International Healthway Corporation Limited - Do the directors really live in the Thye Hong industrial building in Leng Kee?

18/7/2013 – International Healthway Corporation Ltd (IHC) couldn't cheer investors at its debut on the SGX.

The stock couldn't hold on to the issue price of S$0.48 and has been on a consistent fall, as the chart shows.

The reason for the fall could be as much the 8x book value that it was offered to investors at, as the complexity of the prospectus.

Getting through it is a daunting task for any ordinary investor on the street.

We managed it, but were left with many questions that we felt needed to be asked.

First, the stake SGX-listed Healthway Medical Corporation still owns in IHC doesn't add up.

Second, the prospectus doesn't share how the S$89 mln consideration IHC paid to acquire its business was arrived at.

Third, the company is spending one out of every four dollars in proceeds from the IPO on listing expenses. A lot of effort for very little new cash.

Fourth, IHC has acquired a subsidiary which has committed administrative violations in the past. It is waiting for the court's directives on it.

Fifth, IHC claims a vendor of the company it acquired to be unrelated to the directors and substantial shareholders, contrary to other documents in the public domain.

Sixth, it has substantial debts, even as it will need more cash to finance its ambitious projects.

These are among 29 questions that need to be asked.

BACKGROUND

The creation of International Healthway Corporation was a three-step process.

First, SGX-listed Healthway Medical Corporation created a new entity called Healthway Medical Development (Private) Ltd (HMD), into which it sold 12 nursing facilities in Japan, the 800-bed Wuxi hospital and a medical and commercial project in Chengdu in China, and the KLCC project in Malaysia.

This was on top of rights to purchase two senior residences in Japan, one in Iskandar Malaysia and one in Shanghai.

Second, HMD then on-sold the assets into International Healthway Corporation Ltd (IHC) for S$89 mln worth of IHC shares.

Third, these IHC shares were then distributed to Healthway Medical Corporation and other shareholders of HMD.

This process isn't too hard to follow, but it gets more complicated when you put the numbers to it.

That's because, by our calculations based on the prospectus, the numbers don't add up.

Question

1. Where is the missing 2.3% stake in IHC?

According to our reading of the prospectus, Healthway Medical Corp should own a 10.25% stake in IHC.

But the prospectus claims to only hold 7.95%.

Unless there is something in the prospectus which we missed, there is a 2.3% stake which we cannot account for.

And we'd like to know where it's gone.

See for yourself:

The S$89 mln sum was satisfied by issuing exactly 1,419,999,929 IHC shares to HMD at 6.27 Singapore cents per share.

As mentioned, these shares were then distributed among HMD shareholders.

The prominent shareholders of HMD were Fan Kow Hin, Aathar Ah Kong Andrew, Dr Jong Hee Sen and SGX-listed Healthway Medical Corporation Ltd (HMC).

Next, IHC sold 58,517,000 new shares and 45,833,000 vendor shares in the IPO at 48 Singapore cents per share.

For the record, the vendors are - Dr. Dominic Er Kong Kiong, HMD, Aathar Ah Kong Andrew and TMF Trustees Malaysia Berhad (acting in its capacity as trustee for OSK-UOB Pre-IPO Fund).

Now, before International Healthway Corp was formed on February 18 this year, SGX-listed HMC distributed 500,000 shares of HMD to the HMC shareholders on April 2, 2012.

This is shown on page 33 of the prospectus.

Just over a week later, on 13 April 2012, HMC entered into the trust deed with British and Malayan Trustees Limited (BMT) to hold the 500,000 shares in the share capital of HMD for the benefit of HMC's Shareholders.

Six weeks later, on May 22, 2013, HMC distributed another 675,324 HMD shares to HMC's shareholders.

Therefore, BMT then owned 1,175,324 shares in HMD, on behalf of HMC's shareholders.

As a part of the restructuring exercise, the shares owned by BMT were converted into 189,948,004 shares of IHC.

Subsequently, these shares were distributed to the shareholders of HMC. According to page 82 of the prospectus, HMC owned 174,329,000 shares of IHC.

Sofar so good.

On May 22, it then distributed 47,948,004 shares to HMC's shareholders.

Therefore, HMC must have been left with 126,380,996 shares in IHC.

As per note 13 on page 83 of the prospectus, on June 28, HMD transferred 37,918,000 Shares to HMC as repayment of the amount it owed to HMC.

Therefore, HMC must have owned 164,298,996 shares, or a 10.24% stake in IHC after June 28.

Since HMC didn't sell any of its shares in IHC through the IPO, that shareholding should not have changed.

