Friday, June 15, 2018

Uncovering the Real Motivations behind the HyfluxShop - Question 13

In my line of work , uncovering the motivations of individuals and organisations is vital. I can't possibly micromanage everything that an individual or organisation does. However, if i know that the motivations of the individual or organisation is aligned with mine, i guess i can worry less.
"I can calculate the motion of heavenly bodies, but not the motivations of Man."- Sir Isaac Newton ( modified) 
Disclaimer: I am not an investment advisor. Heck, i am not even working in the financial industry. Below are my interpretation and i am grateful if you will let me know if anything i say is wrong and i will correct it in a reasonable time. I am not an expert and don't wish to be assumed to be one. I make losses frequently.
The story so far

  1. In February 2018, Hyflux issued unlisted HyfluxShop shares to ordinary shareholders (600), instead of the usual cash dividends.
  2. Securities Industry Counceil ( SIC) has informed that Olivia need not have to make a compulsory offer to the ordinary shareholders (600) for the HyfluxShop shares.
  3. Olivia( Chairwoman/CEO/Founder) voluntarily made an offer to buy over these HyfluxShares from the ordinary shareholders (600)
One possible opinion

Olivia( Chairwoman/CEO/Founder) is being nice to offer a choice to ordinary shareholders(600) a way to cash out from the unlisted HyfluxShop shares because there is no available market for it currently. She is also using her own personal funds to buy over these HyfluxShop shares.

Olivia is sharing a golden opportunity for ordinary shareholders(600) to take part in a promising unlisted company which will be listed later.

Olivia ( Chairwoman/CEO/Founder) is generous and is keeping to the tradition of being shareholder friendly by dishing out yearly dividends. Despite the cashflow problem of Hyflux, she is trying her best to give ordinary shareholders a dividend which she need not do so.

While i think the above opinions makes sense, may i be allowed to be the Devil's Advocate.

Being the Devil's Advocate

As stated in the circular (click here), the Net Tangible Asset ( NTA) of HyfluxShop is $20 million .  See Figure 1 below.

This $20 million is used as the basis to calculate the $0.178 per share offered to the ordinary shareholders for each of  their HyfluxShop.

At the point of offering, she has 23.8% direct interest ( or 54.2% direct and deemed interest) in HyfluxShop.
See Figure 2 below.

When she made a voluntary offer to buy the remaining HyfluxShop shares from the ordinary shareholders, the maximum she would have to fork out to  100% control HyfluxShop, assuming all ordinary shareholders sold their HyfluxShop shares to her was 76.2% ( 100% - 23.8%) of $20 million, which is $15.24 million. With 100% control, she can do anything she wants with the HyfluxShop and no one can say anything.

In fact, she didn't even need to spend a single cent at all to buy any  HyfluxShop shares because she already controlled 54.2% (deemed plus direct) of HyfluxShop. However, this would not be optimal as the other shareholders still have the right to see the financial statements of the unlisted HyfluxShop if they want to and check on her.

Figure 1
Figure 1

Figure 2
Figure 2

The $20 Million HyfluxShop Preference Shares


In the circular, it is stated that HyfluxShop issued $20 million of preference shares to Hyflux.
The terms of the preference shares were:
1) No- voting rights
2) 6% per annum,
3) First call date 4 years later
4) Step up to 8% pa from first call date
5) no maturity date
6) Will not be redeemable at the option of the holders of HyfluxShop Preference Shares.
HyfluxShop may, at its sole discretion, redeem the HyfluxShop Preference Shares for cash

Sounds familiar?

The Alternative Opinion

Actually , this opinion is not mine alone.

In the business times article written by Marissa Lee on 14 June 2018, some questions were raised too.

Business Times

She has 100% control of HyfluxShop
Now, if Olivia managed to get 100% total control of HyfluxShop, she would have paid $15.24 million, but she would have gotten HyfluxShop with $20 million of funds through the HyfluxShop preference shares. ($20 million inflow  - $15.24 million outflow  = $4.76 million net inflow)

$20 million of funds that did not need to be repaid to Hyflux legally.

And if in the event that Hyflux winds up ( touch wood), it would be even more sweet because the "implied" expectations of repayment of this $20 million is totally gone. An unlisted company with no financial statements publicly available to scrutinise, who is going to check or who will care about what this $20 million is used for.

She does not have 100% control of HyfluxShop
Now, let's take the more likely approach which is Olivia does not get 100% control.
Would it make much of a difference? I doubt so.
Seeing how much the ordinary shareholders trust her through the years even when the financial statements and public announcements were mandatory made transparent by SGX, i shudder to think how much scrutiny she would get when transparency is much much less in an unlisted private company.

Conclusion
Hey SGDividends, didn't you read that Olivia has plans to list the HyfluxShop in future?
Well, plans are plans and are not obligations. Till i see it eventually listed, i would discount whatever is said or promised.

If HyfluxShop needs funds to grow and since it is stated as so promising, it can always do the following:

1) Issue preference shares or bonds to Olivia Lum personally at 6% pa
2) Get private equity or venture capitalists to invest
3) Borrow from banks

Why take from a company (Hyflux) which is already so cash strapped?
The reason i can guess is that Hyflux is controlled by Olivia so its easy to get funds from it.
Well, if anything happens to Hyflux, she can start afresh with HyfluxShop with no obligation to return the $20 million.

What would make me change by mind?
HyfluxShop to return the $20 million to Hyflux. That would immediately eliminate the alternative opinion. 

Olivia, if you are reading this, may i suggest the following to improve people's opinion of you.
This is to align your motivations to the retail investors and to eliminate any mis-aligned motivations.
I am still hopeful you have good intentions.

1) Get HyfluxShop to return the $20 million to Hyflux to show that you do not have a back up plan for yourself.

2) Reduce your salary and your long serving board of directors by 71% or more to show that you have to make Hyflux a success before you reap the benefits.
If Ezion CEO could do it, you can do it.

3) In the long run if Hyflux survives, please get a succession plan in place for an outsider to run the ship. As professor Mak opined, you are an entrepreneur, not really a CEO as the results proof.

Which now leads me to ....

Question 13

Would you take my suggestions?

Further reading
1) Considerations about Hyflux
2) The fate of Hyflux
3)Will Hyflux recover? The billion dollar question
4) Hyflux-Treatmeat of perpetual share holders- Ezion
5) Hyflux - loans and borrowings - Pacific Radiance
6)A happy ending for retail perpertual securities holders - Tiger Air and Hyflux
7) The Very Curious Case of Sharebuybacks- Hyflux
8)What did the founder/Chairwoman/CEO do to help hyflux throughout the years
9) Moving forwards at the Townhall meetings with Hyflux - Part 1
10) Moving forward at the Townhall meeting with Hyflux - Part 2
11)The Lucky Accredited Investors of Hyflux's Perpetual Securities - Part 3
12) The Peculiar Case of HyfluxShop - Question 12 

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