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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.

Tuesday, March 19, 2019

How Effective are SGX Listing Rules Really ? - Hyflux

The " white knight" may not rescue the princess after all.
On 18 March 2019, Hyflux issued an announcement with the following paragraph:

"Hyflux Ltd or Tuaspring Pte Ltd ceasing or threatening “to cease for any reason to carry on its business in the usual and ordinary course” is a “Prescribed Occurrence” within the meaning of the Restructuring Agreement."

This is in response to PUB's recent announcement about the operational and/or financial defaults of Tuaspring which started since 2017. This "Prescribed Occurrence" allows Salim to walk away.
So it seems not only retail investors are not fed material information before, even an institutional investor , who has the utmost complete advantage of resources and the benefit of the comprehensive court affidavits are not aware of such material information when doing their due diligence.

But the above is not the point of this article. The point of this article is to discuss about Singapore Exchange's (SGX) listing rules.
In particular, Practice Note 10.1 Shareholder Approval for Major Transactions.

SGX listing rule

In short, a listed company has to seek shareholder approval when they enter into a new business outside their existing core business.
The listing rule went as far as to state that even if the company is not entering into a new business and yet makes a transaction which will change the existing risk profile of the company, shareholder approval should still be sought.

Hyflux Annual report 2009

Hyflux Annual report 2010

My Thoughts

Before Tuaspring, Hyflux was in the water business.
By taking on Tuaspring in 2010, building a power plant is the first for Hyflux.
I hope you can see how misleading the power plant narrative was pitched " ...to provide an uninterruptible supply of good quality, clean energy to the desalination plant...".
I also hope you can see how stunned investors were when it was recently revealed during court protection that 10% of revenue is from water and 90% is from electricity.

Tuaspring is not a desalination plant with a power plant as an ancillary, instead its a power plant with a desalination plant as an ancillary

Hyflux has actually entered into a new business ( electricity generation) that has drastically changed the risk profile of the company.

To further elaborate my point, the power plant was completely unnecessary for the desalination plant to exist because Tuaspring operated without the power plant from 2013 to 2016.
Tuaspring was taking electricity from the grid instead.
In fact, the funny thing was, (USEP ) electricity prices was high in 2013 - 2015 and Hyflux was still doing well without the integrated power plant, despite needing to pay high prices to buy electricity from other generation companies.
It was only when the power plant at Tuaspring went online in 2016 that losses started to mount.
Imagine how profitable Hyflux would have been in 2016 ,2017 and 2018 since (USEP) electricity prices was at an all time low!

Let us read the reply from SGX when this issue was brought up to their attention.

SGX first reply

I think SGX is equally misled as i was.

"...objective of power plant ...was meant to supply electricity to the desalination plant."
"...Excess power will then be sold to the power grid."

As i wrote before, a 90% revenue from electricity does not reflect the objective of the power plant and also does not account for how an "excess' commodity can translate into such a high revenue.

Naturally, i replied and stated my points about revenue again, just in case, this point was overlooked.

SGX second reply

**I am not sure if you noticed, this second reply wasn't addressed to MAS anymore.

I am not sure if SGX got my point right when it stated:
"...There was no change in the primary infrastructure business of the Company."
I was refering to the time when Tuaspring was conceived in 2010 and Hyflux certainly didn't pitch itself as an infrastructure business then which seems like a catch-all phrase.
See my printscreen for the Annual report 2009 above again.

The paragraph in the red box takes the cake.
SGX defined "transaction" as acquisition.
Since Tuaspring is built by Hyflux and is not acquired by Hyflux, this rule does not apply to Hyflux.
I am not sure if SGX is being overly legalistic here.
Doesn't building a power plant require acquisition of power plant turbines (reportedly SGD$800 million and from here also ) and other power plant components?

Irregardless of whether they built or acquire, haven't the risk profile of Hyflux changed drastically which necessitated the point of requiring shareholder;s approval?

Naturally, i thought it was ridiculous and if i am not a reasonable person, i would be thinking that SGX is defending Hyflux. Thankfully, i think i am a reasonable person and i think SGX is just being misled.

My reply was a lengthy one, mentioning capital expenditure of power plant components in relation to the total project cost and market capitalisation of Hyflux during that time to illustrate how significant this Tuaspring " acquisition/built" was.

SGX third reply

** MAS not addressed too.

When SGX writes like this ".....we cannot determine or intervene in the commercial decisions of listed companies...", i wonder how they act as a front line regulator.
And this phrase " commercial decisions" seems the vogue this days. Everyone seems to be using it.

" Shareholders........have been given the opportunity at AGMs to raise questions and clarify any issues that they may have...."
My interpretation is " your opportunity is gone now" and there is nothing we can do about it.

Do you feel like there are adequate safeguards in place in Singapore to represent the retail shareholders? I certainly don't.

For PnP and MTN holders who wants to vote NO but are unable to attend the voting on 5th April 2019. You can fill up this form to proxy others. This has to be done by 31 March since 2 April is the deadline to give the forms to Boardroom, a Corporate Secretarial Company and some leadtime is necessary for the volunteers.

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Thursday, April 11, 2019

The Liquidation of California Fitness and the case of Hyflux

Tuesday, March 19, 2019

How Effective are SGX Listing Rules Really ? - Hyflux