But on page 82, IHC claims that HMC owns just 127,661,000 shares (a 7.95% stake) in IHC after the IPO.

Therefore what happened to the remaining 2.3% stake of HMC?

Did it sell those shares in the IPO?

Or are we missing something already mentioned in this hugely complicated prospectus?

Question

2. How did it arrive at S$89 mln consideration for acquiring HMD's business?

As already mentioned, IHC acquired all the subsidiaries of HMD for S$89 mln worth of shares.

In the prospectus (page 99), IHC says:

"... consideration was arrived at taking into consideration the group subsidiaries' [HMD's subsidiaries'] net asset values as at 31 December 2012 and the costs of acquisition of the initial portfolio by the group subsidiaries less the loan facilities acquired in connection with the acquisition of the initial portfolio from 1 January 2013 to the Latest Practicable Date [May 20, 2013] and the payment obligations under the Wuxi acquisition consideration."

This explains the process they went through, but leaves investors guessing about the numbers that went into the a valuation of S$89 mln.

See if you can find it on page 99 of the prospectus.

FINANCIALS

IHC was incorporated on February 18 this year and the restructuring exercise was completed subsequently.

So, the company has prepared pro-forma unaudited financial statements for 2011 and 2012 based on the assumption that the company was incorporated earlier and the restructuring exercise had occurred on January 1, 2011.

The prospectus contains the following pro-forma financials for the year ended December 31, 2012:

Revenue: +7% to S$37.8 mln
Profit: +286% to S$53.3 mln
Net fair value gains: S$49 mln vs S$4.5 mln
Cash flow from operations: Not comparable
Dividend: Nil

IHC's revenue is generated from 12 nursing facilities in Japan and the Wuxi Hospital in China.

Question

3. Does it really make sense to apply fair value gains retrospectively?

The rise in pro-forma profit was due to non-cash fair value gains of S$49 mln on investment properties of the company, namely the nursing facilities in Japan, the land for KLCC project in Malaysia and the land for Chengdu project in China, offset by currency translation losses (page 113 & 118).

What we can't get our heads around is how these net fair value gains are recorded in pro-forma financials for 2012, even though they are based on valuations of the properties as on February 28, 2013.

How is this possible?

Shouldn't the pro-forma accounts for FY11 and FY12 value these properties at the fair value at that time?

Otherwise, all companies should be able to restate their accounts from prior years with revaluations carried out, say, last month.

Where would that end?

Excluding the net fair value gains, IHC's profit actually fell in 2012.

But there's more.

Question

4. Why didn't it offset the goodwill on acquisition of the Wuxi Hospital from the fair value gains?

According to page B-68, IHC booked S$43.4 mln goodwill on acquisition of a 76.5% stake in the Wuxi Hospital for US$45 mln (about S$56.25 mln).

But DTZ Debenham Tie Leung Limited – the independent valuer – estimated the value of this stake to be worth just RMB60.4 mln (about S$12.6 mln) on February 28, 2013 (page C-6).

In other words, the S$43.4 mln goodwill is nothing but a fair value loss arising out of an independent valuation of the Wuxi Hospital.

Therefore, IHC should have written-off or offset the S$43.4 mln goodwill (or the fair value loss) on acquisition of the Wuxi Hospital against S$49 mln net fair value gains it recognised in the pro-forma financials for FY12.

Instead, IHC decided to carry the goodwill as intangible assets on its balance sheet (page B-44).

One wonders why IHC would do such a thing.

Here is one of the possible explanations:

IHC has used its unaudited pro-forma financials for FY12 for the purposes of valuing the IPO.

Based on its net profit of S$53.3 mln for FY12, IHC's Earnings Per Share (EPS) works out to be 3.42 cents (page 71).

At an EPS of 3.42 cents, the price-to-earnings ratio of the IPO works out to be 14.04 times.

But had the company written-off S$43.4 mln goodwill out of its pro-forma profit for FY12, its EPS would have dropped to 0.6 cents.

And therefore, its price-to-earnings ratio would have sky-rocketed to 80 times!

Already, based on the NTA of the company, the IPO investors would have witnessed 85% dilution in their investments immediately after the IPO (page 97).

Question

5. Will it remain profitable in 2013?

IHC earned more than half of its pro-forma revenue in 2011 and 2012 from the nursing facilities in Japan.

But due to the unfavourable exchange rate between the Japanese Yen and Singapore Dollar, its revenue from Japan dropped in 2012.

At the same time, IHC's overall operating costs increased in line with more patients at the Wuxi Hospital in China.

As a result, IHC's gross profit margin dropped to 63% in 2012, from 67% in the previous year.

