SINGAPORE: It had been another record year for Hyflux, as its founder and group CEO Olivia Lum described in its 2010 annual report.
That was the year when the Singapore-based water treatment specialist saw its market capitalisation peak at an eye-popping S$2.1 billion, while raking up another high in revenue and net profit on the back of rapid growth.
But fast forward eight years, and the homegrown firm sent ripples through Singapore for a very different reason.
On Tuesday (May 22), Hyflux said it had applied to the High Court to begin a court-supervised process of debt and business reorganisation – an announcement that some market observers told Channel NewsAsia “has been a long time coming”.
The company blamed “prolonged weakness” in the local power market for its financial woes, which has led to “short-term liquidity constraints in recent weeks”.
In a separate letter to stakeholders, Ms Lum, who also holds the position of executive chairman, said the decision will provide the space and time to focus on ongoing discussions with strategic investors and among other things, optimise operations.
FROM UPSTART TO ICONIC SUCCESS STORY
Founded in 1989 with S$20,000, Hyflux has since grown from a fledgling three-person start-up into a leading player in water and fluid treatment with worldwide presence employing more than 2,500 people.
Its rise was synonymous with its founder’s rags-to-riches story.
Much has been said about Ms Lum’s challenging early life. Abandoned at birth and later adopted by a widow whom she called "grandmother", Ms Lum, a Malaysian, started work from a very young age to support the family.
She was determined to do well in school and later moved to Singapore, where she graduated from the National University of Singapore and found a job as a chemist at Glaxo Pharmaceuticals.
However, she soon decided to strike it out on her own and founded Hydrochem with “a big dream and youthful idealism” to solve the world’s water problems.
The initial years of entrepreneurship weren’t easy. In various interviews done over the years, Ms Lum shared how she worked 14 hours a day to sell water treatment products and systems by knocking on the doors of factories in Singapore and Malaysia.
The company got its first break in 1992 when it obtained the exclusive rights from a supplier to distribute membranes and membrane filtration plants to industrial customers. This later paved the way for a research and development team in 1999, which aimed to make its own membranes that would set it apart from competitors.
Then came 2001 – the “defining year” when Hyflux, with Hydrochem as its wholly-owned subsidiary, made a splash by becoming the first water treatment company to be listed in Singapore. It also secured its first municipal water treatment project in Singapore to supply and install the process equipment for the country’s first Newater plant in Bedok.
Other key projects that followed included Singapore’s third Newater plant in Seletar and the SingSpring Desalination Plant, the country’s first seawater reverse osmosis desalination plant.
It also began reaching out further beyond the shores of Singapore, with projects in China, India and the Middle East North Africa (MENA) region, which included Oman and Algeria.
In 2011, Ms Lum became the first Singaporean and the first woman to be crowned the Ernst & Young (EY) World Entrepreneur of the Year award.
That year, it also clinched Singapore’s second and largest seawater desalination project, and proposed incorporating an on-site 411 megawatt combined cycle power plant to produce electricity for the desalination plant and power grid.
But that marked the start of the company’s woes, analysts said.
Touted to be the first in Singapore and Asia, the Tuaspring Integrated Water and Power Project was expected to raise efficiency levels and reduce the cost of desalination. The power plant, which began operations in 2016, also marked Hyflux’s foray into the energy business.
It has, however, been a drag on earnings.
For the full year ended Dec 31, 2017, the integrated water and power plant registered a net loss of S$81.9 million, with wholesale electricity prices clearing at levels that are below fuel costs.
This contributed in a big way to the company’s first annual loss since listing – a loss of S$116.4 million, compared to a restated profit of S$3.8 million for FY2016.
The losing streak continued in the three months to March 31 as Hyflux logged losses of S$22.2 million, widening considerably from a restated loss of S$64,000 a year before. To turn a profit in 2018, a stronger rebound in wholesale electricity prices at a sustained pace will be needed, the company had said.
This strain in the balance sheet and financial covenants coming up may have proven too much.
The water treatment firm has a coupon payment due May 28 on its S$500 million of 6 per cent perpetual securities, which it has said it will not make. It also has S$100 million of 4.25 per cent bonds that will mature in September.
“Hyflux seems to have borrowed too much and the debt is a millstone around your neck when the environment becomes adverse,” said Associate Professor Nitin Pangarkar from the National University of Singapore (NUS) Business School.
