HupSteel

[NTL]

Look like this is their distribution arm, aka stockist arm. And they are in Singapore! So they are competing with the other stockists for businesses here?

Do other mills have a similar business arm?

[FatBoi]

Clement, that's a good find!
Out of curiosity, I went to dig further. Actually, ArcelorMittal had been in Singapore since 1983 (checked company incorporation).

If I can second a guess, they have an arm to supply to their bigger MnC clients which have global presence. But local markets may not make a lot of headway. In Singapore, the buyers of steel mainly in construction, marine offshore? (sorry if I miss out the big ones, lack of knowledge) mainly local boys playing rather than MnCs?

[Clement]

Hi, Arcelormittal was formed in 2006, it could not have been here since 1983. I am not sure whether it was arcelor or mittal steel that was in Singapore at that time but my hunch tells me it was Mittal steel as it started in Indonesia. If i recall correctly, Mittal steel was structured to be more upstream in it's activities and would probably not provide much value added customization and other services.

[FatBoi]

Hi, Arcelormittal was formed in 2006, it could not have been here since 1983. I am not sure whether it was arcelor or mittal steel that was in Singapore at that time but my hunch tells me it was Mittal steel as it started in Indonesia. If i recall correctly, Mittal steel was structured to be more upstream in it's activities and would probably not provide much value added customization and other services.

Hi Clement, it's Arcelor. ArcelorMittal Singapore Pte Ltd was formerly known as Arcelor Intl Singapore Pte Ltd and even before that Tradearbed Pte Ltd. But u r probably right that the downstream business might be a recent thing. Hope the local steel boys can handle these giants. I love David vs Goliath stories. Thanks for your sharing, I learnt much!

[Clement]

Hi, Arcelormittal was formed in 2006, it could not have been here since 1983. I am not sure whether it was arcelor or mittal steel that was in Singapore at that time but my hunch tells me it was Mittal steel as it started in Indonesia. If i recall correctly, Mittal steel was structured to be more upstream in it's activities and would probably not provide much value added customization and other services.

Hi Clement, it's Arcelor. ArcelorMittal Singapore Pte Ltd was formerly known as Arcelor Intl Singapore Pte Ltd and even before that Tradearbed Pte Ltd. But u r probably right that the downstream business might be a recent thing. Hope the local steel boys can handle these giants. I love David vs Goliath stories. Thanks for your sharing, I learnt much!

Hi, thank you for correcting my mistake and the sharing of ideas. Mutual sharing adds mutual value.

[Aldar]

1. Dependence on Msia Construction Projects
Msia customers accounted for almost 12.6% of FY12 sales to external customers (SGD30.3 mm out of SGD239.6 mm). Currently, the Malaysian government is reeling from its high fiscal debt position after incurring debt to give handouts to citizens to win votes in this year’s elections. Thus many government-related construction projects have now stalled and this may impact HupSteel's sales to Msia clients.

2. Tracking of Historical Performance/ Inventory Write-downs
Did anyone track the historical performance of HupSteel over the years? I have not check it yet but I think we should track the inventory write-downs of the company.

(Disclaimer: the statements below are general comments and do not specifically refer to HupSteel)

Steel trading is a cyclical business. During bad economic conditions, some steel trading companies will write down the value of their inventory. It’s mostly due to the companies taking the inventory out and selling them into the market outside of the listed vehicle and pocketing the scrap profits for themselves.

[FatBoi]

2. Tracking of Historical Performance/ Inventory Write-downs
Did anyone track the historical performance of HupSteel over the years? I have not check it yet but I think we should track the inventory write-downs of the company.

...mostly due to the companies taking the inventory out and selling them into the market outside of the listed vehicle and pocketing the scrap profits for themselves.

Did a bit of digging into the annual reports.

Inventory write-downs over the past 5 years:
2013 - Nil
2012 - Nil
2011 - Nil
2010 - Nil
2009 - S$(4,444,000)

But I also noticed there were inventory write-backs:
2013 - S$645,000
2012 - Nil
2011 - Nil
2010 - S$3,170,000
2009 - Nil

Net impact over 5 years = S$(629,000)

Seems that Hupsteel is still suffering / slowly recovering from the huge inventory write-down impact in 2009.

Also realised one thing. Inventory write-down does not mean the company has lost money on the inventories, it is accounting (unrealised loss based on year end market prices of steel inventories). There might not be any cash outflows from the write-downs, provided the company can hold on and sell when prices are better. This is also why there are write-backs.

Aldar, I did not quite follow the past part on how the companies can pocket the money for themselves.

What is the process?

They write down, sell to unlisted vehicle on cheap (but if the mgmt are same it should be disclosed as related party transactions isnt it?) and then pocket $$ themselves?

Care to share? Many thanks in advance.