Unfortunately, in the on-going financial year, the Japanese Yen has depreciated further (page 42), the company's borrowings are all set to increase as it takes up construction of key projects (page 151), the remuneration of directors and executive officers is estimated to increase up to 50% (page 193), and the massive listing expenses, if entirely written-off during the year, will erode most of the profit.

All of the above factors make us wonder if the profitability of the company has a chance to improve over its pro-forma unaudited estimates for 2012.

Question

6. How much of its Japanese Yen exposure can it hedge to stay within an 'acceptable level'?

IHC's revenue is exposed to three currencies – Japanese Yen, Chinese Yuan and Malaysian Ringgit.

Of all three currencies, Japanese Yen has been the worst performing one in the past few months.

According to page 42, the Japanese Yen has depreciated about 30% so far in 2013 from its average levels in the previous year.

IHC plans to 'partially' hedge its foreign currency risks so as to 'keep them at an acceptable level' (page 67).

After witnessing such an extraordinary fall in Japanese Yen in recent months, we wonder how much of its exposure has the company already hedged and how much more does it plan to hedge in 2013.

Also, what is the 'acceptable level' of IHC's foreign currency risks?

Question

7. Does it have a roadmap to deleverage its balance sheet?

Based on debt of S$231.9 mln as at May 20, 2013 (page 92), cash of S$38 mln and equity of S$166.8 mln, the net-debt-to-equity ratio of the company would be about 1.16 times immediately after the IPO.

This already high leverage is expected to worsen further as IHC is yet to borrow funds to develop its ambitious projects in China and Malaysia, and acquire other pipeline projects.

Of course, unless it raises equity funds to finance the projects.

IHC still has S$41.1 mln of cash facilities which remain unutilised.

That makes one wonder how much more the company will borrow and how it plans to repay these loans.

Question

8. Who is behind the mysterious shareholder Dallacy International Inc, which stands to gain so much from its ties to the company?

According to page 93, IHC has borrowed S$20 mln from a shareholder in a convertible loan to be repaid on June 13, 2014.

Sofar, it has used only S$14 mln of the loan facility.

The shareholder wasn't named, but according to the audited financial statements of IHC (page A-36), Dallacy International Inc is one of its shareholders.

We managed to draw a link between the two by deduction, and we figured out that the loaning shareholder must be Dallacy International.

Only the company can confirm this (we have not had replies to our questions), but it would appear to also explain the unusual terms of the loan agreement between IHC and Dallacy International Inc.

Not only did Dallacy International Inc charge 8%pa interest on the loan, in line with other loans of IHC.

IHC also has to pay Dallacy a sum equal to 7.5% of the fair value gain on completion of the KLCC project or the Shanghai project, whichever is higher, subject to a minimum of RM4.5 mln.

Dallacy International also has an option to convert the loan into residential/office units at the KLCC project.

As a part of the restructuring in May (page 171), IHC has extended a corporate guarantee in favour of Dallacy.

Also, the controlling shareholders of IHC, Fan Kow Hin and Aathar Ah Kong Andrew and the executive chairman and group president, Dr. Jong Hee Sen, agreed to pay RM15.3 mln to Dallacy.

The RM 15.3 mln sum represents the profit share in relation to the KLCC project and the Shanghai project.

Now, IHC will have to just repay the outstanding S$14 mln loan to Dallacy International Inc along with an interest of 8%pa.

It is not clear if Dallacy still has the right to convert the loan into units at the KLCC project.

But the biggest question is about the owner of Dallacy International Inc.

It was mentioned only indirectly that Dallacy International Inc was a shareholder of IHC – if you put the information on page A-36 together with that on page 93.

Why not be more upfront about it?

It arouses curiosity about the owner(s) of Dallacy International Inc.

We couldn't find any information on the company. It does not appear to have a website.

Question

9. Who owns the Enterprise Fund II & III, which extended interest free loans to IHC?

According to page 93, IHC has borrowed S$15 mln from The Enterprise Fund II Ltd at 12%pa.

The company has used S$10 mln of the loan facility so far, to be repaid within seven days of listing on the SGX.

IHC has also borrowed another S$25 mln from The Enterprise Fund II Ltd and The Enterprise Fund III Ltd.

IHC has fully utilised this S$25 mln loan, which is interest-free and is to be repaid on April 24, 2014.

According to page 172 of the prospectus, IHC has agreed to pay S$3.1 mln as "investors' return" to The Enterprise Fund II Ltd and The Enterprise Fund III Ltd within 15 days from listing on the SGX.

Put together, IHC has to pay S$13.1 mln to The Enterprise Fund II Ltd and The Enterprise Fund III Ltd within a fortnight from listing.

