(Sept 16): TEE International appears to have been hit by a scandal. The engineering firm said on Sept 4 that a total of $6.55 million had been remitted from the company to other entities, including those owned by its group CEO Phua Chian Kin, without the board’s knowledge.
The remittances were made between July 2018 and May 2019 and had been repaid in full by Aug 29. The transactions included $3.75 million paid by two subsidiaries to Phua and one Oscar Investment, a British Virgin Islands-incorporated company that is wholly- and beneficially owned by Phua. While the money has been repaid in full, the matter is far from settled. TEE International has hired auditors to identify other unauthorised remittances. It has also appointed Protiviti as an internal auditor to conduct checks on its internal controls systems.
The unauthorised remittances were discovered when Deloitt e, TEE International’s auditor, could not ascertain the nature of $3 million recorded under its “other receivables” account.
On Sept 6, Phua was relieved of his responsibilities but remains as an employee. His younger brother, Phua Boon Kin, who was deputy group managing director, was appointed interim CEO. He also took over his brother’s posts in the executive and nominating committee.
The following day, TEE International said it had received a letter from Deloitte stating that it would not be able to complete the audit to a satisfactory resolution until the nature and purpose of the remittance could be fully answered.
In the wake of these announcements, TEE International shares plunged on heavy trading. Since Sept 5, when the trading halt pending the announcement was lifted, it has fallen 33.3% to close at three cents on Sept 11. Year to date, it is down 78.7%, which values the company at just $20.1 million. On the morning of Sept 12, the company’s share price surged 12.9% on heavy volume, before a trading halt was called at 10.24am.
This issue with Phua is yet another black mark against the company, which has been in the red in the past three financial years. For the year ended May 31, 2019, TEE International reported revenue of $420.5 million, up 56.6% over the previous year, as contribution from recently acquired waste management and recycling businesses kicked in. However, cost of sales and administrative expenses and finance costs rose as well. As a result, the company reported losses of $17.8 million, up 78.2% from FY2018.
The recent development may raise questions over whether TEE International’s proposed spin-off of its infrastructure business TEE Infrastructure, announced on April 15, will go ahead. Mark Liew, CEO of Prime Partners Corporate Finance, which has been appointed to advise the proposed IPO, did not respond to requests for comment. TEE International’s spokesman Celine Ooi declined to comment as well. There are no analysts covering this stock.
TEE Infrastructure comprises a 50.1% stake in waste management solutions pro0 30000 60000 90000 120000 150000 0.00 0.07 0.14 0.21 0.28 0.35 TEE International Sept 16 2016 Sept 11 2019 Volume (‘000) Sept 11 0.31 Price ($) BLOOMBERG vider G3 Environmental; a 21.05% stake in PowerSource Philippines Distributed Power Holdings, which owns a 25MW greenfield thermal hybrid power plant in the Philippines; and a 49% stake in Global Environmental Technology Co, one of Thailand’s largest wastewater treatment companies.
TEE International intends to maintain a controlling stake in the listco. The listing is to enable it to unlock value in the spinoff businesses, allowing them to raise new funds independently to fund their expansion, while enabling TEE International to redeploy resources to grow its other businesses.
Spin-off strategy
TEE International has separately listed several of its subsidiaries. In 2013, it spun off property arm TEE Land and, in 2015, it listed CMC Infocomm (now known as Yinda Infocomm), which installs networks for telcos.
These companies have not been performing well, however. For the year ended May 31, 2019, TEE Land reported losses of $23.8 million, from $8.7 million in the preceding FY. Revenue in the same period was down 7.9% y-o-y to $100.5 million, as the company recognised less revenue from the sale of projects already launched. The company’s net gearing ratio is 1.3 times compared with TEE International’s ratio of 1.8 times.
In the few years leading up to 2018, TEE Land was a beneficiary of healthy sentiment in Singapore’s residential market. On Sept 18 and Nov 7, 2017, it bought two existing housing projects to be redeveloped. The two sites cost $25.74 million and $72 million respectively. Prior to this, the company had paid no more than $50 million for a site that it would redevelop. “If I can swing this around, I can buy a $100 million land,” said Phua in an interview with The Edge Singapore in January 2018. On June 28 that year, the company announced it was acquiring yet another plot on Upper East Coast Road for $60 million.
Just a week later, however, the government caught the market by surprise when it introduced a new set of property cooling measures. Facing the prospect of diminished demand, TEE Land announced on July 26 that it had chosen to forfeit the deposit of $600,000 so it could focus its resources on its other projects.
Last December, TEE International announced it was undertaking a “strategic” review of TEE Land. On Feb 25 this year, TEE International said Top Capital Securities had proposed to buy a 28% stake, or 125.1 million shares, in TEE Land for between 17.9 and 20.1 cents. On May 10, the terms were eventually settled at 100.5 million shares for $18.7 million.
On June 27, however, TEE International announced it had ceased discussions with Top Capital Securities. It added that it was now talking to a new party, Hong Kongbased Euro Properties Holding, instead. The two parties agreed to an eight-week-long exclusive negotiation period. As at Sept 12, no further updates had been provided.
CMC Infocomm has also struggled since it was listed in 2015, posting widening losses for the financial years ended May 31, 2015 to May 31, 2017. TEE International sold a 37.2% stake to Shanghai-based company Yinda on May 5, 2017; the other shareholder sold as well, giving Yinda a 74.41% stake in CMC Infocomm. This triggered a mandatory unconditional cash offer for the remaining shares, which Yinda made for 9.5 cents each.
By the close of the offer, Yinda controlled 79.23% of CMC Infocomm. Yinda would go on to change CMC Infocomm’s name to Yinda Infocomm and install a new board of directors and senior management. The latest results show a turnaround of sorts, with Yinda Infocomm posting a 34.3% y-o-y increase in revenue to $18.2 million for FY2019 ended May 31. It posted earnings of $1.2 million, reversing losses of $2.3 million in FY2018. Revenue was driven by projects in Singapore, Thailand and the Philippines.
'Faulty tap’
Phua has stated his preference for infrastructure-related businesses such as power plants and waste collection, which require substantial upfront investments but bring recurring income. “It will be like a faulty flowing tap. You want to turn it off, also cannot,” he quipped.
TEE International had committed heavily to building up its infrastructure arm. In December 2017, the company and two other parties including SGX-listed Advancer Global paid $18.5 million for rubbish collector Chiang Kiong Environmental. TEE holds a controlling stake of 50.1% in the company, which has been renamed G3 Environmental and is now part of TEE Infrastructure.
As TEE International’s latest earnings suggest, the infrastructure business has yet to generate returns, while TEE Land has to contend with cooler property market sentiment.
Clearly, the recent unauthorised transactions are an unnecessary distraction for TEE International. In fact, this is not the first time Phua has been the subject of a corporate governance matter. In April 2012, the company said Phua, along with independent director and non-executive chairman Bertie Cheng Shao Shiong, was being probed by the Commercial Affairs Department (CAD) for possible contraventions of the market rigging provisions in the Securities and Futures Act.
No conclusions, however, were made and no further action in relation to the investigation was taken. In its FY2018 annual report, TEE International noted that Phua and Cheng cooperated with CAD and provided access to relevant records from July 2008 to March 2009. “To its best knowledge, the board of directors of the company is not aware that the CAD investigation had any impact on the group and company,” the company states. For this most recent episode, TEE International shareholders will have to wait for the auditor’s report.
