Financial Accounting Module

Frankfurt 22 – 24 April 2013

Coursework A
Darwansjah (Dani) Toligi
1. Introduction

My formal name is Darwansjah Toligi, but I am widely known as Dani. I am a 46-year old, single
father of 3 children and living in Tangerang, a suburb of Greater Jakarta. My introduction to aviation
began when I obtained the Private Pilot’s Licence in Australia in 1987 and completed my Commercial
Pilot’s Licence at FlightSafety International Academy in Vero Beach, Florida in 1989.

I have been more than 20 years in the aviation industry and have flown different types of
transport jet including F28, F100 and Airbus A320/330/340. I started my professional flying career with
Merpati Airlines, a state-owned company in Indonesia. The opportunity presented itself for me to join
Cathay Pacific Airways in Hong Kong in which I spent for about 10 years. Currently, I am with AirAsia
(Indonesia) as the Head of Fuel and Carbon Management. My other roles include line captain and
instructor pilot.

In between airline jobs, I had been involved in start-up process of an air charter company called
Sky Aviation based in Jakarta where I served as director and the Chief Executives for 2 years. This
provided with a very valuable lesson of aviation management especially dealing with the financial side of
the business. I am very keen to learn more about the financial part of a business in general especially
aviation organization.

As far as investment strategy, I am looking more of long term investment which is focused on
capital gain rather than dividends. Since I have a full time job, therefore, this investment is geared
towards retirement which is beyond 15 years.

2. Investment Analysis

The decision to invest the inheritance of USD 400,000 will based on the analysis made of Cathay
Pacific Airways, Careefour and/or deposit account with a selected bank in Indonesia. Below is the
analysis of each option.

Cathay Pacific Airways

Cathay Pacific being a Hong Kong carrier benefits from Hong Kong’s strong business activities.
The business of Cathay Pacific depends largely from Hong Kong as one of the highest concentration of
millionaires. It is expected by 2047 that Mainland China and Hong Kong economy will be harmonized in
which it will be the largest GDP of any measure.

Cathay Pacific’s business is growing at the rate of over 13% annually for the past 10 years since
2003. The airline has always been profitable for many years where other carrier reported net losses.
Despite the profitable records, Cathay Pacific is not immune to the global financial crisis. In the year of
2008 Cathay Pacific reported a Net Loss of HK$ 8.6 billion, which was the first loss since 1997. In 2010

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Cathay Pacific set another record of high profit of HK$ 14.05 billion where the Net Margin was 15.7%
compare to the past 10-year average of 5.6%. However, the Net Margin decreases at a rate of 15.3%
annually.

The statistics indicates that the productivity in regards to staff cost per Available Tonne
Kilometre relatively the same for 10 years which was HK$ 1,805 per ATK. The cost of Available Tonne
Kilometre which includes fuel has increased from HK$ 2.21 in 2003 to HK$ 3.64 in 2012 which translates
to 5.7% increase annually. Fuel price is an external factor of the airline which is very difficult to control.
The Return on Capital employed over the same period confirms that there has been a slip at the rate of
7.6% annually which is likely due to the continuous rise of fuel price. However, the management has an
excellent job in keeping the cost down internally such as the staff cost.

The Price/Earnings ratio has grown at a rate of 5.4% annually in for a 10-year period where the
average of the ratio was 17.6. The peak was the 2012 result where the ratio reached 61.1 times. This
suggests that the market is confident that Cathay Pacific Airways has a bright future.

Cathay Pacific has been increasing its borrowings over the 10-year period at the rate of 6.2% to
support its growth. However, the Net Debt/Equity ratio of 0.62 is in the reasonable healthy position. It is
somewhat projecting that Cathay Pacific is very cautious to control its growth despite the tremendous
potential.

As a Hong Kong carrier which located in the Hong Kong SAR, China it is expected that Cathay
Pacific to serve as a gateway to the huge market of Mainland China. Cathay Pacific combined with
Dragonair operates nearly 400 flights to Mainland China.

According to the Boeing’s Current market Outlook 2011-2030, half of the world’s air traffic will
be from, to or within the Asia Pacific region. The region is leading the world with the growth rate of 7%
per annum. Cathay Pacific is already established itself in the region by allocating 82.2% of its flights
within the Asia Pacific region.

The future predicts that the GDP of Mainland China will continue to grow enormously and
Cathay Pacific has the potential to do well for the business. Air China owns 29.9% of Cathay Pacific and it
is a clear indication of the interest of the Mainland China to the future of the airline industry in the
region.

It is unique to learn that Cathay Pacific belongs to oneworld alliance while Air China is associated
the Star Alliance. However, it is certain with the political support from the Mainland China both Cathay
Pacific and Air China will be a very strong combination to dominate the market of the Asia Pacific region.

