Asiatic Group (Holdings) Ltd - Why did one of its subsidiaries sue another?

2/12/2013 – Investors in Asiatic Group (Holdings) Ltd will have swallowed hard at the auditor Ernst & Young's concerns, expressed in the recent Annual Report, whether the company can continue as a going concern.

But the energy company says it is in negotiations to restructure existing loans.

It says the construction of a Malaysian biomass plant is underway and should be complete by the end of the financial year.

In Cambodia, due to new power plants starting production, Asiatic Group anticipates a decrease in demand for power produced at its plants in Phnom Penh and Sihanoukville.

For the power plant in the Phnom Penh Special Economic Zone, it expects an increase in demand for electricity as new tenants come to the zone.

Asiatic Group says the fire-fighting and protection business remains stable.

The company recently announced earnings for H1 FY14:

Revenue: +10.5% to S$30 mln
Profit: +181% to S$450,000
One-off gains/losses: S$230,000 vs Nil
Cash flow from operations: (S$2.9 mln) vs S$16.2 mln
Dividend: Nil
Order book: Not disclosed

Its net current liabilities improved to S$9.5 mln on September 30, from S$26.4 mln six months ago.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why did a subsidiary sue another within Asiatic Group?

It all began in December 2011, when Phnom Penh Special Economic Zone Co Limited (PPSEZ Co Ltd) initiated arbitration proceedings against Asiatic Group's subsidiaries, Colben Systems Pte Ltd and Colben Energy Holdings (PPSEZ) Ltd.

PPSEZ Co Ltd and Asiatic Group were jointly developing a power plant in the Phnom Penh Special Economic Zone in Cambodia.

The matter was subsequently referred to the Singapore International Arbitration Centre.

The dispute between PPSEZ Co Ltd and Asiatic Group relates to the terms of the joint venture agreement entered in October 2006 (amended in November 2007), the shareholders agreement entered in October 2006 and the power purchase agreement entered in June 2008.

On February 6, 2012, Asiatic Group announced that PPSEZ Co Ltd initiated one more (third, to be precise) arbitration against Asiatic Group's another subsidiary, Colben Energy (Cambodia) PPSEZ Limited.

Later, on May 24, 2012, Asiatic Group made an interesting announcement: PPSEZ Co Ltd, along with Asiatic Group's 85%-owned subsidiary Colben Energy (Cambodia) PPSEZ Ltd, filed a suit in Phnom Penh Municipal Court against Asiatic Group's 95%-owned subsidiary Colben Energy Holdings (PPSEZ) Limited and another power supplier, Transco Energy (Cambodia) Co Ltd.

In other words, an 85%-owned subsidiary of Asiatic Group was suing a 95%-owned subsidiary of the group.

Why would the company sue itself? What was going through the heads of management of the parent company Asiatic Group?

Unless of course…:

Question

2. Is Colben Energy (Cambodia) PPSEZ Ltd really a subsidiary of Asiatic Group?

According to page 35 of the FY13 annual report, Asiatic Group has not yet adopted FRS 110 which will be mandatory for all financial years commencing on or after January 1, 2014.

FRS 110 makes it mandatory for companies to account for subsidiaries on the basis of control over them, not just majority ownership.

Therefore, will Colben Energy (Cambodia) PPSEZ Ltd remain a subsidiary of Asiatic Group from FY15 (commencing April 1, 2014) onwards?

It seems Asiatic Group doesn't enjoy control over its 85%-owned subsidiary Colben Energy (Cambodia) PPSEZ Ltd.

Otherwise, why would its 85%-owned subsidiary sue a 95%-owned subsidiary?

There is another important thing about the suit between Asiatic Group's subsidiaries:

Question

3. Is its COO involved in competing business in Cambodia?

Peter Ng Meng Cheng, who has been the Chief Operating Officer for Asiatic Group's operations in Cambodia, was also a director of Transco Energy (Cambodia) Co Ltd – the other company named in the suit.

We can't tell for sure whether he is still a director.

Moreover, according to pages 98 & 101 of Electricity Authority of Cambodia's 2013 report on the power sector, Colben Energy (Cambodia) PPSEZ Ltd and Transco Energy (Cambodia) Co Ltd were connected to Cambodia's National Grid through each other.

They are power producers as well as power transmitters, and they transmit power produced by each other to the National Grid.

Now that seems a bit unusual.

As it appears, Mr Ng was competing and collaborating with Asiatic Group's subsidiary within the same territory.

We couldn't find any disclosure by Asiatic Group about a conflict on interest of its COO in Cambodia.

Some clarity on this would be really useful.

(Total number of questions in the full story: 17)

We have sent these questions to the company (colben@colben.com.sg) to invite them for an on-camera interview, and/or seek their written response.

Ernst & Young LLP (donna.liew@sg.ey.com) declined to entertain our questions due to 'client confidentiality'.

We have also emailed Tai Sin Electric Ltd (ir@taisin.com.sg) requesting to contact Mr Bobby Lim Chye Huat.

Sofar, we have not had a reply (which is why you are seeing this message).

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