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INTERNATIONAL -- THE BUSINESSWEEK GLOBAL 1000 The Global 1000 2004 highlights: Japan's comeback and Britain's strength. Plus, for the first time, emerging markets join the ranks For years, Japanese financial companies have been the ugly ducklings of the business world. Brave indeed was the investor who chose to wade into a sector plagued with bad debts, shrinking reserves, and wobbly capital bases. Brave -- and smart. In the past 12 months, Japan's finance industry has made a remarkable comeback. Japanese lenders made the most dramatic gains in BusinessWeek's Global 1000 list of the world's top companies by market value. Two big banks were the top gainers: UFJ Holdings Inc. jumped from No. 780 to No. 191, and Mizuho Financial Group Inc. went from No. 636 to No. 85. Thanks to restructuring efforts, signs of an economic recovery in Japan, and diminishing deflation fears, big Japanese banks like these are suddenly the place to be. "Faith is returning," says Michael O'Sullivan, a global strategist at State Street Global Markets (STT) in London. "Japanese banking stocks are a hot play." The return of investors to the Land of the Rising Sun was one dominant theme of this year's Global 1000. Others were the prominence of energy and financial stocks. The value of Global 1000 energy companies grew 45%, to $1.7 trillion, while financial companies' market value jumped 29%, to $5.1 trillion. Energy companies and financial firms were bolstered by high oil prices and low interest rates. Using data from Morgan Stanley Capital International Inc. (MWD) in Geneva, BusinessWeek ranked companies from 38 countries as of May 31. For the first time, this year's list includes the top companies from emerging markets. Three global giants, all favorites of international fund managers, jumped immediately into the top 100: South Korea's Samsung Electronics (No. 46), Russian energy giant Gazprom (No. 47), and China Mobile (No. 70), an operator of cell-phone networks. Despite the war in Iraq, stubbornly high oil prices, and expectations for rising interest rates, investors sold off some of the defensive bonds they had been buying and moved back into stocks over the last year. The aggregate value of the Global 1000 jumped 26% from May, 2003, to May, 2004, to $21.1 trillion. That was the first gain in four years and the highest total since 2000, when the value hit a record $24.5 trillion. At the pinnacle of this year's list there was little movement, with General Electric (GE) (No. 1), Microsoft (MSFT) (No. 2) and Exxon Mobil (XOM) (No. 3) taking top honors, as they have since 2001. Strong profit growth and steady, if not spectacular, stock prices allowed them to maintain their locks on their respective spots. Similarly, Pfizer (PFE) (No. 4), Wal-Mart Stores (WMT) (No. 5), and Citigroup (C) (No. 6) also retained their leading positions. British oil major BP (BP) PLC, the highest-ranked non-American company, moved up two positions, to No. 7, while Royal Dutch/Shell Group (RD), beset by controversy, slipped two notches, to No. 10. Health-care companies were prominent among the stocks that lost the most ground in the ranking this year. The biggest loser overall: California-based Tenet Healthcare Corp. (THC), which slid from No. 486 to No. 966. Tenet has suffered from declining operating margins and investigations into its Medicare billing practices. "There has been a cloud of uncertainty over them," says Robert Mains, a Saratoga Springs (N.Y.) research analyst at Advest Group Inc. "Their operating performance will get better, but the regulatory overhang will put a lid on valuation." That's a stark contrast with the performance of the Japanese financial companies. The latest news on that front is the proposed merger between UFJ and Mitsubishi Tokyo Financial Group. If the combined bank is looking for a cost-cutting model, Mizuho Financial provides one. Mizuho wrung out $963 million from its cost base, closed 122 branches, and cut its workforce by 5%, to 26,575. The moves paid off: Mizuho earned $3.7 billion this year, an astounding turnaround from last year's $21 billion loss, which was amplified by huge bad-debt writedowns. Ordinary Japanese, after being burned badly in the markets over the past decade, are still reluctant stock investors. That's why much of the money that has poured into the Japanese markets is from the