King Wan Corporation – Part II

It seems that I am not the only disgruntled KW shareholder, based on the number of interested readers who have clicked on and read Part I, and the emails I have received barely 1 day after my post. (!!!)

I am honestly rather surprised to receive this amount of response regarding my KW Part I post. Some have shared privately with me their thoughts and research, and I have learnt much more.

I’ve also found out that I am not the only one who has been asking management hard questions about the “Non current receivables” and the “Loans to associates”

In fact, many of the suffering shareholders who have emailed me, have asked the management similar questions to what I have, but at different periods of time.

Thanks for sharing. I hope you guys do realize though, that this reflects EVEN more badly on KW’s management. Because this means that several shareholders have already contacted them to raise concerns about endlessly bleeding CF over several quarters, and they did nothing/couldn’t do anything. Can’t claim ignorance here. Even though claiming ignorance by itself is bad enough.

At the same time, I’d give credit where it’s due. At least now we know that KW’s IR is one of the more responsive ones on SGX. They do genuinely want to engage minority SHs, as from my queries, I realized many of the guys who have asked and received replies hold a rather insignificant amount of shares. (Good for you guys, your losses in KW pale in comparison to mine)

I generally hold companies who bother to respond to minority SHs in high regard.

Alright, by popular demand, I’m motivated to continue with Part II earlier than planned:

In Part I, I described the problems with KTIS (manufacturing segment that has been divested) and the “False earnings” from the loans/guarantees to associates:

King Wan Corporation – Part I

I’ll add one more thing about KTIS:

I’m not sure if most KW minority shareholders know this, but our MD Chua Eng Eng, is also a director of KTIS:

You can form your own conclusions.

Engineering Segment

The Engineering segment is the core business of KW. KW mainly does M&E as a sub-con for construction projects. This is a business I am familiar with. In fact, I own some shares in their competitor Libra Group currently. (Libra Group)

Unfortunately, IMO, this industry is one with little prospects for growth. It’s stable, you’d win contracts relatively easily, it generates a nice CF, and once you have the reputation, it’s hard to really go out of business as the developers whom you had worked with in previous projects, will always come to you for future projects.

Unless the entire construction industry in SG goes bust, M&E players like KW will find work. Especially since KW has L6 clearance by BCA for the workheads ME12 (Plumbing & sanitary works) & ME15 (Integrated Building Services). This means KW can handle projects of an unlimited quantum size.

KW also has L6 clearance in several other workheads, such as electrical wiring, air-conditioning etc. This by itself is a competitive moat as the main con would only need to engage KW to settle all these sub con work, instead of working with multiple sub-contractors.

I also noted that in this segment, their clients are rather varied. KW’s most recently completed M&E projects, as well as uncompleted orders, include several condos all over Singapore, hotels, a country club, a school and even HDB projects.

This augurs well for their reputation, track record, experience and competency.

In terms of hard figures, this segment actually improved y-o-y. Overall revenue has increased by 18% compared to FY15.

Breakdown of revenue:

	Plumbing & Sanitary	Electrical	Toilet Rental	Investment Holdings
2015	60,216,205	20,069,910	3,632,850	1,326,966
2016	56,885,087	39,556,648	3,508,278	814,810

Breakdown of Segmental Results:

	Plumbing & Sanitary	Electrical	Toilet Rental	Investment Holdings
2015	3,641,338	507,313	159,758	13,071,124
2016	8,705,888	1,858,260	93,073	(26,851,055)

As we can see, KW’s core M&E business didn’t do too badly. As a matter of fact, the core plumbing and sanitary, as well as electrical segments improved dramatically from 2015. All that good work though, is thrown out of the window with a massive writedown in the investment holdings segment.

This means that the core M&E business is actually doing pretty ok, and all that is wrong with KW comes from the investment holdings segment.

Services Segment

Nothing much to talk about here, this segment is involved in the provision of portable toilets, used mainly at construction sites and at large scale events.

I have personally utilized KW’s portable lavatories at local marathons and their lavatories are generally newer and more spacious than the others.

