Hyflux

[slowandsteady]

http://www.eco-business.com/news/hyflux-...ted-water/

https://www.globalwaterintel.com/insight...s-ambition


Tuaspring was never meant to be Hyflux’s project. The tender specified that there would be no pass-through on the cost of power for the project. That is to say, the owner of the plant would not be compensated with higher water tariffs if electricity tariffs rose. The implication of this specification was that the project was meant for one of the island’s power generators (such as Keppel or Sembcorp) who could use the slack in their generating capacity to deliver the lowest cost water.


Ironically, if the electrical tariff has risen, hyflux will be fine.

So, apparently, both PUB and EMA have done Hyflux in.
By promising the cheapest desalination water in the world at 45cts per m3 for the first year, hyflux is not going to make money from water and at the current electrical price, they are also not going to make money by selling electricity.

With the 2nd round of increase in water tariff by PUB, the price per m3 of portable water has risen to $2.74.
So, the moral of the story is that the gov bodies are quite shrewd and therefore, it may not be a good idea to strike a low margin deal with them.

As a comparison, the price Malaysia is selling raw water to Singapore is 0.27cts per m3.

2.74 - PUB water tariff
0.45 - Tuas Spring sale price
0.0027 - Malaysia sale price

Mahathir is back to "renegotiate" the 1962 water deal. The question is this: must deals be fulfilled to the detriment of parties involved, or is renegotiation fair should one party suffer from an extremely unfair deal. This applies to both Singapore-Malaysia and PUB-Hyflux.

https://www.bloomberg.com/news/articles/...e-at-trump

[specuvestor]

^^ For Malaysia it is not unexpected... It's the same old rather than a "new Malaysia"... just need to wait it out for more pragmatic Anwar to take over. The Malaysia sale price seems low cause that was the concession. There's a historical background not just numbers. I didn't know the constructions were done/ paid by Singapore.
http://eresources.nlb.gov.sg/infopedia/a...06-23.html
"Singapore paid for all the costs of the reservoirs in Johor, the dams, pipelines, plant, equipment, etc., and Singapore paid all costs of operating and maintaining the infrastructure." -wiki
https://www1.mfa.gov.sg/SINGAPORES-FOREI...Agreements

I have 2 points to share :

1. If Hyflux had remained just a specialist turnkey EPC contractor - i.e. do the design/engineering work and build to the required specs, and after that get paid for most of the agreed contract value of the individual projects - for water projects, the risk profile of the business would be much lower, the management of the business less complex, and the capital and external borrowings required much smaller. This point actually concerns the CEO Olivia Lum's vision, business competence/judgement, and personal ego.

2. If Hyflux had not borrowed so much - including taking up excess subscriptions of its perp and other debt market issues - and from fancy financial instruments like preps, pref share, bond/note issues not linked to underlying projects, etc., and as a result created for itself a highly complex and huge senior-plus-junior debts funding structure, the current financial restructuring exercise would not be necessary at all. This point actually concerns the CFO Lim Suat Wah (joined Jan2011) who, based on the various fund-raising exercises undertaken by Hyflux since 2011, IMHO has not displayed the necessary financial prudence in managing the financial affairs of the Hyflux Group in the last few years. In this regard, the IDs are also responsible.

As per my posts below, the financial issue started way back but it will always take some time for crap to hit the fan.... fundamentals and price does not always go hand in hand and at times opposite. That's why I never believe in efficient market theory

Firstly i have to admit that i do not follow water stocks closely after my experience with Hyflux and Hyflux Water Trust.

http://www.valuebuddies.com/thread-4415-...#pid112031

^^That was a decade ago. I realized their cash flow and their revenue do not match (to put it mildly) as they pre-book revenue whenever they sell their completed project to another 49% owned entity ie consolidated to associate, but profit from sale booked. So thereafter whenever they make the final sale to the municipal, govt etc the stock doesn't move cause there is no more PnL to book.

In the same logic, they had to sell HWT to recycle their cash cause their business model was extremely capital intensive. I forgot the logic of privatizing it later.

