By Mak Yuen Teen
This is the third of a four-part series of articles on Raffles Education Corporation. It is based on a forthcoming case study to be included in Volume 10 of the Corporate Governance Case Studies published by CPA Australia and edited by Professor Mak Yuen Teen. While the case is written from public information and intended for discussion purposes, this series of articles includes some additional analysis and interpretation by Professor Mak which are his personal views.
In the first two articles of this series, I talked about education quality, board of directors and remuneration issues at Raffles Education Corporation (REC). Here, I will look at its performance, its diversification into property, and its joint venture in China.
New curriculum
“We will continually seek an optimal mix among our three growth engines – Education Provider, Management of Education Assets & Facilities and Education-Linked Real Estate Investment & Development – and balance our assets portfolio and resources both geographically and across sectors for sustainable growth.”
– Chew Hua Seng, Chairman and CEO of REC[1]
While REC started in the education industry, the Group’s business strategy seems to have undergone some changes over the years. In the company’s 2012 annual report, it was stated that the principal activities of the REC subsidiaries were in relation to education and education-related services, except for one entity which was in the business of providing utilities management services. The investment properties under REC were held under four subsidiaries, namely Oriental University City Limited (OUC), Raffles Assets (Singapore) Pte Ltd, Raffles Assets (Thailand) Co., Ltd, and Raffles Iskandar Sdn Bhd. It was further disclosed that OUC owned and leased out these properties to colleges within its self-contained campus while Raffles Assets (Singapore) Pte Ltd leased out the properties in Singapore for commercial office purposes. The land under the last two subsidiaries remained vacant as of 2012.[2]
Today, the principal activities of the parent company of the REC Group are described as investment holding and the provision of business and management consultancy services, while its subsidiaries are largely involved in the education and property management industries.[3]
Over the past few years, the Group has become more involved in property investments. Based on its 2019 annual report, the principal activities of three REC subsidiaries were listed solely as “property investment”, compared to none in 2012. Moreover, the type of properties owned by the Group has evolved. The following is an extract from REC’s 2019 annual report:[4]
“OUC owns and leases out investment properties to colleges within its self-contained campus. The land under [Raffles Iskandar Sdn Bhd], [Mandurah Resort Pty Ltd] and [Raffles Asset (Private) Limited] are vacant as at 30 June 2019. [Raffles K12 Sdn. Bhd.] has utilised part of the land for cafeteria and boarding facilities rental. Building construction on the land of [Trophy Land Global Limited] is ongoing. [Raffles Assets Australia Pty Limited] owns a commercial building and leases out to various tenants. [Raffles Siviez 1750 Pte. Ltd.] owns a commercial building. [4Vallees Pte. Ltd.] owns a hotel and facilities (“Hotel”) and seven commercial units (“commercial units”), of which six are rented out.”
The above extract indicates that a larger number of the REC subsidiaries generated revenue from investment properties, including rental and utility income through renting their investment properties for different business purposes, which includes a hotel.[5]
Mano Sabnani, Chairman and CEO of Rafflesia Holdings, an investment company he founded, described shareholders’ concerns about REC’s diversification into property expressed at its AGM held on 27 October 2014 and how CHS responded. He wrote:
“CEO lost his cool…calling shareholders “Oii..you’re ridiculous!!” and telling them to sell their shares if they are not happy with the company. But how can they? Shares at 35c are one fifth of price five years ago! CEO Chew says co has three businesses now with two legs in property development and management. Result: co has lost focus on education and survives on periodic sale of land. Shareholders want better focus on education and recurrent earnings. It’s not likely he will listen…Sigh. Question that irritated CHS related to loss of focus and need to refocus in education. His point is group has already diversified. So take it or leave it. A lot of bad news is IN the price. Stock is trading at multi-year low. Student enrolment which has been declining past few years is stabilising now. I would NOT be a seller at this point. Balance sheet has improved through land divestment and will improve further with flotation of OUC in China.”[6]
I very clearly remember that AGM. I was moderating a roundtable at the annual conference of the Securities Investors Association (Singapore) when a REC shareholder who had just left the AGM joined the roundtable. Clearly angry, he said he could not believe the attitude of CHS towards shareholders at the AGM.