[Aldar]

2. Tracking of Historical Performance/ Inventory Write-downs
Did anyone track the historical performance of HupSteel over the years? I have not check it yet but I think we should track the inventory write-downs of the company.

...mostly due to the companies taking the inventory out and selling them into the market outside of the listed vehicle and pocketing the scrap profits for themselves.

Did a bit of digging into the annual reports.

Inventory write-downs over the past 5 years:
2013 - Nil
2012 - Nil
2011 - Nil
2010 - Nil
2009 - S$(4,444,000)

But I also noticed there were inventory write-backs:
2013 - S$645,000
2012 - Nil
2011 - Nil
2010 - S$3,170,000
2009 - Nil

Net impact over 5 years = S$(629,000)

Seems that Hupsteel is still suffering / slowly recovering from the huge inventory write-down impact in 2009.

Also realised one thing. Inventory write-down does not mean the company has lost money on the inventories, it is accounting (unrealised loss based on year end market prices of steel inventories). There might not be any cash outflows from the write-downs, provided the company can hold on and sell when prices are better. This is also why there are write-backs.

Aldar, I did not quite follow the past part on how the companies can pocket the money for themselves.

What is the process?

They write down, sell to unlisted vehicle on cheap (but if the mgmt are same it should be disclosed as related party transactions isnt it?) and then pocket $$ themselves?

Care to share? Many thanks in advance.

Great digging, I really did not know about the write-downs and write-backs.

In my opinion, you should be right to state that any sales to unlisted vehicles should be disclosed as related party transactions (again I have not checked the annuals for such transactions).

But I think it's also possible to:
- write down and sell such inventory on the cheap to related parties given tough economic conditions as long as it's an arms-length transaction (related parties would then dispose inventory on the market at a profit) ---> cash inflow from disposal
- sell to an unlisted vehicle that is not registered as a subsidiary but is effectively controlled by the mgmt ---> cash inflow from disposal

The cash outflow would have already occurred and reported when the inventory is purchased (increase in assets = decrease in cash and vice versa)

Please note that the above are purely speculations pertaining to doing business in general and are not accusations/insinuations that HupSteel is engaged in such activities!

The write-downs should be non-cash expenses but affect the amount of tax that the company pays (lowers the tax).

For e.g. a $100 write-down of inventory

- Income statement: operating expenses increase by $100; assuming a 20% tax rate, net income after tax is down by $80

- Cashflow statement: net income after tax is down by $80 but non-cash expense of $100 is added back, hence operating cashflow is up by $20 and overall cashflow is up by $20

- Balance sheet: Inventory down by $100 but cash is up by $20, so assets are down by $80. Net income is down by $80 and thus equity is down by $80 and both sides of the balance sheet balances.

[FatBoi]

In my opinion, you should be right to state that any sales to unlisted vehicles should be disclosed as related party transactions (again I have not checked the annuals for such transactions).

But I think it's also possible to:
- write down and sell such inventory on the cheap to related parties given tough economic conditions as long as it's an arms-length transaction (related parties would then dispose inventory on the market at a profit) ---> cash inflow from disposal
- sell to an unlisted vehicle that is not registered as a subsidiary but is effectively controlled by the mgmt ---> cash inflow from disposal

The cash outflow would have already occurred and reported when the inventory is purchased (increase in assets = decrease in cash and vice versa)

The write-downs should be non-cash expenses but affect the amount of tax that the company pays (lowers the tax).

Thanks much Aldar for the sharing.

If the unlisted vehicle (not a subsidiary) is effectively controlled by mgmt, FRS 24 Related Party Disclosures should still render it necessary to disclose the transactions. Of course, if the transaction(s) are immaterial (very judgmental), it may still fall through the cracks. Done a quick check on the annual reports, Hupsteel's intercompany inventory transactions are with subsidiaries, so nothing outside of group. Worth keeping tabs as possible red-flag signposts I guess.

I think you are right on the tax treatment. I have been away from the accounting scene for a few years now, but in the past, there is a difference between "general" and "specific" allowance on stock obsolescence. The former is not tax-deductible (hence tax is not lowered), the latter is. Nowadays the accounting standards do not allow general provisions to be made (except under certain circumstances). So likely Hupsteel's inventory writedown in 2009 is tax-deductible. Most of the tax benefits might be clawed back in the subsequent years' reversals though.

[Greenrookie]

Hi buddies,

Sorry to ask some silly qn here.

When a company write down inventory, it will captured in the loss?

When there is a reversal of inventory write down, then it will be captured as profits?

I saw a company with both write down and reversal in the same year, so we take the net? Write down and reversal are are cash items right??? Where will be captured under the cash flow statement.

I got the figures from footnotes of AR. Trying to make more sense of things .. Thanks for any help