This is a simple business to understand, they lease out these toilets for a fee, and collect and dispose of the waste at the end. It doesn’t contribute much to the financials though (3.48% of total revenue), and I generally don’t pay much attention to this segment. Margins are around 3-4% consistently. No complaints from me regarding how this particular segment has turned out thus far.

Like I said, it’s stable, but there just isn’t room for it to grow. It’s in the nature of the business. What can you do? Encourage more people to use portable toilets? Like I said, I personally found their toilets to be in better condition than others, but I’m not going to boycott events that do not use their portable toilets.

Just to divert a bit, this reminds me of an interview WB gave when he was describing Berkshire Hathaway’s textile business. He said they were the best supplier for a certain coat company, but when they tried to raise their prices, the company refused to budge.

It’s in the nature of the business, some businesses just do not have the bargaining power. It’s hard to grow. Still, WB kept the business going for a long time as it was still profitable and generating CF.

Vessel owning and chartering segment

Alright, this is where it starts to get “fun”. Since we have earlier ascertained that the M&E business is actually doing pretty good, the toilet rental business is so-so, and that all the problems arise from the “Investment Holdings” side, let’s now delve into this segment.

Now, why does our MD think she’s an expert in the marine sector suddenly? I guess with some earlier success with KTIS, suddenly everyone thinks they’re a WB.

In March 2013, KW, via a 30% stake in Gold Hyacinth Development Pte Ltd (GHD), took delivery of a Crown 58 ‘Supramax’ Bulk Carrier for USD21million. At that point in time, MD Chua said she came across this “deal” and felt sufficiently comfortable with the dynamics of it.

The skeptic TTI immediately surfaced and I had my doubts. Still, bear in mind the context. This was coming on the back of a successful KW with the listing of KTIS. On top of that, upon conclusion of the acquisition, the vessel was rented out for $9.5k USD a day for 3 years.

That surely is confidence boosting. I have had no experience with the maritime sector, and had to take faith with the investing prowess of our MD.

I do not wish to sound arrogant, but I now know better. Many companies’ management would be better than me (hopefully) in their core businesses. But since KW’s CF is deployed as an investment in unrelated industries, I think I’d put more faith in my own investing prowess in future, rather than trust management.

3 yrs on, it’s obvious that this investment has gone sour. As of the most recent quarter (mrq), the receivables from this segment is carried at approximately $3mil SGD, AFTER a write off of $1.05mil.

Directly from the horse’s mouth:

I am not optimistic about the remaining $3mil of receivables.

I think there is a very real chance that KW is just trying to soothe things out by breaking up the receivables to write off. I’m pricing in a full default, and the remaining $3mil in my mind, is as good as gone.

The other major issue I have here is with corporate governance and conflict of interests. In the comments section in Part I, I mentioned that it is not always in the best interests of SHs if management has direct interests as well. This is an example.

The vessel is only 30% owned by KW. 20% of it is owned by MD Chua’s immediate family members(via UT Group), while no info is given on the remaining 50% except that it is owned by a “group of individuals”

“GHD is 20% owned by UT Group Pte Ltd (“UTG”), a Singapore incorporated company. UTG is wholly owned by Ms Ley Seaw Khim and Ms Chua Yean Shien, who are also UTG’s directors. They are the spouse and daughter respectively of the Company’s chairman, director and substantial shareholder, Mr Chua Kim Hua. They are also the mother and sister respectively of the Company’s Managing Director and substantial shareholder, Ms Chua Eng Eng.

The remaining 50% shareholdings would be held by other individual investors. Saved as
disclosed above, none of the directors or controlling shareholders has any interest, direct or indirect, in GHD, saved for their shareholdings in the Company.”

My question is, if KW has to write off $1mil, what about UTG aka Chua Eng Eng’s mum and sister? How much, if any, have they loaned to GHD and how much writedowns do they have to bear?

I asked and am awaiting a reply. I must be asking harder and harder questions as the time taken has progressively gotten longer and longer. (2.5 weeks and counting)

Anyone with some common sense will see the potential conflict of interests though.