Perhaps REC should have paid more heed to shareholders’ concerns, as its share price today is about a quarter of what it was seven years ago!
Failing grades
In FY2018, REC’s revenue from investment properties was 18.4% of the total revenue. The Group’s investment properties amounted to S$520.3 million and represented 41.3% of the Group’s total assets. The company’s net profit before tax of S$42.4 million for FY2018 was largely attributable to the fair value gain on investment properties of S$64.9 million from its investment properties in Thailand, Australia and China.[7] For FY2019, net profit before tax of S$28.1 million was bumped up by a gain on disposal of subsidiaries amounting to S$37.4 million.[8]
Based on the FY2020 annual report, REC recorded an increase in revenue to S$100.5 million, up from S$97.9 million in the previous year. However, the company fell into the red, reporting a net loss attributable to shareholders of S$16.4 million – a sharp fall from the net profit of S$40.2 million in the prior year.[9],[10] These figures were a far cry from those reported in its heyday – for example, REC’s net profit for the FY2007 and FY2008 amounted to S$49.3 million and S$98.8 million respectively.[11] Analysts back then expected the company’s profit growth to average 35% per year through 2010.[12]
Table 1 shows that revenue for REC has generally fallen over the ten years from FY2011 to FY2020, with revenue relatively flat in recent years. Net profit after tax attributable to shareholders has been highly volatile with FY2012 reporting a loss of more than S$66 million and generally on a downward trend from FY2011, except for FY2014 when a profit of S$55.4 million was reported, and with reported profits of S$10.7 million and S$40.2 million in FY2018 and FY2019 respectively. Cash flows from operations have also deteriorated considerably over the past 10 years, except for an increase in FY2019.
| (in S$ thousands) | FY 2011 | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | FY 2018 | FY 2019 | FY 2020 |
| Revenue | 146,353 | 131,135 | 128,377 | 127,390 | 119,895 | 111,030 | 96,220 | 96,832 | 97,854 | 100,477 |
| NPAT attributable to shareholders | 41,917 | (66,261) | 26,672 | 55,374 | 16,983 | 15,818 | (1,853) | 10,667 | 40,213 | (16,426) |
| Cash flow from operations | 29,331 | 13,768 | 9,009 | 12,354 | 4,167 | 815 | (5,515) | (10,707) | 16,438 | 8,847 |
Table 1: Financial performance of REC from FY2011 to FY2020[13]
In its announcement of its FY2020 financial results, REC cautioned that the “challenging global education environment, currency volatility, increasing competition and the COVID-19 pandemic continue to impact the Group”. In particular, its recruitment and retention of foreign students has worsened from border restrictions and lockdowns implemented as part of worldwide COVID-19 measures. The company also reported a loss per share of 1.19 Singapore cents for FY2020, compared with an earnings per share of 2.92 Singapore cents for FY2019.[14],[15]
Getting demoted
REC’s share price has been on a downward trend since its heyday in the mid-2000s. During its prime, the company was known to have an aggressive acquisition strategy and a generous dividend policy, which made it a ‘darling’ of the Singapore bourse.[16]
The company had previously carried out 2:1 stock splits on 10 November 2006 and 13 March 2008 respectively.[17] On 29 March 2011, the company carried out a share consolidation exercise, which resulted in every three existing shares being consolidated into one consolidated share.[18]
In March 2009, the CEO of REC’s associate company, Oriental Century Limited, admitted to have inflated the company’s sales and cash balances, prompting a suspension of its shares on the SGX.[19] REC announced that the company was “not materially affected” by the development.[20] However, its share price had already taken a hit and fell as much as 19%.[21] On 8 June 2010, REC’s shares fell to their lowest level since March 2009 after AIF Capital Asia III LP – a Hong Kong based private equity group – pulled out from a non-binding agreement to buy a 10% stake in Oriental University City due to poor global economic and market conditions.[22] In March 2011, some analysts attributed the fall in REC’s share price by 24% to “the rising tension in the Middle East and the unfolding nuclear crisis in Japan”.[23]
As the company’s financial performance worsened, so did the performance of its share price.[24]
Figure 1 shows the movement in REC’s share price across the years.
