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Figtree Holdings Ltd - MANAGEMENT REPLY: How will it manage conflict of interest with Freight Links?

Ashish Saxena
Investor Central

17/11/2013 – Figtree Holdings Ltd had a strong start on the SGX, with the stock rising to 45 cents on debut, twice its issue price.

Figtree raised S$10 mln by placing 54.546 mln shares at 22 cents each.

The company is an associate of SGX-listed Freight Links Express Holdings Ltd, and designs and builds commercial and industrial facilities.

Freight Links is not only a shareholder but also the largest customer of Figtree Holdings Ltd.

Figtree Holdings' prospectus leaves us with some questions that need to be asked.

First, Freight Links' disclosed investment sum in Figtree Holdings doesn't match with the prospectus.

Second, three out of its six directors have been questioned by the Commercial Affairs Department (CAD) in two separate matters.

Third, Mr Lee Kim Huat, the lead independent director of Figtree Holdings, bought placement shares in SGX-listed Cacola Furniture International Ltd even as Ernst & Young was investigating discrepancies in its cash holdings.

Later, Ernst & Young revealed Cacola Furniture's actual cash reserve was much less than what was stated in its financials.

Fourth, Figtree Holdings will spend more than 40% of the placement proceeds on property development projects in which it only has a 20% interest.

..with a very brief track record of three years…

Fifth, Figtree Holdings is spending more than 17% of the proceeds on listing expenses, which include professional fees.

PrimePartners Corporate Finance Pte Ltd is the manager, sponsor and placement agent of the IPO.

The prospectus was not reviewed by MAS. Instead, it was registered by the Singapore Exchange Securities Trading Limited (SGX-ST), acting as agent on behalf of the Monetary Authority of Singapore, on October 29.

Background & Restructuring Exercise

Figtree Holdings Ltd was incorporated in Singapore by its Executive Chairman and Managing Director of Figtree Holdings Ltd Danny Siaw and Tan Chew Joo on June 5, 2013.

Apart from designing and building commercial and industrial facilities, it also holds minority interests in property development.

Figtree Projects Pte Ltd - a wholly-owned subsidiary of Figtree Holdings - has a B2 grade registration with the Building and Construction Authority (BCA) under the category of CW01 for general building.

The registration is valid until July 1, 2015.

Figtree Holdings Ltd acquired its business through a restructuring exercise (refer page page 61).

The problem is, some of the numbers stated in the prospectus do not appear to match disclosures by SGX-listed Freight Links.

On October 8, 2013, Figtree Holdings Ltd bought the entire issued and paid-up capital of Figtree Projects Pte Ltd for S$9.2 mln from Danny Siaw, Robert Oei and Singapore Enterprises Private Limited.

To settle the consideration, Figtree Holdings Ltd allotted 999,998 new shares to Danny Siaw, Tan Chew Joo, Eileen Tan, Fung Tze Ping, Teoh Hoon Song, Robert Oei and Singapore Enterprises Private Limited in the proportion of their interest in Figtree Projects Pte Ltd.

Danny Siaw was holding shares in Figtree Projects Pte Ltd on trust for Eileen Tan, Fung Tze Ping and Teoh Hoon Song.

At the time of allotment of shares in Figtree Holdings Ltd, Eileen Tan asked some of her consideration shares be allotted to her father Tan Chew Joo (page 61).

The prospectus doesn't share the shareholding pattern of Figtree Projects Pte Ltd immediately before its acquisition by Figtree Holdings Ltd.

But we try to work it out based on the changes in share capital of Figtree Holdings Ltd as shown on page 56.

At its incorporation on June 5, Danny Siaw and Tan Chew Joo equally owned (one share each) Figtree Holdings Ltd (page 61).

Subsequently, on October 8, Figtree Holdings allotted 999,998 new shares in consideration for the acquisition of Figtree Projects Pte Ltd.

As a result, Figtree Holdings Ltd had a share capital of 1 mln shares after the acquisition on October 8.

Soon after, each share of Figtree Holdings Ltd was split into 223 shares.

Therefore, immediately before the placement of shares in this IPO, Figtree Holdings Ltd's share capital comprised of 223 mln shares.

Now, page 58 of the prospectus shows the shareholding pattern of Figtree Holdings Ltd immediately before the IPO.