And, why would a company lend S$25 mln 'interest-free' loan to IHC?

Therefore that makes us curious about the owners of The Enterprise Fund II Ltd and The Enterprise Fund III Ltd.

Are they related to the substantial shareholders of the company?

If yes, where in the prospectus is this highlighted?

Question

10. Will it pay S$13.1 mln to the lenders out of the IPO proceeds?

The company has not proposed to use the IPO proceeds for repaying loans.

But excluding the IPO proceeds, it seems it won't have sufficient funds to pay S$13.1 mln to The Enterprise Fund II Ltd and The Enterprise Fund III Ltd.

Question

11. Which 'related party' owes S$11.6 mln to the company?

According to page A-33, a 'related party' owes S$11.6 mln to IHC as on December 31, 2012.

The amount is unsecured and IHC charges an interest of 8%pa. on it.

Therefore, who is this 'related party'? How soon is it expected to repay the outstanding amount?

Question

12. Why would Dr Lin Kao-Kun and Dr Dominic Er Kong Kiong repay RMB 8 mln loan of behalf of the company?

According to pages 93 & 94 of the prospectus, Dr Lin Kao-Kun and Dr Dominic Er Kong Kiong will repay an RMB 8 mln "entrusted loan" from Bank of Nanjing's Shanghai Branch within five days of IHC's listing on the SGX.

Why would they do that?

Also look at page 110 of the prospectus.

GROWTH DRIVERS

IHC operates 12 nursing facilities in Japan and a hospital in Wuxi city of China.

The company has three under-development projects, three other pending projects and four pipeline projects.

The three under-development projects are – the Kuala Lumpur City Centre (KLCC) project, the Wuxi project and the Chengdu project.

The KLCC Project will be a 33-storey integrated mixed-use development comprising specialist medical suites, retail space and service residences.

This 100%-owned project of IHC is targeted to complete in 2016 (page 151).

The Wuxi project is about redeveloping the Wuxi Hospital into an 800-bed hospital from a 125-bed hospital at present.

IHC, via a 74.97% stake in Health Kind (Shanghai) Ltd, acquired a piece of land adjacent to the Wuxi Hospital in China.

The Wuxi project is targeted to complete in 2018 (page 153).

Finally, the Chengdu project is an integrated mixed-use development, with a 150-bed hospital specialising in women and children-related medical disciplines and a wellness themed retail and lifestyle centre.

As the name suggests, the project is being built in the Chengdu city of China.

This wholly-owned project of IHC is targeted to complete in 2016 (page 154).

Question

13. Is its Chengdu project in breach of covenants with the authorities?

According to page C-10, Sichuan Dujiangyan Land Resources Bureau and a subsidiary of IHC had agreed to commence the construction of building at the Chengdu project before August 1, 2013 and complete the construction before August 1, 2015.

But IHC won't be able to meet the deadline.

First, IHC had not commenced the development at the site as at February 21, 2013 (page C-10).

And according to page 154, it is targeting to complete the construction at the Chengdu project only in 2016.

The problem with this is that these dates are part of the covenants of the agreement.

What happens if/when it breaches those covenants?

Moving forward, other than the above mentioned three under-development projects, IHC has the rights to acquire four other pending projects.

These are – Commercial Centre and Service Residences in Iskandar (the Iskandar project), Maternity Homes & Commercial Centre in Shanghai (the Shanghai project), Aqua Villa Kashiihama Ichibankan (the Aqua Villa project) in Fukuoka and Kashiihama Senior Residence (the Kashiihama project) in Fukuoka.

The Iskandar project is being developed by Nusajaya Consolidated Sdn Bhd, a joint venture company between United Malayan Land Bhd and UEM Land Bhd (page 163).

The project is a 35-storey integrated mixed-use development consisting of a retail podium and a service apartment tower.

IHC has the right to acquire the project upon its completion in 2017.

The Shanghai project consists of three blocks of Dutch-themed architectural designed mixed-use development will house a 86-room maternity home, specialist medical suites specialising in women wellness, wellness medicine, reproductive medicine and aesthetics as well as niche retail shops and a lifestyle and entertainment centre (page 164).

IHC is targeting to complete the acquisition of the Shanghai project by the end of September this year.

However, the status of development works at the project is still not clear.

The Aqua Villa project in Fukuoka, Japan caters to residents above the age of 60, and is similar to service residences with fully furnished rooms, equipped with additional facilities such as panic call buttons and common areas that include lounges, community activity areas and restaurants (page 165).

The property is in operation since 2009 and IHC expects to complete its acquisition in August this year.

