The Fall Of A Star

Hyflux, once a star in the local business scene hit the headline on 18 May 2019. This time, it was for the wrong reason. Its S$1 billion flagship desalination plant, Tuaspring was taken over by the Public Utilities Board (PUB) at no cost. You may sign up for economics tuition with a reputable economics tutor to learn more about the importance of water desalination to Singapore’s economy.

Tuaspring is Singapore’s largest seawater treatment plant and the first water plant in Asia integrated with a power generator. The successful bid of this project marked Hyflux’s foray from its core business of water treatment into the energy business. However, it was later proved to be a watershed in Hyflux’s 30-year history. With guidance from your economics tutor in your economics tuition class, discuss the pros and cons of aggressive business expansion.

The Rise of Hyflux

The rise of Hyflux was once a frequently featured story by local media, alongside the inspiring rags-to-riches story of its founding CEO, Olivia Lum. In 1989, Lum gave up her career in pharmaceuticals to establish Hyflux. Her hard work soon paid off. In 2001, the company went public. In the same year, Hyflux secured the important project of supplying and installing the process equipment for Singapore’s first NEWater plant. The company went on to win more such projects in Singapore and beyond, building a brand name in water treatment.

At the height of its growth in 2010, Hyflux boasted a market capitalization of S$201 billion, with a record-high revenue of approximately S$570 million and net profit of close to S$90 million. Singapore is widely recognised as a regional leader in water treatment technology. In consultation with your economics tutor in economics tuition, discuss the significant role of Hyflux. You may sign up for Mr Edmund Quek’s economics tuition for a comprehensive case study. Mr Quek, principal economics tutor of Economics Cafe Learning Centre is the best economics tutor renowned for incorporating real world events into his economics tuition.

An Ambitious Move Turned out to be the Biggest Mistake

When PUB called a tender for the largest desalination plant in 2010, Hyflux went all out to secure the Tuaspring project, beating eight other bidders. The “impossibly low bid” of S$0.45 per cubit metre raised questions from some experts about the financial viability of Hyflux’s new project. However, Lum was optimistic about its prospect, hoping to sell the excess electricity generated to the national grid to offset its low bid. In consultation with your economics tutor in your economics tuition class, explain the various risks involved in submitting a very low bid.

Unfortunately, things did not turn out as she had planned. By the time Tuaspring was in operation, the power generation market was badly hit by a severe oversupply, suppressing the electricity trading prices to a persistently low level. Losses started to snowball. In May 2018, Hyflux applied for court protection to restructure its debt of S$3 billion.

Unsustainable Business Model Funded by Debt

To fund its Tuaspring project, Hyflux issued perpetual preference shares in 2011 offering an annual dividend of six per cent. The then first perpetual shares issued by a non-bank company in Singapore, the preference shares met with overwhelming demand. To learn more about perpetual shares, you may sign up for economics tuition with Economics Cafe Learning Centre, the best economics tuition centre in Singapore.

The financial statement of the company painted a less rosy picture. By 2013 when the Tuaspring was opened, Hyflux’s net profit had dropped by 50% as compared with 2010. Another alarming sign was the company’s operating cash flow, which had been negative since 2010. However, the company continued with its aggressive borrowing. It issued perpetual securities of six per cent annual return in 2016, which, again, met with overwhelming demand.

In 2016, Hyflux reported a full-year revenue of S$4.8 million, a 91 per cent drop from the previous year. Taking into account the perpetuals issued in 2011 and 2016, the company’s debt to earnings was 23.4 times. In 2017, Hyflux reported its first full-year loss. In May 2018, it filed for court protection.

Linda Geng

Click to Read Next Post

economics tuition, back to homepage

Economics Tuition Singapore @ Economics Cafe
Principal Economics Tutor: Mr. Edmund Quek