Taking in account the sale of 13,139,200 shares by Danny Siaw to Singapore Enterprises Pte Ltd (page 60) and simply dividing the number of shares of every shareholder by 223 should reflect the shareholding pattern of Figtree Holdings Ltd immediately before the splitting of shares.

So, this should have been the shareholding pattern of Figtree Holdings Ltd immediately before the share-split: Danny Siaw had a 34.33% stake (343,333 shares), Tan Chew Joo had a 11.67% stake (116,667 shares), Singapore Enterprises had a 19% stake (190,000 shares), Eileen Tan had a 5% stake (50,000 shares) and Robert Oei, Fung Tze Ping, Teoh Hoon Song had a 10% stake (100,000 shares) each.

That means 998,000 consideration shares which Figtree Holdings Ltd allotted to the shareholders of Figtree Projects Pte Ltd were distributed as follows: 343,332 shares to Danny Siaw, 116,666 shares to Tan Chew Joo, 190,000 shares to Singapore Enterprises, 50,000 shares to Eileen Tan and 100,000 shares each to Robert Oei, Fung Tze Ping, Teoh Hoon Song.

Since the shareholders of Figtree Projects Pte Ltd were allotted shares in the proportion of their interest in it, the shareholding pattern of Figtree Projects Pte Ltd before the acquisition was: Danny Siaw had a 34.4% stake, Singapore Enterprises Pte Ltd had a 19% stake, Tan Chew Joo had a 11.6% stake, Eileen Tan had a 5% stake and Robert Oei, Fung Tze Ping, Teoh Hoon Song had a 10% stake each.

Singapore Enterprises Pte Ltd is a wholly-owned subsidiary of SGX-listed Freight Links Express Holdings Ltd (refer page 8).

So, it's clear that Freight Links Express Holdings Ltd had a 19% stake in Figtree Projects Pte Ltd before Figtree Holdings acquired it on October 8.

According to page 85, Figtree Projects Pte Ltd was incorporated by Robert Oei on July 18, 2009.

But the prospectus doesn't highlight when Singapore Enterprises Pte Ltd bought a 19% stake in Figtree Projects Pte Ltd.

Freight Links Express Holdings Ltd's announcement on the SGX doesn't match with what's being said in Figtree Holdings' prospectus.

1. Which of the two is correct – Freight Links' announcement or Figtree Holdings' prospectus?

On October 12, 2013, Freight Links Express Holdings Ltd said its wholly-owned subsidiary Singapore Enterprises Pte Ltd had acquired a 24.89% stake (55,509,200 shares) in Figtree Holdings for a cash consideration of S$2,741,840.

Now there are two facts in the announcement that are contradictory to what's mentioned in Figtree Holdings' prospectus.

First, as per Figtree Holdings' prospectus, Singapore Enterprises Ltd is a long-time shareholder of Figtree Projects Pte Ltd.

According to page 120, Singapore Enterprises Pte Ltd extended loans to Figtree Projects Pte Ltd in 2011.

Moreover, according to page 53, Freight Links' wholly-owned subsidiary Singapore Enterprises Pte Ltd was a shareholder of Figtree Projects Pte Ltd on March 23, 2012.

Now, we couldn't find any disclosure about its investment in Figtree Projects Pte Ltd in Freight Links Express Holdings Ltd's

2. How will Figtree Holdings Ltd and Freight Links Express Holdings Ltd manage their conflict of interest?

Freight Links Express Holdings Ltd, through its wholly-owned subsidiary Singapore Enterprises Pte Ltd, is a controlling shareholder of Figtree Holdings Ltd with a 20% stake after the listing (refer page 58).

So that makes Figtree Holdings Ltd an associate of Freight Links.

But Figtree Holdings' dependence on Freight Links is much more than just an associate company.

According to page 121 of the prospectus, Freight Links E-Logistics Technopark Pte Ltd – a wholly-owned subsidiary of Freight Links – awarded a S$2.6 mln worth of contract to Figtree Projects on June 6 – a day after incorporation of Figtree Holdings Ltd.

According to page 122, Crystal Freight Services Distripark Pte Ltd – another wholly-owned subsidiary of Freight Links – awarded a S$63.3 mln worth of contract to Figtree Projects on September 30.

Together, Freight Links has awarded S$65.9 mln worth of contracts to Figtree Holdings Ltd.

