In January 2010, UFIDA started its new three-year development plan. The goal was clear: scale revenue to become a world top ten management software and service provider, and gain number one position in the e-business service market in China. Financing was seen as an essential tool to achieve these goals.Financing has been critical to UFIDA since its incorporation in 1988. Its foundation was supported by private loans and it launched its financial management software with bank loans. It did an IPO in 2001, before launching its ERP product lines. During 2002-2007, UFIDA saw a rapid growth, and after 2008, UFIDA needed significant financing as it started large-scale investment and acquisition.

Financing in the early days

On August 15, 1988, at the opening ceremony of Beijing New Technology Industry Development Experimental Zone, Wang was excited to learn of China's new policies to encourage business startups and innovators. He decided to quit his RMB130/month job and start a company.

In his view, the establishment of the Experimental Zone showed the Chinese government's determination to support development of new technologies. Moreover, among the government's 18 new policies was one that encouraged professionals to start high-tech companies in the Experimental Zone. "I already had the idea, and the atmosphere was good. I decided to quit the job and start a company in Zhongguancun," he recalled.

The promulgation of the Private Enterprise Regulations that year was also important to him. "Clear definition of property rights is very important for the mid and long-term development of a company. UFIDA has never had an equity dispute ever since its establishment because we adopted this simple way of registration," said Wang. "We insisted that the company have major shareholders."To raise the seed funds, Wang Wenjing asked everyone he knew for money. Finally, his college classmate, Wu Zhengping, loaned him RMB50,000 from his friends and relatives. He registered his company as an Individual Business under the name UFIDA Financial Software Services.

Wu Zhengping has a natural talent in borrowing money. After joining UFIDA Software before the IPO, except for establishing a strong financial capital system for the company, his key role was working with the banks to provide financial support for the company's expansion.

After spending RMB20,000 on a Great Wall 0520DH computer, there was not much left from the RMB50,000 initial fund. Unable to win additional shareholder investments or bank loans, they tightened operations management and focused on selling quality financial software to customers to maintain cash flow. Fortunately, UFIDA made a profit in the year it was established, and has done so ever since. At the beginning, the company was small. "We were so excited holding that first RMB7,000 check. That was a very big order for us. We really needed money then," said Wang Wenjing.

Commercial bank loans

In the 1980s, it was quite common to borrow private funds to start businesses. Few companies, however, dared to use borrowings to grow business, establish core competence and become industry leaders. With the company's growth being restricted by the limited seed fund, Wang Wenjing and Wu Zhengping continuously talked with different banks and even customers. "Thanks to our customers and partners, we soon got support," says Wang Wenjing.

In 1989, Beijing Guanghua Timber Factory, an early customer of UFIDA, provided a loan guarantee for UFIDA. The company then managed to obtain a loan of RMB100,000 from Bank of Beijing, which was the first loan that UFIDA had gotten since incorporation. Beijing Guanghua Timber Factory was formerly a repair and production center for central government offices, and later became a comprehensive timber processor division in the Beijing Building Materials Group Co., Ltd.

At the end of 1989, UFIDA already had over 20 employees and in February 1990, UFIDA Electronic Financial Technology Co., Ltd was set up. One year later, the 1990 version of the UFIDA financial management software was issued. With the rapid growth of customers and sales, UFIDA sought more bank loans. "In 1990, we obtained a bank loan of RMB300,000. We invested all we had - RMB500,000 - to develop new software products," said Wang. In 1991, UFIDA ranked number one among Chinese financial software companies. They started to seek long and short-term loans from banks and other financial institutions to finance this growth. Wang Wenjing recalls:

Every two or three years, we face different competitors. Software companies spring up and die off like mushrooms. Each technical change upsets the market. If you fail to grasp the opportunity, you can die. Only a few survive. We were desperate for money. Marketing, after-sales service and recruitment all needed money. Our own internally-generated capital couldn't satisfy our strategic and growth needs.

In 1990, there were over 200 software companies in China. Wang Wenjing took market growth as the first priority of the company. He set up over 20 branches in different regions. In 1994, he introduced the development strategy of "Industrialization from Software" and the company grew over 60 percent per year in revenue and operating profit for three consecutive years.

In January 1995, UFIDA Software Co., Ltd. was incorporated with a registered capital of RMB20 million. In 1997, its registered capital was increased to RMB50 million with operating revenue exceeding RMB100 million. Wang dreamed about UFIDA's own building, but they had only RMB2 million in cash. The Bank of Beijing again lent UFIDA Software RMB10 million. In 1998, UFIDA's operating revenue reached RMB180 million.

IPO

To speed up its growth and overtake international players in China, UFIDA's board of directors decided in 1998 that the company should go public. UFIDA prepared an IPO plan in 1998 and carried out joint-stock reorganization according to the IPO requirements. After the reorganization, UFIDA had a registered capital of RMB75 million, with Beijing UFIDA Technology Co., Ltd, Beijing UFIDA Business Management Institute Co., Ltd, Shanghai UFIDA Technology Investment Management Co., Ltd, Nanjing Yibei Management Consulting Co., Ltd and Shandong Youfu Information Consulting Co., Ltd holding 55 percent, 15 percent, 15 percent, 10 percent and 5 percent of its shares respectively. According to China's then capital market stated regulations, individuals could not become shareholders of listed companies at the time of IPO. They could only hold shares in corporate shareholders of listed companies. By virtue of holding shares in the five companies, Wang Wenjing controlled the to-be-listed UFIDA Software. On December 6, 1999, UFIDA was ready for the IPO with Wang Wenjing indirectly holding 73.6 percent of the total shares.

