The Edge Singapore spoke to Professor Lawrence Loh, director, Centre for Governance and Sustainability, at NUS Business School, about the Hyflux saga. The following is the interview:
What went wrong with Hyflux?
The Hyflux board of directors’ oversight over the years had gone awry. I don’t think the board of directors had done an effective job.
There are many issues. If you look at Olivia Lum, very interestingly, she’s the biggest shareholder with 35% [shareholding], she’s also the chairman and CEO — three in one. From a corporate governance perspective, who was overseeing who? It was kind of a very convoluted arrangement. The chairman was supposed to oversee the management, which was led by the CEO. The three-in-one is a hotbed for many potential issues.
The other thing is debt management. At a particular juncture, they had taken on too much debt — debt of almost $3 billion, including from the retail side, 34,000 of them [retail investors]. This created a problem in itself — the issue of cashflow management, the issue of this unwieldy financial structure.
The third thing is risk. On the way, they moved into mega projects. Tuaspring integrated desalination and power plant is actually a reverse osmosis facility, which was what they were quite good in. And they added a power generation plant. They were actually in a wrong place at a wrong time. When the electricity [market] was liberalised, prices went down. They contracted at a higher price. They moved into a non-related business. All along they had been doing water, suddenly they moved into electricity. It was a totally new ballgame.
Loh: Don’t get distracted. Stick to what you are good at, which is your core competence — water provision, desalination [in the case of Hyflux]. Photo: NUS Business School
What can companies learn from this saga?
Don’t get distracted. Stick to what you are good at, which is your core competence — water provision, desalination [in the case of Hyflux].
Don’t bite more than what you can chew. They were on a very aggressive growth trajectory. They went all out. They could not manage all the new businesses, they borrowed.
Were they being too aggressive in their overseas ventures?
Yes, definitely, [they were in ventures] from China to the Middle East. I don’t think they had a good structure to monitor and to interact with the overseas markets. These small issues tended to come out during this restructuring period. They should also focus on geography. They tried to bite the whole world, in dribs and drabs. There was no logic, no design in their international business strategy.
The third thing is, don’t drag on restructuring. Even though they halted trading [in May 2018], they could have just turned around during this three-year period and come back to life again, but they just missed the opportunity. Maybe they had too many advisers, the only winners were the advisers — all the lawyers and other advisers. They dragged their feet while the assets were depreciating. There was probably a lot of vested interests to manage along the way.
What can investors learn from this saga?
There are three ‘P’s — products, people and process — for this.
Products: Of course, caveat emptor. Investors should do their sums, invest with eyes open, and ears on the ground. High risks, high returns, but the returns can be negative. The returns can be high in both ways. They think high is only upside high. [Also,] don’t go for all the fashionable products. The perpetuals [securities] were fashionable products at that time.
People: As investors, you have to watch the leaders of the company and the board. There would be a lot of tell-tale signs, especially during the restructuring process [for Hyflux], even before May 2018, when they applied for the moratorium and halted trading.
Process: When we invest, we must be prepared for any eventuality, [especially] if you are [investors in] perpetuals, if you are [investors in] preferential shares, knowing that there is so much debt along the way. The whole world is above you in the priority of claims. If something happens, where are you in the [debt recovery] process?
See: Hyflux: Down the slippery slope
Cover photo: Bloomberg
