Hyflux: A case-study and a BIG (expensive) lesson

A background on Hyflux

As a company focusing on sustainable solutions in the areas of water and energy, Hyflux provides solutions that contribute to resource optimisation and sustainable growth for the market.

In 2001, the company was awarded its first municipal water treatment project in Singapore to supply and install the process equipment for the Bedok NEWater Plant, the country’s first NEWater plant which would mark the launch of the Third National Tap.

Following the successful launch of the Bedok NEWater Plant, Hyflux subsequently secured two more projects from PUB: To Construct and Comission the country’s third NEWater Plant in Seletar, as well as Chestnut Avenue Waterworks, Singapore’s first waterworks that uses membrane-based filtration to produce potable water.

Sourced from the Hyflux Website

In January 2003, Hyflux was named the preferred bidder by PUB to build, own and operate Singapore’s first seawater reverse osmosis (SWRO) desalination plant and also first Public-Private-Partnership project. Thus, this led to the construction and commissioning of SingSpring Desalination Plant.

Sourced from Pub.gov.sg

The Hyflux Bonds

The Hyflux Perpetual Bonds were first introduced in 2011. It offered a high 6 per cent coupon which were further boosted by private banks who offered cheap and attractive leverages for them.

“Dont worry, Hyflux wont Toh(collapse) one!”

Hyflux was a household name the public could trust and it was one of the main players in one of Singapore’s most important national assets – Water. It seemed like a sure-bet for most and a lucrative way to expand one’s wealth, given the perceived lack of risks involved. In addition, it was widely assumed at the time that Hyflux was a government-linked corporation (GLC), thus building onto investors’ confidence and perception that the Hyflux bonds would be insured by the Singapore government.

Hyflux’s Diworsification

Diworsification is the process of adding investments to one’s portfolio in such a way that the risk/return trade-off is worsened.

Sourced from Mothership.sg

Being the first in Singapore and Asia, the Tuaspring Integrated Water and Power Project was expected to raise efficiency levels and reduce the cost of desalination.

The power plant was opened in 2016 and was Hyflux’s first venture into the energy business.

Sourced from Hyflux Financial History

Notice how Hyflux chooses to report their profits and earnings by excluding Tuaspring ?

This was because Tuaspring was a drag on the company’s earnings and profits, Hyflux stated that the “prolonged weakness” in the local energy market as one of the main reasons for its losses.

Sourced from Yahoo Finance

Notice how Hyflux’s total cash flow from its operating activites are in the negative? This was a huge warning sign as its negative cash flow for the past 5 years meant that it had to either finance themselves by debt or sell their assets.

Furthermore, in 2017, their debt-to-equity ratio was calculated to be around 263%. This meant that for every dollar of Hyflux shares owned by investors, they would be bearing $2.63 worth of debt!

The spiraling losses and accumulation of bad debt led the company to eventually file for bankruptcy and subsequently apply for court protection to begin a reorganization of its business and address its growing pool of debt.

What does it mean for Retail Investors as of now ?

As things stand, should the restructuring of Hyflux follow through with their White Knight, Salim-Medco, share-holders will only stand to receive only 9% of their original investments (3% in the form of cash). However, all of which will be wiped out if the company is liquidated.

An expensive Lesson …

On Hindsight, there are some key takeaway from the aforementioned case study:

  1. Do not buy for the brand/name, buy its business instead.
  2. There are always credit risks involved in Investing and nothing is a sure-bet.
  3. Always look out for negative cash flow from operating activities as it is a instant red flag.
  4. Look out for increasing Debt-to-Equity ratios that are above 100%.
  5. As attractive as coupons are, be wary!
Sourced from Hyflux Website

We hope that the above content has benefited you and will allow one to make a more informed decision in their investments.

Stay tuned ! Till next time …



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