I think it is important to figure out the capital intensity of water stocks, despite the nice macro / concept.

[yeokiwi]

Malaysia water issue has many historical baggage and it is totally irrelevant in this thread or discussion.

https://www.mfa.gov.sg/content/dam/mfa/i...0Facts.pdf

And as Hyflux's financial troubles continue, Mahathir came to help
https://www.channelnewsasia.com/news/sin...s-10466780

[BRT]

hi weijian, i dont understand why the asset cannot be sold at its current BV, and how retained earnings are needed for the cushion. if you dont mind, could you please explain that part to plug my lack of understanding?

hi BRT,

(1) The current "book value" of Tuaspring is a PV based on DCF model of the guaranteed payments from PUB for the water, and also the expected payments from selling the excess water/electricity. The key word is "expected" and with the asset having a 25year concession (meaning value=0 after 25years), it is making losses after accounting for depreciation/amortization, and so this means that some assessment is required to update the PV again as it probably did not meet expectation. Coincidentally, the asset was transferred to "asset available for sale" in 2017 and it seems like conveniently, Tuaspring did not have to review the value in 2017 (or maybe even in 2018). That said, Mgt made a call to sell in Jan2017, and 18months down the road, the asset is still not sold - This means that the Market has spoken about the veracity of the "book value".

(2) Lets have an example below about retained earnings.
- I start a durian stall with 100dollars (capital) and then asked my best friend to chip in another 100dollars (perpetuals). Since we are perpetual best friends, i don't have to account it on the books as a debt. So my total equity is 200 dollars (my capital and my best friend perpetual).
- Let's say with the 200dollars capital+perpertual, I only use money to pay for durians to the supplier, then all my equity would be 200dollars worth of durians (inventory).
- Let's say over next 5 years, my net earnings is 100dollars in total, and if i don't give out any dividends, that means that i would have 100dollars of cash. I could use the cash to order more durians (50dollars) and then keep the remaining 50dollars extra as cash --> So now, i would have 250dollars of durians (inventory) and 50dollars of cash --> so out of this 300dollars of equity i have in my durian stall, it can be broken down into 100dollar capital + 100dollar perpetual + 100dollar retained earnings.
- One fine day, when i open my durian stall, i realized that monkeys came and eat 50dollars worth of durians. Hence now, i have to write off this 50dollars and my equity becomes 250dollars. From accounting standpoint, my 250dollars of equity is 200dollar durian+ 50dollar cash and can be broken down into 100dollar capital + 100dollar perpetual + 50dollar retained earnings.
- In an alternate scenario, if i wasn't able to earn any money over 5years and monkeys came, then i would end up with only 150dollars of durian (inventory) which is also all my equity. At this time, i would have to ask myself - who is going to pay for that 50dollar loss (is it my capital or my friend's perpetual?), if i decide to wind up for business tomorrow.

hope this make sense...

i think this is great. thanks for the explanation. follow-up qn - can't retained earnings be negative and hence able to serve the cushion role?

[donmihaihai]

hi BRT,

(1) The current "book value" of Tuaspring is a PV based on DCF model of the guaranteed payments from PUB for the water, and also the expected payments from selling the excess water/electricity. The key word is "expected" and with the asset having a 25year concession (meaning value=0 after 25years), it is making losses after accounting for depreciation/amortization, and so this means that some assessment is required to update the PV again as it probably did not meet expectation. Coincidentally, the asset was transferred to "asset available for sale" in 2017 and it seems like conveniently, Tuaspring did not have to review the value in 2017 (or maybe even in 2018). That said, Mgt made a call to sell in Jan2017, and 18months down the road, the asset is still not sold - This means that the Market has spoken about the veracity of the "book value".

Never look into Hyflux in details but your comment caught my eyes and a quick look say otherwise. 
The concession in the B/S is recognized base on POC during construction of the plant. which also mean there is a profit element for the construction portion. And Hyflux never get paid during construction period but across the 25 year period. ==> good reasons for the lousy cashflow. 
Yearly guaranteed payments will be recognized during each financial year. 
From 25 year concession plus some other assets less liabilities to held for sale did not result in any gain. In writing, it has to state at fair value and amortization but basically, what we see there is revenues earned for construction of the plants plus some other assets less related liabilities.

