Matrix Concepts Holdings Berhad - Why spend millions developing land it doesn't own?

21/5/2013 – Matrix Concepts Holdings Berhad is a family-owned property developer with a long track record in Malaysia.

Analysts are excited about its development prospects east of Kuala Lumpur International Airport.

But after reading the prospectus we have some questions that need to be asked about exactly where the IPO proceeds will be spent, and who owns the land it is building on.

First, we couldn't find revenue or earnings forecasts.

Moreover, an unusually big jump in profit margins in 2012 raises the question whether it can repeat that showing this year and beyond.

Second, the promoters and management own stakes in separate companies which supply raw materials and services to Matrix Concepts.

How will the company ensure those suppliers will charge competitive prices?

Third, some units of projects it completed years ago remain unsold.

Fourth, almost the entire IPO proceeds will be used for working capital.

And fifth and perhaps most interestingly, it appears almost all of its landbank of 1,550 acres are owned, not by Matrix Concepts, not even by Matrix Concepts' Joint Ventures, but by the Joint Venture partners alone.

BACKGROUND

Matrix Concepts Holdings Berhad was incorporated as Brilliant Radical Sdn Bhd on December 24, 1996.

Subsequently, it was renamed as Matrix Concepts Holdings Sdn Bhd on January 13, 2003.

Finally, on November 22, 2004, it was converted into a public limited company and that is when it assumed its present name.

Matrix Concepts Holdings Bhd is an investment holding company.

Property development, trading of land, investment holding, project management, procurement of building materials, administrative services and others are undertaken by its subsidiaries.

Matrix Concepts was founded by Dato' Lee Tian Hock, presently serving as its CEO and Group MD.

As at April 15, 2013, the company says it has launched 3,128 units of residential, commercial, industrial and leisure properties.

Of these, 2,807 units – about 90% - were sold by April 15.

Matrix Concepts Holdings Bhd is raising RM137.5 mln through the IPO.

Separately, its promoters are selling 37.5 mln shares for RM82.5 mln to private investors.

Further details can be found on page 5 of the prospectus.

FINANCIALS

The company has disclosed these results for FY2012:

Revenue: -27% to RM456.1 mln
Profit: +49% to RM103.5 mln
One-off gains/losses: RM64,000 vs RM128,000
Cash flow from operations: RM34.6 mln vs RM335.8 mln
Total Dividend: Not Declared vs RM41.2 mln
Order book: Not Disclosed

QuestionCan it keep up the growth momentum?

Matrix Concepts Holdings Bhd's gross profit margin expanded to 42% from 24% last year, despite a 27% drop in revenue due to lower land sales.

The reason: it could sell its industrial development properties in Sendayan TechValley at 50%-70% higher prices than before.

As a result, its profit-after-tax margin also swelled to 23% in 2012, from 13% a year earlier.

Apparently, 2012 was the best performing year for Matrix Concepts, since 2009.

Therefore that makes us wonder if its margins and profits are sustainable at this level.

QuestionWhat are its earnings targets?

We looked through various sections of the prospectus concerning the outlook and future prospects, but we couldn't find any revenue and profit forecasts.

That's a shame, because investors subscribe to IPOs not because of a company's historical performance, but because of expectations for the future.

QuestionWhy is it not repaying loans from Directors?

Matrix Concepts owed RM8 mln to its Directors as on December 31, 2012 (refer page 378).

These loans represent payments made by the Directors on behalf of the company.

Though these loans have no fixed repayment terms, Matrix Concepts has to pay interest at 7% pa (refer page 397).

Interest rates on loans are charged at levels not dissimilar to that, so the Directors are cutting their own company very little slack.

Why are not some of the IPO proceeds being used to repay the Directors' loans?

But this raises another question: why did the Directors pay bills on behalf of the company, even though it had a working capital loan and bank overdraft facilities with the banks?

QuestionWhy not wait with the bonus issue until after the IPO?

Matrix Concepts Holdings Bhd distributed 3.65 bonus shares for every share held by its shareholders on March 18, less than three months before the IPO (refer page 217).

In short, the promoters were issued RM186.4 mln worth of bonus shares out of its retained profits.

