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Soilbuild Construction Group Ltd - MANAGEMENT REPLY: Would it have had enough working capital without the IPO?

Ashish Saxena
Investor Central

25/5/2013 – Soilbuild Construction Group Ltd, as the name suggests, comes from the stable of formerly-SGX-listed Soilbuild Group Holdings Ltd.

In 2010, Lim Chap Huat paid S$418 mln to privatise Soilbuild Group Holdings Ltd.

So, by listing the group's construction business, Mr Lim seems to be unlocking some value.

It is difficult to determine exactly how much profit Mr Lim is making from the listing, as we don't know the sum-of-the-parts valuation of Soilbuild Group Holdings Ltd when it was privatised in 2010.

What we do know is: Soilbuild Construction Group Ltd is worth S$166 mln, based on the IPO price of S$0.25/share, so that's about 40% of what Mr Lim paid when taking the parent company private in 2010.

Mr Lim Chap Huat is not selling his shares in the IPO.

But the parent company made S$46 mln, by way of an unusual dividend, in the weeks and months ahead of the IPO.

The dividends, equivalent to about 27% of the post-listing market capitalisation of Soilbuild Construction Group Ltd, came about through the cancellation of trade receivables and loans owed by the parent company.

They are even more than the gross funds being raised from the listing.

Soilbuild Construction Group Ltd is raising S$39.5 mln in net proceeds from the IPO.

More than 60% of the proceeds will be used as working capital.

So, while new money is coming into the company, it is really just replacing funds Mr Lim took out.

That is his prerogative.

But it raises some important questions that need to be asked.

First, the company is left with hardly any working capital after paying dividends to Mr Lim.

Second, its commentary about the Angullia Park project don't match with those of its equal partner in the JV.

Third, it acknowledges the on-going projects awarded by parent company were not negotiated on an "arm's length" basis.


Soilbuild Construction Group Ltd was incorporated as a private company just a few months ago, on January 14, 2013.

As a part of the restructuring exercise, on May 6, Soilbuild Group Holdings Ltd sold three of its subsidiaries – Soil-Build Pte Ltd, SB Procurement Pte Ltd and SB Project Services Pte Ltd – to Soilbuild Construction Group Ltd, in exchange for shares.

Subsequently, Soilbuild Construction Group Ltd's shares were split and it was converted into a public limited company.

Broadly, the company's business can be divided into three segments – residential construction works, industrial/business construction works, and consultancy and project management services.

As on April 30, it had four on-going residential construction projects, six on-going business space projects, and two consultancy contracts in Myanmar.

For details of these projects, please refer to page 109 of the prospectus.

Further details can be found on page 28 of the prospectus.


Together, Soilbuild Construction Group's three subsidiaries registered these results for 2012:

Revenue: +82% to S$213.5 mln
Profit: +142% to S$22 mln
One-off gains/(losses): S$1.6 mln vs S$0.1 mln
Cash flow from operations: S$8.6 mln vs S$10.5 mln
Dividend: Nil vs S$42 mln
Order book: S$511.2 mln with deliveries up to 2017

Would it have had enough working capital without the IPO?

Soilbuild Construction Group Ltd declared a S$42 mln dividend, equating to all of its retained profits, payable to the parent company, Soilbuild Group Holdings Ltd, on December 31, 2012 (refer page I-37).

Subsequently, on April 24, it announced another S$4 mln dividend to the parent company.

But these were no ordinary cash dividends.

They weren't even scrip dividends.

Instead, Soilbuild Construction Group Ltd simply waived S$42 mln worth of trade receivables and loans due from its parent company.

In other words, Soilbuild Group Holdings Ltd didn't pay for S$42 mln worth of works sub-contracted to Soilbuild Construction Group Ltd.

As actual cash didn't flow out of the company's books, the dividend is not reflected in the cash flow statement on page I-8.

It's just that cash for work done will now not come into the company.

Mr Lim did nothing wrong by having Soilbuild Construction Group pay the parent company a big dividend – that is his right as the owner of the company.

But in essence it pulled valuable retained earnings out of the company, just before the IPO.

A quick check on its working capital, calculated as current assets less current liabilities, tells the story:

As on December 31, 2011, its working capital was S$19.7 mln.

