Southern Plastic Holdings (Splas), another sorrowful tale, was listed on the KLSE Second Board in Sep 1994. Initially, it manufactured and traded in plastic products for use in kitchens and electrical appliances. With annual sales growth of 26% between 1990 and 1994, accompanied by a double digit profit margin and with established clients like Sanyo, Sony and Mattel, this self proclaimed largest exporter of plastic products very quickly diversified into plastic packaging and manufacturing and trading of timber products. Unfortunately, Splas failed to live up to its early promise. Due to its unsuccessful diversification, poor management, ill-disciplined borrowings and severe shortage of working capital, the group was crippled. On Feb 2001, Splas fell under the PN4 category.
No Alarm Bells?
In reading the first annual report of Splas as a listed company, there were superficially no alarm bells ringing. But if one were to put the various pieces together, a worrying picture would emerge. First, the listing was via an offer for sale, meaning that Splas would not be receiving any funds from the listing. No prizes for guessing who received the listing proceeds. Secondly, upon its listing, Splas very quickly diversified into new businesses - too quickly perhaps. By itself, there was nothing wrong with this but a look at figures 1 and 2 would probably complete the jigsaw puzzle. As shown, earnings of its core plastics division peaked immediately after its listing. Coincidence or the shareholders and management already knew that its core operation was a fast declining business?
Figure 1 : Sales of Plastics Division
Figure 2 : Pretax Profit of Plastics Division
Diversify, Diversify, Diversify
So, it was not surprising that shortly after its listing in 1994, Splas implemented various diversification plans to broaden its earnings base. In 1995, the group expanded horizontally into PET bottle packaging via its 70% owned subsidiary, Southtech Plastic (M) S/B. The group also ventured into the trading of sawn and moulded timber business via a 60% owned subsidiary, Southtim (M) S/B. The group made a foray into another unfamiliar industry, property development. Later in 1997, it subscribed to a 51% stake in Southtech Timber (Sabah) S/B, which manufactures and trades finger-jointed and laminated boards, sawn timber and moulded timber.
Table 1 : Segmental (RM mln)
As table 1 shows, its diversification ended in a fiasco. The group suspended its property development plans in 1997 due to a general decline in the market. Its timber division did not fare any better. Barring the anomalous results in financial year 1999, profits were miserable, especially when the huge capital invested was taken into account. As for the exceptionally good results in 1999, Splas benefited from a temporary surge in timber prices, a one-off event that also marked the end of its timber trading activities. While sales jumped, earnings were at best erratic. By fiscal year 2000, the day of reckoning for Splas came.
Whilst the group was busy diversifying, its core plastics division was declining. Unlike the robust growth during the pre-listing period, the low barrier to entry, competitive plastics business stuttered through the late 90s. Although sales from the plastics division continued its steady growth, albeit at a slower rate, profits peaked in 1995 and subsequently started its decline. By 2000, the division started to record hefty losses, pulling the performance of the entire group down. Table 2 below shows the losses and major factors contributing to the disaster.
Table 2 : Loss before taxation after charging (RM mln)
Too Liberal With Borrowings and Credit
In its bid (almost desperate) to find new businesses to replace its declining core operations, Splas invested RM50 mln in non-productive fixed assets while its working capital needs ballooned. Since its entry into the timber business, the group had been strangely liberal with its credit facilities. In 1998, the group made "deposits" of RM20.37 mln to apparently secure future timber purchases. These advances were made to companies of which a director is a common director to one of the group's subsidiaries. In addition, inventories and trade debtors were also surging. The big jump in trade debtors in 1999 was because of timber sales to a company with common directors. Beginning to sound familiar ?
To finance this spending spree, Splas relied heavily on borrowings, one of the primary causes for its subsequent collapse. Short-term borrowings surged 2,476% from RM2.51 mln in 1995 to RM64.66 mln in 2000 while total loans surged 1,361% from RM5.38 mln in 1995 to RM78.62 mln by 2000. No wonder, interest expenses jumped 1,027% from RM0.59 mln in 1995 to RM6.65 mln in 2000.
A Departure Too Late
Looking at the group's plans through the years revealed warning signs about its management quality and integrity. Splas was an accident waiting to happen. Its overly liberal credit practices, consistent overspending and ill-disciplined borrowings finally took its toll on the group's balance sheet. Hindered by its severe lack of working capital and management practises that seem to be against the interest of the entire group, the group's operations inevitably suffered, recording a loss of RM10.3 mln in 2000, a first for the group. In July 2000, the entire board, led by the group's founding and controlling shareholder, Ch'ng Kee Guan, resigned.
Not helped by the low or even non-yielding assets of its manufacturing and trading operations, Splas was struggling to service and repay its debts. Not surprisingly, Splas also defaulted on certain bank borrowings. In 2000, the auditors expressed doubts as to the group's ability to continue as a going concern. As a result, Splas fell under the PN4 category in Feb 2001.