Canada, Bahamas, Hong Kong, Taiwan, Thailand, USA, and the Phillipines. [60]
FY2007 China Development Financial[61] Chinatrust Financial[62] SinoPac Financial[63] Mega Financial[64]
Net Profit Margin40.09%22.23%7.88%63.00%
Operation Margin43.36%29.26%8.29%7.47%
Return on Average Assets2.09%0.79%22.00%0.01%
Return on Average Equity4.90%9.78%2.91%0.16%
Employees2,07310,1778,3128,685

References

  1. ↑ 2007 AR ENG.pdf CDFHC 2007 Annual Report Pg. 18
  2. ↑ CDFHC 2008 Earnings Report Pg. 7
  3. ↑ CDFHC 2008 Earnings Report Pg. 8
  4. ↑ CDFHC 2008 Earnings Report Pg. 6
  5. ↑ "Taiwan indicts China Development CEO Angelo Koo for role in takeover"
  6. ↑ 2007 AR ENG.pdf CDFHC 2007 Annual Report Pg. 6
  7. ↑ 2007 AR ENG.pdf CDFHC 2007 Annual Report Pg. 32
  8. ↑ 2007 AR ENG.pdf CDFHC 2007 Annual Report Pg. 15
  9. ↑ Formosa Plastics Group
  10. ↑ 10.0 10.1 CDFHC 2008 Earnings Report Pg. 7
  11. ↑ 11.0 11.1 CDFHC 2006 Earnings Report Pg. 7
  12. ↑ CDFHC 2005 Earnings Report Pg. 7
  13. ↑ 13.0 13.1 CDFHC 2008 Earnings Report Pg. 8
  14. ↑ 14.0 14.1 CDFHC 2006 Earnings Report Pg. 8
  15. ↑ CDFHC 2005 Earnings Report Pg. 8
  16. ↑ 16.0 16.1 16.2 16.3 16.4 16.5 CDFHC 2008 Earnings Report Pg. 6
  17. ↑ 17.0 17.1 17.2 17.3 17.4 17.5 CDFHC 2006 Earnings Report Pg. 6
  18. ↑ 18.0 18.1 18.2 CDFHC 2005 Earnings Report Pg. 6
  19. ↑ 19.0 19.1 19.2 CDFHC 2008 Earnings Report Pg. 106
  20. ↑ 20.0 20.1 20.2 20.3 CDFHC 2006 Earnings Report Pg. 136
  21. ↑ 21.0 21.1 CDFHC 2005 Earnings Report Pg. 119
  22. ↑ CDFHC 2005 Earnings Report Pg. 7
  23. ↑ CDFHC 2006 Earnings Report Pg. 184
  24. ↑ 2007 AR ENG.pdf CDFHC 2007 Annual Report Pg. 15
  25. ↑ - Consolidated Financial Statements Eng - 2004.pdf CDIB 2004 Earnings Report Pg. 22
  26. ↑ - Consolidated Financial Statements Eng - 2005.pdf CDIB 2005 Earnings Report Pg. 4
  27. ↑ Housing Market 2006
  28. ↑ CDFHC 2007 Earnings Report Pg. 31
  29. ↑ 29.0 29.1 CDFHC 2008 Earnings Report Pg. 7
  30. ↑ 30.0 30.1 30.2 CDFHC 2008 Earnings Report Pg. 194
  31. ↑ 31.0 31.1 31.2 - Financial Statements for the Year Ended December 31 2007 and 2006 ENG.pdf CDFHC 2007 Earnings Report Pg. 160
  32. ↑ 32.0 32.1 32.2 CDFHC 2006 Earnings Report Pg. 184
  33. ↑ 33.0 33.1 33.2 CDFHC 2005 Earnings Report Pg. 128
  34. ↑ 34.0 34.1 34.2 CDFHC 2005 Earnings Report Pg. 129
  35. ↑ CDIB Company Website -- Principal Investment
  36. ↑ CDIB Institutional Banking
  37. ↑ CDIB Structured Finance
  38. ↑ CDIB Equity Derivative and Principal Trading
  39. ↑ CDIB Trusts
  40. ↑ Graph of NTD vs. USD
  41. ↑ GCSC Capital Markets Business
  42. ↑ GCSC Brokerage Business
  43. ↑ GCSC Fixed Income Business
  44. ↑ GCSC Derivatives Business
  45. ↑ CDFHC 2008 Earnings Report Pg. 200
  46. ↑ Taiwan's Cosmos Bank reaches final investment deal with SAC, GE
  47. ↑ CDFHC Organization Structure
  48. ↑ 48.0 48.1 Taiwan Times "FSC orders China Development to dump Koo"
  49. ↑ Taiwan News "Angelo Koo indicted for role in takeover attempt"
  50. ↑ CDFHC 2007 Earnings Report Pg. 31
  51. ↑ 51.0 51.1 CDFHC 3rd Q. 2008 Pg. 24
  52. ↑ CDFHC Company Website Investment Banking
  53. ↑ 53.0 53.1 53.2 CDFHC Company Website Direct Investments
  54. ↑ CDFHC Company Website Track Record
  55. ↑ Google Finance Chinatrust Financial Holding Co. Ltd.
  56. ↑ Chinatrust Financial Information
  57. ↑ SinoPac Holdings Corporation About US
  58. ↑ 58.0 58.1 SinoPac 2007 Financial Information Pg. 91
  59. ↑ 59.0 59.1 Mega Financial Holding Co. 2007 Annual Report Pg.7
  60. ↑ Mega Financial Holdings Co. Organization Structure
  61. ↑ Google Finance TPE:2883
  62. ↑ Google Finance TPE:2891
  63. ↑ Google Finance TPE:2890
  64. ↑ Google Finance TPE:2886
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