We revisit the saga of the one-time stock market favourite, water treatment group Hyflux, and draw lessons from it
What a dramatic difference two decades make!
On July 21 this year, it was announced that beleaguered water treatment group Hyflux — for over one decade a favourite of stockmarket investors — would be wound up after tumultuous years of business challenges, debt woes and investors’ wrath. The announcement was made by Borrelli Walsh, the liquidators appointed to oversee Hyflux’s court-protected debt management. Exactly two weeks earlier, Hyflux announced that it was selling its 30% stake in the SingSpring desalination plant in Tuas to Keppel Infrastructure Trust for $12 million. In May 2019, its flagship Tuaspring desalination plant had already been taken over by the water agency, Public Utilities Board (PUB), at zero cost.
Going back more than 18 years, it would have been difficult for those present at a cheery news conference on Jan 19, 2003, to imagine the celebrated water group would end up in dire straits decades later. At the afternoon news conference, a toast was proposed in front of applauding journalists and analysts — and for good reasons. Hyflux had just won a $250 million tender for SingSpring, which was Singapore’s first seawater reverse osmosis desalination plant. (According to the PUB website, Singapore has four desalination plants today, with a fifth one due to be ready this year.)
And barely a fortnight before that, on Jan 9, Temasek Holdings had increased its investment stake in Hyflux by 4.76% to over 5%. (Temasek subsequently cut the stake to 0.89% by March 2005.) This came two years after Hyflux was listed on Singapore Exchange (SGX) on Jan 17, 2001. It was upgraded to the SGX mainboard in April 2003.
It was no wonder that Hyflux’s CEO, Olivia Lum, was hailed as the poster girl for Singapore’s water industry, having helped to boost the vital water resources in Singapore, through the desalination plant project as well as the production of Newater. It was tasked by the PUB to build Singapore’s first and third Newater reclamation plants. (According to the PUB, there are five Newater plants supplying up to 40% of Singapore’s current water needs today.)
The underlying enabler of Hyflux’s mega water projects was the use of membrane filtration to treat water affordably.
Hyflux was playing a pivotal role in developing two of the city-state’s four “national taps” — apart from Newater and desalination, the other two “taps” are water from local catchment and imported water — that will ensure sufficient long-term supply of water for Singapore to meet its residential and industrial needs. Newater was literally the toast of some 60,000 Singaporeans and other participants when it was first unveiled at the National Day Parade held at the
National Stadium in 2002.
Those developments came as a relief at a time when Singapore was facing the grim prospect of a jump in water prices, as the Malaysian government of the day threatened to amend laws to obtain a higher price for water supplied to Singapore.
Hence, Lum herself won widespread recognition. She became a Nominated Member of Parliament from 2002 to 2004, and was on the boards of Spring Singapore and SGX. By 2005, she had a net worth of over US$240 million, and was the only woman on Forbes’ South-east Asia Rich List. In 2006, she was ranked 17th in Forbes’ first Singapore rich list.
It is no surprise, too, that Lum was one of the most featured personalities on the covers of The Edge Singapore through its 1,000 issues. Indeed, many cover stories of The Edge Singapore through the years traced the spectacular rise of Hyflux. These included:
“Liquid Gold” (Issue 48, Feb 3, 2003), when Hyflux was hogging the limelight with public-sector water projects in Singapore, including the SingSpring desalination plant. Hyflux was set to receive triple revenue benefits pertaining to the plant: a revenue stream of more than $100 million for the design and construction of the membrane plant; dividends from the project issued to Hyflux arising from the water fees charged to the PUB; and 20 years’ worth of recurrent revenue from the operation and maintenance of the plant.
“Cleaning China’s Water” (Issue 124, July 26, 2004), when Hyflux was extending its success in Singapore to China. It won its first municipal project there, to build, own and operate a seawater desalination plant in the city of Tianjin. That promised to be one of China’s largest desalination plants, which would supply water to Tianjin’s Dagang district for at least 30 years.