Finally, the Kashiihama project is located near the Aqua Villa property in Fukuoka.

The property is under development and is expected to complete in late 2013.

IHC aims to acquire the property in January next year.

Question

14. How will it finance S$268.3 mln worth of acquisitions in the next six months?

According to page 165 of the prospectus, the independent valuers have estimated the market value of the Shanghai project at S$220.6 mln, the market value of the Aqua Villa property at S$24 mln and the market value of the Kashiihama property at S$23.7 mln.

And all three properties are lined up for acquisition by IHC in August, September and January.

Put together, the market value of all three properties (S$268.3 mln) is about 35% of IHC's market capitalisation at the IPO offer price.

With already S$231.9 mln outstanding debt on its books, we wonder how IHC will finance the acquisitions in coming months.

Other than the projects under development and pending projects, IHC is in negotiations with two other vendors to acquire a piece of land for the medical resort in Chengdu, and two more plots of land in Johor to develop a retirement village and an aesthetic and wellness centre.

Question

15. How soon does it expect to finalise the pipeline of projects?

The timing of the acquisition of the pipeline projects is important given an already high leverage and upcoming acquisitions of the pending projects.

Further details can be found on page 151 of the prospectus.

MANAGEMENT

Dr. Jong Hee Sen is the executive chairman and group president of IHC.

He served as an executive director and president of SGX-listed Healthway Medical Corporation Ltd (HMC) from 2007 to 2010.

Dr Jong resigned as a non-executive and non-independent director of HMC on July 8.

From 1996 to 2000, he was with the Government of Singapore Investment Corporation and was responsible for real estate investments and fund management in Asia markets.

Dr Jong held the position of vice president of GIC Real Estate Pte Ltd when he left in 2000.

Interestingly, other than being a director of IHC, Dr Jong is a director of 13 of its subsidiaries and 62 other companies.

Yip Yuen Leong is an executive director of the IHC.

He also serves as the president of Integrated Medical Real Estate division of the company.

Mr Leong has over 20 years of experience in the real estate industry.

He worked with Pacific Star Asset Management from 2008 to 2012, where he last held the position of executive vice president.

From 2003 to 2008, Yip Yuen Leong was with Singapore Airlines Limited, during which he last held the position of vice president of the properties department.

Wong Ong Ming Eric is a non-executive director of IHC.

Mr Wong was with the Singapore Police Force from 1967 to 1978, leaving when he ranked as acting assistant superintendent.

From 2005 to 2007, Mr Wong was a director for central services with Healthway Medical Group.

Currently, he is a non-executive director of Healthway Medical Enterprises Pte Ltd (since 1 December 2010) and Pathway Biomed Ltd. (since 31 December 2010).

Mr Wong is also the sole proprietor/shareholder and director of SBCC Women's Clinic Pte Ltd (since 22 March 2011).

Siew Teng Kean is the lead independent director of IHC.

He worked as a senior analyst with Peregrine Securities Singapore Pte Ltd in 1997.

Mr Siew was a managing director at Temasek Holdings (Private) Ltd where he worked from 1998 to 2006.

He is currently a senior director with UOB Asset Management, having joined in 2006, and heads its institutional business – business development department.

Mr Siew resigned as an independent director of HMC on July 8.

Ong Lay Khiam is an independent director of IHC.

Mr Ong has worked in the banking and finance industry in Singapore since 1971, principally as a commercial banker.

He is currently an executive director of UBS AG, Wealth Management.

Mr Ong also serves as a director on the board of SGX-listed Tiong Seng Holdings Ltd.

Teo Cheng Hiang Richard is an independent director of IHC.

Mr Teo has more than 30 years of experience in managing funds in senior fiduciary positions in the Government of Singapore Investment Corporation and for large blue chip financial institutions and ultra high net worth individuals.

Question

16. Did Mr Wong forget to mention information about his past directorships?

The website of Pathway Biomed Ltd suggests that Mr Wong was serving as a director of Tri-Global Security Pte Ltd around the time he was appointed as a director of Pathway Biomed Ltd on February 25, 2011.

Interestingly, the prospectus (page 182) doesn't mention what occupation Mr Wong held between 2007 and December 2010.

Was he perhaps serving as a director of Tri-Global Security Pte Ltd at that time?

If so, why isn’t this reflected in the directorships of Mr Wong in the past five years in the prospectus (page 187)?

Question

17. Why doesn't the prospectus contain the actual addresses of its directors and executives?

On pages 181 & 188 the fields which should have contained the actual addresses of the directors and executives instead carry the registered address of the company, namely 2 Leng Kee Road, #04-10A Thye Hong Centre, Singapore 159086.