U.S. and other Western nations. Foreigners own about 20% of the outstanding shares of Mizuho and UFJ, for instance. In June, Standard & Poor's (MHP raised its long-term ratings on eight major Japanese banks, citing a brighter outlook for their loan books and earnings. That was the first ratings boost since S&P began rating Japanese banks at their zenith in the 1980s. "We went from a near-crisis situation to stability," says Jason Rogers, a credit analyst at Barclays Capital (BCS) in Tokyo. The subprime side of Japanese finance also shone in the Global 1000, as consumer-finance companies made big gains. Firms such as ACOM Co. and Aiful have outperformed because they essentially have a license to print yen. Japan's near-zero benchmark interest rates means these companies can raise funds at as little as 2% interest -- and turn around and lend it unsecured to cash-strapped workers at some 25%. As a result, margins in the industry have been sky-high. ACOM, which moved to No. 510 from No. 739, has a capital tie-up with Bank of Tokyo-Mitsubishi Ltd., the strongest money-center bank. That has boosted its credibility with investors. Plus, the company also has "relatively good" risk-management systems that keep its bad-debt costs low, notes Tokyo-based S&P analyst Nana Otsuki. Banks weren't the only Japanese sumo stocks. Tech players such as Softbank (No. 354), Yahoo! Japan (No. 122), and Fujitsu (FJTSY) (No. 396) also shot up in the rankings. Japanese tech companies have benefited from dramatic growth in broadband, online advertising, and online trading. And rising global demand for DVD players, digital cameras, and LCD and plasma TVs has boosted the shares of such companies. British corporations were also standouts this year, thanks in no small part to a 12% rise in the value of the pound against the dollar. The British economy is so hot that the Bank of England has made an aggressive effort to cool it down, hiking interest rates four times in the past eight months. Reuters Group PLC (RTRSY) was one of the biggest winners, jumping to No. 566 from No. 849. The company, whose market cap improved more than any other British corporation on the list, has benefited from aggressive cost-cutting, rising orders for market data terminals in the U.S. and Japan, and a turn in the markets. Analysts at Morgan Stanley predict that Reuters' pretax profit will jump 31% this year, to $461 million, from $352 million last year. Not surprisingly, company managers are upbeat. "Sales are improving, and competitive momentum is building," Chief Executive Tom Glocer told investors recently. "We are really starting to feel that the ship is turning." British banks also held their own -- and then some. No. 13 HSBC Holdings PLC (HBC) added to its girth by making some smart acquisitions, most notably Household International Inc. in the U.S. That move enabled the bank to expand into lower- and middle-income lending. Things are going so well that this spring, HSBC reported a 41% jump in net profits, to $8.77 billion -- a record -- on a 54% gain in revenue, to $41.1 billion. Likewise, Royal Bank of Scotland Group PLC, which advanced to No. 31 from No. 38, has continued to snap up U.S. retail banks with great success. RBS' $10.5 billion purchase of Charter One Financial Inc. in Cleveland makes its U.S. banking operations the seventh-largest in the country. And that acquisition isn't likely to be the last. "There are definitely lots of banks to look at in America," says Group Chief Executive Fred A. Goodwin. The oil patch is another area where the Brits -- and the Russians -- outdid others. With oil prices close to $40 a barrel, BP, Gazprom, and Lukoil (LUOKY) (No. 206) made it into the top quarter of the list. Royal Dutch/Shell, which restated its proven reserves several times this year, is attractive to some investors now that its stock has fallen and management has been reshuffled. As for Russian energy companies, money managers have pulled back some in recent weeks. That's because of the political risk related to the government's assault on Yukos, which has been hit with a multibillion-dollar back-tax bill. But even after the pullback, stocks such as Gazprom and Lukoil retain hefty market caps. Its robust economic growth makes Russia "a very attractive area for investors," says Dwyfor Evans, an emerging-markets strategist at Bank of America (BAC) in London. "It's on a good