Innopac Holdings Ltd - Did the Megapoint factory at Tanjung Malim ever exist?

12/10/2013 – Profitability is a key measure of a company's success. In theory, profits come about as a result of higher sales and well-managed costs.

But imagine if you could boost profit independently of revenue, without revaluing buildings or changing depreciation policies.

Here's how: buy a company under the guise of diversifying your business. Let those companies fail, or report that they have failed. Sell them to a friend, together with their liabilities. And with those liabilities off the books, you can register a windfall profit.

Let's see whether this methodology applies to Innopac Holdings' acquisition of a company called Mega Highlights Sdn Bhd.

Innopac was supporting a Management Buyout of DRB-Hicom's commercial vehicle assembly business, Hicom Carriage Engineering Sdn Bhd.

Perhaps the parties involved can answer the following sets of Questions and explain some of the mysteries surrounding the following string of events. We would of course be happy to publish their answers and explanations. But unless there is some credible explanation offered by these parties, the string of events seem to suggest that when things turned sour, a minority stake turned into a full takeover, and it sold it some years later for a peppercorn fee, registering a significant profit in the process.

The money that was invested and loaned is gone, and the numbers are later reported to be different than at the time of the transactions.

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

Question

1. Why couldn't it put to use one of the only four automobile manufacturing licences in Malaysia?

Here is what happened:

Hicom Carriage Engineering was incorporated on May 13, 1994, to make, assemble and market buses, bus bodies and associated transport equipment.

But by late 1997, its owner DRB-Hicom was suffering from the downturn resulting from the Asian currency crisis. Hicom Carriage Engineering was making deep losses, and, with a future which DRB-Hicom described as "bleak", it was looking to divest Hicom Carriage Engineering in a fire sale.

It found a buyer in Hicom Carriage Engineering's own CEO, Khoriri Abu Sabri.

He was to pay RM 850,000 in six instalments over three years, for an 85% stake. DRB-Hicom retained the other 15%.

We know this from DRB-Hicom Bhd's announcement to this effect on November 19, 2001.

In order to buy Hicom Carriage Engineering Sdn Bhd, Khoriri had incorporated Mega Highlights a month earlier, on October 12, 2001, together with Borhan bin Kassim.

Also, Hicom Carriage Engineering Sdn Bhd was renamed as Mega Commercial Vehicle Sdn Bhd (MCV).

The transaction was completed on March 30, 2002.

Innopac, via its wholly-owned subsidiary Awana Rentak Sdn Bhd, bought a 30% stake in Mega Highlights Sdn Bhd on November 28, 2005, by subscribing to new shares in Mega Highlights for a cash consideration of RM 42,857.
Innopac said MCV had built 700 vehicles worth RM 270 mln, and the stake in Mega Highlights was "a rare opportunity to participate in the relatively uncrowded commercial vehicle market in Malaysia".

That's because, according to its announcement on November 28, 2005, MCV held one of the four full automobile manufacturing licenses issued by the Malaysian Government.

Sometime after April 2004, Mega Highlights had signed an agreement with the Perak State Development Corporation to buy 48.3 acres of land in Tanjung Malim, to build an assembly plant for commercial vehicles.

It was to be a single storey building measuring 100 metres x 33 metres x 7 metres, to be built over just two months in November 2005 by CPE Builders Sdn Bhd for RM340,000.

CPE Builders was to later sue over the deal.

At the time of announcement in November 2005, the construction of the Megapoint Commercial Vehicle Industrial Park factory was underway, and production of vehicles was expected to start in the first quarter of 2006.

In the first phase, it planned to build 750 vehicles a year.

The next phase of development would raise production capacity to 3,000 buses and trucks a year.

Apart from the acquisition of that 30% stake in Mega Highlights, Innopac also extended a RM2 mln interest-free loan to the company to build the production facility.

The loan was secured by an irrevocable and unconditional guarantee by Khoriri Abu Sabri, the 70% shareholder of Mega Highlights.

Sofar, the story is easy enough to understand: Innopac was seemingly supporting a management buyout of an asset with good potential.

But this is where it started to get complicated.

In response to SGX queries on November 30, 2005, Innopac disclosed the Net Asset Value (NAV) of Mega Highlights was negative RM1.1 mln as at October 30, 2005.

In other words, Mega Highlights had net liabilities of RM1.1 mln.

Innopac said it had paid more than RM 40,000 in cash for its 30% stake as a nominal fee, because of the intrinsic value of the full manufacturing license and the land for the Megapoint Industrial Park.

But the book value was only RM 245,315, implying that while intangible value outpaced its liabilities, it's still a small amount, in the context of the RM 270 mln in sales value MCV was supposed to have generated when it was still called Hicom Carriage Engineering.

Further, in the same announcement, in reply to an SGX query on why Innopac extended a loan interest-free, despite owning just a minority stake of 30% in the company, Innopac said the loan was a condition of the 30% stake purchase.

Almost a year later, on September 6, 2006, Innopac signed a supplementary loan agreement with Mega Highlights to raise the loan amount to RM2.5 mln from RM2 mln earlier.

But the loan was no longer interest-free and would carry an interest rate of 5% pa, back-dated to July 1, 2006.

The loan was to be repaid with interest before June 30, 2007.

But it didn't happen.

A few months later, on August 21, 2007, Innopac announced that Mega Highlights defaulted on the RM 2 mln loan and therefore, Innopac invoked a claim over Khoriri Abu Sabri's 70% stake in the company.

Also, Mega Highlights would settle part of the loan by issuing 2 mln fresh shares at RM1/share to Innopac.

As a result, Mega Highlights became a wholly-owned subsidiary of Innopac.

As was its right, Innopac appointed its own directors, namely, Innopac's Chairman Dato' Moehamad Izat Emir, Director Md. Abdul Wahab bin Md Shahir and Managing Director Wong Chin Yong.

Innopac's August 21, 2007 announcement said this about Mega Highlights:

"It had successfully designed and built two prototype buses in late 2006 and was scheduled to commence commercial production in early 2007, However, this did not materialise. The directors are reviewing Mega Highlights' business and evaluating its future plans".

According to Innopac's circular to shareholders on November 5, 2007 (page 27), Mega Highlights completed the construction of its factory in May 2006.

So, the production facility was ready by mid-2006, behind the original target of Q1 2006, but it could not kick start commercial production for unnamed reasons.

Overall, Innopac had lost its RM 2.5 mln loan and the RM 42,857 it paid in cash for the initial 30% stake in Mega Highlights.

So, that's about RM 2.54 mln loss on investment.

But some things don't add up.

Innopac's Annual Reports reveal a lot more about the deal and various other transactions surrounding it.

According to page 74 of the 2008 annual report, Innopac invested S$ 2.01 mln in Mega Highlights before acquiring a 70% stake in it.

At the conversion rate at the time, this works out to about RM 4.5 mln.

This was RM 2 mln more than the RM 2.54 mln Innopac disclosed to the market.

Therefore that begs the question:

Question

2. When did Innopac invest an additional RM 2 mln in Mega Highlights? And when was this announced to shareholders?

We couldn't find any such disclosures.

But the story continues.

On June 4, 2007, Innopac sold MCV to Mohamed Azhar bin Haron for a token RM1.

This is important for two reasons: first, the date of June 4, 2007.

(Total:13 questions)

We have sent these questions to the company (info@innopacific.com) and its IR agency, August Consulting Pte Ltd ( lily@august.com.sg), to invite them for an on-camera interview, and/or seek their written response.

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

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