Business Times Singapore August 7, 2009
© 2009 Singapore Press Holdings Limited
CONVENTIONAL wisdom can sometimes turn out to be unconventionally off the mark. And if there is one company which has just proven this, it must be crane lessor Tat Hong Holdings. Just three months ago, market pundits were writing off the growth and earnings prospects of this mainboard-listed company and one of the world's largest crane lessors.
After it reported a 40 per cent year-on-year slide in Q4 FY2009 revenue to $110.7 million in May, accompanied by a 49 per cent fall in net profit to $14.6 million, several leading research houses plonked a 'sell' call on the stock. The conventional wisdom was that Tat Hong - which serves the infrastructure and resource sectors - would be badly hit by the global recession. This was especially so for its key Australian business, which depends largely on resource mining and infrastructure.
Tat Hong's full-year results did seem to suggest trouble ahead. With the exception of its tower crane division, all its businesses recorded lower revenue and gross profits for Q4. In particular, the group's equipment sales segment recorded sharply lower sales on lacklustre capital spending among its customers.
But fast forward to this week: the company unveils two back-to-back deals which suddenly puts it right back in the game.
On Monday, Tat Hong surprised the market by announcing that Asian venture fund AIF Capital had invested some $65 million in the company via convertible redeemable reference shares (CRPS), which when converted would translate into a stakeholding of 11.4 per cent.
About 80 per cent of the net proceeds will be used to expand its business in Australia and China, while the remaining amount would be used as general corporate and working capital. A day later, on Tuesday, Tat Hong made another surprise announcement - that it would be taking a 54 per cent controlling stake in one of the largest and most established tower crane companies in southern China, Guangzhou Hailin, for some $15 million.
AIF's entry as a strategic investor provides critical funds for Tat Hong at a time when it had cash of just $46 million, and it was stuck with some $218 million in inventory holdings of unsold equipment and needed some $100 million in working capital.
The extra funds now enabled Tat Hong to push ahead with plans to expand in key existing and new markets just as the recession seems to be bottoming out.
But more importantly, in Hong Kong-based AIF, Tat Hong has found a strategic partner with critical business connections and networks.
With investments exceeding US$1.5 billion, and offices in Hong Kong, Beijing, and New Delhi, AIF manages a broad portfolio of investments in sectors ranging from supply chain management and manufacturing, to specialty steels, engineering services and power generation. It has particularly strong connections in China, where Tat Hong has been trying to grow its business.
It is not clear if the AIF entry had anything to do with Tat Hong's purchase into Guangzhou Hailin.
Even if it didn't, the fact remains that its Guangzhou Hailin venture is backed by a strong strategic partner with deep pockets.
Established in 1997, Guangzhou Hailin today manages around 113 mid to large-size tower cranes valued at about 90 million yuan (S$19 million). With offices covering Hainan, Guangdong, Guangxi, Hubei, Hunan, Yunnan and Chongqing, the Chinese company has evolved into a leading tower crane rental player in southern and south-western China. A specialist in the erection of power transmission pylons, it has benefited from China's massive stimulus package which has given special emphasis to infrastructure and power sector expenditure.
Though Tat Hong has a couple of joint ventures in the country, it has not made much headway in terms of establishing a solid footprint in the vast China market.
Guangzhou Hailin could be just the catalyst that Tat Hong needs to begin its aggressive expansion in China.
Interestingly, all the key officials, including the chief financial officer, of the new joint venture will be appointed by Tat Hong.
Tat Hong is already planning to phase out Guangzhou Hailin's mid-sized cranes and rebuild it as a large-size crane player, thus raising its profile as a bigger player in the infrastructure sector. The company is already eyeing a huge pipeline of infrastructure projects coming onstream in the wake of the massive fiscal stimulus. Some of the biggest opportunities lie in Sichuan and Chongqing, where reconstruction work is starting following the devastating earthquakes.
Indeed, in one fell swoop, Tat Hong has expanded beyond its traditional markets of Australia and Singapore, into China. And in the process, it has proved that predictions about the potential slide of its business were somewhat exaggerated.
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