But after waiving trade debts in lieu of dividend to the parent company, its working capital collapsed to S$1.3 mln on December 31, 2012.

All companies must have a surplus (i.e. positive) working capital to keep operating.

Soilbuild Construction Group Ltd might have drifted into a deficit (i.e. negative)working capital position after it waived another S$4 mln worth of trade debt of the parent company, in lieu of dividend on April 24, 2013.

This explains why most of the IPO proceeds will be used for working capital purposes.

Let's assume for a moment the company had not paid the dividend.

The parent company would (should) have paid Soilbuild Construction Group S$42 mln for work done.

Cash would have flowed from the parent company to the subsidiary, but stayed within the group.

So, why bother?

We can only guess at the strategy of paying the dividend.

Is the parent company cash strapped, and needed its debts to the subsidiaries forgiven? It's a private company, so we have no way of knowing.

However, it looks like the investment bankers had a field day, structuring a deal which, in essence, brings fresh capital into the company without Mr Lim having to sell even a single of his own shares, or list the parent company on the stock market.

Soilbuild Construction Group Ltd had S$31.1 mln worth of unutilised bank facilities as on April 30, 2013 (refer page 79).

So, it could have used these facilities to finance its day-to-day operations.

But would the bankers agree to finance its working capital which has been drained in paying dividends to the parent company?

If yes, why did Soilbuild Construction Group Ltd need to raise funds for working capital through an IPO?

How can investors figure out contradictory statements in the prospectus?

According to page 93 of the prospectus, Soilbuild Construction Group Ltd paid interim dividend of S$4 mln, for FY2013, on April 26, 2013.

Further, the interim dividend was paid in cash and out of its retained earnings.

After paying the dividend, the company had retained earnings of S$17.6 mln on its books as at April 30, 2013.

That means, it had retained earnings of S$21.6 mln before paying the interim dividend.

Surprisingly, all of the above statements are in contradiction to other statements in the prospectus.

According to page I-38, Soilbuild Construction Group Ltd declared the dividend on April 24, not April 26.

Further, the dividend was settled by 'netting of intercompany balances', and not in cash.

According to the combined audited balance sheet of Soilbuild Construction Group Ltd on page I-6, the company didn't have any retained profits – after declaring the dividend for 2012- as on December 31, 2012.

Therefore, if the information on page 93 is to be believed, Soilbuild Construction Group Ltd generated S$21.6 mln profit in Q1 2013.

That is almost equal to its full-year profit in 2012.

We can't make heads or tails of this.

Why not disclose Q1 2013 earnings, on the basis of which the S$4 mln interim dividend was paid?

About the dividend declared in 2012, we know that entire retained profits were distributed to the parent company.

But we couldn't find any explanation to the interim dividend announced in April 2013.

Was it based on Q1 2013 performance?

Soilbuild Construction is not obliged to report the most recent quarterly earnings before listing, but it would have been useful for investors to know what they were.

What are/were its intercompany balances with the parent company?

Soilbuild Construction Group Ltd paid S$46 mln dividends by netting inter-company balances with its parent company, Soilbuild Group Holdings Ltd.

However, the prospectus didn't share the exact intercompany balances at the end of 2010, 2011, 2012 and April 30, 2013 (being the latest practicable date).

Can we have them now, please?

Why do its project management services disappoint year after year?

Soilbuild Construction Group Ltd's revenue from project management services fell 44.8% in 2012.

This comes after a similar fall of about 47.3% last year.

Therefore that makes us wonder why it is witnessing a consistent decline in project management revenue.

Why don't its numbers for Angullia Park project match with those of its JV partner?

The Angullia Park Project was awarded to Forte Builder Pte Ltd, a 50:50 JV of OKP Holdings and Soil-Build Pte Ltd, by China Sonangol International (S) Pte Ltd in 2010.

According to OKP Holdings Ltd's announcement, the contract, worth S$83.5 mln, was scheduled for completion in April this year.

Earlier in the year, in reply to a query from Investor Central, OKP Holdings Ltd said the project was on schedule for completion in April.

But according to page 109 &110 of the prospectus, Forte Builder Pte Ltd has subcontracted the construction of Angullia Park to Soilbuild Construction Group Ltd.

Further, the sub-contract is worth S$77.4 mln and will be completed only in September 2013.