trajectory, particularly with oil prices so high." Among the emerging-market additions to this year's 1000, none impresses more than Samsung Group. Its second-quarter results, scheduled for release on July 16, should be robust. At the beginning of the year, Samsung forecast 2004 sales of $39.1 billion, up from $37.9 billion last year, but analysts now predict revenues in excess of $50 billion. With the global information-technology industry so strong, the South Korean giant's main businesses -- memory chips, liquid-crystal display panels, and mobile phones -- are all on track to post gains. "Profits in the first six months of this year could almost match last year's whole-year profits," says Samsung Senior Vice-President Chang Il Hyung. Chinese companies joining the Global 1000 party are all energy- and tech-related. PetroChina Co. (No. 656), Asia's biggest oil company by market value, is boosting output quickly to meet fast-growing local demand. The outfit, which produces two-thirds of China's oil and gas, won a government license in July to drill in the South China Sea, adding to its offshore assets in Bohai Bay in north China. Mobile-phone operators in the country are also doing well. China Unicom Ltd. (CHU) (No. 565), the smaller of China's two mobile-phone operators, added 1.73 million new subscribers in May, bringing its user base to more than 100 million. One reason for its popularity: fast networks, which give it an edge in wireless Internet surfing. The melding of emerging-market companies into the Global 1000 puts two of Thailand's best corporations on the list: Siam Cement Group (No. 846) and PTT (No. 498), the oil, gas, and petrochemical conglomerate. Both companies are profiting from Thailand's strong economic growth. Siam Cement, arguably Thailand's best-managed company, is poised to benefit from a surge in infrastructure spending by the government. Earnings are likely to grow by 25% in both 2004 and 2005, predicts Sriyan Pietersz, head of research at J.P. Morgan Chase & Co. (JPM) in Bangkok. "It's the bluest of blue-chip companies in Thailand,"Pietersz says. PTT, the leading supplier of natural gas in Thailand, has seen its refinery margins increase because of strong local demand. The euro zone economy grew by just 0.4% last year. But that didn't stop many Continental enterprises, such as French pharmaceutical giant Aventis (AVE) (No. 59), German tech company Siemens (SI) (No. 60), and the Netherlands' Royal Philips Electronics (PHG) (No. 133) from making healthy gains in the 1000. Their progress was helped by the strong euro, which rose 19% against the greenback during 2003. One notable winner from the Continent: Swiss drugmaker Roche Holding (RHHVF). Over the past few years the company has consistently rebuffed merger overtures from Novartis (NVS), its crosstown rival in Basel. Chief Executive Franz B. Humer insists that the company is better off going it alone. At the moment, Roche, which rose to No. 29 from No. 40, boasts more than a dozen late-stage or recently launched drugs with blockbuster potential. These new medicines cover a broad range of therapeutic areas including diabetes, asthma, anemia, rheumatoid arthritis, cancer, and antiviral. Roche stands in contrast to Britain's GlaxoSmithKline PLC (GSK), the world's second-largest drugmaker. GSK, created through a merger four years ago, is still struggling to convince shareholders that bigger really is better. The company, which slid six places, to No. 22, spends nearly $5 billion a year on research and development. However, most of its potentially lucrative products are still years from the market. GSK says its most promising products -- a new painkiller, potential cancer treatments, and new drugs for asthma and heart disease -- will prove the doubters wrong. But the size of the business, which last year posted sales in excess of $39 billion, makes its task all the more challenging. To beat the industry, each new drug has to give sales an even larger jolt than the ones that came before. That's not to say there's no hope for GSK. As this year's Global 1000 list amply demonstrates, companies out of favor one year can turn into investors' darlings the next. By Laura Cohn in London, with Brian Bremner in Tokyo, Moon Ihlwan in Seoul, Kerry Capell in London, Frederik Balfour and Chen Wu in Hong Kong, and David Fairlamb in Frankfurt |
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