In 2021, Hyflux filed for liquidation. I heaved a sigh of relief.

Liquidation means a company has to shut its entire business. It cannot reorganize themselves profitably again.

For Hyflux, it had to sell off all their assets and pay off money owed to creditors and suppliers. Plus, 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, 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.

In May 2018, Hyflux declared bankruptcy. It couldn't pay interest on its debt any longer. Wiping out S$900 million of retail investors' money.

How I’ve avoided a company before it collapsed

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. Why would any company borrow so much, even though it was producing negative free cash flow?

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

What many people didn't know was this

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.

Put it this way, 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. 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:

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 was over-borrowed. It didn't have enough money.

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 ask yourself:

Back then, I’ve seen other companies borrowing at a much lower interest rate of 2% to 3%. It just doesn't make sense.

BIG RED FLAG.

By then, Hyflux shares sank 49% to less than a dollar. From its peak in 2010.

Then why did so many people invest in Hyflux

Temasek invested in Hyflux during the early 2000s. But I believed what many people didn't know was this - Temasek completely exited its Hyflux position in 2006. And somehow this got many people angry when Hyflux's story was unintentionally sold on a flawed assumption that Singapore’s investment company Temasek was a Hyflux shareholder.

​According to ST:

Even Temasek had to explicitly tell people about their divestment from Hyflux.

When we invest, we can only rely on our due diligence.

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'll always remember what Warren Buffett says about investing:

I always believe the key to successful investing is good research - make sure your homework is done and studying a company's fundamentals to lower your chance of failure.

And if there's one thing I'll remind myself in the Hyflux saga is this:

Willie Keng, CFA

Founder, dividendtitan.com

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