A quick Google search reveals that Bally – the bag maker – had a boutique at this address.

We have checked it out, and it is a small office with a sign saying Healthway Medical Development behind the reception counter.

Obviously, eight of the directors and executives of IHC don't reside at the registered address of the company.

Why so shy?

Further details can be found on page 181 of the prospectus.

KEY RISKS

Limited supply of specialised healthcare professionals

It is just not enough to develop and acquire healthcare assets unless the company has desirable professionals to manage those assets and serve the patients/customers.

IHC acknowledges the demand for healthcare professionals is highly competitive.

And in case of specialist doctors, the supply is even more constrained due to long training period which can be up to 15 years or more in some cases.

Question

18. How does it plan to hire quality healthcare professionals for its upcoming projects?

In the next four years, IHC's under-development and pending projects will add about a thousand beds, other than serviced residences and medical suites, to its portfolio.

Therefore it is as important to know the company's strategy to hire/employ qualified and specialised healthcare professionals for its upcoming hospital and medical centres.

But we couldn't find much on this in the prospectus.

Question

19. Why does it need the independent medical practitioners?

IHC says many of its doctors are independent medical practitioners and it cannot control their practice.

Moreover, IHC can be held indirectly responsible for their actions by a court.

IHC's association with any doctor involved in the medical malpractice litigation, even if the company's medical facilities are not involved, might adversely impact its reputation.

First, the prospectus doesn't share the number of independent medical practitioners contracted by the company.

Second, one wonders the reasons for which IHC must hire the independent medical practitioners instead of full-time employed staff.

Threats to project under development, pending and pipeline projects

IHC has three projects under development, four other pending projects and three pipeline projects.

All these projects face several regulatory risks like obtaining necessary approvals, licences, permits, etc.

And as most of these projects are under construction, it is important for the company to ensure timely execution of works.

Any delay in completion of the projects is bound to have an adverse impact on the health of IHC.

IHC even runs the risk of failing to acquire these projects.

Question

20. What happens to the independent valuations if any of its projects fail to complete?

IHC's under-development and pending projects have been valued by the independent valuers.

Based on such independent valuations, the company recorded the fair value gains of S$49 mln in pro-forma audited financials for 2012.

The company has also used the valuers' estimates, of its under-construction projects on an "as if complete and fully leased" basis, for reference at various instances in the prospectus.

One such instance can be found on the 4th page of the cover of the prospectus.

As seen on the page, a pie-chart titled 'ASSET VALUE BY GEOGRAPHY' shows 40.24% worth of IHC's assets were located in Japan, 38.58% worth of assets were located in Malaysia and 21.18% worth of assets were situated in China in FY2012.

A small note below the chart says the value of the assets is based on estimated valuations of the under-construction projects on "as if completed and fully leased basis".

In other words, those projects which are scheduled for completion in 2016-18 have been assumed to be completed and fully leased as at the end of FY2012.

In reality, excluding the under-construction projects, more than 90% worth of IHC's assets are nursing homes located in Japan while the only other operational asset is the Wuxi Hospital in China.

The title of the properties of IHC is another important risk and concern.

The independent valuer – DTZ Debenham tie Leung Limited - did not search for the original title documents of the Wuxi project and the Chengdu project, to make sure that IHC is the owner of the property (page C-4).

Rather the valuer relied on the copies of the documents which were provided by the company.

In the context of the Chengdu project, IHC was applying for the Land Use Rights Certificate for the site when the independent valuer prepared its report (page C-10).

One of the key aspects of independent valuation is to check the legality of ownership of the claimant.

If the valuer didn’t confirm the ownership with the original documents, it opens the possibility (without making any allegations) that the copies were not authentic.

The independent valuer prepared its report on a 'good title' basis.

Similarly, the independent valuer seemingly didn't verify the ownership of IHC's Shanghai project (page C-14).

IHC was applying for the Real Estate Ownership Certificate of the property when the independent valuer prepared its report (page C-19).

Again, the independent valuer prepared the valuation report on a 'good title' basis.

Question

21. Does IHC have the right to sell the project sites if it fails to develop them?

The independent valuers might have valued the project sites at prevailing property prices in the vicinity.

But it is still not clear in the prospectus if IHC can indeed sell the project sites if it fails to develop them.

The conditions set by the land authorities in China makes us wonder if the sites are readily marketable.

According to page C-7 of the prospectus, the site for the Wuxi project has been leased for hospital use only.

Similarly, the Chengdu project site has been leased partly for commercial use and partly for medical health use (page C-10).

Moreover, in this case, the authorities have laid down covenants for beginning and completion of the development at the site.