Figure 1: Share price of REC[25]
No money back
REC had consistently paid dividends between 2006 and 2009. In 2007 and 2008, the company distributed dividends ranging from S$0.0065 to S$0.013 four times a year. However, when its financial performance started deteriorating, the dividend payouts slowed down and eventually stopped. REC’s last dividend declared was in October 2015 at S$0.01 per share.[26]
No dividend was declared by REC for FY2020 “due to the COVID-19 pandemic and on a prudence basis”.[27] Meanwhile, the company’s reason for not paying out a dividend for FY2019 was due to the lack of accumulated profits to declare a dividend.[28]
Chinese lessons
In October 2007, REC announced that it was buying a campus in Langfang city in Hebei province near Beijing from Oriental University City Development for S$392 million.[29] Through this deal, REC would acquire the land and two of the 19 schools, and be the landlord to the other 17 colleges on the campus. CHS said that the acquisition would “leapfrog Raffles Education to be the largest foreign provider of education in China” and REC would be able to intensify the land use by building more schools. It said it planned to add five more colleges and one university in four years, with further plans to add new courses and programmes, while improving existing ones. Payment for the deal will be through four instalments over four years.
An investigation by Mark Laudi of Investor Central in May 2011 questioned whether the deal was really about education or whether it was in fact a property deal.[30] A visit to the campus found a lack of students. Within a few short years, the number of students had halved and the number of schools had fallen from 19 to 14. REC blamed the change in the quota system for the decline in student numbers. The investigation said that Oriental University City was no longer just a university campus and that REC had been trying to sell some of the land in order to build residential units. Based on its accounts, REC had made around S$10 million profits from the sale of land and a potential S$50 million from the realisation of assets assuming all of the units they have developed are sold. It seems that what started purportedly as an acquisition in the education business was now a property transaction.
In 2013, REC’s subsidiary, Langfang Tonghui Education Consulting Co., Ltd. (Tonghui), entered into a framework agreement for the sale of land and buildings in the Oriental University City Development to Langfang Heying Real Estate Development Co., Ltd. (Heying). Heying’s principal business is property development and property leasing. It has a registered capital of RMB318.8 million, and its assets primarily consists of land with a total area of 332,833m2.[31] The land and buildings had earlier been transferred to Tonghui in 2012 as part of an “internal reorganisation” of the Group.
Tonghui and Heying then incorporated Langfang Hezhong Real Estate Development Co., Ltd (Hezhong) in 2014 as a joint venture (JV) company between Tonghui and Heying, with the two JV partners contributing 70% and 30% respectively to the registered capital of Hezhong. Tonghui’s contribution was in the form of the land and buildings valued at 233.33 million yuan, while Heying’s contribution was cash of 100 million yuan. Heying’s role as a JV partner was to procure the conversion of the land from educational use to residential and mixed development use. However, efforts to convert the land to commercial and residential land titles over the past six years had been stalled by “numerous protracted challenges” and had not been successful.[32]
On 16 July 2020, REC announced its plans to take control of Hezhong after Tonghui entered into a sale and purchase agreement with Heying to raise its stake by 35.9% for RMB254 million (S$49.2 million) in cash. As at the date of the announcement, Tonghui had a 34.1% stake in Hezhong while Heying held the remaining 65.9% stake. As the proposed acquisition was considered a “major transaction” under Chapter 10 of the SGX Listing Manual, it was subject to shareholder approval.[33] REC’s share price closed at S$0.11 on the date of the announcement, down by S$0.005, or 4.4% from prior to the announcement.[34]
REC rationalised that the proposed acquisition would allow it to “obtain majority control over [Hezhong] and thereafter rationalise the land for development and use as education facilities”. The company also said that the acquisition would “create revenue streams complementary to the Group’s businesses of providing education consulting and other education related services”.[35] It said that Langfang City, being strategically located between Beijing and Tianjin, is “well poised to cater to the demands for educational facilities of higher education institutions”. According to REC, the acquisition would result in an increase of net tangible assets per share from S$0.3715 to S$0.3790.[36],[37]
REC Education held the EGM for shareholders to vote on the proposed acquisition on 30 September 2020[38] and it was duly approved, with 78.61% of shares voting for the transaction.[39]
Definitely not Simplified Chinese[40]
The proposed Hezhong transaction raised a number of questions.
