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Singapore 1000 gets ready for SG100
THE year 2016 - just after Singapore’s 50th year of independence, the passing of Lee Kuan Yew and the ruling party's landslide win, what many would describe as a "watershed election" - may not go down into history as a remarkable period in the country’s growth story; but it could be just so important in the journey to the next 50 years.
The economic landscape between mid-2014 and the present was dominated by sliding oil prices and the spectre of an impending unwinding of the quantitative easing measures put in place by the Federal Reserve to sustain the economy from the last Global Financial Crisis.
Paying close attention to the stripe of corporations in this year’s Singapore 1000 (S1000) ranked* companies becomes more significant in the face of mounting uncertainty in the global economy. Tepid growth is expected for the island’s economy as prospects have softened since the start of this year amid a pullback of demand especially from China and the global financial market volatility.
Over the 29 years of ranking enterprises on the basis of their revenue, profitability and other financial performance indicators, DP Information Group (DP Info) is able to trace the phenomenal rise of Singapore’s economic growth through the past few decades.
This, by elucidating core factors driving the stellar performance of companies that are behind Singapore’s astonishing economic achievements.
From the post-independence export-led industrialisation to multinationals in the 80s, followed by the rapid rise of modern services (financial, business, information communications and entertainment) as a twin engine of growth alongside manufacturing in the 90s and the new millennium, different companies have emerged in DP Info’s distinguished S1000 list of most influential entities over the years.
2007 saw S1000 companies’ revenue first crossing the S$1 trillion milestone before Singapore’s corporate powerhouses powered past the S$2 trillion revenue mark in 2013. It then took these business elites another three years, in half the time they had taken to add the earlier trillion, to achieve the S$3 trillion benchmark in 2016.
With the external threats facing Singapore’s trade-dependent economy, such resilience will be required as the region faces the challenging prospect of strong economic headwinds. As Singapore pursues deep restructuring and develops a future-ready workforce, the government released its 2016 Budget proposal on March 24 where the complexity of emerging challenges and the need for new strategies for growth and productivity are important themes.
While there has been outperformance in some sectors, others have seen a steady decline in their representation in the S1000. Notable among these is the manufacturing industry. The sector contributed 233 companies in 2007, falling to 175 in 2013 and to 146 this year. The sector’s contribution to revenue as a percentage of the total has also halved since 2007.
The internal challenge of improving a company’s competitiveness may be as daunting as weathering the economic storms brewing beyond our borders.
Singapore’s leaders call for a rethink on the concept of value-adding in our diverse industries and the reminder could not have come at a more appropriate juncture. Value creation as a new model for growth is seen increasingly as the new mindset. The relentless march of new technology has already claimed business victims that have long relied on “valuable” intermediaries that demand pricey premiums in exchange for market share and supernormal profits. Their demise came about when disintermediation took root and demolished the traditional business to customer supply chain.
During times of economic uncertainty, it is important that one’s business is able to sustain financial effectiveness and efficiency as it scales the heights. The continuous improvement of performance from an earnings or financial strength perspective determines triumph or failure. Possessing the knowledge of how to drive it becomes critical before enhancements can be made.
So as we marvel at the S1000 winners and congratulate the entrepreneurs, business owners and key executives behind these top corporations and small and medium enterprises (SMEs) in Singapore, we must acknowledge these stewards as decision makers with a comprehensive sight of the road map to the top as well as an understanding of the leverage points that can be used to positively impact future performance.
Resilience amid challenging times
The anointed members of the S1000 ranked companies have always demonstrated a remarkable knack for resilience and their ability to punch above their weight. In 2013, Rhodium Resources Pte Ltd, one of Singapore’s largest independent commodity traders, had its revenue at S$76.8 million before catapulting itself to achieve sales of S$1 billion a year ago. In 1993, Simon Tsai, the chairman and founder of the Kensteel Group, started Kensteel Industries Pte Ltd to manufacture and provide cable trays and ladders for the petrochemical, global marine and offshore industries.
While many oil and gas players struggled to find their feet as crude oil prices continued their downward slide, Kensteel has done well to diversify its business as well as to adapt its business models to move with the changing economic environment.