Therefore that makes us wonder if the IHC has the right to sell the land if it fails to meet the covenants.

Claims against properties in Japan

It is even more difficult to ascertain the ownership and clear title of properties in Japan.

IHC already owns 12 nursing homes there.

Also, it is in the process of acquiring two senior residences.

As described on page 60 of the prospectus, IHC did not obtain the boundary confirmations for its Japanese properties.

Also, the Japanese real property registration system doesn't really reflect the legal owner of the property-related title or right.

Above all, the registration of title of the properties does not guarantee absolute ownership under Japanese law.

For example, what if IHC acquired the property while the seller or a former owner was insolvent, or if as a result of the sale of the property to IHC, the seller becomes insolvent (page 61).

In such a case, IHC may be required to return the property or beneficial interest in the property to the seller or a former owner without refund of the purchase price.

Or, IHC may be required to pay significant amounts to settle such claims.

Further, if the former owner of a property IHC acquired from was or becomes unable to pay its debts at the time of the acquisition of the property, the acquisition may be voided by the creditors of the former owner.

Question

22. Is it reasonable to book fair value gains on properties even if the title of properties is uncertain?

The fair value gains on properties are of relevance only to their owners.

Therefore, one wonders if IHC should book fair value gains on its properties even though the independent valuers have not verified their ownership in China and an uncertainty hangs over the title of the properties in Japan.

Competition from SGX-listed Healthway Medical Corporation Ltd

The healthcare industry in China, Japan and Malaysia has public and private service providers.

But IHC faces immediate competition from its substantial shareholder listed on SGX, Healthway Medical Corporation Ltd (HMC).

According to the independent market research report by Frost & Sullivan (page F-25), HMC is the third biggest hospital provider in China.

The list of 10 institutions it operates in China can be found on HMC's website.

Now, IHC is working on three projects in China – the Wuxi Project, the Chengdu project and the Shanghai project.

Question

23. Why didn't IHC and HMC sign a non-compete agreement?

In the absence of a non-compete agreement between them, IHC and HMC could be in for a battle in China.

According to page 177, IHC acknowledges that HMC may expand into competing businesses.

And instead of trying to eliminate the competition, HMC has declared to sell its entire stake in IHC within a year of its listing on the SGX.

Further details can be found on page 44 of the prospectus.

PAST VIOLATIONS

IHC's subsidiaries in Hong Kong have failed to comply with the Companies Ordinance on several occasions (page 52).

The subsidiaries failed to hold their AGMs in time and lay their audited accounts before the shareholders.

These subsidiaries are: IHC Assets (Hong Kong) Ltd, IHC Services (Hong Kong) Ltd and IHC Facilities (Hong Kong) Ltd (page 142).

In another instance, Health Kind (Hong Kong) Ltd - a 76.5% subsidiary of IHC - failed to timely notify the change in directors to the Hong Kong Companies Registry.

Health Kind (Hong Kong) Ltd was incorporated on June 9, 2010 (page 80).

The Hong Kong subsidiaries (including Health Kind) of the company voluntarily disclosed the non-compliances to the authorities in March this year.

Subsequently, the authorities have asked the subsidiaries to rectify the non-compliances by seeking the appropriate court orders.

The Hong Kong subsidiaries of IHC applied to the courts on May 30.

The pleas of the companies are scheduled for hearing on September 4.

Irrespective of the court order, the Hong Kong authorities can take action against the companies and their directors for non-compliance.

Dr. Jong Hee Sen and Yip Yuen Leong, the executive directors of IHC are also directors of Hong Kong subsidiaries.

Therefore, they face the risk of being penalised and/or being imprisoned by the Hong Kong authorities.

In such circumstances, IHC fears adverse impact on its operations, business continuity, cash flows and results (page 52).

Question

24. Who is accountable for the lapses before acquisition by IHC?

Health Kind (Hong Kong) Ltd owns the Wuxi Hospital.

IHC acquired a 76.5% stake in Health Kind (Hong Kong) Ltd from Dr. Lin Kao-Kun and Dr. Dominic Er Kong Kiong (page 125).

Dr Lin Kao-Kun continues to own the remaining 23.5% (page 107).

Moreover, IHC has retained Dr Lin Kao-Kun as the President, China Medical Services and managing director of the Wuxi Hospital (page 100).

Dr Dominic Er Kong Kiong has resigned as a director of Health Kind (Hong Kong) on May 2, 2013 (page 88).

Question

25. Why didn't IHC acquire the remaining 23.5% stake in Health Kind (Hong Kong) Ltd?

By doing so, IHC could have taken complete control of the Wuxi Hospital which is already operational and generating cash from its operations.

