Long Huat Group (LHG) was listed on the 2nd Board of the KLSE in May 1990. From a modest beginning as a manufacturer of timber mouldings and timber-related products, it ventured into various businesses, ranging from veneer wrapping to furniture production to property development and shoe manufacturing in China. However, in financial year 2001, it all went awry when LHG reported a staggering loss of RM118.22 mln, turning its shareholders' funds of RM60.93 mln in 2000 to a deficit of RM58.79 mln in 2001.
How did LHG arrive in such a predicament ? Inept management that persistently ignored the basics of sound business and financial management, unhealthy reliance on loans combined with a list of failed ventures were some of the reasons that led LHG to be classified as a PN4 company in Jul 2001. Unlike the experience of Southern Plastic, LHG did not see its core timber operations declining soon after its listing. In LHG's case, they were still profitable but there were already signs of deterioration in the group's business fundamentals. Take a look at Table 1.
Table 1 : Financial Highlights (RM mln)
Signs Of Deterioration
From 1990 to 2000, sales were climbing but gradually and in an erratic manner. While earnings before interest, tax, depreciation and amortisation (EBITDA) were rising steadily, on the other hand, pre-tax earnings were flat for most of the time. What was worrying was the disproportionate rise in total assets and borrowings needed to fund the rise in sales. It was not just the increase in fixed assets but the massive and persistent rise in stocks and debtors that were ringing the alarm bells very loudly. By 1997, stocks and debtors almost totalled RM68 mln, as opposed to a turnover of around RM46 mln. By 2000, stocks and debtors had spiralled out of control to more than RM92 mln. It is really puzzling how they could surge to such high levels. Not surprisingly, the reasons for the hefty losses in 2001 were basically related to the high level of debts and stocks - see table 2.
Table 2 : Losses in 2001 (RM mln)
Non-Existent Financial Management
For the most part of the Nineties, LHG was cash strapped - see table 3. Had LHG financed the investments in assets with shareholders equity and/or trade creditors, the consequences may not have been so dire. Unfortunately, to finance these increases in assets, total loans surged to almost RM54 mln by 2000, comprising mainly short-term loans. So, besides burdening a balance sheet that was already overstretched, this also meant that the financial charges - table 3 - were also eating into the group's profit margin, leaving very little for LHG to finance its current operational and future expansion needs. As a possible sign that the management was too confident over its financial condition, LHG continued to pay dividends until 1996 - see table 3. A more prudent step would have been to conserve the cash for its future use. However, to be fair to the management, LHG did try to avert a liquidity crunch by proposing to issue long-term bonds with warrants attached. This was not successful. What caused LHG to reach such a disastrous state of affairs?
Table 3 : Cash flows
Expand and Diversify Mantra
In its search for additional sources of growth, the group had early on initiated various expansion and diversification plans, spreading its wings upstream, downstream and even to non-timber related industries and to China. However, as summarized in table 4, the results were less than inspiring and as we have shown earlier, the substantial increase in assets and sales did not lead to higher profits.
Table 4 : Summary of Expansion and Diversification Plans
The management of LHG showed either a lack of focus or an orientation towards short-term goals. They were pursuing a strategy that seemed to be at odds with the overall operations of the group. Since the core business of LHG was in timber moulding and related timber activities, it would be logical to pursue plans that complemented this main source of income. However, several decisions made not only seemed dubious, but those decisions may have adversely affected the group's operations in the long run. They were :
. Cessation of the veneer wrapping of mouldings and furniture parts division. LHG set up Long Huat Wood Tech S/B in 1990 to operate its veneer wrapping of mouldings and furniture parts division. This downstream segment of the timber industry has higher value-added, compared with the group's traditional activities. Sales in 1992 were RM5.28 mln, an increase of 258% from 1991 and RM5 mln was invested. Then, in 1993, Long Huat Wood Tech S/B abruptly ceased all activities without any explanations. This was certainly strange, considering all the hopes the group has been hyping about this division.
. LHG acquired a 65% interest in Nianli Wood Products S/B (Nianli) for RM4.81 mln cash in 1994, which manufactured timber mouldings and provided timber kiln-drying services in Sabah. Besides, Nianli also enjoyed pioneer status. Then, not even a year later, LHG sold off its entire interest in Nianli for RM6.5 mln, making an exceptional gain of RM1.69 mln. This was a surprising development, for the management had said that this acquisition was part of its long-term plan to expand its core business. It just seemed that the one-time gain was more important than the future contributions that can be garnered by integrating Nianli with LHG's operations.
. In 1996, LHG bought the right to extract merchantable timber in Sabah for RM9.23 mln. This 5-year concession would ensure that the group had a steady supply of raw materials for its operations. Then, in 1998, LHG sold the entire right for RM6.5 mln. Perhaps this was not surprising, as the group was already cash strapped, but the disposal was certainly not in harmony with LHG's long-term plans.
New Shareholder, Old Problems
In April 1997, Damansara Realty (D Bhd) purchased 11.801 mln shares for RM148.41 mln cash to emerge as the largest shareholder with a 31.6% stake. Demi Maju S/B sold down its 20.7% interest to 5.97% and subsequently, 4 directors resigned, paving the way for the formation of a new board and management. How could one resist such a hefty sum for a set of operations that was deteriorating ?
With D Bhd in the driving seat, LHG proposed a list of acquisitions to form an enlarged integrated timber company, focusing mainly Unicorn Timber Industries Bhd and its subsidiaries. The price tag was a staggering RM566.5 mln - ha, the good old days. The acquisitions were to be funded by a combination of cash, bonds, new shares and a rights issue. However, even before D Bhd could settle in, it had to take a whopping loss of RM128.3 mln (86.4% of its investment) due to the plunge in the share price of LHG. This massive provision contributed to D Bhd's net loss of RM158.8 mln for fiscal year 1997. D Bhd was facing financial problems of its own. In 1998, even with the aid of a RM540 mln term loan from EPF, it reported a net loss of RM210.8 mln with a humongous working capital deficit of RM665.69 mln. D Bhd subsequently had to undertake a restructuring exercise to nurse it back to health. With D Bhd also wobbly, LHG faced a bleak future.
Too Late, Too Little
Efforts to pare down its debts were futile as its cash flow problem was worsening. With its liquidity tight and an over-reliance on short-term loans, LHG was unable to service its interest and principal repayments. Its banking facilities were recalled, thereby, paralysing the group's operations. The advance of RM7.62 mln from D Bhd was unable to make any difference. LHG subsequently suspended its core timber operations and had to incur exceptional losses amounting to RM98.05 mln. More sordid details surfaced when the management was unable to determine the movements in its stocks, the realizable value of its assets, the details of its asset disposals and the utilization of its proceeds. Incidents of missing assets and misplaced company documents were also reported.
The KLSE publicly reprimanded LHG for failing to make immediate announcements pertaining to writs of summons served on the company and its subsidiaries by financial institutions from 30 Nov 1998 to 23 Mar 2001. The company was subsequently served with a winding-up petition on Sep 2001.