Tonghui and Heying had also entered into an option agreement which gave Tonghui the right to require Heying to buy Tonghui’s 70% interest in the JV for 700 million yuan, which was based on the then prevailing value of the land. In 2014, the two JV partners entered into supplementary agreements to amend the shareholders’ agreement and the option agreement.
Tonghui later exercised its option but Heying paid only 460.83 million yuan instead of 700 million yuan. Heying now owned a total beneficial interest of 65.9% in the JV. Both parties agreed to waive any claims against each other under the shareholders’ and option agreements. The settlement agreement was announced in June 2019.
The EGM was for REC shareholders to approve the sale back to Tonghui of the additional 35.9% beneficial interest, which Heying acquired following the exercise of the option.
The net tangible asset value and book value of the sale shares based on the latest management accounts for the year ended 31 December 2019 was 290.34 million yuan. An independent valuation commissioned by Tonghui undertaken by Jones Lang LaSalle Corporate Appraisal and Advisory Limited valued the sale shares at 295.97 million yuan as at 30 June 2020.
On the surface, it did not seem like a bad deal. After all, Heying had paid 460.83 million yuan for the stake, which it was now selling back to Tonghui for 254 million yuan. The sale price was also below the net tangible asset value and book value in Hezhong’s management accounts and the valuation by Jones Lang LaSalle. However, these values may not be relevant given that the land will now be used for educational purposes. Jones Lang LaSalle also emphasised that with COVID-19, “values may change significantly and unexpectedly even over short periods”.
On 21 September 2020, Oei Hong Leong (OHL), a minority substantial shareholder, sent a letter to REC attention to its lead ID, LHT, regarding the proposed transaction.[41] The letter requested that REC make the relevant agreements and supplemental agreements available for inspection. It also raised a series of questions, including inter alia, why REC did not pursue a claim against Heying for the breach of shareholders’ agreement; reasons for continuing with a JV with a defaulted partner; and rationale for entering into the option settlement agreement and agreeing to buy back shares rather than pursuing a claim for a breach.
The EGM was to be conducted by virtual means under the COVID-19 measures introduced by the regulators, which require issuers to answer shareholders’ substantial questions before or at the shareholder meeting. REC only responded to the questions from OHL on 29 September 2020 at 5.30pm. This was after the deadline for voting, which was 10am the day before.
As I said in a commentary: “In REC’s case, the concerns and further questions raised by REC’s responses could also have influenced how other shareholders vote. It is simply unacceptable for REC to post its responses to the shareholder’s questions the day after the voting deadline, when the questions were sent eight days earlier.”[42]
Key Takeaways
In this article, I discussed how REC has diversified from the education business into the property business and its venture into China. The questions I have raised about board competencies relevant to the education business also apply to its diversification into property and China.
The company’s performance from all perspectives – education quality, corporate governance, profits, cash flows, share price and dividends – are arguably all achieving failing grades.
In the next and final article, I will look at the issues raised by OHL in his battle with CHS, and its serious disclosure breach.
Endnotes
[1] Raffles Education Corporation Limited. (n.d.). Annual Report 2018. Retrieved from https://raffles.education/images/Investor/AnnualReport/Raffles-AR2018.pdf
[2] Raffles Education Corporation Limited. (n.d.). Annual Report 2012. Retrieved from https://raffles.education/images/Investor/AnnualReport/Raffles-AR2012.pdf
[3] Raffles Education Corporation Limited. (n.d.). Annual Report 2019. Retrieved from https://raffles.education/images/Investor/AnnualReport/REC_AR2019.pdf
[4] Raffles Education Corporation Limited. (n.d.). Annual Report 2019. Retrieved from https://raffles.education/images/Investor/AnnualReport/REC_AR2019.pdf
[5] Ibid.