We are confused as to which of the JV partners we should believe.

What is the future of its 19% stake in Solstice Development Pte Ltd?

Solstice Development Pte Ltd is the developer of the Solstice Project, and Soil-Build Pte Ltd is the main contractor.

The project was completed on April 5, 2013 (refer page 110).

Therefore that makes us wonder what could be the future of Soilbuild Construction Group Ltd's 19% stake in Solstice Development Pte Ltd.

Further details can be found on page I-1 of the prospectus.


Soilbuild Construction Group Ltd's wholly-owned subsidiary, Soil-Build Pte Ltd, has been graded A1 by the Building and Construction Authority (BCA) under the registration category CW01 for General Building.

Soil-Build Pte Ltd's A1 grading, which allows it to tender for public sector projects in Singapore of an unlimited contract value, is valid up to July 1, 2015.

Despite several cooling measures implement by the Government to cool residential property prices, BCA expects public sector residential construction demand to strengthen in 2013 (refer page 30).

BCA expects the public housing and infrastructure construction works to contribute S$14-S$17 bln out of S$26–S$32 bln construction demand in Singapore in 2013.

The average construction demand for 2014 and 2015 is projected to be S$20-S$28 bln per annum (refer page 33).

But the relevance of all these forecasts depends on one simple question:

How much of this can Soilbuild Construction Group Ltd grab, realistically?

Given that so much working capital flowed out of the company before the IPO, does it have the resources to bid for the work which BCA is referring to?

Its subsidiaries' status with the BCA depends on it.

To maintain Soil-Build Pte Ltd's BCA grading status of A1 (under the category CW01 for General Building), it has to secure projects with an aggregate value of at least S$150 mln over five years, and there is at least one project with a contract value of at least S$37.5 mln.

Which equates to the entire amount of money raised in the IPO.

As a part of its growth strategy, Soilbuild Construction Group Ltd plans to invest in automated and improved technologies that would improve the efficiency of its construction process.

As a matter of fact, it plans to spend up to S$10 mln of the IPO proceeds for investment in productivity improvements like pre-casting technology.

It believes that pre-casting technology will reduce dependence of labour and shorten construction time.

This way, it can improve efficiency and control labour costs.

How many labourers can the technology replace?

Soilbuild Construction Group Ltd had 800 employees as on December 31, 2012 (refer page 200).

We wonder how many of these labourers will no longer be required after pre-casting technology is adopted.

That leads us to another question:

Why didn't Soilbuild Group adopt and implement pre-casting technology much earlier?

Moving ahead, Soilbuild Construction Group has secured two consultancy 'contracts' in Myanmar.

First, secured in March 2013, a contract for professional consultancy and project management services for a proposed hotel development, by a third party, in Myanmar.

Second, secured in April 2013, acceptance in-principle of company's offer to provide project management consultancy services for three residential and/or commercial developments, of another third party, in Myanmar.

The second "contract" is still subject to execution of a formal letter of award.

In other words, it isn't a "contract" yet.

Is there anything that could yet scupper this deal?

Also, what is the value of both the "contracts"?

Further details can be found on page 126 of the prospectus.


Lim Chap Huat, the co-founder of Soilbuild group, is the executive Chairman of Soilbuild Construction Group Ltd.

Mr Lim has been the Group Managing Director of Soilbuild Group Holdings Ltd since 2001, and also serves on the board of all of its subsidiaries.

In 2010, Dolphin Acquisitions Ltd, a company wholly-owned by Mr Lim, successfully privatised SGX-listed Soilbuild Group Holdings Ltd, for S$418 mln.

Now, Mr Lim has spun the group's construction business into Soilbuild Construction Group Ltd which has been valued at S$166 mln in the IPO.

Mr Lim is not selling any of his shares in the IPO and will own 73.5% stake in Soilbuild Construction Group Ltd through the parent company, immediately after the IPO (refer page 75).

According to his service agreement with Soilbuild Construction Group Ltd, Mr Lim's annual remuneration includes basic salary of S$252,000, and performance bonus of up to S$655,200, among other benefits (page 198).

Apart from his business interests, Mr Lim Chap Huat is believed to be active in the political arena.

According to this news article on Urban Redevelopment Authority's website, Mr Lim Chap Huat is a grassroots leader of People's Action Party (PAP), the ruling party of Singapore.

