Thursday, April 11, 2019

The Liquidation of California Fitness and the case of Hyflux



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.
California Fitness

 In a Straits Times article on California Fitness, the liquidators said ,in their view, that there was a "fundamental failure" in the conduct of the companies directors, management and auditors to prudently and reasonably assess the veracity of the financial position of the company.

California Fitness had accumulated losses as early as 2013, yet the auditor did not raise red flags. Instead, its financial statements were  prepared on the basis of ongoing concern which assumes the company will remain solvent and operational indefinitely until proven otherwise. The auditor also issued an unqualified opinion despite the company's poor financial standing. Unqualified means no issue with the financial statements and they are true and fair.
California Fitness was still collecting membership fees from 2013 to 2016.

A legal opinion the liquidators obtained said that the auditor had " breached it duty of care to the company" by failing to adhere to auditing standards.


Hyflux Limited

2015 - In the annual report 2015, it is stated that Hyflux has $41m (green box) profit attributable to shareholders.
However, on closer look, if one is to consider perpetual securities and preference(PnP) shares as debt,
which is classified in the court affidavits " Debt Securities Claim", then the profit attributable to the REAL ordinary shareholders should actually be a loss.

See the red boxes below.
Instead of just stating it as simply as possible as , "Loss attributable to Ordinary shareholders", Hyflux has stated it as " Earnings/(Loss) per share (cents)"
The interest paid to the PnPs which are not "owners" but more like debt are commingled with the $41 m, " Profit attributable to shareholders"

In fact, every year from 2011 to 2015, Hyflux seems to be making pretty stable profits.
However, a starkly different story emerges when one looks at the " Earnings/ (Loss) per share (cents)" over the years. It has been declining drastically from 2012 to 2015, this despite Hyflux doing massive sharebuybacks over the years.

 It looks like financial engineering to me. With issuance of Perpetual Securities in the local market given the blessings by higher ups, more financial engineering ensued.


2016 - Hyflux issued $500 million of the perpetual securities to retail investors.
In their Offer Information Statement (OIS) , see how rosy they portrayed the profitability of Hyflux in the years preceding it with no footnotes on this page ( pg 146) mentioning that this profit figure included interest that is paid to the PnP ( debt securities).
The product highlight sheet which most investors would most likely read, compared with the main Offer Information Statements (OIS)also portrayed a beautifully rosy picture of the profitability.

Of course being bankers they would cover their ass with the green box.
Reading the OIS is like reading a book on "Finding Wally".
Beautiful numbers placed in prominent places but ugly information written in obscure places.


The green boxes reference to these pages.




2017 - The annual report for 2017 was signed off on 22 March 2018 as a going concern but Hyflux went into court protection on 22 May 2018. Exactly 2 months later.



My Opinion

Why did Hyflux choose to use the phrase " Profits attributable to shareholders" when PnPs is more like a debt? PnPs have no voting rights nor do they share in the profits of the company.


If you look at the profit trend in blue above with interest to PnPs removed, one can see a drastic decline from 2013 to 2015.
Coincidentally, 2013 was the year the Tuaspring Desalination plant started producing water and taking electricity solely from the grid. Olivia Lum had signed a disastrous money losing contract with PUB and i think she was hoping for the Tuaspring power plant to cover the cost.
It can be seen clearly, Olivia Lum's intention was to built a Power Plant whose forecasted profit was to be so large that it was enough to cover the loss selling water to PUB !
Who would have known this woman did not intend to be in the water business but have instead used the water part of Tuaspring to masquerade Tuaspring as a Desalination Plant instead of a Power Plant. No one would have expected electricity to be the death knell to Hyflux!
Many would have thought the power plant would be the right size for the water part and once built, would supply electricity inhouse so as to lower the cost of producing water, boosting profits.

In addition, looking at the trend of profitability with PnPs removed, one can see the severe downtrend with a loss in 2015 already, making further losses in 2016,2017. Similar to California Fitness, why did the Auditor still sign Hyflux off as a going concern in 22 March 2018, only for it to enter into court protection in 22 May 2018?

Why did DBS and Hyflux issue $500 Million Perpetual securities to retail investors in 2016 when in 2015, Hyflux was already at a loss?

Why did MAS approve such a thing? Where are the safeguards to retail investors?


Register your interest for legal avenues.
Click here.

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 
13)Uncovering the Real Motivations Behind the HyfluxShop 
14) High Level Staff Movement Indication of Red Flags -Hyflux
15)An industry comparison of Hyflux compared with its peers - Question 15
16)What other Water Companies did that Hyflux didn't - Question 16
17)Why a debt to equity option for retail investors is not right
18) Consolidated Questions For Hyflux Townhall Meeting on 19 and 20 July 2018 - Hyflux
19)Consolidated Questions For Hyflux Townhall Meeting on 19 and 20 July 2018 - Hyflux- continued
20)Informal Steering Committee for the Reorganisation Process - Hyflux
21) What happened to other Debt Restructuring Exercises - Ausgroup
22)What happened to other Debt Restructuring Exercises - Nam Cheong
23) My layman views of the so-called " White Knights of Hyflux"
24) The Unsecured Working Group (UWG) are against the retail investors - Hyflux
25)Where to find money to pay back retail investors? 
26)What happened at Hyflux's Second Townhall Meeting
27) Another bomb to the retail investors of Hyflux
28)The Underrated Importance of Regulatory Risk - Hyflux
29)The Overlooked Importance of Another Regulatory Risk - Hyflux
30)Why did so many Singaporeans invest in Hyflux - The positive image illusion
31)On Why The Rich Get Richer And Poor Gets Poorer - The Hyflux Proposal is Out!
32)The " not spoken much" dirty little thing about the Restructuring Proposal - the $33 million - Hyflux
33) The Failure of the much touted Public-Private-Partnership Model in Singapore - Hyflux
40)How Effective are SGX Listing Rules Really ? - Hyflux
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