China’s love affair with wine stretches back millennia, though its modern-day relationship with the grape beverage began in 1980 when a farsighted Tianjin local government struck an investment deal with a French winemaker. The result was Dynasty Fine Wines, now one of the top three wine producers in China.
The HK$1 million ($129,000) investment from Rémy Martin (Rémy Cointreau remains a 27% shareholder) has helped to create a company whose market capitalisation has grown to over HK$4 billion since its IPO on the Hong Kong Stock Exchange in 2005. Dynasty Fine Wines has now evolved from a pure manufacturer into a retailer and exporter, also signing reciprocal distribution agreements with overseas wine producers.
Overseeing the treasury operations underpinning the company’s growth is financial controller and company secretary Rex Yeung. Here he describes his role to FinanceAsia.
Please describe Dynasty Wines and the role your treasury operations play within it.
I have a team of 30 people helping me with treasury, finance, accounting, taxation and investor relations operations at Dynasty Fine Wines. We have a simple group structure with a winery located in Tianjin, three grape juice producing companies in Tianjin, Shandong, Ningxia, and we manage five vineyards in Xinjiang, Ningxia, Hebei, Tianjin and Shandong. We have a centralised management structure unlike overseas wineries which are typically very scattered. This way we ensure the quality is consistent across our five categories: red wine, white wine, ice wine, sparkling wine and brandy. Each of our factories has its own accounting manager answering to the listed holding company.
We have two sales companies, a trading company and a membership club called Dynasty Club located in Shanghai, plus three retail outlets. One of my main roles is to monitor fluctuating currency rates and construction material prices which impact our production costs.
How would you describe your cash management structure?
For the most part we use domestic bank treasury services for fund transfers, letters of credit, structured deposits and payments. For possible overseas acquisitions, investment banks have helped us a lot with due-diligence, but services offered by domestic banks are much more sophisticated these days so we use them for our domestic operations.
While we have yet to feel any impact from steps taken by the PRC government to encourage RMB use in international trade settlement, any RMB appreciation will be beneficial for our company as this would help reduce production costs for items like oak barrels which we import from Portugal and France, and for our bottling line which we imported from Italy. Also, keep in mind that more than 90% of our products are sold domestically.
How has the role of CFO changed since you joined the company in 2005?
Back in 2005 we didn’t think of Dynasty Fine Wines as entering the global market. However, after the IPO the company decided that exports would be one of our longer-term strategies. In the past, all my work was focused on how to comply with Hong Kong and PRC listing rules, accountancy and taxation policies, double taxation agreements and the like. Now I have to think about managing treasury operations in the context of our overseas distributors and suppliers, as well as potential overseas M&As.
If you had to identify one of the most important decisions you have made at Dynasty, which would it be?
We launched an HK$724 million IPO in 2005 which generated substantial US and HK dollars for us. When the RMB appreciated sharply in 2006 and 2007, I made the decision to remit almost all of our IPO money back to the PRC to enjoy the RMB’s appreciation. This was not easy, as the PRC’s State Administration of Foreign Exchange (Safe) would have rejected it if it had believed that the remittance was to be used for speculative and not investment purposes.
As such, we had to carefully ensure that our documents justified the remittance based on our production capacity expansion schedule and an acquisition of a wine-related company in Ningxia.
How is Dynasty’s rapid rate of expansion affecting treasury operations?
Some of the proceeds from the IPO have been used to develop our sales and distribution networks and to expand our production capacity, all of which require careful capital expenditure planning. At the time of our IPO in 2005, our production capacity was only 30,000 tons; we spent HK$200 million to increase production capacity so that by the end of 2006 our capacity had grown to 50,000 tons. We subsequently spent another HK$160 million to further expand capacity to 70,000 tons, which we should reach by mid-October this year.
In addition, starting last December we have been developing our retail business opening up a retail shop in Shanghai and two more in Tianjin. In the past we were just a manufacturing company, but now we are a retailer and also distribute some foreign brands to expand our product portfolio. This not only involves carefully monitoring of cash inflows and outflows, but we must also act as a business advisor as the retail business is totally different from manufacturing and involves a lot of cash management. As a result, I have to work with our sales teams to predict cash inflows, and balance them against operating expenses in order to justify whether we should open the shop in a given location.