With such strong leadership, the S1000 ranked companies generated an improved combined turnover of S$3 trillion in 2016. While the 0.8 per cent increase in turnover growth observed this year was considerably lower than the previous 8.3 per cent, it is a remarkable achievement during a turbulent economic period. Sectors that contributed to the moderate increase include property (up 43.9 per cent), transport/ storage (up 11.9 per cent) and services (up 10.4 per cent). (Chart 1)
Despite the slower trade flows especially from China, stable growth from regional trade as well as the corresponding transportation needs have kept businesses fairly busy for those in transport/storage. The sector has also arguably been one of the greatest beneficiaries of lower oil prices. Savings in the areas of utilities and transportation costs would have brought some relief to these companies, assisting them to price their services more competitively.
Improvements in turnover have also translated to better profits for the S1000 companies - absolute net profit increased 16.7 per cent to S$174.8 billion. The number of profitable companies within this group of top 1,000 ranked companies has also increased to 867 from 859 in the previous ranking period, bringing the average profit margin of these companies up to 5.5 per cent.
SMEs in Singapore account for 99 per cent of businesses and contribute nearly half of Gross Domestic Product (GDP), making them an integral part of the economy. This year, the Singapore SME1000 (SME1000) companies have also managed to generate a higher combined turnover of S$29.2 billion during the ranking period.
Despite turnover improvements, business costs have continued to be a key challenge for SMEs with a fall in the number of profitable companies from 869 in the previous ranking year to 856. Unlike their larger counterparts, the absolute net profit for SME1000 companies inched down by 1.6 per cent to S$3.3 billion in 2016. While some SMEs may have benefited from lower utility and transportation costs, a large proportion of expenditure was spent on manpower as well as rental costs.
The tight labour market, heightened by the foreign worker hiring curb and increased levies, had inflated the cost of wages that led to margin compression in the process. When faced with similar challenges as their larger counterparts, SMEs are generally less insulated from the economic turbulence and any downturn as they lack economies of scale. The ability of such companies to engage in diversification of risks in terms of overseas exposure as well as leverage in negotiating terms with both clients and suppliers are also weaker compared to larger corporations. (Chart 2)
In particular, SMEs in transport/storage have seen a drop in their combined turnover for 2016 (down18.4 per cent to S$2.6 billion). As mentioned above, these companies would have a less diversified portfolio and are more impacted by slowdowns in global trade.
In the spotlight are SMEs in the information & communications sector. They were observed to have the greatest leap in average profit per company (up 45.1 per cent to S$1.7 million).
In an environment where lifting the level of profitability is very much an uphill struggle, the sector has done well for itself. Evidently, the next generation of innovative high-tech companies are set to be key contributors to Singapore’s future economy.
Polarisation in companies’ credit worthiness
DP Credit Rating is a proprietary development tool designed to provide financial analysts and evaluators with a simple system of gradation by which future relative creditworthiness of Singapore companies may be gauged. To each of the ratings from a scale of DP1 to DP8, DP Credit Rating appends the corresponding Probability of Default (PD) to each of the numerical modifiers 1 to 8; the lower the number, the higher-end the rating or the lower the credit risk.
Credit rating tools such as DP Credit Rating plays an important role in the credit process of Singapore and several other countries around the world. In Singapore, DP Credit Ratings are used in regulations by the Council for Private Education, the Building and Construction Authority and other government agencies and private corporations.
By overlaying the DP Credit Rating on the S1000 companies, a polarisation of the DP Credit Rating grades was observed in the most recent ranking exercise. There is an increase in both Investment Grade (DP1-4) companies as well as companies in the High Risk (DP7-8) band within the top 1,000 businesses in Singapore.
By and large, companies that have been able to keep their business agile have managed to adapt to changing times and excel. Credit ratings offer an important insight into today’s markets and the global financial system. With increased market volatility and uncertainty in finance, there is a greater demand for certainty and knowledge about market actors. Through the provision of reliable and trusted indicators of creditworthiness and risk, DP Credit Rating provides the market with stable expectations of future financial performance. This has contributed to the tacit fabric of trust and certainty without which the cogwheels of trade would grind to a rapid halt and would have never been able to expand when the elimination of doubt is nearly impossible.
The writer is chief operating officer of DP Information Group.
* The S1000 ranks the top 1,000 companies in Singapore by revenue and is published with the SME1000 and the Singapore International 100 (SI100). DP Information Group is the ranking body and publisher of the rankings. The rankings are based on audited financial figures, i.e. Sales/Turnover or Net Profit After Tax for financial period ending between 1 June 2014 and 31 May 2015 for the 2016 rankings.