That's about 72% of Figtree Holdings' order book on October 3 (refer page 28).

Also, Figtree Holdings' exposure to property development is entirely through its 20% stake in Vibrant Properties Pte Ltd which is an 80%-owned subsidiary of Freight Links (refer page 62).

Apparently, it seems Freight Links' has a much larger role to play in the existence and operations of Figtree Holdings Ltd.

As Freight Links is not just a substantial shareholder but also major customer of Figtree Holdings, shareholders in both companies will want to be assured that projects are priced at market rates.

Figtree shareholders would not want to see discounts given to Freight Links, thereby undermining their margins.

Freight Links shareholders would not want to see cash being spent unnecessarily on projects awarded to Figtree.

Management Reply Freight Links and Figtree Holdings say: Potential conflict of interest (if any) will be dealt with independently as both companies are run by its own Management & Board who will seek to look after their own company’s interest. Thomas Woo, who sits on the Board of both companies and being non-executive on Figtree Holdings, will abstain from deliberation should such a situation arises.

Further details can be found on page 27 of the prospectus.

FINANCIALS

The company has disclosed these results for the first half of 2013:

Revenue: +42.2% to S$49.9 mln
Profit: +128% to S$5.7 mln
One-off gains/losses: Nil
Cash flow from operations: (S$0.9 mln) vs S$4.6 mln
Dividend: Nil
Order book as on October 3: S$91.91 mln (to be completed by FY15)

Further details can be found on pages 63 & B-5 of the prospectus.

GROWTH DRIVERS

The directors of Figtree Holdings Ltd believe that stable consumption and urbanisation will lead to positive demand for retail and industrial property in Singapore, Malaysia and China.

Further details can be found on page 115 of the prospectus.

MANAGEMENT

Other than the two founding directors of Figtree Holdings Ltd, three other directors of its subsidiary Figtree Projects Pte Ltd have worked at Magdecon Projects Pte Ltd some time in their careers.

Therefore it wouldn't be wrong to say that Figtree Holdings Ltd is a venture incorporated and managed by a team of ex-employees of Magdecon Projects Pte Ltd.

Managing Director Danny Siaw and Executive Director Tan Chew Joo worked together at Bovis Lend Lease Pte Ltd.

And together, in 1998, they moved to Magdecon Projects Pte Ltd.

So, that makes Mr Siaw and Mr Tan long-time acquaintances.

Siaw Ken Ket @ Danny Siaw, aged 48, is the Executive Chairman and Managing Director of Figtree Holdings Ltd.

Mr Siaw started his career in November 1990 as a site engineer with Civil & Civic Pty Ltd before joining Bovis Lend Lease Pte Ltd in July 1993 as a business development manager.

In 1998, he joined Magdecon Projects Pte Ltd as an executive director.

He started a seven year stint as Managing Director of Magdecon Projects Pte Ltd in 2004, taking over from Tan Chew Joo, who had held that position since 1998.

In 2011, Mr Siaw became the Managing Director of Figtree Projects Pte Ltd.

Tan Chew Joo, aged 65, is an executive director and the Cost Director of Figree Holdings Ltd.

Mr Tan started his career in 1973 as a quantity surveyor with the Singapore Public Works Department before joining Soh Beng Tee Pte Ltd, a general building contractor, as a contracts manager in 1975.

In 1980, Mr Tan joined Bovis Lend Lease Pte Ltd as a cost manager where he rose up the ranks to the position of director and General Manager.

Mr Tan served for three years as the Executive Chairman of Magdecon Projects, after he handed over the Managing Director's position in 2004.

Subsequently, Mr Tan was occupied as a technical consultant for Magdecon Projects Pte Ltd from 2007 to 2009.

During the same period, he was also an executive director of Singa MP Corporation Pte Ltd, the holding company of Magdecon Projects Pte Ltd.

In 2011, Mr Tan joined Figtree Projects as its cost director.

Two directors were appointed on the date of the restructure, October 8, 2013, just before the listing.
Thomas Woo Sai Meng, aged 63, is a non-executive director of Figtree Holdings Ltd.

He also serves as an executive director and the Chief Investment Officer of SGX-listed Freight Links Express Holdings Ltd.

Mr Woo joined Freight Links in May 1997 and was its Chief Financial Officer until November 2010, when he became its Chief Investment Officer.