The company had RM290.5 mln retained profits as on December 31, 2012, so these shares represent about 64.2% of company's retained profits.

This means, new public investors will get to benefit only from a reduced part of past profits. They need to wait for future profits to build their wealth.

You can read more about retained profits here, but in essence they are described as "an important and attractive source of finance".

Further details can be found on page 305 of the prospectus.

GROWTH DRIVERS

Matrix Concepts Holdings Bhd plans to develop several projects in the next 5-6 years.

Of all the planned projects, Kota Gadong Perdana in Negeri Sembilan is the largest with 3,632 residential units to be developed between January 2016 and December 2018.

According to the prospectus, its development projects will keep it occupied up to June 2019.

Question Why can it not sell units from long-completed developments?

These are not booked as investment properties, so we assume they are not held as rent-generating investments, but simply cannot be sold.

The properties are:
* Five shop offices at Taman Putra, which were completed 13 years ago
* Nine houses at Taman Gadong Jaya – Phase 4, completed 10 years ago
* Two bungalows at Impiana Villa 1, completed in November 2012.
* One stall at Nusari Aman 2A, completed in December 2011.

Further details can be found on page 83 of the prospectus.

MANAGEMENT

Dato' Haji Mohamad Haslah bin Mohamad Amin is the non-independent non-executive Chairman of Matrix Concepts Holdings Bhd.

He has also been serving as the CEO of Menteri Besar Negeri Sembilan (MBI), a Negeri Sembilan state-owned entity, since 2004 – the same company with whom Matrix Concepts has a JV to develop a township spanning 5,233 acres in Negeri Sembilan.

Dato' Lee Tian Hock is the group Managing Director and Chief Executive Officer of Matrix Concepts.

He founded Matrix in 1997 and is its largest shareholder.

Ho Kong Soon is the group Deputy MD and Chief Operating Officer.

He joined Matrix in 1997 as a Director and General Manager.

He is also a Director of Anexco Sdn Bhd, a property rental and maintenance company.

QuestionHas Matrix Concepts ever had business with Anexco Sdn Bhd? If yes, when and for how long?

Dato' Firdaus Muhammad Rom bin Harun is an independent non-executive Director of Matrix Concepts.

He was elected as a member of Malaysian Parliament in 2004.

In 2008, he was elected political secretary to the Chief Minister of Negeri Sembilan.

Rezal Zain bin Abdul Rashid is another independent non-executive Director on Matrix Concepts' board.

In 2000, he successfully completed a management buyout of TD Technologies Sdn Bhd and is serving as its Director.

Dato' Ir. Batumalai a/l Ramasamy is another independent non-executive Director of Matrix Concepts.

He served in the Department of Irrigation and Drainage (DID) in Malaysia for 35 years.

He retired as Director of DID in 2003.

QuestionWere the CEO and COO over-paid earlier, or are they underpaid now?

Dato' Lee Tian Hock will be paid 43% less in FY13.

He took home about RM5.9 mln in FY12, but that has been slashed to RM3.35 mln for FY13.

Similarly, Ho Kong Soon will be paid 17% less in FY13.

He earned RM3.45 mln in FY12, a figure which has been cut to RM2.85 mln for FY13.

Therefore that leaves us wondering why? Were they overpaid in 2012, or are being under-paid now.

To answer that question we would need to see their remuneration for 2011 and earlier, but we don't have access to that.

Matrix Concepts Holdings Bhd had 547 employees as on April 15, 2013.

Further details can be found on page 266 of the prospectus.

KEY RISKS

Property overhang in Malaysia

According to Vital Factor Consulting, an independent advisor hired by Matrix Concepts, a total of 15,000 residential units worth RM4.7 bln were completed and remained unsold in Malaysia in 2012.

In the near term, this is not a risk for Matrix Concepts as it has already sold almost all units at its on-going residential development projects (refer pages 80-83).

However, if such stockpiling continues for a few more quarters, it might begin to have an impact on Matrix Concepts' future projects.

Matrix Concepts has massive projects lined up in the next few years (refer pages 83-90).

QuestionCan Matrix Concepts be certain it can sell its units?

Conflicts of interest

According to page 302 of the prospectus, several close relatives of CEO Dato' Lee own shares in suppliers to Matrix Concepts.