“Liquid Assets” (Issue 316, April 28, 2008), when Hyflux clinched a mega US$468 million deal to build a seawater desalination plant in Magtaa, in water-stressed Algeria, North Africa. This and a previous US$251 million deal, also for a desalination project in Algeria, were propelling Hyflux into the league of global, heavyweight players. In fact, it had to fend off 11 other competitors from around the globe — including the likes of GE Water, a unit of General Electric — for the deal.
“Hyflux scores another big deal” (Issue 376, June 29, 2009), when the group followed up its success in Algeria with two major water desalination project wins in another country in North Africa, namely Libya, one of which is a plant with a 500,000 cu m-per-day capacity — the world’s largest desalination plant then — in Tripoli.
Court complaint
My coverage of Hyflux as a then-senior writer for The Edge Singapore extended beyond happy press events like that of January 2003. A notable highlight of the coverage was when I snagged an exclusive, one-to-one interview with Lum in March 2003, as The Edge Singapore had obtained a copy of legal documents that showed Air 2 Water, a company Hyflux had bought a 2% stake in, had filed a patent infringement complaint against a company based in Utah, US.
The complaint was served in a Californian court on Jan 22, just a week after Hyflux had launched an air-to-water product, Aquosus, in Singapore. Aquosus used a filtration system to purify water extracted from the air, as well as an ultraviolet-ray system to get rid of airborne germs and bacteria. At the interview which took place at Hyflux’s headquarters, Lum was keen to stress to me that her patent for the air-to-water technology was very thorough, and that Air 2 Water had spent a lot of money filing patents in Singapore, the US and many other countries.
Subsequently, when Hyflux trod down the hill, articles in The Edge Singapore analysed the failings that led to its ultimate downfall. The key reason was Hyflux’s decision to ramp up the capacity of the power plant at Tuaspring to not only support the usage of the Tuaspring desalination plant, but also to sell electricity to the national electricity grid. However, the prevailing low electricity prices meant that Hyflux was to suffer massive losses.
Also, its balance sheet was stacked with hybrid capital like preference shares and perpetual securities and its debt levels were a lot higher than the optics presented. This was evident even before the group went belly-up.
In FY2001, the year Hyflux was listed on SGX, its net profit and revenue were at $7.4 million and $27.2 million, respectively. By FY2010, Hyflux’s net profit had climbed a record high of $88.5 million. MENA (the Middle East and North Africa) and China had also become key markets for Hyflux, contributing 60% and 26% respectively to the group’s revenue of $569.7 million that year.
Then in FY2016, Hyflux reported a 91% y-o-y drop in net profit to $4.8 million, although its revenue doubled to $987 million. The spike in revenue was attributed to its Tuas-One waste-to-energy project and its water project in Oman. However, earnings from these two projects were erased by losses at Tuaspring, without which net profit would have been $118 million.
Hyflux first bled red ink in FY2017 with a full-year loss of $116.4 million. The Tuaspring project single-handedly accounted for a net loss of $81.9 million that year.
Hyflux’s debts piled up over the years, and Hyflux was staring at nearly $3 billion in debts by FY2018. This included about $1 billion claims from about 34,000 preference share and perpetual securities investors. Hyflux had to request for suspension of share trading in May 2018 and to go under court protection while it tried to settle its debt issues. Subsequently, efforts by corporate white knights to mount a rescue of the group fell through.
To be sure, through the two decades of Hyflux’s ups and downs, fortunes were made by many investors who rode its ascent, while many others suffered painful losses when the fall came. The long-drawn Hyflux saga certainly holds valuable lessons for investors — those who are caught in it as well as those who are not — and companies alike. As the master investor Warren Buffett put it: “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.”
See: Hyflux saga: Lessons for companies and investors
Cover photo of Hyflux’s flagship Tuaspring desalination plant, which was taken over by the Public Utilities Board, at zero cost, in May 2019: Albert Chua/The Edge Singapore
