[Solution]Case Study – ABC International Ltd.

The questions at the end are all based on the ‘ABC International Ltd’ case study below. ABC International is a fictitious company based on a…

The questions at the end are all based on the ‘ABC International Ltd’ case study below. ABC International is a fictitious company based on a composite of various companies in the Hang Seng index.Case: ABC International Ltd.ABC International Ltd. was incorporated in 1968 as a manufacturer of electrical components and telephone equipment in Hong Kong. In 1979 ABC entered into a joint venture with an Australian group in the telecommunications field and opened a factory in Shenzhen to manufacture components. Subsequently rights were acquired to manufacture and sell a range of telecommunications equipment inHong Kong and China. This proved to be a very successful arrangement and ABC grew substantially in turnover, profits and employees.The company was listed on the Hong Kong stock market in 1997.Business performance and prospectsThe company manufactures and markets a range of equipment for large telecommunication systems, a proprietary telecommunication system for smaller organisations, and a range of telecommunicationdevices for the office and home. These markets include government, military, and industrial customers, as well as retail outlets. Growth is expected in each of these markets in Hong Kong and China. A mailorder facility through the internet is being designed for direct sales. The business also has the potential to expand geographical throughout Asia Pacific, but a covenant in their joint venture agreement withtheir Australian partner prevents growth elsewhere in the world.2New products developments come from the Australian joint venture partner, who has also licensed various products, devices, and software from the United States. ABC is currently considering a strategyto develop a range of its own products and systems.Competition for the existing range of products is high, except in the military field where there are various restrictions. Moreover, there are a number of new technologies, including wireless communication, computer based systems, and telecommunication systems convergence, that couldhave strategic implications for ABC. New entrants into the market could include computer manufacturers, telephone companies, and media network providers.ABC imports some specialised electronic components from Australia, Japan, and the United States, manufactures other equipment and assembles the products and systems in its Shenzhen factory.In his annual report to shareholders, the chairman said that:“We expect the PRC to maintain its prudent approach to stable financial and monetary policies so asto strengthen and improve the effectiveness of its austerity measures. Your company will benefit from the growth of infra-structural investment at government and industry level and from the increasing spending power of consumers” A recent report in the financial press said that:“The shares of ABC International raced up yesterday with a bullish report from Salmon, Smith Barney. The company’s recent announcement, of its latest range of telecommunication products,supports this confidence. Growing optimism on consumer spending and booming sales in electronicproducts in both the office and home markets also fuelled the enthusiasm. The company’s earningprospects seem bright and it will also benefit from lower costs on imported products due to the weakJapanese yen and the economic slowdown in the US.”Financial positionIn the latest published accounts the chairman of the board reported that turnover in 2004 had exceededexpectations at $237,632,000, but that profits were lower than analysts’ expectations, at $6,693,000,due to one off write-offs of obsolete stocks. The company did not pay a dividend this year, ploughingback profits into product development and expanding production capacity.EmployeesABC International reported 1,280 employees at end 2004: 370 in Hong Kong, 910 in Shenzhen. Labourproductivity had steadily improved in recent years, partly due to investment in capitally intensivemanufacturing and assembly methods.3ShareholdingsAccording to a Hong Kong financial information company the balance of shareholdings in ABC at presentis:Goldbarb (a company registered in Bermuda) 39.8%Transelec (a company incorporated in Australia) 15.6%Public shareholdingsInstitutional investor (1) 8.8%Other institutional investors (6) 10.2%Other investors 25.6% 44.6%100%The investment report states that Goldbarb is the holding company for the founding family’s investmentin ABC and that Transelec is the Australian joint venture partner. Transelec is the wholly ownedsubsidiary of a company incorporated in Delaware in the United States and listed on the New York StockExchange.Share price historyThe floatation in 1997 the ABC share price had risen from 19.80p per share to 63.5p, with an 11%growth over the year 2004.Board of directorsThe latest annual report states that the board had eight members:Executive directorsAlan K M. Yau PresidentPeter Y. M. Chow Vice PresidentCharles K. K. Lau Director OperationsJohnny Y. K. Ho Director FinanceDr. Andy H. S. Woo Director DevelopmentRebecca H. S. Sun Director PersonnelIndependent non-executive directorsAbraham P. K. LauFrederick W. L. HoThe company secretary is Rebecca S. S. Cheung4Corporate governance report / annual report includes the statement that:“In the opinion of the board, the company has complied with the code of best practices as set out inAppendix 14 to the Listing Rules throughout the accounting year covered by this report. An auditcommittee was established with terms of reference which deal clearly with its authority and duties inParagraph 14 of Appendix 14 of the Listing Rules, including a review of the company’s financialreporting processes and internal audit systems and the review of audited financial statements. Twoindependent non-executive directors have been appointed to the audit committee and a thirdmember is being actively sought.”The company’s auditors are Deloitte Touche Tohmatsu, Hong Kong.Your taskMr. Y. K. Chan has sought your advice. He is a qualified accountant, employed as the Finance Director ofDim Sum Ltd; a Hong Kong listed company in the food industry.Mr. Y. K. Chan has been asked by Mr Alan K.M.Yau, the Chairman of ABC International (another HongKong listed company), whether he would consider joining the board of ABC as an independent nonexecutive director. The Chairman also suggested that Mr. Chan should join the company’s auditcommittee.Mr. Chan tells you that he does not know the Chairman of ABC very well. He was introduced to him byMr Johnny Y. K. Ho, the ABC Finance Director, who serves with Mr. Chan on a committee of the HongKong Institute of Certified Public Accountants. Mr. Chan subsequently had dinner with Mr Yau(chairman) at the China Club, where the growth of ABC, its current activities, and its prospects for thefuture were described.Mr. Chan is an executive director of Dim Sum, but has no other experience of serving on boards ofdirectors. He holds no shares in ABC, but would be prepared to invest up to HK$100,000. He believesthat his wife’s father also has some ABC shares. As far as he knows Dim Sum does not have businessdealings with ABC, although he thinks the Dim Sum internal communications system uses ABCequipment.QuestionsMr. Y. K. Chan has asked for your professional advice. Please write a report to him discussing thematters he should consider, in particular related to:

Duties, rights and competences of a director (10 marks)Committee work (10 marks)Board structure and styles (10 marks)Transparency and accountability of the company (10 marks)
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