The Big Hoo-Ha Over Hiap Teck's Eastern Steel Deal

On Business Times: Hiap Teck outlines merits of Eastern Steel deal

• Hiap Teck outlines merits of Eastern Steel deal
  
  By Ooi Tee Ching Published: 2010/01/11
  
  PIPEMAKER Hiap Teck Venture Bhd's (HTVB) (5072) move to buy 55 per cent of Eastern Steel Sdn Bhd to produce steel slabs by 2012 is a worthwhile business move to leverage on the benefits of Asean Free Trade Area (Afta), said group managing director Kua Hock Lai.
  
  "Currently, there is a mismatch between the steel slab demand for downstream hot-rolling activities versus the steel-making capacities in Asean. Downstream players here, in Thailand, the Philippines and Indonesia are all importing slabs from the European Union, Turkey and Brazil," he told Business Times in an interview in Klang.
  
  Two weeks ago, HTVB told Bursa Malaysia that it wanted to spend RM110 million to buy 55 per cent of Eastern Steel Sdn Bhd from Datuk Law Tien Seng, Lau Chin An and Lee Ching Kion.
  
  Eastern Steel owns 240ha of land in Teluk Kalung, Kemaman in Terengganu and has approval from the Malaysian Industrial Development Authority and the Ministry of International Trade and Industry to build the plant.
  
  HTVB plans to seek the help of China's Jinan Iron & Steel Group Corp to build the steel slab plant in Kemaman. The first phase of 530 m3 blast furnace and a slab caster will have an annual production capacity of up to 700,000 tonnes.
  
  Kua said the plan is still at a preliminary stage as it hinges on the Department of Environment's (DOE) approval of an Environmental Impact Assessment. "It is still too early to talk about financing of the blast furnace and impact on HTVB's gearing level. We have to wait for DOE's approval," he said.
  
  Kua said HTVB is expected to complete the Eastern Steel purchase by the third quarter of 2010. The blast furnace construction will then take another two years.
  
  In the past news reports, analysts commented that HTVB's plan to move upstream falls short of real integration benefits.
  
  Kua said a hot-roll coil factory is actually phase two of the company's plan. "Right now, demand for slabs exceeds supply in Asean. We can and should leverage on the benefits of Afta platform," he said.
  
  "As long as the plan to do slab casting first has the potential to make money, that is what shareholders are more concerned about. We estimate the return on investment to take 10 years, which is normal in this course of business," he added.
  
  Kua said while the company has no dividend policy, it has been paying dividends since HTVB was listed.

Quote:

• "As long as the plan to do slab casting first has the potential to make money, that is what shareholders are more concerned about. We estimate the return on investment to take 10 years, which is normal in this course of business,"

Mr. Kua, and all listed companies owners, should realise that once the company is listed, the company's money belongs to the shareholders too. Yes, it's the shareholders money too!

And needless to say, the shareholders would welcome any opportunities that have the potential to make money. Which shareholder do not want to see their investment generate more money?

However, having said all that, there are so many restrictions. Risk management is so important and the listed companies cannot simply adapt the 'no risk no gain' business ventures in their attempt to make more money.

Yes, in my flawed opinion, the listed company cannot simply use the 'potential to make more money' as the justification to embark on risky business ventures.

Do I see it happening in Hiap Teck's Eastern Steel venture? Yes, I do consider Eastern Steel venture to be rather risky for Hiap Teck!

Many others see it too.

Here's a newsclip on 31st December 2009: Furnace deal may raise Hiap Teck's gearing

• PETALING JAYA: Hiap Teck Venture Bhd’s acquisition of Eastern Steel Sdn Bhd and the capital expenditure (capex) needed for the latter’s blast furnace may bring the company’s total outlay for the acquisition to RM910mil and cause its debts to spiral to RM1.3bil.
  
  The company would need to spend RM110mil to acquire a 55% stake in Eastern Steel, a dormant company, plus an additional RM800mil in capex for Eastern Steel’s blast furnace.
  
  “This would inflate its net gearing to 188.5%. Even factoring in only an effective 55% share of the additional capex, Hiap Teck’s net gearing would still balloon to 120.3%,” OSK Research said in a report.
  
  Hiap Teck’s current gross debts amounted to RM393.3mil, with cash and equivalents amounting to RM171.2mil, and shareholders’ funds totaling RM600.5mil, for a net gearing level of 37%.

The cash equivalent as stated by OSK is at rm171 million.

However, as stated in an earlier posting last month, A Look At Hiap Teck Earnings, this rm170+ million is not too 'comforting' because the screen shot from Hiap Teck's earnings notes show that some rm 174 million is parked under 'short term investment' (click here for that screen shot). And to make matters worst, one does not know exactly what are these investments as Hiap Teck was not too transparent in disclosing the details.

With cash and bank balances at only 19.9 million, it was rather incredible to learn that Hiap teck wants to spend some rm 110 million to buy a 55% stake in Eastern Steel.

Where is Hiap Teck going to get the money to finance this 'investment'?

Borrowing so much more money to 'invest' doesn't sound too prudent, does it?

And making it more incredible, Mr.Kua reckons the return of investment in this Eastern Steel deal would take some 10 years!!!

Now if one is a minority shareholder, surely one have to address if HTVB is being prudent here.

And 10 years is a pretty long term investment!!!

Would the minority shareholder trust this company so much and hold on to their investment in Hiap teck for 10 years?

Yes, on one hand, in general, investments do take time before one get reap the benefits but 10 years is an issue that the current minority shareholder needs to address because if they don't foresee holding to this stock investment for so long, then for whom is this Eastern Steel 'investment' going to benefit?