Why a debt to equity option for retail investors is not right - Hyflux

Approaching a pretty banker, he muttered in a husky voice " Hi, my friend told me about a 18% pa product that he bought from the bank. Something like I-U-ME-Later...." he asked eagerly. "
Oh, pls complete this form.
"Sorry, your risk profile is very low and your knowledge of investing is practically nil. I think a one-year fixed deposit is most suitable for you."She said.
Ok, i think we are not fated, guess i will go to somewhere else to grow my money then...." he muttered softly..

After the mini bonds saga in 2010, more protection for retail investors were put in place. The Monetary Authority of Singapore (MAS) required all investment products to be rated for relative complexity and risk. See this link for more details. Retail investors had to take a risk profiling assessment to see if the product offered by the bank is suitable .

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.

Why did the retail investors GULP Hyflux?

In 2011, about 20000 retail investors, mainly mom and pop and retirees, many of whom used their Central Provident Fund bought the preference shares (N2H) of Hyflux. Preference shares were a relatively new concept in Singapore. If i am not wrong, OCBC with their 5.1% NCPS 100 was the first publicly listed company in Singapore to offer this to retail investors in 2008. DBS was next in 2010.  ( I base this on the list of such listed NCPS in SGX and found OCBC to be the earliest)

Given the ultra low interest rates in 2011 due to the financial crisis, to borrow the phrase from Business Times, retail investors "GULPED down " with their CPF monies.
In 2016, given the continuation of the low interest rates, new retail investors and some old ones also, totaling about 20,000 " GULPED down" with their CPF monies for the newly issued perpetual securities (BTWZ). In fact, they "GULPED down" so much, the original $300 million "GULPED down" has to be increased to $500 million to satisfy the lack of investment opportunities to grow their money.

The much hyped fanfare of the opening of Tuaspring," being Singapore's first" , "largest desalination plant in South East Asia" and " one of the world’s largest UF installations in a desalination plant" only added to its allure.

Whoever mentioned about a debt to equity for Hyflux ?

To be clear, i don't think a debt to equity option has been mentioned by Hyflux at this point.
I think what most people expect at this time is a cut in coupon or maybe a temporary stopping of coupon to tide Hyflux over this unfortunate incident.

A debt to equity means converting how much one is owed into shares of the company at a certain price.

However, the following outcomes for other SGX listed companies in trouble, sure doesn't put one at ease that this will be totally ruled out.

Why a debt to equity option for retail investors is not right?

Reason 1- Complexity
Preference shares and perpetual securities are accounted in the financial statements under equity.
However, when you think of it, people ( or at least to the retail investors of the N2H and BTWZ) expect it to be a debt.

It gets so complicated and technical that headline numbers seem to consider it a debt at some time or equity at another time depending on how nice it would make the numbers look.

When it is considered equity that makes the gearing lower

When it is considered debt that makes the NAV per share higher

I am not finance-trained and i do not want to even calculate what is the right gearing and right NAV per share to do a comparison.

To be fair, if retail investors were to read the annual report very very deeply, there will be explanations as to how they define the gearing, or what were used and what were not used in the calculations.

But touch you heart and tell me is this reasonably expected of a retail investor who comprise of mom and pops, retirees or people who were turned away from banks due to their low risk profiling?

Reason 2 - Risk Profile

I think in the recent news about Hyflux, it was mentioned that there were in total 34000 retail investors in N2H and BTWZ and another 16,000 who invested in the ordinary shares. The headline numbers should not be 50,000 retail investors ( as stated by some media) as some 16,000 investors in ordinary shares would have also invested in BTWZ and N2H.

Assuming the unlikely scenario that ALL 16,000 ordinary share investors invested in N2H and BTWZ, that would make about (34,000 - 16,000) 18,000 retail investors in N2H and BTWZ who do not own Hyflux ordinary shares.

Now, this 18,000 retail investors would  likely be those risk-adverse sort who shun shares ( thats why they didn't buy the ordinary shares) and would probably fail the risk profiling from a bank, like the dude in the fist paragraph that tried to buy an accumulator with a husky voice.

If their preference shares and perpetuals are indeed converted into ordinary shares, this would be akin to a risky product shoved down their throat against their risk profiling!

Conclusion

I think it is morally wrong to subject N2H and BTWZ investors to a debt to equity deal. These are retail investors who include retirees, mom and pops who are not financially savvy, unlike those investors who can afford the wholesale bonds of Nam Cheong, Ezion, Noble e.t.c.

Mini bonds saga involved banks, foreign companies and 10,000 investors who were not able to use their CPF to buy the "bonds". This was set against a backdrop of a Global Financial Crisis, where Singapore is a price-taker in the international stage. 