So let’s set up a company, get KW to fund it, and if there are profits to be shared, well, the MD’s family members have a nice stake. If there are losses, too bad for KW’s receivables.

Great example of a “heads I win, tails you lose” kinda situation.

I do wonder if the other SHs have brought this up. Please do look into and protect your investments. Relying on the independent directors is like asking the fox to guard the hen coop.

Workers’ dormitory

KW has a 19% stake in a JV with TA Corporation Ltd & SKM Development Pte Ltd to build a 9,200 bed dormitory in Tuas. The dormitory has just been completed in May 2016 and the land tender is valid for 20 years.

I did some work on this. I personally know the management of a privately owned, fairly sizable company. They have just completed a workers’ dormitory, coincidentally in Tuas as well.

From what I gather, this sector has slowed down considerably, at a time where the supply is just coming on. Workers from the marine and the O&G sectors especially, have pretty much dried up.

A few years ago, there was a shortage of beds when the government mandated that workers cannot stay on the construction site. Many players started building dormitories and these were very profitable then.

Basic economics 101 directs that now, the supply of beds has risen significantly, and unfortunately it comes at a time where the demand (number of workers) have fallen drastically.

Still, there are certain cross benefits to operating dormitories. The government is trying to ensure that these dorms are self-sufficient so that the workers do not have to leave the premises for food and entertainment.

It’s obvious why the government wants to do this. If the workers do not have to leave their accommodation, it’d add less stress on our transport system. Local residents residing near these dorms would be less likely to complain. On top of all this, presumably, we’ll be less likely to avoid alcohol-induced crime from happening as well.

As such, during the tendering process, it is actually mandatory for certain features to be planned to be built in these dorms. These dorms actually have provision shops or supermarts situated on-site, as well as several facilities such as eateries/canteens, laundry services, remittance centres, reading corners, gym rooms, movie screening centres and even on-site fields for soccer and cricket.

The dorm operators can choose to sub-con these facilities out to external parties to manage. If the operators wish to, they can also operate these facilities themselves to improve on the margins they derive from operating the dormitory. For eg. operating the supermart themselves instead of leasing it out.

In any case, the business is such that as the occupancy rises, the benefits accrue exponentially. For eg. if the dormitory has a lot of occupants, the rent for the food stalls in the canteen can be increased as there is a lot more demand and the owners renting would have certainty that there’d be high demand.

I have seen the actual site blueprints as well as aerial images of the actual dormitory and I’m honestly a bit surprised. Never thought that dormitories these days look like this. It’s almost like a chalet.

I’ll analyze the latest figures in each segment the Part III (yes I think I’d need a Part III!) but it doesn’t look good for even this segment right now, although I’d say it’s early days to tell for sure right now.

In FY16, the dorm has started operating and received a maiden $417,348 in revenue. Overall, the dorm managed a loss of (3,127,390) though, due to additional capital pumped in.

I wouldn’t blame management for this though, because like I said, it is still early days to tell (we’ll have more clarity in the next AR since the dorm has been completed this year).

Property segment

I deliberately left this to the last. This is a nightmare.

The company has property investments/developments in Singapore (Starlight suites, The Skywoods), Thailand (SI Property) and China (Dalian Shicheng) via JVs.

I wont elaborate too much on the SI Property. Basically KW owns a 30% stake, and SI Property owns and operates 17,308 square metres of office and commercial building in Liberty Plaza in Bangkok.

In Singapore, I wont elaborate too much on The Skywoods project either. It’s doing fairly well, sales were very slow at the launch a few yrs back. I was monitoring it like a hawk as I owned a large stake in another partner in this JV – Hock Lian Seng.

After cutting the sales price though, The Skywoods sales picked up substantially. I wasnt overly worried as I trusted Hock Lian Seng’s expertise.

The Starlight Suites project has been a disaster. The entire stake has just been disposed off at a cut throat price of $16.8mil for 23 units. According to a ST article, this works out to a sale price of $1,670 psf vs a launch price of $2,000 psf.

