By Mak Yuen Teen and Chew Yi Hong

On February 19, 2020, DLF Holdings, a Catalist-listed company, announced that its wholly-owned subsidiary had disposed of a motor vehicle to Abwin (1994) Pte Ltd, an unrelated third party buyer. The vehicle was a BMW528iA, with the certificate of entitlement originally registered on November 29, 2013 and an expiry date of November 28, 2023, and the number plate “SKN3333R”.

The car was delivered to the dealer on February 12. The company said that the sale price of $72,000 was the highest quote from three unrelated third-party prospective purchasers. It was sold to improve its cash flow.

This small transaction had to be disclosed by DLF because the car’s book value exceeded 5% of the group’s net asset value. In fact, the book value of $114,322 accounted for 21.2% of the group’s net asset value.

DLF had listed only in July 2018. The fact that a listed company had to sell a used car to improve its cash flows so soon after its IPO raises a lot of questions about how it was ever allowed to list in the first place. The sale of the car is symbolic of the state that the company has found itself in.

Through a desktop search, a car with the same make and model, and the same registration date, was traced to the car dealer mentioned in the SGX announcement. The car was listed by the agent on 19 February, the date the company announced the disposal.

The car dealer’s listings showed no other BMWs in the past three months. The registration date is a perfect match as well. Under the remarks in the listing, it was stated that the previous owner had retained the car plate, suggesting that the car plate likely have value.

All the above – same dealer, same model and make, same registration date and valuable number plate – suggest that it is almost certainly the same car.

The car plate, SKN3333R, would indeed have value. In fact, the very exact car registration was listed in 2014 at $17,000. Other “3333” plates are being listed today at asking prices of between $6,333 and $12,800.

If this is the car in question, does the company still own the number plate? Or did the company sell it separately and receive the proceeds?

The reason why we raise this issue is because the company has not demonstrated much corporate governance and internal control since its listing.

Listing through placement

The listing of DLF in July 2018 was done entirely by placement, with 18.5 million shares priced at $0.23 each. The controlling shareholders of DLF were Manfred Fan Chee Seng and Wong Ming Kwong, who held 49.7% and 43.9% of the shares immediately before the IPO, and 42.1% and 37.2% respectively after the placement. Fan was the executive chairman while Wong was executive director and CEO.

The IPO raised $4.255 million, of which $1.12 million went to PrimePartners Corporate Finance (PPCF) who acted as the sponsor, issue manager and placement agent. PPCF was paid an additional $0.6 million through the issue of 2,608,700 new shares as part of its management fee for acting as sponsor and issue manager (which was not included in the non-sponsor fees disclosed by DLF in its annual report). PPCF’s fees were inclusive of a placement commission of 4%.  The net proceeds of $2.85 million were to be used for general working capital and to fund acquisitions and alliances..

Not surprisingly, there was very little trading in the shares after listing. For instance, in the six months prior to this article, there were only 6,000 shares traded on the market on two trading days. What really is the point of such a listing in the first place?

And it has been all downhill since its listing.

Reversal of fortune

In its offer document, the company marketed itself as a promising mechanical and electrical engineering services and solutions provider with a regional footprint. Its unaudited income statements showed impressive upward trajectories for revenues and profits. Revenues increased by more than 52% between FY2015 and FY2017, gross profit by 100% and profit before tax by 427%. Curiously, despite the significant revenue increase, its selling and distribution expenses and administrative expenses shrunk by 70% (from just $71,594 to $21,337) and 21% respectively.

Its first half-year results for the period to June 30, 2018 post-listing continued to show strong growth. Despite revenue falling by 6.8% compared to the corresponding previous half-year, gross profit increased by 53% and profit before tax by144%.

However, the unaudited full-year results announced on March 1, 2019 showed a total reversal of fortunes. Revenue for FY2018 fell by 15.2% compared to the audited FY2017 results, gross profit fell by 34.2%, and profit before tax had fallen from $3.87 million to a loss of $0.96 million. Profit after tax had dropped from $3.37 million to a loss of $1.18 million.

A 68% fall in revenue from mechanical and electrical services was largely responsible for the fall in revenues, which the company attributed to the completion of a hospital project and trade tensions between US and China, the latter resulting in reduction of purchases of its products from US customers. Why did the company not issue a profit warning?

While uncertainty in the global economic outlook was listed in the offer document among the long list of risk factors, it did not mention the trade tensions between US and China. In March 2018, the US started imposing tariffs on certain goods, not only those from China. In early April, China imposed tariffs of up to 25% on 128 US products, and US almost immediately responded with plans for 25% tariffs on US$50 billion of China imports. In other words, the trade war had started several months before DLF’s IPO, but was not specifically mentioned as a risk factor.

The company had also not identified any major US customers in its offer document, while its annual report shows two geographical segments of Singapore and Maldives for FY2017 and FY2018. Perhaps the reporting accountant and auditor, Foo Kon Tan LLP, should be asked about this matter.

Another factor which turned out to be a major risk, but which was not mentioned, was the turnover in the board and management.

Friends becoming foes?

At the AGM on April 30, 2019, the CEO, who was the second largest shareholder, and the three independent directors were voted out by Fan, the largest shareholder. Fan himself was voted in with 100% of the votes. Therefore, the CEO who was removed as a director was clearly taken by surprise by the move to vote him out, as the share count indicated that he had voted for Fan.

What was even more surprising is that the cessation announcements for the four directors who were voted out all stated there were no unresolved differences and no matter that needs to be brought to the attention of shareholders. The sponsor stated that it was satisfied that there were no other material reasons for their cessation. Did the sponsor interview the directors concerned?