But the prospectus doesn't highlight the reasons why IHC didn't want to buy the remaining 23.5% stake in Health Kind (Hong Kong) Ltd from Dr Lin Kao-Kun.

Question

26. Is Dr. Lin Kao-Kun related to the promoters of IHC?

According to page 100, IHC claims that none of the vendors of the companies it acquired are related to any of its directors or substantial shareholders.

One of these vendors is Dr. Lin Kao-Kun.

On November 30 last year, SGX-listed Healthway Medical Corporation Ltd (HMC) – which owned 25% stake in IHC and whose promoters own the majority stake in IHC – announced the appointment of Dr David Lin Kao Jun as a consultant from October 18, 2012.

Dr David Lin Kao Jun was assigned the title of President, Medical Services China as he would assist in the management of HMC's operations in China.

The name in the announcement is Dr David Lin Kao Jun, not Dr Lin Kao Kun.

Based on this announcement, one might think that they are two different individuals.

But HMC's 2012 Annual Report (pages 13 & 19) gives us the correct name – Dr David Lin Kao Kun.

In fact, the annual report goes on to highlight that Dr David Lin Kao Kun assumes the role similar to that of a chief executive officer (page 20 of AR 2012).

Therefore, unless there is a remarkable coincidence, Dr Lin Kao-Kun – the managing director of the Wuxi Hospital and the vendor of Health Kind (Hong Kong) Ltd to IHC – and the person who serves as the President of China Medical Services at HMC – Dr David Lin Kao Kun – are one and the same person.

Dr Lin is related to the directors and substantial shareholders of IHC.

Dr Jong Hee Sen and Mr Siew Teng Kean are the directors of both IHC and HMC.

Also, Fan Kow Hin, the executive chairman and a controlling shareholder of HMC, is also a controlling shareholder of IHC.

And Aathar Ah Kong Andrew is the other common controlling shareholder of IHC and HMC.

Therefore, all of the above information establishes the relation between Dr Lin Kao-Kun and the directors and substantial shareholders of IHC.

Moreover, Dr Lin Kao-Kun's relation to the directors and substantial shareholders of IHC renders its acquisition of Health Kind (Hong Kong) Ltd to be an 'interested party transaction'.

Further details can be found on page 229 of the prospectus.

DIVIDEND POLICY

International Healthway Corporation Ltd (IHC) doesn't follow a fixed dividend policy.

Further details can be found on page 75 of the prospectus.

IPO PROCEEDS

S$ 10 mln for development and redevelopment of existing projects
S$ 8 mln for acquisition of pending projects
S$ 4.2 mln for working capital
S$ 0.5 mln for upgrading medical equipment
S$ 5.4 mln for listing expenses

Question

27. How can it justify spending 25% of the gross IPO proceeds for listing expenses?

IHC is spending one out of every four dollar it raises from the IPO on expenses related to the listing.

One wonders why the company did not borrow funds at much lower cost.

Question

28. Why aren't the vendors bearing proportionate share of the listing expenses?

Out of S$6.2 mln listing expenses, the vendors shared only S$0.9 mln expenses even though they took home more than 40% of the issue proceeds.

Question

29. Will it write-off entire listing expenses during 2013?

In case it does, the company might struggle to register a growth in its profit this year.

Further details can be found on page 73 of the prospectus.

We have sent these questions to the company 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).

ISSUE DETAILS

Total Offer Size: 104,350,000 shares
Price per share: S$0.48/share
New shares: 58,517,000 shares
Vendor shares: 45,833,000 shares
Placement shares: Nil
Public shares: 104,350,000 shares

KEY FINANCIALS AT LISTING


Market cap: S$ 770.33 mln
Price/Book: 8x
Price/Earnings: 14.04x

There are only four (4) reasons companies list:
1. Raise fresh capital for expansion. This is the most virtuous reason, because new shareholders can take part in the growth of the company.
2. Allow existing shareholders to (partially) exit. Frequently this means the best growth days of the company are behind it.
3. Change in laws and regulations. Such as when revised foreign ownership restrictions force existing shareholders to pare down their stakes, even though they might not want to do so. While this gives you the opportunity to buy into companies, you must ask yourself whether how the company is impacted by excessive regulation.
4. Raise the company's profile. New shareholders must ask themselves whether an ego-trip by existing shareholders is a good enough reason to buy into a stock.

"Sharing the growth" is frequently stated in the IPO's publicity material as the reason for listing, but that's just the marketing pitch.

The real reason is only ever one of the four stated above.

Download the prospectus here.


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Key financials at listing