The case concerns dividend policy at Fuyao Glass Industry Group, Ltd., the leading manufacturer of auto glass in China and the world’s second-largest manufacturer of auto glass (early 2015). Fuyao was controlled by Cho Tak Wong, a man of humble, rural origins with little formal education, whose success came from business acumen, a strong service ethic, commitment to lifelong learning, industry focus, and good fortune.
Cho had been recognized as a leading philanthropist (2010) and EY Entrepreneur of the Year (2008 China). Fuyao had relatively modest cash balances but strong cash flows. Domestically, the company had little opportunity for investment, but Cho wished to become the leading auto glass company in the world, so Fuyao was getting ready to enter production in both the United States and Russia. To raise the required capital, Fuyao was scheduling a global initial public offering (IPO) of its shares in Hong Kong (2015).
Cho had to decide, in early 2015, the size of its dividend distribution and whether Fuyao should change its residual, fluctuating dividend policy in light of it IPO.
Case study learning objectives
- The role of dividends in corporate finance
- How dividend policy affects the value of a company and the wealth of shareholders
- How to make a dividend decision based on analysis of financial statements, pro forma statements, capital structure, and dividend policies
- How to interpret the effect of leadership style on corporate performance and value.
Major Case Questions:
- To what extent is Fuyao a value creator or a value destroyer, and what are the potential sources of that creation (or destruction)?
- Is dividend policy irrelevant to Fuyao? If so, why? If not, why not?
- Project Fuyao’s cash flows for the next year under the conditions of dividend decrease, maintenance, and increase, using end-period cash balances or short-term borrowing as the “plug”. How do assumptions about operating cash flows, capital structure, and IPO proceeds affect the dividend policy decision?
- How do regulatory concerns, signaling to future investors in the upcoming IPO, and shareholder preferences affect Fuyao’s dividend decision?
- How has Cho’s leadership affected the value of the company and the dividend policy of Fuyao?
- Take the position of a Fuyao board member. Propose a dividend payout and future policy. Defend your proposal in light of your answers for questions 1 through 4. In a discussion that includes group members taking on the roles of other board members, come to a board decision on dividend policy.
Submit your answers in a Word document.