LHT Holdings Ltd - Why did it not disclose purchase of Hong Leong Asia's Malaysian pellets machinery earlier?

9/6/2013 – When LHT Holdings Ltd announces half-year results to the Singapore Exchange in a few weeks from now, shareholders will want to know how its Malaysian pellets business has been going.

That's if they even know about it.

LHT Holdings didn't inform shareholders that it bought S$3 mln in machinery and equipment earlier this year until it published its Annual Report in April – even though the purchase price would have warranted a much more full disclosure in January.

It all started when LHT Holdings incorporated a wholly-owned subsidiary, LHT Gpac Technology (M) Sdn Bhd on January 31 this year.

The incorporation was announced to shareholders on February 8, 2013.

Its principal activities are manufacturing moulded pallets, wood waste recycling, industrial packaging and importing and exporting green products – not dissimilar from LHT Holdings itself.

LHT Holdings was founded in 1980, and its principal directors, employees and shareholders are members of the Neo and Yap families.

It's a sleeper stock, one of the many under-appreciated family-run businesses which listed on the Singapore market in years gone by, and, trading below book value despite paying an annual dividend of 0.5 cents, is seemingly forgotten by the market.

The Malaysian subsidiary was incorporated with a paid-up capital of only RM5, but LHT Holdings Ltd infused RM 9.5 mln more funds subsequently.

Despite making several announcements about the incorporation, LHT Holdings Ltd didn't explain why it needed to set up another subsidiary when it already owned two others in Malaysia.

But shareholders didn't know more than that until the 2012 Annual Report was published in April.

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

Question

1. Should it have not disclosed the purchase of Hong Leong Asia's Malaysian pellets machinery earlier?

According topage 74 of Annual Report for 2012, LHT Holdings Ltd signed a sale and purchase agreement with a similarly-named subsidiary of Hong Leong Asia called Gpac Technology (M) Sdn Bhd on January 3, 2013.

So, to be clear, there appear to be two subsidiaries: GPac Technology (M) Sdn Bhd, owned by Hong Leong Asia, and LHT GPac Technology (M) Sdn Bhd, owned by LHT Holdings.

As per the agreement, LHT Holdings Ltd bought machinery and equipment from Hong Leong Asia's subsidiary for S$3 mln (about RM7.4 mln), and injected these into its newly incorporated subsidiary, LHT Gpac Technology (M) Sdn Bhd.

This was all LHT Holdings Ltd's Annual Report had to say about the deal.

Page 103 of Hong Leong Asia's Annual Report for 2012 acknowledges Gpac Technology (M) Sdn Bhd as a wholly-owned subsidiary, but we couldn't find any announcement by either company about the transaction on the Singapore Exchange's website.

But it appears to us that one should have been forthcoming.

According to Rule 1010 of the SGX-ST Rulebook, acquisition of assets is a 'discloseable transaction' if the value of the transaction is between 5% and 20% of the company's market capitalisation.

Although we don't know the profit attributable to the machinery and equipment being sold, the price tag of S$3 mln was less than 1% of Hong Leong Asia's market capitalisation.

But based on LHT's stock price of S$0.125 and 212.98 mln outstanding shares on January 3, 2013, the day the deal was done, LHT Holdings Ltd's market capitalisation was S$26.62 mln.

Therefore, the consideration of S$3 mln payable to Hong Leong Asia works out to be 11.3% of LHT Holdings Ltd's market capitalisation on the day of agreement.

In other words, the acquisition of machinery and equipment for S$3 mln was a 'disclosable transaction' for LHT Holdings Ltd.

But we couldn't see any announcement from LHT Holdings Ltd to this effect.

In fact, not a single announcement was made by the company in the month of January 2013.

And it didn't even mention the deal in the FY2012 earnings announcement on February 26.

LHT Holdings Ltd mentioned the deal with Gpac Technology (M) Sdn Bhd only in its Annual Report for 2012 which was signed by the Directors and Independent Auditors on March 26, 2013 and adopted by the shareholders in the AGM on April 26.

The Independent Auditor of the company is BDO LLP.

Question

2. Why not disclose the transaction?

We can't think of any reason why LHT Holdings would not have disclosed the transaction.

Perhaps it was just an oversight?

Only a disclosure by the company of a valuation of the equipment and profits earned would shed light on this.

Further, Rule 1011 says:

"Where a sale and purchase agreement is entered into, or a valuation is conducted on the assets to be acquired, the issuer must include a statement in the announcement that a copy of the relevant agreement, or valuation, report is available for inspection during normal business hours at the issuer's registered office for 3 months from the date of the announcement."

SGX-ST may waive a rule, or a part of a rule, in certain circumstances.

But as no such announcement was made on the exchange's website, only either LHT Holdings Ltd or SGX-ST can tell us if any waiver was granted.

Question

3. Why not just buy Hong Leong Asia's subsidiary?

Rather than buy the equipment and machinery and inject it into a new subsidiary, why didn't LHT just buy Hong Leong Asia's subsidiary.

It already had a similar name.

What debts or other issues was it saddled with?

Question

4. Why not inject the equipment into an existing subsidiary?

LHT Holdings already has two subsidiaries in Malaysia – why not just inject the machinery and equipment into one of these?

Question

5. Who are Mr Tay Kee Soon and Mr Bey Ah Kuee?

In the announcement on February 8, 2013, LHT Holdings Ltd said:

"Mr Neo Koon Boo, Ms Yap Mui Kee, Mr Tan Kim Sing, Mr Tay Kee Soon and Mr Bey Ah Kuee have been appointed as the Directors of LHT Gpac Technology (M) Sdn Bhd."

We already know about Mr Neo Koon Boo, Ms Yap Mui Kee and Mr Tan Kim Sing who are the Executive Directors of LHT Holdings Ltd.

But Mr Tay Kee Soon and Mr Bey Ah Kuee are the new faces appointed as Directors of LHT Gpac Technology (M) Sdn Bhd.

Sorry, but we couldn't find anything about them even on the internet.

Perhaps Mr Tay Kee Soon is a nephew of the Managing Director, as his name is similar to Mr Tay Kee Kuang, who appears in the full year earnings announcement as working for LHT Holdings.

In any case, we would appreciate if the company could tell us more about Mr Tay and Mr Bey.

Also, why were they appointed to the board of the newly formed wholly-owned subsidiary?

Question

6. Why is LHT Holdings trading at these levels?

LHT is a small company compared to many others on the Singapore market.

But with positive cashflow, a cash balance of around S$8 mln, paying a dividend and trading below book value, it seems value investors might take another look at this stock.

While the timber industry it is in might not be sexy, we wonder why this stock is not trading higher.

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).


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