Saturday, February 21, 2009

Tat Hong featured in The Edge Singapore

The Edge has a 2-page article on Tat Hong and Mr. Roland Ng. I shall not reproduce the full article here due to copyright issues, but I will do a summary as follows. For more details get a copy of The Edge at $3.80.

Tat hong faces weaker demand and currency volatility, analyst opinion divided

1) Roland Ng says Tat Hong has "the right business model", and he believes the pace of building activity won't slow due to massive stimulus spending packages unleashed by many Governments as a result of the economic downturn.

2) In Singapore, over S$18 billion worth of public sector infrastructure projects are up for grabs.

3) Tutt Bryant is expanding its fleet of crawler cranes for LNG projects in Sydney and Melbourne. Roland Ng says although there is news of delays and stoppages of projects due to funding problems, there is still a big part of the business which is ongoing.

4) Tat Hong's associate, Yongmao, will benefit from China's RMB 4 Trillion stimulus package. Tat Hong itself has done a "roaring business" renting tower cranes in China.

5) Analysts add that renting equipment helps construction companies stay flexible and adapt quickly to changing demand.

6) Roland Ng concedes that even if rental demand remains firm, rental rates are likely to dip 5-10%.

7) Tat Hong imports cranes from Japan and earns most of its revenue in Australia and Singapore. In 3Q 2009, JPY strengthened against SGD by 19%, and against AUD by 41%. Though the Company has usually been able to adjust selling prices to factor in unfavourable exchange differences, Ong Tiew Siam (Exec Director at Tat Hong) says that this time around, the JPY was really volatile and that's why Tat Hong got "hit so bad".
Comment: This makes the exchange loss seem like a one-time problem which is unlikely to occur with such magnitude in future periods.

8) The problem was further exacerbated by a slowdown in crane demand, which meant a build up of inventory. According to CIMB, 30% of the exchange loss was due to inventory value adjustments, while the remaining 70% is due to a revaluation of its trade payables.
Comment: Thus, quite a large part of its exchange loss should be unrealized, and will hinge upon the strength of JPY against SGD and AUD.

9) Due to the ongoing crisis, Tat Hong has cancelled half its outstanding orders for cranes and transferred S$43.5 million worth of inventory to its rental fleet, which still enjoys strong demand.

10) The Company is banking on its rental business (see below) to sustain it through the entire downturn. They expect to remain profitable for 4Q 2009.

Under the section "BIG MONEY" by Assif Shameen, there was an interview with Mr. Roland Ng. A summary as follows:-

How a King of Cranes positioned his firm for a downturn

i) Roland Ng is the eldest in a family of 15 children and a UK-trained civil engineer. He joined the family's equipment trading and leasing firm in 1979 after a brief stint with Jurong Town Corp and has been CEO since 1991.

ii) Tat Hong was set up by his father, Ng Chwee Cheng, in the 1960s as a tyre and battery service shop. In the 1970s, Tat Hong branched into the trading of second-hand excavators and eventually, cranes.

iii) In 1996, just before the onset of the Asian Financial Crisis, it bought control (70%) of Tutt Bryant as it proved to be a good move as it helped to cushion Tat Hong during the dark days of 1997-1998.

iv) Ng says Tat Hong was successfully transformed from a diversified company that was selling, distributing and leasing heavy equipment to a predominantly [b]rental[/b] company. He says it's a more steady, stable and predictable revenue model.

v) Up to 10% of rental income comes from China, under 50% from Australia and the remainder from Singapore and S.E.A.

vi) Tat Hong remodelled its business model after the financial crisis as the volatility was "too much" for the conservative businessman. Eventually, Ng hopes that Tat Hong will be a predominantly crane and heavy equipment rental firm.

vii) Roland Ng insists Tat Hong is not tied to the global property boom, so with the collapse of the boom, Tat Hong should not be adversely affected. He insists that Tat Hong's cranes are not helping to build luxury condos whether in Singapore, Sydney or Shanghai; but the cranes are building bridges, ports and other infrastructure.
Comment: I have seen this for myself in Singapore. Most of their cranes are used to build either HDB flats, the IR or for road works and highways (tunnels) + MRT.

viii) The firm is NOT over-exposed to the mining bust in Australia either. Ng says they rent equipment to the oil, gas and energy projects rather than mining.

ix) Ng is seeing a lot of potential as Singapore has infrastructural projects coming up, plus China will be building more power plants, ports and bridges which will need Tat Hong's equipment and cranes. Indonesia is also reviving a lot of large infrastructural projects.

x) As the downturn takes hold, Tat Hong is ready to pounce. Ng says when valuations come down to more realistic levels, Tat Hong might buy equipment rental companies in Australia and China, maybe even South East Asia.

xi) Governments often try to kick-start economies by splashing big on infrastructure. What Tat Hong’s CEO has learnt about his business is that it isn’t tailored just to ride booms but it is also a key cog in the wheel of recovery.

Note: As a result of this article, my China Fishery analysis (which is already half-done) will be pushed to a few days later. Check back for details !

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