KW and partners (TA Corp and Far East Distillers) had their hand forced though, as they’d have had to pay very hefty QC charges if they didn’t sell before May 2016. Either way you put it, it’s a bulk firesale.

I really couldn’t figure out how this project can end so terribly. The launch price was rather high ($2k psf), and over the past 2 years it has actually increased further despite having almost 0 transactions in recent times.

I got sufficiently worried to write in to ask what are the plans for this project. Afterall, we’re approaching the QC deadline, and there just simply seems to be ZERO activities. No marketing done aside from getting the usual agents. It almost looks like management has given up on this project:

“The current starlight suites project still has 31 unsold units, and will have to be sold by mid 2016 to avoid the developmental charge taxes. Does the management have any plan regarding this? What is the breakeven cost psf for this project?”
Starlight Suites is managed by a joint venture company, Meadows Properties Pte. Ltd, which the Group owns 35.6%. The JV is deeply aware of the impending deadline and is studying a few options. These include the possibility of bulk sale and a change in sales strategy. The decision has yet been reached. Due to the confidential nature of the breakeven cost psf of this project to the joint venture partners, the Company is not able to share this information with you.

$1,670 psf is really low for the RV area, even in this current market. My question is, if the management knows that the units are not moving, and the impending deadline is approaching, and that they’d be selling out at $1670 psf anyway, why not reduce the selling price and try to sell out the units individually to the public?

The last I checked, the asking price is still >$2,000 psf, and in fact, mostly around $2,200 psf! Let’s try to think of this logically: the deadline is not a sudden curve ball. Everyone knows it’s impending.

Why not reduce the selling price to say $1,800 psf to test the market? I’m sure you’d be able to move some units at this price. Or even $1,700 psf. Hey, if a brand new, FH unit at RV area is offered to be at $1,700 psf, I’d buy a unit from these guys.

But no, it’s marketed at >$2,200 psf all the way until it was finally sold out in bulk at a firesale price. There may be reasons that I am unaware of, but again, management actions (or rather the lack of any action) has been most disappointing here.

A simple check as of today (17/07/2016):

BTW: the above mentioned ST article:

http://www.straitstimes.com/business/property/last-units-of-starlight-suites-sold

It says that “The developers of Starlight Suites yesterday sold the remaining units in a bulk sale, just in time to beat the Qualifying Certificate (QC) sales deadline at the end of this month. They sold the 23 units at the River Valley project for about $48 million to an entity associated with Evia Capital, The Straits Times understands.”

$48mil? The figure is wrong. It’s $16.8mil isn’t it? Shows that even ST can get their data wrong. Always verify your own data! Here is the official SGX announcement on the sale:

“The Board of Directors of King Wan Corporation Limited (the “Company” and together with its subsidiaries, the “Group”) wishes to announce that its 40% owned associated company, Meadows Bright Development Pte Ltd (“MBD”) has on 25 May 2016, disposed its entire 88.89% equity holding in Meadows Property (S’pore) Pte. Ltd. (“MPS”) (the “MPS Disposal”). The other shareholder in MPS, which holds the remaining 11.11% of equity in MPS, and which is unrelated to the Company, also disposed of its entire shareholding in MPS to the same buyer on the same day.
MPS is the legal and beneficial owner of 23 strata units (the “Investment Assets”) in the residential property development known as Starlight Suites located at River Valley Close, Singapore. Upon completion of the MPS Disposal (“Completion”), MPS has ceased to be an associated company of the Company.
The consideration of approximately S$16.8million for the sale of the entire shareholdings in MPS (the “Consideration”) was arrived at on a willing-buyer and willing-seller basis after arms’ length negotiations based on MPS’ unaudited total capital deficiency of about S$25,000 on disposal (the “capital deficiency”). The capital deficiency was derived after taking into account an agreed value for the Investment Assets, capitalisation and waiver of portion of receivables due from MPS to its shareholders. The Consideration was satisfied wholly in cash.
The Group had accounted for provisions made on the value of Investment Assets in MPS’ financial statements as at 31 March 2016, in its results for the financial year ended 31 March 2016. After taking into account the Consideration, the completion of the MPS Disposal will have no material effect on the consolidated earnings per share or the net tangible assets per share of the Group for the financial year ended 31 March 2016.”