Mr Lim served as Vice-Chairman at Sembawang Chong Pang CCC and as Assistant Treasurer at PAP Chong Pang Branch.

The news report highlights how Jurong Town Corporation (JTC) ended up divesting some properties to Temasek-owned Mapletree Industrial Trust and Mr Lim's Soilbuild Group.

Commenting on the divestments, JTC's CEO said Mapletree Industrial Trust and Soilbuild Group were short-listed after rigorous two-staged tender process.

Moving forward, Ho Toon Bah is the only Executive Director of Soilbuild Construction Group Ltd.

He will hold a 1.2% stake in the company, immediately after the IPO.

Mr Ho joined Soilbuild Group Holdings Ltd in 2009.

Before that, he occupied several management positions in the banking industry.

According to his service agreement with Soilbuild Construction Group, Mr Ho's annual remuneration includes basic salary of S$432,000, and performance bonus of up to S$672,000, among other benefits.

Lim Cheng Hwa is the Non-Executive Director of Soilbuild Construction Group Ltd.

She joined Soilbuild Group Holdings Ltd as the Group Financial Controller in 2007 and was promoted to Director of Capital and Investment Management in 2010.

Poon Hon Thang is the Lead Independent Director of Soilbuild Construction Group Ltd.

He retired as a Senior Executive Vice President from UOB in 2006.

In addition, Mr Poon has been an Independent Director of SGX-listed Enviro-Hub Holdings Ltd, since 2007.

He also serves as an Independent Director of J.P. Nelson Holdings Ltd which is listed on the Taiwan Gretai Securities Market.

Tan Jee Ming is an Independent Director of the company.

Mr Tan is currently a Director in Straits Law Practice LLC where he practises general civil and criminal law.

Teo Chee Seng is another Independent Director of Soilbuild Construction Group Ltd.

He is the Managing Director of Able Law Practice LLC and has been a lawyer in private practice in Singapore for more than 30 years.

Further details can be found on page 184 of the prospectus.


Challenge of maintaining A1 grading status with BCA

To maintain Soil-Build Pte Ltd's BCA grading status of A1 (under the category CW01 for General Building), it has to comply to the following requirements:

(a) it has to secure projects with an aggregate value of at least S$150.0 million over a five year period, of which S$75.0 million is in respect of projects in Singapore, S$112.5 million is in respect of projects where it is the main contractor or nominated contractor and there is at least one project with a contract value of at least S$37.5 million;
(b) it must have a minimum paid up capital and net worth ofS$15.0 million;
(c) it must have in its employment at least 24 holders of approved professional qualifications; and
(d) it must possess ISO 9001:2008 (SAC), ISO14000 andOHSAS18000/SS506 Part1 certifications.

If Soil-Build Pte Ltd fails to comply with any of the above requirements, its BCA registration status would accordingly be downgraded.

Thereby it would lose the ability to tender for public construction projects of an unlimited contract value.

Soil-Build Pte Ltd's A1 grading is valid up to July 1, 2015.

How many of the above requirements has it complied so far?

Competition in the Industry

According to page 120 of the prospectus, BCA has 1,199 contractors registered with it.

Of these, other than Soil-Build Pte Ltd, 63 other contractors enjoy A1 grading status.

Certainly, it won't be easy for Soil-Build to outbid so many contractors.

Conflict of Interest

Soilbuild Construction Group Ltd is heavily dependent on its controlling shareholder, Soilbuild Group Holdings Ltd, and other companies owned/related to Mr Lim Chap Huat.

Soilbuild Construction Group Ltd derived 100%, 83.7% and 58.4% of its revenue in FY2010, FY2011 and FY2012 respectively, from construction projects awarded by companies of Mr Lim.

Such contracts made 100%, 80.5% and 83.3% of its gross profit in FY2010, FY2011 and FY2012 respectively.

And, 49.1% of its S$511.2 mln order book (as on April 30, 2013) is made up of contracts from companies of Mr Lim.

According to page 159 of the prospectus, Soilbuild Construction Group Ltd acknowledges that S$251 mln worth of contracts from Soilbuild Group Holdings Ltd had not been negotiated on an "arm's length basis" as it was a subsidiary of the latter when these contracts were awarded.