Mr Woo was appointed as an executive director of Freight Links in September 2001 and he concurrently sits on the boards of a number of Freight Links' subsidiaries and associated companies.

Apparently, he represents Freight Links' interests on the board of Figtree Holdings Ltd.

He is also a director of Crystal Freight Services Distripark Pte Ltd and Freight Links E-Logistics Technopark Pte Ltd.

Both these companies are wholly-owned subsidiaries of Freight Links and make up about 72% of Figtree Holdings Ltd's order book as on October 3.

Also appointed October 8 was Lee Kim Huat, aged 58, was appointed as the lead independent director of Figtree Holdings Ltd.

He is currently the Chief Operating Officer and the finance director of Nordic Global Holdings Pte Ltd, Nordic Lift-Truck Pte Ltd, Nordic Trading & Engineering Pte Ltd. and PT Nordic Lift-Truck.

From 2002 to 2009, Mr Lee was the group Chief Financial Officer of SGX-listed BBR Holdings (S) Ltd.

3. What fascinates Mr Lee about troubled Cacola Furniture International Ltd?

In December 2011, the
SGX queried Cacola Furniture International Ltd about a share placement to Mr Lee Kim Huat, among others.

SGX's query was in relation to a Business Times article titled "SGX needs to relook its approach towards China Sky and Cacola" published on December 2, 2011.

The crux of the matter was that despite RMB 83.4 mln cash and bank balances, Cacola Furniture was raising S$700,000 from a placement issue for working capital purposes.

Therefore, on the directions from the exchange, Cacola Furniture contracted Ernst & Young Advisory Pte Ltd to conduct an independent audit.

At the time of the placement, Mr Lee was already a non-substantial shareholder of Cacola Furniture.

Also, Mr Lee introduced the other placees to Cacola Furniture and was to be paid a commission of 5% of the gross proceeds from the placement.

But a month later, in January 2012, Mr Lee agreed to forego the placement commission of S$30,000.

The placement was completed on January 27, 2012.

A few months later, in August 2012, Ernst & Young's independent audit report highlighted Cacola Furniture's cash and bank balances were misstated in the financial statements.
The auditor couldn't get access to all the information necessary to work out exactly how much cash it had, but it concluded that it was well short of the RMB 83.5 mln stated in the financials.

That would explain why Cacola was trying to raise S$700,000 in cash.

The whole episode makes us wonder why Mr Lee was so keen to invest in Cacola Furniture International Ltd when the existence of its cash reserves was doubtful.

Moreover, if he couldn't see the fraud at Cacola Furniture, what actions will Mr Lee take to safeguard shareholders' interests as the lead independent director of Figtree Holdings Ltd?

Management Reply Mr Lee had agreed to take up the placement shares of Cacola somewhere in Nov 2011 before the company appointment of an independent auditor (EY) to look into cash position of the company. He had done some vital analysis of the company in term its cash position, NAV, borrowings and others ratios before making an investment bearing in mind the information available to Mr Lee is limited as he can only rely on the external audited report and interim announcement by the company approved by the board. As at 30/09/2011 the latest information available to Mr Lee, the company has no borrowings, has healthy cash and cash equivalent position, reasonable good NAV and in-addition there is a major change in the board of directors and furthermore the external auditor had not made any qualification in the auditor’s report since the company being listed on the SGX-ST. Based on the EY report, the investigation by IA [Independent Audit] of EY [Ernst & Young] do not discover or reveal any frauds committed by the management in regard to its cash position. It appears the investment seemed to be sound as the company has entered into an MOU to acquire a 51% stake in the "proposed hubei goldmine" in china as announced in the sgxnet.
With Mr Lee’s extensive experience in the finance and accounting, serving as a past group CFO in a listed company as well as serving past directorship of few private limited companies and more over as a lead ID [Independent Director] of Figtree, he has direct access to the board as well as to the management to obtain any information he desired. He has a power to review, performing, examine, asking questions, etc, vis-a-vis, the system of internal controls systems / accounting standards, compliances, accounting functions and other listing requirements are in place and to make recommendations so to enhance the effectiveness of the operating system, to investigate any matter within its terms of reference and to report to the board, audit committee and the relevant authorities without fears for any irregularities, wrong doings or frauds detected and to ensure good corporate governance has always being maintained and implemented to a high standard of accountability to the shareholders and the company.


(Total:10 questions)

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