I wanted to comment on the debacle between greengiraffe and Qiaofeng for quite some time but have been busy. I think both made sense in their arguements but were slightly extreme. Nonetheless it is a good exercise to discuss the risks involved in heavy industries. And I really wish Qiaofeng to come back and discuss in this thread. Note that I am not vested in Boustead.
Let me start first on what I think about FF Wong decision on this project. First of all, I have full respect of him for investing in OM Holdings at current economic environment. If one think about it, FF Wong identified a cheap deal when the cost of borrowing is relatively stable with a rare exception of this industry suffering with low manganese prices. Usually when we see M&As carried out during the good times, we will see companies paying huge and unjustified sums of money between 8-12x or even more of peak market EBITDA to realise that they suffer in the end. But now, I am sure FF Wong have paid a really great price to own a stake in a potential growth cyclical industry. Using Yongnam as example (vested), if you look at their 5 year earnings generation, you will realize that the turning point came about in 2007 when Yongnam successfully bidded the MBS project and followed up with various Specialist engineering MRT projects which allowed them to grow their EPS significantly so far. Prior to 2007, construction prices or industry are suffering like hell in Singapore but Yongnam is really one of the bright stars as there are one of the market leaders (with only 3 major competitors at Singapore) and large fabrication yard or space to allow them to do what they want. Yongnam also always went bankrupt but was fortunately saved by some of the local banks. I believe the same story will happen for OM holdings as well as the industry consolidate and the demand of steel manufacture go up in the future.
Typically, based on my experience, such heavy industrial greenfield projects tend to have a ROCE of above 25% or payback of 5 years to justify for the project to go ahead. But it all depends on the prices estimates they used or the synergies in cost to justify the project. But nonetheless there is no such thing as a riskless project and this is highlighted by Qiaofeng on the environmental risks that it carry.
Every heavy industry will bound to face environmental risk one day. Some mines need to filled or restored after reserves are exhausted. Sometimes, like what Qiaofeng have warned, that there may be a possiblity of complaint from the people. However, it depends on whether you like to see the glass is half filled or half empty. The project also inevitably brings employment to the people, the surrounding areas will start to flourish with schools, food stalls, apartments etc. People have a more stable life. Some people benefit also from the initiation of the project where farmers or landowners sell their land at ridiculous prices to the project. Usually things turn ugly beyond the payback period when the local management falls out with certain people or political parties which results in discussions like the one is Kuantan. Therefore, in my view, the short to middle term should not be much impact to investors unless the local management really screw up and not pacify their current "supporters" or performs substantial CSR well enough.
One must remember, no risk no return. If you dislike such risk, then this deal is not suitable for you. This is just my 2 cents from my exposure with heavy industries.
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