Therefore that makes us ask:

How will it make sure the future contracts from companies related to Mr Lim are negotiated on an "arm's length basis"?

On that note, what does "arm's length" mean, and who verifies if it was indeed followed while transacting with 'related parties'?

On the brighter side of things, Soilbuild Group Holdings Ltd and Mr Lim Chap Huat have signed separate 'Non-Competition Deeds' with Soilbuild Construction Group Ltd.

Stop-work orders

Soilbuild Construction Group Ltd has been issued 'stop-work orders' on several occasions (read more on page 46).

Though stop-work orders are temporary, they might lead to a delay in completion of company's projects.

Increased foreign worker levy

The government has increased the foreign worker levy with an aim to make companies more productive – doing more with the same or fewer workers.

As at April 30, 2013, Soilbuild Construction Group Ltd employed625 workers which are subject to levies (refer page 48).

It plans to procure and implement pre-casting technology to reduce its dependence of labour and increase productivity.

However, it is still a proposal and the company will use part of IPO proceeds to finance the investment in pre-casting technology.

Until such time, it will have to pay higher levies to the government.

How much will its labour costs increase due to higher foreign worker levy?

Further details can be found on page 38 of the prospectus.


Earlier this month, Soilbuild Construction Group Ltd received a notice of intention from a supplier, threatening to apply for adjudication of a claim of S$3.4 mln.

The company says the notice was later withdrawn by the supplier following 'partial payment as well as an agreement on the release of the balance amounts in accordance with certain supplies delivery milestones'.

Why couldn't it settle supplier's claim before the notice was served?

Afterall, Soilbuild Construction Group had S$5.3 mln cash reserves as at December 31, 2012 (refer page 86).

How much did it pay to partially settle the claim?

Has it agreed to settle supplier's remaining claim out of IPO proceeds?

The company says the balance amounts will be paid 'in accordance with certain supplies delivery milestones'.

In other words, supplier's S$3.4 mln claim was for supplies which are yet to be delivered to the company.

If such is the case, why did Soilbuild Construction Group give in to supplier's notice?

Further details can be found on page 237 of the prospectus.


Soilbuild Construction Group Ltd intends to recommend an annual dividend of at least 25% of profit-after-tax for the financial period from the listing date till December 31, 2013.

For FY2014, it intends to recommend a similar annual dividend of 25% of profit-after-tax.

Further details can be found on page 69 of the prospectus.


S$ 24.5 mln for working capital purposes
Up to S$ 10 mln for investment in productivity improvements like pre-casting technology
Up to S$ 5 mln for expansion in Myanmar, ASEAN countries
S$ 2.5 mln for listing expenses

Further details can be found on page 67 of the prospectus.


Total Offer Size: 168 mln shares
Price per share: S$0.25/share
New shares: 168 mln shares
Vendor shares: Nil
Placement shares: 166 mln shares
Public shares: 2 mln shares


Market cap: S$ 166mln
Price/Book: 3x
Price/Earnings: 7.6x


Thank you for email and your questions.

As you can imagine, we are in the process of preparing for the listing of the Company on Monday and there are various related logistics that need to be coordinated before then. We are afraid that we are unable to accommodate your request to respond to your questions within 24 hours, but would like to quickly respond to what we believe is the key underlying point that you appear to be raising through most of the 19 questions you have raised.

We have reviewed your questions and note that your underlying suggestion is that Soilbuild Construction Group Ltd (“Company”) does not have sufficient working capital and would have collapsed without the IPO. We would like state that we categorically disagree with this suggestion. In this regard, we would like to highlight the following:


Key financials at listing

As at 30 April 2013 (after the payment of the interim dividends of S$4 million and prior to the IPO), the Group had net cash and cash equivalents (after deducting total indebtedness of S$993,000) of approximately S$11.3 million.


Taking into consideration the cash and cash equivalents, the Group’s existing credit facilities and operational cash flows (after payment of the interim dividend of S$4 million), the Company believes that the Group has sufficient working capital for its present requirements. This is already stated in the prospectus.

Unfortunately, at this time we are unable to accommodate the timing constraints that you have requested for to provide you with further insight (subject of course to legal and regulatory constraints on disclosure of information) and clarification on some of the disclosures
made in the prospectus. We seek your kind understanding.

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