This means Matrix Concepts management must be extra careful to ensure those suppliers charge competitive prices, not inflated ones.

Dato' Lee's brother Lee Tan Huat is not only a promoter of Matrix Concepts, but also a 45% shareholder and Director of Chuan Song Electrical Sdn Bhd, which is a sub-contractor of electrical works to Matrix Concepts.

Dato' Lee's wife, Datin Yong Chou Lian and her brother Yong Ing Kiat own Y&Y Mix Sdn Bhd, which supplies building materials to Matrix Concepts.

Y&Y Mix Sdn Bhd also counts Dato' Lee's sister-in-law Yong Moi Noi as a Director.

Another 'related' supplier of Matrix Concepts is T&T Cahaya Murni Sdn Bhd, which is co-owned by Tung Kwi Hoiu and Tung Kew Tiong.

Their brother Tung Ah Qui is a Director of various subsidiaries of Matrix Concepts Holdings Bhd, and a substantial shareholder of a company called Magnitude Point – which in turn is a substantial shareholder of Matrix Concepts.

QuestionWho is Tung Ah Qui? Is Tung Ah Qui related to the family? If not, when and how did he join hands with Dato' Lee?

Lastly, Dato' Lee owns a 12.61% stake in Matrix Concepts through a 50% stake in Ambang Kuasa.

The other 50% is owned by Tan Wan Fook – a shareholder/promoter of Matrix Concepts and a 50%-shareholder and Director of CTH Builders Sdn Bhd.

CTH Builders Sdn Bhd is in the same line of business as Matrix Concepts, that is, property development and construction (refer page 254).

Question Is Mr Tan is also a part of Dato' Lee's extended family?

Mr Tan is also a Director of Mikayla Hunt Sdn Bhd, a manpower agency.

We don't know if Mikayla Hunt provides services to Matrix Concepts.

QuestionHow will it deal with conflicting interests of management/promoters?

The prospectus acknowledged the potential for conflicts of interest, but we couldn't find out how the management plans to deal with conflicting interests and thereby protect the interests of the shareholders of Matrix Concepts.

Dependence on JV partners

According to page 5 of the prospectus, Matrix Concepts says it has a land bank of about 1,568 acres.

However, it also says 1,457 acres are owned by its joint-venture partners.

We read this several times over, but it seems quite clear: neither Matrix Concepts, nor its Joint Ventures, own the land.

The land is owned by the Joint Venture partners.

In short, Matrix Concepts directly owns just 111 acres of its landbank.

Read for yourself on page 80 of the prospectus.

QuestionWhy is it spending millions of ringgit developing land which it doesn't even own?

Matrix Concepts got its big break in 2005, when it formed two joint ventures.

First, with Koperasi Kemajuan Tanah Negeri Johor Bhd (KKTNJB), to develop a township on a 900-acre piece of land in Johor.

Soon after, that same year, Matrix Concepts formed a second JV with the Menteri Besar of Negeri Sembilan to develop a township, spanning 5,233 acres, in that state.

QuestionWhat stakes does it own in the Joint Ventures?

The prospectus did not offer this basic, but important, piece of information.

QuestionWhy does it not want to use IPO proceeds for acquiring land?

Matrix Concepts will use IPO proceeds for working capital to develop projects which are being built on land which it doesn't own, rather than actually buying the land.

ONGOING LITIGATION

Matrix Concepts Holdings Bhd's wholly-owned subsidiary, Matrix, is defending a civil suit at the Seremban High Court.

The suit, filed by the adjoining landowners to one of Matrix's housing project, alleges that Matrix had encroached into the lands of the adjoining properties.

Matrix has admitted to the encroachment but claims to have restored the lands exactly as they were prior to trespassing.

Further, Matrix claims that the neighbouring landowners have not suffered any damages due to its trespassing.

Matrix's lawyers estimate the damages, due to its trespassing, to not to exceed RM100,000.

While the suit has not yet been scheduled for hearing, we must ask some pertinent questions:

QuestionTo begin with, why did Matrix encroach neighbouring land?

Who was the surveyor who made this mistake?

QuestionWhich housing project is the dispute related to?