Alright, here I start to get confused about the finer details about the aspects of this deal. I can only conclude that not enough data has been given for me to understand it fully. It says the unaudited capital deficiency (aka liability!) of this entity is $25,000.

However, in FY16 AR regarding MBD:

The capital deficiency aka net liabilities is $2.69mil. How did this get reduced to $25,000 in 5mths? Since the data is unaudited, I guess I’d never find out.

KW also carries the MBD stake as $1.06mil in the books, but apparantly, this entire deal “has no material effect” on the financials.

This is something that I don’t understand, and still cannot figure out. Nevertheless, the conclusion is still the same: I’m writing off this entire deal.

Perhaps an expert reader who is accounts trained can drop me an email to explain the discrepancy. I suspect nobody can because the finer details of these adjustments are unaudited and not released.

Dalian Shicheng

The nightmare continues.

At the first hint of trouble in this project, I actually delved really deep into analyzing Dalian Shicheng to understand it better. I analyzed chinese property portals and even buyer’s feedback to understand the locality and the characteristics of Dalian property market.

I won’t be describing all that in detail here, but for those who wants to find out more, simply start by googling: “大连狮城花园 “

Or visit here: http://xinjiapohuayuan0411.fang.com/

This is a development in a 2nd tier city, and KW management was hoping that with the development of transport links, the property in this sector will boom. The residential components were rather well received in the earlier launch phases. (9 phases in total)

I can pinpoint the exact time when things starting going downhill: Phase 7.

Phase 6 was mostly sold out, but the selling psf just simply fell off a cliff by the time phase 7 was launched. (according to the chinese property portal I found). Following that, I emailed the management again to express my concern. The reply:

” ….Phases 8 and 9 will consist mainly shop spaces in malls and hotels. The associate is of the view that the current local market is not ready for the 2 remaining phases and might not be ready in the next 2 years. It is continuously monitoring the local situation and will only launch the 2 phases when demand has improved.”

2 years! Obviously with a 2 year (minimum) delay, some write downs is in order! The alarm bells should’ve rang, but I guess it was at a period where I was too busy to analyze further.

Anyway, to summarize a little, this project is now like a ghost town. (From the chinese forum reviews). It doesn’t help that this project is in a subdistrict (in Lüshunkou District , subdistrict 水师营街道 ) that has the lowest selling psf amongst Dalian.

I do think they got the selling price wrong, as many commentors in the forums mentioned that this project has a premium in the selling psf, probably because it’s supposed to be branded “Singaporean” (it’s in the name: 大连狮城花园).

Thus far, KW has a terrible track record in property development. The one development that went fairly ok, The Skywoods, is IMO, due to the presence of Hock Lian Seng. In this regard, I also do not have much respect for TA Corp. Admittedly, I havent analyzed their financials but judging from all the partnerships they have with KW, they’re pretty screwed as well.

Now, after a big fat $12mil writedown from Dalian last year (FY15), I was monitoring closely it’s progress. In fact, I believed management “kitchen-sinked” the results by writing off as much as possible to coincide with the large gain from KTIS listing in FY15.

I was wrong.

Here is my query and CFO’s subsequent reply. In FY16Q2:

Alright, so after the massive write down, we still have $85mil out there with our associates. I asked as this figure still kept climbing up and up and up AFTER the write down in FY15.

Of this figure, $8.35mil is from our Dalian associate. Now $8.35mil isn’t a lot when you put things in context. Surely they’d be able to return this loan?

That was in FY16Q2.

In FY16Q3, the  total non current receivables was $84,558,299. Not too bad. slight dip. KW must be turning the corner.

Imagine my shock when in FY16Q4, (most recent results), KW has to write off a further $11.8mil, of which $10.7mil is from Dalian Shicheng!

For the keen eyed reader, you might be thinking… WAIT! $10.7mil writedown from Dalian? I thought they owed only $8.35mil?

How do you write off $10.7mil when they only owe $8.35mil?

