Posted by: donmihaihai | August 3, 2009

Jumping around

Just as I posted my lousy written “jumper post”, I am being tested on ARA Asset Management and Tat Hong. Convertible Bonds due 2016 issued by CapitaLand caught my interests and Tat Hong is a follow up.

Setting up Harmony fund by ARA to hold Suntec Convention and Exhibition Centre with Suntec REIT investing in 20% using debts. This is a small token for Suntec REIT and another small token for ARA Assets Management as its impact on earnings is likely to be under 10% on the long run. Still, it is going to be positive taken by many as ARA actually “tighten” its hold on Suntec City.

But does ARA willingly and eagerly trying to tightening its hold on Suntec City at this moment? Firstly, Suntec Convention and Exhibition Centre was an unwanted child during Suntec REIT IPO as it was being told as in a good way, that it does not have the cashflow to be include in the REIT, put it in another way is that owner does not want to sell it cheap. Actually if Suntec REIT holders notice, they are still paying the sellers years after it was being sold. Now from IPO till crisis hit, Suntec REIT had all the time and capacities to acquire this assets but it was not being done. Perhaps it was not available. But at this moment, it is not the right time for Suntec REIT to acquire it because in a way, debts are not available and equity is too expensive. Financially, Suntec REIT is not a willing buyer for the whole asset.

With ARA taking up part or all of the S$37 million mezzanine loan which stress it already stressed B/S, going round and round, to own this assets, its doesn’t look like a happy acquisition or expansion. Its look like they are being force to act with ARA taking the majority of the risk. The amount of risk is hard to quantify as it all depend on how much ARA is going to input into the mezzanine loan, the market and its intention on future Suntec REIT units received.

The question to ask is why risk — the B/S(whole?) of ARA now? When everything is over, this asset will likely be dump into Suntec REIT, but at this moment, it is worthwhile jumping around at seller camp.

Then there is Tat Hong. Rather than reading the happy, expansionist, blue sky(ocean) press release, it is worthwhile to jump and ask from the other shoe, which is raising capital shoe. From the structure of this convertible redeemable preference shares(CRPS), it looks like either Tat Hong is really desperate or the opportunities are abundant and juicy.

1) Firstly, Tat Hong has 50.7 million warrants that can be convert into share(1 : 1 ratio) at a price of $2.50, expiring at National day. If Tat Hong share price is over $2.50, it can bag >S$150 million, with dilution of 10%. It is impossible at the current share price, so here goes the S$150million.

2) 65 CRPS for S$65 million, dilution of 11.41 million. Unlike the carefree warrants, strategic investor AIF Capital has many demands (If I am AIF, I would love to has these demands)

– 10 annual return on compounded basis for AIF in case of breaches.

– Cost of investment is S$1 per share. Duration is 5 years. This is cheaper than Tat Hong current share price. Now if Tat Hong future is great and wonderful, who don’t want to buy it 5 years later at a price that is cheaper than current market price?

– Conversion only happen if Tat Hong share price crossed S$1.50 for 30 days. This will ensure that AIF in a winning situation as the cost of investment is just S$1.

– Shareholder got $0.05 dividend per share in FY2009 and $0.076 dividend per share FY2008. AIF will get what shareholder get. In that case, CRPS yield for FY2009 and FY2008 are 5% and 7.6% respectively if it was issued before year end FY2008. After 5th years, if the CRPS is not redeemed, preference dividend will be 25% of issue price, i.e $0.25 before any dividends can be declare to shareholder.

– Redeem at 115% in 5th year, 140% in 6th year(less any preference dividend received between 5th and 6th year) and 165% in 7th year(less any preference dividend received between 6th and 7th year)

– There are more but ultimately, the above are good enough for a simple look.

Because of the undertakings by control shareholders and structure of this CRPS, if Tat Hong future change and goes down hill, AIF is protected. Then, the preference dividend is so costly that it will effect how much dividends current shareholder will receive in this 5 years to 7 years. So Tat Hong is likely to declare little or no dividend going forward as long as CRPS is not converted or future is not that good. Even if the future is good, cashflow need to support additional CRPS.

If Tat Hong retained all future earnings, if Tat Hong next 5 years average ROE is 10%, NAV will reached $1.16 by 2014. and $1.45 if average ROE is $1.45.

Buying cheap anyone? Please be AIF Capital.



  1. Hi Donmihaihai, sorry, but I don’t quite get it why ARA’s B/S is stressed. From ARA’s 1Q09:

    Cash & short term deposit: 47.5m
    Total Liabilities: 35.98m

    It’s in net-net-net cash position. How is this a “already stressed B/S”?

    Thanks for any enlightenment.

  2. AIF Capital has a good deal, no doubt about it.

    Which means Tat Hong may have an even better deal at hand, for the BOD and Management to agree to such terms which seem to be detrimental to their own interests (after all, they own about 60% of the Company). Knowing that they are conservative businessmen who have built up the Company through many recessions and downturns, I would not imagine that they undertook such an exercise without due consideration and deliberation.

    Or perhaps I am just being too optimistic, and the S$63.5 million cash Tat Hong will receive from the RCPS will not be used for anything other than “General Working Capital”.


  3. Hi bluechipstamp,

    With 2Q2009 results released, maybe I will need to take back my words on ARA’s B/S being stressed.

    You are right that ARA is in net-net-cash position(as at 2Q2009) but that is what “on B/S”.