[6] Sabnani, M. (2014, October 29). Mano Sabnani: On PEC, RAFFLES EDUCATION AND AUSGROUP. NextInsight. Retrieved from https://www.nextinsight.net/story-archive-mainmenu-60/924-2014/9215-mano-sabnani-on-pec-ausgroup-and-raffles-education
[7] Raffles Education Corporation Limited. (n.d.). Annual Report 2018. Retrieved from https://raffles.education/images/Investor/AnnualReport/Raffles-AR2018.pdf
[8] Raffles Education Corporation Limited. (n.d.). Annual Report 2019. Retrieved from https://raffles.education/images/Investor/AnnualReport/REC_AR2019.pdf
[9] Raffles Education Corporation Limited. (n.d.). Annual Report 2020. Retrieved from https://raffles.education/images/Investor/AnnualReport/REC-AR2020.pdf
[10] Lam, F. (2020, August 27). Raffles Education says no merit to tycoon’s EGM request; posts S$16.4m FY loss. The Business Times. Retrieved from https://www.businesstimes.com.sg/companies-markets/raffles-education-says-no-merit-to-tycoons-egm-request-posts-s164m-fy-loss
[11] Raffles Education Corporation Limited. (2008, August 25). Financial statements for the financial year ended 30 June 2008. Retrieved from https://links.sgx.com/FileOpen/Results300608.ashx?App=ArchiveAnnouncement&FileID=199602
[12] Balfour, F. (2007, November 21). Raffles’ Designs for Asian Education. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2007-11-20/raffles-designs-for-asian-educationbusinessweek-business-news-stock-market-and-financial-advice
[13] Yahoo Finance. (n.d.). Raffles Education Corporation Limited. Retrieved from https://sg.finance.yahoo.com/quote/NR7.SI?p=NR7.SI
[14] Raffles Education Corporation Limited. (2020, August 27). Financial statements announcement for the financial year ended 30 June 2020. Retrieved from https://links.sgx.com/FileOpen/REC%20-%20Financial%20Results%20Announcement%20FY20.ashx?App=Announcement&FileID=629406
[15] Lam, F. (2020, August 27). Raffles Education says no merit to tycoon’s EGM request; posts S$16.4m FY loss. The Business Times. Retrieved from https://www.businesstimes.com.sg/companies-markets/raffles-education-says-no-merit-to-tycoons-egm-request-posts-s164m-fy-loss
[16] Balfour, F. (2007, November 21). Raffles’ Designs for Asian Education. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2007-11-20/raffles-designs-for-asian-educationbusinessweek-business-news-stock-market-and-financial-advice
[17] Yahoo Finance. (n.d.). Raffles Education Corporation Limited – Historical data. Retrieved from https://sg.finance.yahoo.com/quote/NR7.SI/history?period1=1163116800&period2=1600560000&interval=div%7Csplit&filter=split&frequency=1d
[18] Raffles Education Corporation Limited. (2011, April 1). Completion of the share consolidation. Retrieved from https://links.sgx.com/FileOpen/REC-ShareConso-Anncemt-Completion-01042011.ashx?App=ArchiveAnnouncement&FileID=105108
[19] Lee, S. Y., & Venkat, P. R. (2009, March 12). Oriental Century CEO claims to have inflated numbers. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/SB123683521742405261
[20] Raffles Education Corporation Limited. (2009, March 12). RafflesEducationCorp not materially affected by Oriental Century’s latest development. Retrieved from https://links.sgx.com/FileOpen/REC_News_Release_OCL.ashx?App=ArchiveAnnouncement&FileID=146691
[21] Reuters. (2009, March 12). China’s Oriental Century says CEO inflated ’08 book. Retrieved from https://www.reuters.com/article/singapore-oriental/chinas-oriental-century-says-ceo-inflated-08-book-idUSSIN50269020090312
[22] The Edge Markets. (2010, July 5). Founder Chew Hua Seng raises stake in Raffles Education Corp. Retrieved from https://www.theedgemarkets.com/article/founder-chew-hua-seng-raises-stake-raffles-education-corp
[23] Maybank Kim Eng. (2011, March 23). Raffles Education Corp. Retrieved from http://www.shareowl.com/admin/pdf/RISE%20&%20FALL%20&%20POTENTIAL%20RISE%20AGAIN%20OF%20A%20MULTI-BAGGER%20RAFFLES%20EDU%20(RLS)%200.26%20KIM%20ENG%2023-3-11%20WITH%20ATTACHMENT.doc.pdf