The following day, SGX queried the company. Two weeks later, on May 15, the company replied and now disclosed that some shareholders (including Fan) were not satisfied with the performance of the CEO and therefore decided to vote against his re-election. They also decided to remove the independent directors to restructure the board in line with the change of management.

So were the company announcements accurate when they disclosed that there were no unresolved differences or matter that needs to be brought to the attention of shareholders? Dissatisfaction of the chairman/largest shareholder with the CEO was not a matter that needs to be brought to the attention of shareholders?

On May 30, the company announced the appointment of three new independent directors. This was done through a fractured nomination process whereby the sole director left – the largest shareholder and executive chairman – reviewed and considered the qualifications, work experience and independence of three new directors. This second set of three directors did have experience as directors of listed companies.

On July 3, the financial controller, who was then the most senior finance executive in the company, resigned with immediate effect “to pursue other career opportunities”. There was no indication that she served any notice period but the sponsor was nevertheless satisfied that there were no other material reasons for her cessation. Since the company was able to appoint a replacement that same day and disclosed that the board had assessed him to be suitable, was the departure of the financial controller already known and was she serving a notice period, which would normally be expected? Did the company disclose the cessation timely, when it first became aware of her departure?

More bad news

About three weeks later, the company issued a profit warning that the company was expected to report a significant loss for 1H 2019. If the FY2018 results were a shock, the 1H2019 results released on August 14 were a catastrophe.=

Revenue for the six months had collapsed 92% to $0.74 million compared to $9.54 million from its restated results for the corresponding period; gross profit fell from $3.05 million to a loss of $0.22 million; and net profit before tax had fallen from $2.06 million to a net loss of $5.62 million. The company said that the fall in revenue was due mainly to the termination of the Maldives project on February 5, 2019 – but the company made no announcement about the termination at that time. Is this in compliance with the continuous disclosure requirement?

The day after the 1H2019 results were announced, the financial controller who had joined just over a month earlier, resigned with immediate effect “to pursue other career opportunities”, with the sponsor again saying that there are no other material reasons for his departure. The following day, SGX queried the company about this latest departure and the earlier departures of the financial controller and directors. The company responded about two weeks later saying there were no other material reasons for their departures. The finance function was now going to be overseen by the finance manager, who had joined less than three months earlier.

What internal controls?

More late disclosure was to come. On August 30, 2019, the company announced that the chief operating officer had resigned “due to family commitment”. His effective date of cessation was four months earlier on April 30. The announcement disclosed that he had already in October 2018 informed the former CEO of his intention to resign, and was serving six months’ notice which ended on April 30. Did the company not know that the COO had already left four months earlier, and had served notice six months before that? So much for timely disclosure of material information again.

SGX queried the company about the adequacy of its internal controls given its failure to announce the cessation of the COO and steps the company will take to strengthen the controls. The company responded that it was a “one-off”, that it will engage the internal auditor to review its internal controls and corporate governance, and send its key management for training. That is well and good, but will there be accountability?

Cheap sale

On September 20, the company suddenly announced that QRC Pte Ltd had entered into sale and purchase agreements with Fan and Wong to buy 57.16% of the company at $0.0809 per share, which will trigger a mandatory general offer (MGO). This was a 54.5% discount from the one-month VWAP. Fan sold 20% out of his 42.11% stake, while Wong sold his entire 37.16% stake.

Fan and Wong were subjected to a moratorium of 6 months, with 50% subject to a further moratorium of another 6 months from the placement. So two months after the moratorium expired, the second largest shareholder had sold his entire stake, while the largest shareholder had sold nearly half.

On September 23, SGX queried the company about the huge discount and the company’s responded that both the balance sheet and income statement had deteriorated significantly. SGX followed up with a notice of compliance on September 26. The independent directors are to scrutinise the bases used by the independent financial adviser to arrive at its recommendation for shareholders, and set out the detailed justifications and bases for shareholders. The company was also to engage with the offeror on its business plans and future direction and disclose to shareholders.

On September 30, the company appointed a CFO but he lasted less than four months. On November 13, all three independent directors resigned to make way for new directors to be appointed with the change in controlling shareholder. Three new independent directors were appointed. Enomoto Hiroyuki, who now owns 64.13% of the shares, did not join the board but had nominated the CEO and the director of QRC to the board as a non-independent non-executive director. None of them has any experience as a director of listed companies but they were nevertheless assessed by Fan to be suitable to be directors.

This is just the latest instance of listed companies appointing a slate of independent directors without experience as directors of listed companies. Regulators must hold directors, regardless of whether they have experience or not, accountable for their actions. Perhaps it is time for “fit and proper” tests to be introduced for directors of listed companies, and not just for financial institutions.

SGX issued two sets of queries relating to the appointment of the new directors and the cessation of the CFO, and about past turnover. On January 22, 2020, the company appointed a 35 year-old as a provisional financial controller.

Over its short history of about 1.5 years on Catalist, DLF has seen three different sets of independent directors; the departures of a CEO, COO, CFO, two financial controllers; several disclosure lapses; six sets of queries; a notice of compliance; a price fall of 65% (based on IPO price and MGO price); and sharply rising pre-IPO revenues and profits followed almost immediately by sharp reversals.  Now it has to sell a car for $72,000 to improve its cash flow.

Questions must surely be asked of the sponsor and issuer manager, the reporting accountant and auditor, Foo Kon Tan LLP, and of course the directors and management involved.

Sad to say, it is still far from being the worst IPO to have listed on Catalist over the last two years.

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The first author is an associate professor of accounting at the NUS Business School, where he specialises in corporate governance. The second author is an active researcher and investor who holds as MBA with distinction from the London Business School.