    By considering ARA commitments, actions, unoffical but high dividend payout ratio, as a potential backup to their fund and REITs, market risk and mezzanine loan(how much?), ARA net-net-net cash level was an illusion.

    Not anymore with ARA selling Suntec REIT’s units received as revenues in 2Q2009 and if market does not work against ARA and does not need to put in most of the mezzanine loan.

  4. musicwhiz,

    Tat Hong may have an even better deal but it is “may have”.

    What ever Tat Hong want to do with the S$65M, one thing is for SURE, the cost of S$65M is high, double digit. The potential returns — unknown.
    Let just assumed returns are going to be way higher but that doesn’t change the fact the these returns are funded by high cost. A simple look show that ROC(for S$65M) must be in excess of 25%(pre-cost) to justify that Tat Hong gets an even better deal.

    What more as long as it is not being converted, Tat Hong B/S is encumbered.

    Shareholders shoudn’t be cheering but screaming. Even a pure equity offers to 3rd parties is better.

  5. Hi Donmihaihai,

    Thanks for your reply. Would just like to correct you on the 25% ROC part. It is 25% after the 5th year, which means 5% per annum from the 1st year to the 5th year; so Tat Hong needs to find an acquisition which can give ROC better than 5% and not 25% annually.

    Also, not sure why you mention Tat Hong’s B/S is “encumbered”. If you treat the RCPS as debt, then yes current/quick ratio will be affected and interest payments will also drain cash flows – in short, leverage goes up. But in this case RCPS are accounted for as equity, and though AIF is entitled to ordinary dividends, the Company has the privilege of not declaring this unlike for preference dividend. Hence, the entry would be:-

    Dr Cash S$63.5M
    Cr Preference Shares S$63.5M

    This provides a boost to current assets and working capital.

    Perhaps you could also elaborate on why a placement offer would be better than the RCPS, as it is immediately dilutive to EPS (Ordinary Shares).

    Thank you.

  6. musicwhiz,

    Before talking about the 25% of this CRPS, it is better to look at the basic.

    Everything has a cost. Cost of debt at min is interests. Issuing equity, while hard to quantify, has a cost too. As for cost of CRPS = preference dividend + cost of equity.

    Why am I talking about costs rather than just leverage? Because as it is clearly the case for any offering, Tat Hong is selling parts of itself to get something more.

    I does not take the 25% as what required to pay in a year after 5 years if no conversion or redeem. ROC in excess of 25% because I views the cost of CRPS at double digit, somewhere between 10 to 15% or more(I thinks it is nearer to 15%). So ROC of 25% become 10 to 15% after cost, pretty reasonable.

    Why encumbered? Because as long as CRPS is not converted, Tat Hong has to follow all contractual agreement. And since the outcome is unknown(potential returns and share price movement). Looking at the list of possible outcomes, good outcomes mean focus on “cost” and bad outcomes mean Tat Hong has to find ways to fulfill CRPS, especially after 5th year at the worse possible times.

    There isn’t much difference between having dilution now or later. A placement while immediate, is certain while CRPS is not with too many demands.

  7. Hi thanks for the detailed reply. I agree with what you said on cost. I believe there is a cost to everything, especially if you intend to grow your company and expand it. Some companies use internally generated cash flows and their existing cash hoard which may be enough; while others have to use debt or equity to fund their growth. But your point is correct – everything has a cost.

    As for your point on uncertainty, I think the global financial crisis has shown just how uncertain things can be, and how vulnerable companies can be as well. Everything in the business world is uncertain, and most companies with good Management have to tackle this uncertainty on a daily basis in order for the company to grow and prosper. This is where Management quality, experience and competence comes in.

    As to whether the outcome will be +ve or -ve 5 years later, there’s no way to tell obviously. A good Management team will mitigate their risks (downside) while ensuring they get enough upside even if things go horribly wrong; but of course this is also subject to not just market forces but economic forces as well. The reason Tat Hong is funding their expansion with RCPS (I believe) is that they have good reason to believe the benefits (i.e. earnings accretion) will exceed the cost (i.e. 5% per annum and all associated dividends).

    The agreement also gives them room to redeem the RCPS if certain conditions are met, and the conditions are not too stringent and it makes sense for the Company to convert as soon as possible to avoid the 25% after 5 years. If the M&A they are pursuing is truly accretive, I think a share price of S$1.50 in the near-term should not be a problem, and this will be one of the “triggers” for conversion of the RCPS to Ordinary Shares.

    Another factor which I would like to highlight is the intangible benefits of having a strategic investor such as AIF Capital, with their network of contacts. This can enhance Tat Hong’s networks in China and in other areas where they seek to expand into, and I am factoring this in as well in assessing this deal.

    Anyhow, Tat Hong had just announced a JVC formed on 4 Aug 2009, to buy into a Chinese company. I am hoping there is more to come from the use of proceeds from the issue of RCPS.

    Once again, thanks for your comments and wish you all the best in your investments.

  8. Hi, sorry a bit off topic here. Could you send me an email to I have an advertising company willing to place an advert on your blog. Fees will be paid upfront. Do let me know if you are keen.

    I am sure some bloggers have already receive payment for the ads I recommended already. 🙂

  9. sgbluechip,

    Thank you. Maybe next time.

  10. Actually, I stay clear of all companies “owned” by someone, he is what I defined as the typical retail speculator buying into growth stories.

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