[24] Simply Wall Street. (2019, December 24). Do Insiders Own Lots Of Shares In Raffles Education Corporation Limited (SGX:NR7)?. Retrieved from https://simplywall.st/news/do-insiders-own-lots-of-shares-in-raffles-education-corporation-limited-sgxnr7/
[25] Yahoo Finance. (n.d.). Raffles Education Corporation Limited. Retrieved from https://sg.finance.yahoo.com/quote/NR7.SI?p=NR7.SI
[26] Yahoo Finance. (n.d.). Raffles Education Corporation Limited – Historical data. Retrieved from https://sg.finance.yahoo.com/quote/NR7.SI/history?period1=1163116800&period2=1600560000&interval=div%7Csplit&filter=div&frequency=1d
[27] Lam, F. (2020, August 27). Raffles Education says no merit to tycoon’s EGM request; posts S$16.4m FY loss. The Business Times. Retrieved from https://www.businesstimes.com.sg/companies-markets/raffles-education-says-no-merit-to-tycoons-egm-request-posts-s164m-fy-loss
[28] Heng, J. (2019, August 21). Raffles Education full-year net profit nearly quadruples to S$40.2m. The Business Times. Retrieved from https://www.businesstimes.com.sg/companies-markets/raffles-education-full-year-net-profit-nearly-quadruples-to-s402m#:~:text=No%20dividend%20was%20declared%2C%20similar,profits%20to%20declare%20a%20dividend.
[30] Hong Bao Media. (2011, August 24). DueDilligence: Raffles Education Corp [Video]. YouTube. Retrieved from https://www.youtube.com/watch?v=COQBoHaQQvc
[31] Raffles Education Corporation Limited. (2020, September 8). The proposed acquisition of 35.9% shareholding interests in Langfang Hezhong Real Estate Development Co., Ltd. Retrieved from https://links.sgx.com/FileOpen/REC%20-%20Circular%20to%20Shareholders%20-%208%20September%202020.ashx?App=Announcement&FileID=630857
[32] Raffles Education Corporation Limited. (2020, September 8). The proposed acquisition of 35.9% shareholding interests in Langfang Hezhong Real Estate Development Co., Ltd. Retrieved from https://links.sgx.com/FileOpen/REC%20-%20Circular%20to%20Shareholders%20-%208%20September%202020.ashx?App=Announcement&FileID=630857
[33] Ibid.
[34] The Straits Times. (2020, July 17). Singapore stock watch: OUE, Top Glove, Biolidics, Rex, Raffles Education, Yeo Hiap Seng. Retrieved from https://www.straitstimes.com/business/companies-markets/singapore-stock-watch-oue-top-glove-biolidics-raffles-education-yeo-hiap
[35] Ibid.
[36] Ibid.
[37] Mui, R. (2020, July 17). Raffles Education to raise stake in Chinese property firm for 254m yuan. The Business Times. Retrieved from https://www.businesstimes.com.sg/companies-markets/raffles-education-to-raise-stake-in-chinese-property-firm-for-254m-yuan
[38] Raffles Education Corporation Limited. (2020, September 7). Notice of Extraordinary General Meeting. Retrieved from https://links.sgx.com/FileOpen/REC_Notice%20of%20EGM.ashx?App=Announcement&FileID=630856
[39] Raffles Education Corporation Limited. (2020, September 30). Announcement on Resolution Passed at the Extraordinary General Meeting (“EGM”. Retrieved from https://links.sgx.com/FileOpen/REC%20Announcement%20on%20Poll%20Results%20at%20EGM%20held%20on%2030%20Sep%202020.ashx?App=Announcement&FileID=633588
[40] The following summary of the background to the proposed Hezhong transaction is based on the article “Raffles Education and the Bane of COVID-19 Meetings” by Mak Yuen Teen published in The Business Times on 6 October 2020 and posted at https://governanceforstakeholders.com/2020/10/06/raffles-education-and-the-bane-of-covid-19-meetings/
[41] Oei, H. L. (2020, September 21). Oei Hong Leong to Lim How Teck. September 21, 2020. Retrieved from https://save-raffles-education.com/letter-dated-21-sep-2020-from-mr-oei-hong-leong-to-mr-lim-how-teck-lead-independent-director-of-raffles-education/