Careefour

Careefour is the third largest retailer in the world after Wal-Mart and Tesco. It operates nearly
10,000 outlets globally including Hypermarket, Supermarket, Convenience Store and Cash and Carry

Financial Accounting April 2013: Coursework A 3

outlet. Careefour is a multinational company operating into various parts of the world mainly in Europe,
China, South America, Middle East and Africa penetrating market with over 2 billion population.
Careefour business is growing at the rate of 0.9% over the last 10 years. However, the global
financial crisis which started in 2007 is affecting the European economy. Careefour’s annual reports
indicate that the business in terms of revenue has dropped approximately 20% from 2010 figure of
91,513 million to 76,127 million.

The Profit Margin has been decreasing at the rate of 3.9% annually with the 10-year average of
1.62%. There has been no loss reported during that period of time. The productivity has indicated that
there has been a decrease in terms of Return of Capital Employed of 12.6% per year over the last 10
years.

The Net Debt/Equity has increased at the rate of 2.3% over the last 8 years with the average of
0.92%. This figure is reasonable to support its growth and given the current economic situation. This
projects a picture that the management has been very conservative in terms of growing the company in
the competitive situation. In 2011, Careefour has planned to invest EUR 1.5 billion in response to the
competition from Casino Guichard-Perrachon and reviewed its strategy to introduce a new concept of
Careefour Planet in Western Europe. The annual report of 2011 revealed an increase Net Debt/Equity
ratio which suggests the requirement to fund the growth.

The market responded quite positively and it is reflected on the Price/Earnings ratio has almost
doubled from 61.7 times to 114.9 times in 2012. This suggests that the market is confidence of the
potential of future earnings.

Bank Deposit

Term Deposit is certainly an option of investment by earning interests. Banks in Indonesia are
considered for this purpose because own familiarity and reasonable interest rates ranging from 4.5% to
6.5% per annum with reputable banks such as the state owned BNI or HSBC. Inflation is always a
consideration and is currently at rate of 5.57%

3. Conclusion

Cathay Pacific Airways and Careefour are both well managed companies. They are very cautious
in terms of borrowings strategy. Both companies are sensitive to the external factors such as global
financial crisis and fuel price being global operations. As a results past performance indicates a period of
ups and downs.

The outlook for Cathay Pacific is quite bright being a premium major airline in Asia with tapping
the growing China. However, being an airline which capital intensive and is very sensitive to oil price. Its

Financial Accounting April 2013: Coursework A 4

Price/Earnings of 61.1 times is above the industry average of 50.8 times mitigates the general
impression of airline business. The dividend yield is at industry average of 0.6%.

The future of Careefour seems promising as indicated by the Price/Earnings ratio of 114.9 times
in 2012. Being a retail business it certainly can access to wider market segments. The dividend yield is
1.4% and slightly higher than industry average of 1.3%.

After a thorough review of the three options the decision as such that USD 160,000 or 40% will
be placed on Careefour for its potential capital gain and dividend, USD 160,000 on Bank BNI at interest
rate of 6.5% per annum and the remainder 20% will be placed at Cathay Pacific Airways.

It is expected that this decision would fulfill my preference of the medium high risk. However,
the decision is true for the current situation and should be reviewed in response to the changing
markets.

Financial Accounting April 2013: Coursework A 5

Bibliography
(n.d.). Retrieved May 25, 2013, from Indonesia.org: http://indonesia.deposits.org/

(n.d.). Retrieved May 25, 2013, from Wikipedia: http://en.wikipedia.org/wiki/European_sovereign-debt_crisis

(n.d.). Retrieved May 25, 2013, from Wikipedia: http://en.wikipedia.org/wiki/worldpopulation

(n.d.). Retrieved May 25, 2013, from Wikipedia: http://en.wikipedia.org/wiki/careefour

Careefour S.A. (2012). Full Year Results. Careefour.

Cathay Pacific Airways. (2012). Annual Report. Hong Kong: Cathay Pacific Airways Limited.

Flightglobal. (2012, December 29). Retrieved from Flightglobal.com:

http://pro.flightglobal.com/Pages/Profiles/Airlines/MyFGDashboard.aspx

Morningstar. (n.d.). Retrieved May 25, 2013, from Morningstar:

http://financials.morningstar.com/ratios/r.html?t=CRRFY

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http://financials.morningstar.com/ratios/r.html?t=CPCAF

Selim, G. (2013). Financial Accounting. London: City University.

Skytrax. (2012, December 29). Retrieved from Airline Quality: http://www.airlinequality.com/

Walton, P., & Aerts, W. (2009). Global Financial Accounting and Reporting Principles and Analysis. Hampshire:
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Wikipedia. (2012, December 30). Retrieved from Wikipedia: http://en.wikipedia.org/wiki/Hong_Kong

Financial Accounting April 2013: Coursework A 6