This Hyflux fiasco involves 34000 preference and perpetuals and 16000 ordinary shareholders, against a backdrop of a booming economy, where the company involved is local with a majority of local contracts. 

I urge the stakeholders to exercise " heart" in their decision.

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

What Other Water Companies Regularly Did But Hyflux Never Did - Hyflux - Question 16

"I took my suppliers out for an event and i spent $XX,000 on my XXX credit card...." says my wife. Discontent immediately filled me and i retorted " Why didn't you use the YYY credit card, i painstakingly labelled the cards for each specific purpose, you have basically lost many krisflyer miles, enough to take a free saver ,return business class to New York!"

"You shut up! You lost many multiples more in Hyflux!...." . With that, i retreated into my Man-Cave.....knowing full well i could never raise my head up high in this household again, unless of course, i got back my money. My ever faithful three-year old wingman followed me behind.

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.

Sources of funds
Companies have many ways to raise fund.
They can:
1) Borrow from bank
2) Issue bonds, preference shares and perpetual securities
3) Director's loan
4) Rights issuance and placement shares
5) "Borrow" from suppliers when they extend their trade payable dates
6) Go Initial Public Offer

Each has it's merits and demerits. Most notably, rights issuance and placement shares are important because they do not impose a heavy burden on the cash flow of the company in the form of interest. They also improve a company's debt ratios.
However, they result in the dilution of existing shareholder's control in the company, unless the existing shareholders have enough funds to subscribe to their rights entitlement or are given a chance to participate in the first place.

Now back to Hyflux. 
Hyflux has NEVER done a rights issuance or placement shares in its history!

Let's take a look at the close ,locally-listed ,competitors of Hyflux.

Notice how everyone of them does rights issuance and placements regularly?
To be clear, they have also embarked on other sources of funds.

But the question is, why does Hyflux choose to omit rights issuance and placement as a source of funding? 
Instead, they love to issue preference and perpetual securities with no voting rights.

Darco 
What They Do:
Darco specialise in designing, fabricating, assembling, installing and commissioning engineered water purification and wastewater treatment systems

Fund Raising:
Feb 2015 - Rights issuance
Feb 2017 - Placement of shares
Nov 2017 - Placement of shares
Feb 2018 - Placement of shares

Citic Environtech
What They Do:
Citic Environtech is a leading membrane-based integrated environmental solutions provider specializing in water and wastewater treatment, water supply and recycling.

Fund Raising:
Feb 2007 - Placement of shares
Oct 2009 - Placement of shares
Mar 2013 - Placement of shares
Nov 2014 - Placement of shares
April 2015 - Placement of shares
Dec 2017 - Placement of shares
Mar 2018 - Placement of shares

China Everbright

What They Do:
China Everbright has six major business sectors, namely environmental energy, environmental water, greentech, envirotech, equipment manufacturing and international busines

Fund Raising:
April 2006 - Placement of shares
Sept 2009 - Placement of shares
Dec 2013- Placement of shares
Aug 2013 - Placement of shares

Moya Holdings Asia
What They Do:
Indonesians need access to clean piped water. Local governments need help. We are building new treatment plants and expanding pipe networks.

Fund Raising:
Nov 2011 - Rights issuance
May 2018 - Right issuance

SIIC Environment Holdings
What They Do:
It is engaged in wastewater treatment, water supply, solid waste management and other environment-related businesses.

Fund Raising:
April 2008 - Placement of shares
October 2009 - Placement of shares
March 2010 - Rights issuance
October 2013 - Placement of shares
October 2014 - Placement of shares
May 2017 - Placement of shares

Conclusion
Hyflux is a good company with a viable business model, the problem is with the management. Therefore, i would reasonably expect it to be successful without the current management.

However, as Hyflux is in a tight time situation ( 6 months moratorium), i would think it would be quite unlikely to quickly find a replacement who can get up to speed. However, if such a top dog person should appear, i hope the management would humbly give up their throne. I hope the controlling shareholder would also be open to diluting her stake to cede control of her baby to save his life. In the long run when Hyflux survives, the management, please just go relak one corner to not cause any damage. ( 越幫越忙)

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

An industry comparison of Hyflux compared with its peers - Question 15

Finally, i am upgraded to my bed! All thanks to my toddler that insists on sleeping with Papa on the sofa. My wife's love for the Son superseded her despise of her Good For Nothing, Penny wise,Pound foolish Husband. She must have logically deduced that she will still be able to keep a distance from me as my son sleeps in the middle.

Children are angels to be cherished..truly......

Now back to Hyflux.