Hence my initially polite and curious query to our CFO:

The reply started off friendly enough:

“Dear xxxxx,

Attached are some responses to the few queries you have raised.

I look forward to your attendance at the Company’s forthcoming AGM that will be held on 28 July 2016.”

Then, I read the real reply:

“The $2.35 million was additional loans provided to the Dalian project from October 2015 to March 2016.”

My god. Does anyone else realise what this means? Do the other shareholders know about this? If not, are they asking this same question?

This means that after FY16Q2, in the 6 months from October 2015 to March 2016, the company extended a FURTHER $2.35mil of loans to the Dalian project, and then IMMEDIATELY after that, in FY16Q4 results, wrote off EVERYTHING.

The $8.35mil, + the $2.35mil of our shareholder’s $$$!!!

I was livid. I honestly still am.

I wonder if any one of these individuals on the board, will behave the way they have, if this $8.35mil + $2.35mil is their own personal money.

Hence, my less than polite reply:

“Dear Francis

Thank you for the prompt reply.

I do have more queries, hope you can help with them.

1) Just so that I understood you correctly, are you saying that KW continued to loan Dalian another $2.35mil in the preceding 2 quarters, and then immediately wrote off these loans (together with the earlier loans), in the quarter right after that? This is despite a write off of $12mil in FY15?

Why would KW management think it’s wise to continue more loans despite having a huge write down the previous year?

What new data has emerged from the 2 quarters where KW loaned an additional $2.35mil, to the most recent quarter where KW wrote it off?

2) Which “Investment properties” under the non current receivables is this $19.7mil parked under?

3) From my research, the dormitory sector is already showing reduced demand. This trend is unlikely to reverse and would likely exacerbate. There seems to be more and more supply coming on, whereas demand is clearly reducing. I’m aware of a new dormitory in Tuas that’s newly operational, that is having trouble filling it’s beds. 

Has management worked in these factors into it’s projections?

 

KW’s core M&E business has been relatively steady, albeit with minimal growth. However, management’s track record in deploying cashflow into investments have been abysmal. The investments have proven to destroy value. 

Why does KW persist in trying to invest precious CF in unrelated ventures that management does not have expertise in?

 

There are very few executives that can execute successful long term investments across industries. Would KW consider deploying CF generated into either acquiring related businesses, or if there are no such opportunities, to return cash to shareholders instead?

 

When KTIS was listed, MD Chua Eng Eng was happily projecting several years of special dividends from regular divestments, prompting unrealistic reports from analysts. Would she be prepared to provide an update on what went wrong?

 

I hope KW management will be prepared to provide some colour at the AGM on why these investments have gone south, who is ultimately responsible for them, and what are the projections going forward.

Thank you”

It’s been 2.5 weeks and I have yet to receive a reply, although in all fairness, he did send a follow up email to say he’d be replying “soon”.

I haven’t decided if I will be attending the AGM as there’d be real opportunity costs involved for me. Spending that morning at the AGM will mean I’ve to cancel some other stuff on my schedule that’s going to generate CF for me. Not sure if I should be pouring good money after bad.

Just so that I’m clear, I actually do appreciate that the CFO has thus far, been fairly transparent. I am upset with what the management as a whole did. I can only conclude that MD Chua is the “brains” behind our excellent investment strategies thus far.

Thus far, Part I and II is relatively retrospective. I’ve explored in detail the business model, the problems from the start to date, and a certain part of my personal due diligence in this company.

In Part III, if I do get around to writing it, I’ll conclude with something more prospective. What happens next? Do I divest and accept the losses? Is there a turn around on the horizon? What’s the value vs price equation like now?

This may take some time to come though, as I am still completing my due diligience on some aspects. (Also, the AR was only just released a while ago and I do want to see what’s communicated at the AGM too)

Like I said earlier, my mistakes (and KW is obviously the worst of them all) will get as much, and in all likelihood, even more spotlight and analysis.

I also realise that I still hold 1,000,000 KW shares currently. So I am technically talking against my books, so to speak. This surely, is as transparent as it gets.

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