While companies with strong balance sheets can survive these downturns, “too much debt can bring down a company”, he warned.
In the case of Hyflux, there was “too much risk” that included the oversupply and deregulation of the local electricity market. “These different sources of risk will tend to multiply.”
Agreeing, CMC Markets sales trader Oriano Lizza said Hyflux has incurred a mounting debt burden from “over-expansion into additional sectors that (the company) may not be so specialized in”.
In addition, market conditions like the massive overcapacity depressing prices and an influx of natural gas as an alternative energy source certainly did not help Hyflux to sizzle in its energy venture.
With the company having “overcapitalised too rapidly and spread itself too thin in terms of asset allocation”, Mr Lizza said Tuesday’s announcement "has been a long time coming".
For iFast’s senior fixed income analyst Ang Chung Yuh, “the speed at which things went downhill” exceeded his forecasts. He had expected Hyflux to be able to meet its obligations for the next 12 to 18 months.
Mr Ang added that he is also unsure as to why Hyflux opted for a court-driven reorganisation process, instead of first approaching creditors, including bondholders, with a proposal.
“But in any case, if management has crunched the numbers and found that it is impossible for them to come up with the money needed one or two years down the road, we think it is a good thing that management has chosen to bite the bullet now rather than later,” he added.
WHAT ARE ITS OPTIONS?
Analysts agreed that the 30-day moratorium, which kicked in automatically from the date of Hyflux’s application to court, will buy the company some much-needed time.
Mr Lizza thinks the immediate remedies for Hyflux include turning to its investors and shareholders for additional capital injection or speed up the sale of its existing loss-making assets.
“If they are able to shift these assets for cash in the short term, it will give them continued breathing space until they can balance their books.”
Hyflux said in February last year that it is exploring a partial divestment of Tuaspring, and has also been looking at a potential divestment of its Tianjin Dagang desalination plant. Alongside the release of its first-quarter financial report earlier this month, it said that divestment discussions for these two projects are in progress with interested parties.
But now that things have changed, Hyflux will have to play its cards carefully.
“The problem is that investors will be circling these assets in hope of a bargain because they know the situation that Hyflux is in,” said Mr Lizza. “If they sell too little, it won’t get them out of the current situation but if they are unwilling to budge on current prices, they won’t (get) any interest.”
“They are really in a sticky situation,” he added.
Mr Ang reckons a debt restructuring could be a “virtual certainty”.
“In our opinion, to have some chance of restoring Hyflux’s financial health for the long run, the exercise needs to involve a debt-to-equity conversion of a substantial part of the perpetual securities,” he said, adding that the firm had about S$2.4 billion of debt outstanding at end-March if the perpetual securities are taken into account.
“Short of a Government bailout, it is difficult for us to conceive a scenario where a capital injection by external investors could achieve a sustainable capital structure for Hyflux.”
Hyflux on Wednesday morning called for a suspension of trading in all its shares and related securities, which had been halted since Monday and analysts do not rule out the prospect of heavy selling when it resumes trading.
The route ahead for Hyflux will not be an easy one, experts added.
Describing the trading halt and seeking of court protection as “a broad, open admission of its festering business problems”, NUS Assoc Prof Lawrence Loh said: “Hyflux’s ongoing reorganisation move is necessary to ensure that any asset divestments will get the best value for its stakeholders, particularly creditors and shareholders.”
“While there were already market expectations for the troubles at Hyflux, the issue has probably brewed for a time much longer than necessary. Hyflux has probably seen this coming and could have been more expeditious and decisive in its restructuring efforts along the way,” he added.
As Ms Lum had forewarned in the company’s latest annual report, 2018 was going to “be another challenging year”. But with “boldness, entrepreneurial spirit, customer satisfaction focus, and teamwork”, she said she was confident of overcoming the obstacles ahead.
During a 2016 interview with Channel NewsAsia, the award-winning entrepreneur described herself as a “more optimistic person”, and that challenges and uncertainties are the norm for any business.
“I still have the hunger in me,” she said. “Every day, I still look forward to more and more exciting business opportunities and persevere to manage the challenges.”
And with that, all eyes will likely be now on the businesswoman to see if her unique brand of tenacity can reverse the fate of one of Singapore Inc’s most-visible success stories.