[ACTIVIST SPEAKS]

weijian, your comment also caught my eyes ..but for different reasons.  For some reason, though educational, I find it hilariously funny.  I guess any investment concept explained with a monkey is always funny....

[weijian]

@donmihaihai, Tuaspring is held as a Level2 asset, and so the "fair value" is based on Mgt's inputs and assumptions. I don't remember seeing any significant writedowns in AR16/17 on this asset, esp 2017 where they can shift Tuaspring to "asset avail for sale" and may not have to undergo scrutiny again by the auditors on their assumptions to derive its fair value. Mgt believes their fair value is market value, but other people are calling the bluff and believe market value << fair value.

@ActivistSpeaks, look forward to the day where you can add such characters into some of your activist statements

[donmihaihai]

Hi weijian

The fair value amount in the note is not carrying value or book value. It is just disclosure purposes. Book value is base on recorded value. If adjusted to fair value done. There will be a gain. Whether in income statement. Oci or straight to capital.

Idk what book value Hyflux is talking about in announcement/news. But it seem like everyone is using their own book value

[dreamybear]

Singapore opens its third desalination plant in Tuas
Channel News Asia
28 Jun 2018 10:23AM
(Updated: 28 Jun 2018 11:14AM)

SINGAPORE: Singapore on Thursday (Jun 28) opened its third desalination plant, boosting the country’s desalination capacity from 100 to 130 million gallons a day (mgd).

The Tuas Desalination Plant, which can produce 30 million gallons of drinking water a day, will help to meet up to 30 per cent of Singapore’s current water demand.............
Despite its size, the plant can produce the same amount of drinking water as SingSpring Desalination Plant, Singapore’s first such plant ........
The plant is also the first in Singapore to adopt an advanced pre-treatment technology, which combines two existing filtration methods – dissolved air floatation and ultrafiltration.........
With Singapore’s water demand projected to double from the current 430mgd by 2060, two more desalination plants are in the pipeline

Slated to be completed in 2020, Marina East Desalination Plant and a fifth desalination plant at Jurong Island will bring the total daily water production in Singapore to 190mgd in two years’ time.......

Read more at https://www.channelnewsasia.com/news/sin...b-10477996

-------------------------------------------------------------------------------------------------------------------------------------------------
Not sure how the whole desalination works, but from the above news, it was stated "the first in SG to adopt advanced pre-treatement technology" for this new plant, so does it mean Hyflux's technology is not the only available viable technology ?

Just for capacity comparsion to have a better understanding, what I found from " https://www.pub.gov.sg/watersupply/fourn...natedwater " was :
SingSpring : 30 million gallons ( wholly owned subsidiary of Hyflux)
TuasSpring : 70 million gallons
Tuas Desalination Plant(new) : 30 million gallons (occupy less space but produce same capacity as SingSpring as stated in CNA article)

The latest plant seems to suggest better tech can be available, e.g. same capacity less space. 

Actually, pardon my ignorance, but what exactly is Hyflux's economic moat ?

[d.o.g.]

Actually, pardon my ignorance, but what exactly is Hyflux's economic moat ?

There isn't one. Which is why it is suffering so badly. Power and water are commodities. The lowest price that meets the specs will get the order. Once upon a time Hyflux made good money by focusing on high-margin EPC work. Then governments realized this meant nobody would bid for the lousy BOT business so they required package bids. Hyflux created Hyflux Water Trust to offload the BOT projects but HWT never traded at a low enough yield to buy anything from Hyflux, so it was game over #1. Then they decided to go into power generation despite having no prior experience. Other players also added capacity resulting in a glut and lower prices, so game over #2.

Olivia Lum was named World Entrepreneur of the Year in 2011. Unfortunately it is 2018 and the world is different now.

Just my $0.02.