This is an important point, because according to page 222 of the prospectus, Matrix is the 100%-owner of the Sendayan Club.

And, Matrix Concepts Holdings Bhd is planning to spend RM10 mln of the IPO proceeds to build the clubhouse at Bandar Sri Sendayan (refer page 25).

QuestionWhen did the dispute arise and when was the civil suit filed?

QuestionCould the High Court suspend the construction at the project until the dispute is resolved?

QuestionWhat gives Matrix's lawyers confidence that the claim for damages will not exceed RM100,000?

QuestionHas Matrix Concepts Holdings Bhd made a provision for damages payable to the neighbouring landowners?

Further details can be found on page 400 of the prospectus.

DIVIDEND POLICY

Matrix Concepts Holdings Bhd has a policy to distribute at least 40% of its profit-after-tax as dividend to its shareholders.

Based on this policy, Hong Leong Investment Bank, in its IPO note, expects a dividend payout of 10 sen for FY12 and 16 sen for FY13.

However, we couldn't spot in the prospectus anything about this.

We wonder from where Hong Leong unearthed the dividend of 10 sen for FY12.

Also, the dividend of 16 sen per share is based on Hong Leong's own forecast of RM118.6 mln profit-after-tax of Matrix Concepts in FY13.

A quick check on Hong Leong's estimates for FY13 reveals the broker has estimated Matrix Concepts revenue to rise 70% in FY13.

Again, the prospectus didn't share the forecast for FY13.

Question Then, how did Hong Leong arrive at the estimates?

Btw, the issue manager, underwriter and placement manager is Hong Leong Investment Bank.

Further details can be found on page 353 of the prospectus.

IPO PROCEEDS

RM 55 mln for working capital
RM 55 mln for Hijayu development project
RM 11 mln for repayment of bank loans
RM 10 mln for construction of clubhouse at Bandari Sri Sendayan
RM 6.5 mln for listing expenses

QuestionWill most of the IPO proceeds end up in private companies of the promoters?

It doesn't take too much to figure out that almost entire proceeds from the IPO will be used for working capital.

While RM55 mln are explicitly said to be allocated for working capital, RM55 mln allocated for infrastructure works at Hijayu development project will be used for paying creditors, suppliers of raw material and other expenses.

Similarly, the term loan of RM11 mln, to be repaid from the IPO proceeds, is meant for working capital of Bandar Sri Sendayan development.

And RM10 mln - allocated for the construction of a clubhouse in Bandar Sri Sendayan - will be used to pay creditors and suppliers.

In other words, even though the construction of infrastructure, common facilities and clubhouse at Bandar Sri Sendayan are broken out as a separate line item from the RM 55 mln in working capital, these are themselves working capital items.

This way, almost the entire IPO proceeds will be used for working capital of Matrix Concepts Holdings Bhd.

But Matrix Concepts Holdings Bhd's major suppliers are none other than the private companies linked to its promoters.

According to page 398 of the prospectus, Matrix Concepts paid companies connected to its directors RM33.6 mln for building materials and sub-contracting services in 2012.

In fact, such 'related' companies have been consistently supplying raw materials to Matrix Concepts at least since 2009.

Matrix Concepts Holdings Bhd says it deals with 'related' companies on an "arms' length" basis.

QuestionWhat does "arms' length" mean, and who verifies if it was indeed followed while transacting with 'related parties'?

Without alleging anything, we wonder if Matrix Concepts will indulge in greater and larger transactions with related parties in future.

Hypothetically, it could use the IPO proceeds to pay for the raw materials, thereby paying a good amount of money to promoters' privately-owned companies.

A reasonable person would ask: how will the company guard against this?

Further details can be found on page 24 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: 100 mln shares
Price per share: RM2.20/share
New shares: 62.5 mln shares
Vendor shares: 37.5 mln shares
Placement shares: 43.7 mln shares
Bumiputera placement shares: 32.5 mln shares
Private placementof vendor shares: 5 mln shares
Public shares: 10 mln shares
Employees and Directors: 8.8 mln shares

KEY FINANCIALS AT LISTING
Key financials at listing

Market cap: RM660mln
Price/Book: 1.39x
Price/Earnings: 6.38x

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.

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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