In March 2001, UFIDA issued 25 million shares on the Shanghai Stock Exchange at a price of RMB36.68 with a very high PE ratio of 64. On May 18, 2001, its price rocketed to RMB100 from RMB76 on the first trading day, and became the third RMB100 stock on the Chinese stock market after Yorkpoint and Unis. On the first trading day, UFIDA increased 250 percent and closed at RMB92, with the daily turnover and turnover rate reaching 1.736 billion and 85.6 percent respectively, breaking Chinese capital market records.

The day after the IPO, reports about Wang Wenjing and UFIDA appeared in many major newspapers, including Shanghai Securities News, China Securities News and the Financial Times of the UK. Still in his thirties, Wang Wenjing shocked the world as the head of a high-tech company, whose assets exceeded RMB100 million.

Excluding the underwriting cost, UFIDA raised RMB887 million of funds on the A-share market, ten times the amount another financial software provider Kingdee raised in Hong Kong in February 2001.

"After the IPO, we left our competitors far behind." UFIDA invested the money from the IPO in 29 projects, including R&D, new products, marketing, support service and personnel training.

Equity incentive

To improve the company's performance assessment system and incentive mechanism, UFIDA Software's shareholders adopted an Equity Incentive Plan on August 2, 2007. UFIDA Software would implement the plan by granting new shares accounting for 8 percent of the total shares of the company. UFIDA was one of the first listed companies that were approved to launch such a plan when it became legal, and also one of the few companies to have successfully implemented such a plan.

Recipients of UFIDA's incentive shares include supervisors, senior management staff and other core employees. Directors and senior management staff that indirectly held shares were not covered in this plan. While the equity incentive plan covered many people, recipients accounted for less than 20 percent of the total employees.

The shares of the equity incentive plan are valid for five years, starting from the day when the equity incentive plan was approved by the shareholders' meeting. Shares accounting for 3 percent, 1 percent and 1 percent of the total shares of UFIDA were granted to employees qualifying for the incentive in 2007, 2008 and 2009 respectively. Recipients and the proportion of the incentive shares were decided by the board of directors.

A one-year, no-sale period existed after the incentive share recipients received the shares which were not transferrable. The shares granted are unlocked in two installments. The first installment should be carried out in the first year upon the expiry of the no-sales period, with 60 percent of the incentive shares being unlocked. The second installment should be carried out in the second year, which should be the expiry of the no-sales period with the remaining 40 percent of the incentive shares being unlocked.

The performance criteria for the award of incentive shares is as follows: the weighted average return on net assets of UFIDA Software in the previous year must be no lower than 10 percent, and the weighted average return on net assets in the current year, excluding non-recurring profit and loss, be no less than 10 percent.

Dividend policy

UFIDA's dividend sharing principles have remained consistent. First, the company gives cash to shareholders. Normally, it allocates two-thirds of the attributable profit of the year to shareholders as cash. As the company is rapidly expanding, and its shares are rapidly appreciating, UFIDA additionally gives stock dividends in line with the growth rate of its principal business. The growth rate is generally in the 30 percent range; i.e. three shares will be increased for every ten shares;

Trend of UFIDA's share price

The price movement of UFIDA shares can be roughly divided into four stages since its IPO from May 18, 2001 when the IPO was made to June 6, 2005, from June 6, 2005 to March 5, 2008, from March 5, 2008 to October 23, 2008, and from October 23, 2008 to April 22, 2010 as shown below

On April 23, 2001, UFIDA issued 25 million A-shares on Shanghai Stock Exchange at the price of RMB36.68 with a PE ratio of 64.35. UFIDA rose over RMB800 million from its IPO, increasing its net assets by ten times from RMB83.84 million at the end of 2000. On May 18, 2001, UFIDA shares started trading on Shanghai Stock Exchange and the price was RMB76 at the opening, which was lowered to RMB73.88 instantly and then rocketed up. The highest price was RMB100. However, influenced by the trend of the market and software industry, UFIDA went down from the initial RMB100 to RMB12.78 on June 6, 2005.

In 2005, with the reform of the shareholder structure of listed companies in China, a great bull market on the Chinese securities market appeared. The Shanghai composite index soared from 998 on June 6, 2005, to 6124.04 on October 16, 2007, the historic highest point, a total rise of 514 percent. From June 6, 2005 to March 5, 2008, UFIDA, with the rising of A-shares as a whole, climbed from RMB12.78 to RMB68.05, a rise of 432 percent. The global financial crisis between the end of 2007 and 2008 was a heavy hit on the domestic security market. People sold out their assets to get the cash for safety. The Shanghai composite index went down all the way from 6124.04 on October 16, 2007 to 1664.93 on October 28, 2008, a decline of 72.81 percent. The great market results from three years vanished in only one year. The software industry also suffered heavily and the applied software index fell from 1831.36 to 676.87, a total decline of 63.04 percent. For UFIDA, as the top domestic software company, its ex-right price fell to RMB16.30 on October 23, 2008 from RMB 68.05 on March 5, 2008, a decline of 51.26 percent, which was far smaller than that of the shares of the enterprises in the same sector. Afterwards, with the establishment of the multi-layered system of Chinese capital system and the active support of the financial policy of the Chinese government, funds flew back to the stock market. The Shanghai composite index rebounded from 1664.93 to 3478.01, a rise of 108.9 percent. UFIDA, through a series of changes in management, strategic plan and tactics, saw its share price rise from RMB16.30 to RMB37.65.

Required

1.Focusing on the financial environment, evaluate five key lessons on financing that a potential investor can learn from the case above.

2.With reference to the case above, what is the relationship between the type of financing used by the company and the performance of its shares.