The much needed 6 months moratorium has been granted, though it could be said to be expected. Courts generally rule on precedents and precedents in the form of Nam Cheong, Pacific Radiance,e t.c having secured 6 months moratorium before, means it isn't too difficult to justify the decision to grant Hyflux the moratorium.  And, Hyflux, as i have said before, is a company that does indeed provide value to society, and so, should be able to squeeze out a profit. The problem is the management...truly..big problem.

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.

How are the management like in other Water companies in Singapore

To make it an apples to apples comparison as much as possible, i used Water companies within Singapore  to further elaborate why i think the issue is the management. Granted there are slight differences, as always, as no 2 companies or 2 persons are identical, i think the reasonable person wouldn't object to the chosen companies.

I have used companies larger and smaller than Hyflux in terms of revenue to try to show objectivity as much as possible.

I have flagged out in red the undesirable attributes ( in my opinion) of Hyflux.
Except for Darco, no other water companies have the same CEO and Chairperson.
Among Hyflux's peers, it has the largest percentage of directors serving more than 10 years on the board.
In terms of remuneration in cash, Olivia's remuneration in cash is roughly in the range of Citic Envirotech's CEO despite Citic's revenue about 3 times of Hyflux and Citic being profitable but Hyflux making a loss.
The funny thing is all of them are making profits and yet Hyflux's Olivia is getting the highest ( same par as Citic) remuneration in cash.

Do you think it is reasonable?

Now for the ....
Question 15

 Olivia and the remuneration committee, can you comment on what is the basis on deciding the amount of remuneration?

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

High Level staff Movements Indication of Red Flags - Hyflux - Question 14

For the past few nights, after the fateful confession to my Significant Other and despite it being Father's day, i have been relegated to my sofa to sleep through the nights.
Should have bought a more expensive sofa.
Indeed, Hell has no fury like a woman's.

Let's see the high level staff movements in Hyflux over the years.

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.

Take note that i did not include employee stock options as part of their vested interest at time of cessation.

2010 
Designation: Non-executive non-independent director
Service:  2 years
Vested interest at time of cessation :Nil

2013
Designation: Group Executive Vice President and Group Chief Financial Officer
Service: 2 years
Vested interest at time of cessation:
Ordinary Shares:
360,000 ordinary shares held in his own name
3,000 ordinary shares held by his spouse.
Preference Shares:
2,000 preference shares held in his own name

2013
Designation: Non-Executive Independent Director. Member of Audit Committee, Remuneration Committee and Investment Committee
Service: about 6 years
Vested interest at time of cessation:
20,000 Hyflux Preference shares ( N2H) at time of cessation

2014
Designation: Group Senior EVP and Group Deputy CEO
Service:  7 months
Vested interest at time of cessation:Nil

2015
Designation: Group Senior Executive Vice President
Service: about 6 years
Vested interest at time of cessation:
Deemed interested in 2,000 ordinary shares and 11,950 Preference Shares of Hyflux Ltd held by her husband.

2017
Designation: Group Executive Vice President
Service: about 1.5 years
Vested interest at time of cessation: Nil

2018
Designation: Group Executive Vice President and Group Chief Operating Officer
Service:  About 3.5 years
Vested interest at time of cessation:
Holds 50 Preference Shares of Hyflux Ltd and is deemed interested in 70 Preference Shares of Hyflux Ltd held by his wife


Tuaspring has been mentioned as the reason for Hyflux's problems.

The spate of staff movements have also been fairly aligned and consistent , during and after Tuaspring's planning and inception.

Due to investor's recency bias and tendency to forget things a long time ago, i felt it was important to put some objectivity and to reduce people's biased opinion that the blame for Hyflux's mess is pinned on the Group Executive Vice President and Group Chief Operating Officer who resigned in 23 May 2018.

In 2014, the Group Senior EVP and Group Deputy CEO, served for only about 7 months,  the shortest tenure in the list above and the only one who had the title deputy CEO.

The tenure is also very short, with a 4 out of 7 of them working for 2 years or less. 2 years being a reasonable time needed to be familiar and really start contributing to the topline of a company.

Does this reflect the working environment of the management at the very top  ?
The emperor's new clothes syndrome perhaps?

If anything is impeding the funding or capitalization of Hyflux or maybe even the sale of Tuaspring to a foreign entity at a reasonable price,  to the detriment of thousands of mom and pop investors funds and CPF money, they must touch their heart and do some reflection. 

Which leads me to ....

Question 14

Can you explain the spate of high level staff movements along the years and also comment on the short tenure of many of them?

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 

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 who is going to go the distance to ask for this $20 million back. Would Hyflux liquidators be able to get back the full $20 million? 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