“What has to happen before a company will collapse?”
That was the question I asked myself when Hyflux filed for liquidation last Friday.
Liquidation means a company has to shut its entire business. It cannot reorganize themselves profitably again.
For Hyflux, they had to sell off all their assets and pay off money they owe to creditors and suppliers.
And the 50,000 retail investors who invested in Hyflux bonds would lose their entire investment.
It was disappointing.
At first glance, Hyflux was a star performer in the mid-2000. It had growing revenues and earnings.
Hyflux was thriving from new projects it bagged in the Middle East and North Africa countries.
It was making good money.
At one point, in 2010, shares hit its all-time high of S$2.31 in 2010.
But I realized this one thing about Hyflux. And quickly sold off my Hyflux stock at a loss.
Built to Fail
Hyflux had a great business idea.
Its goal was to make drinkable water accessible to poorer countries.
Even in Singapore, we don’t even have our own source of water. We buy it from our neighbours.
But the trouble was, Hyflux’s had poor financial management.
In 2011, Hyflux had S$830 million of debt. It was bleeding with a negative free cash flow of S$140 million.
You might wonder, why would any company borrow so much, even though it was producing negative free cash flow?
You see, a utilities company, like Hyflux is often known to be a stable, “defensive” business.
But to build all these water treatment plants, you needed huge capital investments.
And Hyflux had a voracious appetite to grow.
The company borrowed a lot of money to fulfil its projects — build treatment plants, R&D facilities and hire talents.
Here’s What is Little-Known to Many People
What many people didn’t know was — after a plant is built, the fees you collect from operating each water plant is stretched over a long period of 20 to 30 years.
That means, Hyflux will take many, many years to make a good profit for its shareholders.
In other words, Hyflux’s return on investments (ROI) wasn’t attractive.
And if your projects are located in an “emerging” country with huge political risks, sooner or later, a crisis will affect the business.
And it happened.
When the Libyan crisis unfolded in 2011, Hyflux lost many projects.
It couldn’t collect fees from its water treatment plants.
All their billings were stuck.
Even management said in its annual report 2011: “We saw a shift in the geographical mix of group revenue in FY2011 from MENA to Asia. Contributions from the MENA market decreased from S$343 million in FY2010 to S$114 million… as a result of lower EPC activities.”
Hyflux scrambled for new projects and turned to Singapore.
But Hyflux simply couldn’t compete with other big utilities players — Keppel Corp and SembCorp Industries.
What was worse, Hyflux had to find ways to pay back its debt.
By 2013, its free cash flow ballooned to a negative S$422 million and had racked up a massive S$1.2 billion in debt. It over-borrowed.
How to Lose S$900 million in a ‘Star’ Business
So what did Hyflux do?
In 2014, Hyflux raised its first perpetual bond (or a preference shares) from the public.
It paid a high yield of 6%.
Imagine this: Your friend borrows $1,000 from you but tells you he can choose never to pay you back that $1,000.
That’s exactly what Hyflux’s perpetual bond does.
But you must ask yourself: “If a company like Hyflux is indeed a strong company, why would it need to pay you 6%/year for borrowing your money?”
Other companies I’ve seen could borrow at a much lower interest rate of 2% to 3%.
It just doesn’t make sense (and of all things, you could buy Hyflux perpetual bonds with your CPF. I’d never understood that).
By then, Hyflux shares sunk 49% to less than a dollar. From its peak in 2010.
Hyflux declared bankrupt in May 2018.
It couldn’t pay interest on its debt any longer. Wiping out S$900 million of retail investors’ money.
Then Why Did So Many People Invest?
You see, Temasek invested in Hyflux during the early 2000s.
But what many people didn’t know was this. Temasek exited all its position since 2006.
And this got many people furious.
I believed many investors were sold Hyflux’s story with the perception of a “government support”.
Even Temasek had to explicitly tell people about their divestment from Hyflux.
When we invest, we can only rely on our due diligence.
Here’s the the other thing. Hyflux’s CEO was a celebrity CEO.
She was often touted in the media.
And had faced way more publicity than any other CEOs I’ve known.
This created trust amongst many investors.
And Investors felt safe in a company whose CEO was often in the media.
But that’s not all.
What I found even more frustrating was this.
Hyflux was often a “Buy” recommendation by analysts from top banks. Even though the company was deteriorating.
What I’ve Learnt From Hyflux
I’ve invested for more than 10 years now.
I still make mistakes.
Investors make mistakes.
Even Warren Buffett has his bad days.
We are human after all.
But we can always learn our lessons and reduce our errors.
So that we can continue to safely compound our wealth in retirement.
And if there’s one thing I’ll remind myself in the Hyflux saga is this: Hyflux, together with Noble Group and NOL all had one thing in common.
They collapsed because of massive debt.
They say: “The devil is always in the detail.”
I cannot agree more.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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