Clearer skies ahead for Ho Hup

KUALA LUMPUR: The walls of Ho Hup Construction Co Bhd's head office in Bukit Jalil are adorned with photos of its previous projects, including landmarks like the Petronas Twin Towers, the National Sports Complex and the Kuala Lumpur International Airport.

Founded in 1960 by the late Low Chee, in the 1990s Ho Hup was one of the country's most prominent construction firms, probably due to United Engineers (M) Bhd (UEM) being among its substantial shareholders.

But those were the glory days. Today, Ho Hup, a Practice Note 17 (PN17) company, is a pale shadow of its former self.

Still, there is a sense of optimism. After protracted boardroom and courtroom battles, Ho Hup may soon chart its own course to regain some glory. But this time, property development will be its core activity.

A PN17 company is a financially distressed listed company or one that does not have a core business or has failed to meet minimum capital or equity (not less than 25% of the paid up capital). It must submit a regularisation plan to Bursa Malaysia.

On June 7, Ho Hup won a courtroom battle with Malton Bhd for the ownership of its 60-acre (24.3ha) plot of land in Bukit Jalil, although the work is still far from over.

The High Court ruled in favour of Ho Hup when it declared null and void the joint development agreement (JDA) signed between Ho Hup's 70% owned unit Bukit Jalil Development Sdn Bhd (BJD) and Pleasant Haven Sdn Bhd, controlled by Malton, to co-develop the tract.

The court ruled that the previous board of directors, led by substantial shareholder Datuk Vincent Lye, had acted in breach of their duties to Ho Hup by signing the agreement just before Lye was ousted in an EGM.

"The High Court also found that Pleasant Haven had knowingly assisted in these breaches. Significantly, the High Court found that the JDA was, in substance, a disposal of BJD's 60-acre landbank and as such required the approval of shareholders under Section 132C of the Companies Act 1965.

"As no such approval was obtained, the JDA and other associated instruments were null and void for contravening the law," said Ho Hup in an announcement to Bursa Malaysia.

Although Pioneer Haven has a wildcard in a form of an appeal to the Court of Appeal, spirits are already up on Ho Hup's side.

"It has been a long legal battle. We have gone against formidable opponents such as Malton and the previous board of directors. The decision of the High Court has been positive for Ho Hup and we have plans to lift [the company] from its PN17 status," executive director Derek Wong told The Edge Financial Daily.

Ho Hup's share price shot up nearly 15% to a 15-month high of 86 sen on the day after the court ruled in favour of the company, but it then retreated from the peak. The stock closed at 82 sen last Friday.

The 60-acre piece of freehold land is Ho Hup's crown jewel and it is the only trump card left in hand to get out of PN17 status.

The company previously owned 87 acres in Bukit Jalil but some of it was divested to ease its tight cash flow.

The master plan for the 60-acre tract of prime land includes the development of shophouses, a shopping mall, apartments and high-rise office towers.

"The land is very strategic and has been designated as 100% commercial by Kuala Lumpur City Hall. This land is intended to be a commercial hub and catchment area for Puchong, Seri Kembangan, and Bukit Jalil. That is why it is the source of the tussle," said Wong.

Wong said Ho Hup is planning to launch the project by 4Q, and the development will be spread out over the next 10 years.

The land had a net book value of RM122.46 million, carried at a relatively low price of RM47 psf.

Wong added that the land has an approved nine million sq ft of net sellable area, with market prices of RM500 to RM600 psf.

He said Ho Hup would mainly develop the tract on its own, but he would not rule out the possibility of joint venture with others as well.

Assuming a profit margin of 20%, analysts said this could translate to profit of RM800 million to RM900 million, much higher than the RM265 million Ho Hup would be entitled to under the JDA.

But will Ho Hup, which has been categorised as a PN17 company since July 2008, have the financial resources to kick start the massive development?

Ho Hup was loss making in FY10 ended Dec 31, incurring a net loss of RM13.6 million on revenue of RM65.1 million. It returned to the black for 1QFY11 ended March 31 with a net profit of RM32,000 and revenue amounting to RM6.7 million.

Wong said Ho Hup is currently talking to a few financial institutions.

"We believe we will have the financial muscle after the regularisation plan is completed. Apart from that, we are currently engaging a valuer but the land should be worth at least RM300 million. By pledging one of the parcels of the land to the bank, it should be enough to finance the first phase of the development," he said.

The regularisation scheme that will see the entry of a new shareholder will play a crucial role in reviving Ho Hup, he added.

Ho Hup tweaks regularisation plan
Having regained the sole ownership of the Bukit Jalil land, Ho Hup is tweaking its regularisation plan.

"Since we have managed to wrest the land back to Ho Hup, we need to tweak the details [of the regularisation plan]," said Wong.

Ho Hup made the requisite announcement of its regularisation plan in March, which involves a proposed par value reduction of 50 sen, proposed rights issue and private placement with warrants, a creditors scheme and the acquisition of two property development companies from Plenitude Frontier Sdn Bhd.

"The creditors scheme under the first proposed regularisation was based on the scenario that we lost the court case. Now that we have won, we have to make adjustments to the plan as the improved cash flows will definitely help us to repay all our creditors. We aspire to wipe out all our debts in the next two years," said Wong.

He said Ho Hup has about RM140 million of debt owed to external parties, which includes creditors from 10 to 20 years ago.

The company's par value reduction exercise is proposed to pare down RM51 million to wipe out its accumulated losses of RM134.9 million as at Dec 31, 2010.

The rights issue and private share placement, which both come with free warrants, are expected to raise RM30.6 million, of which RM28.1 million will be used for its new development projects.

The critical part of the restructuring plan is the entrance of a new shareholder, Raymond Tan, a familiar name in the property development industry.

Tan is perceived to be the white knight injecting two property companies into Ho Hup in return for a 29.44% stake, becoming the single largest shareholder.

Ho Hup has proposed to acquire Fivestar Development (Puchong) Sdn Bhd and Kolektra Recreation Sdn Bhd for RM43.8 million from Plenitude, to be satisfied with the issuance of 93.6 million new Ho Hup shares.

According to Ho Hup, Fivestar currently has a few projects in Puchong with a gross development value of at least RM40.5 million, while Kolektra is awaiting letter of award to develop 4.26 acres (1.7ha) in Puchong.

Ho Hup is proposing that Tan become the company's executive director after the acquisition.

"We are excited to have him come aboard as his experience in property development will definitely help Ho Hup to develop the 60-acre piece of land [in Bukit Jalil]. In addition, the ongoing projects under Fivestar and Kolektra will contribute positively to Ho Hup's bottom line and cash flow," said Wong.

Some quarters said having Plenitude in the picture might help to resolve any differences between the other two substantial shareholders — Extreme System Sdn Bhd and Low Chee & Sons Sdn Bhd — when it comes to decision-making.

But before it can reach that stage, Ho Hup must obtain the current shareholders' consent to execute the regularisation plan. The current shareholding structure raises concerns that the dispute between Extreme System and Low Chee & Sons may hinder Ho Hup's regularisation plan.

As at May 5, Extreme System holds 27.95% equity interest in Ho Hup and Low Chee & Sons 21.92%. Datuk Low Tuck Choy, one of the owners of Low Chee & Sons, holds a direct stake of 2.56%.

Extreme System is the investment vehicle of Datuk Vincent Lye which surfaced as substantial shareholder and took control of Ho Hup in July 2008. Lye was the deputy chairman before he was ousted last year.

To recap, two years ago Low opposed Lye's proposed restructuring scheme, which involved a steep capital reduction and the two have been at outs since then.

"We are in talks with all shareholders, including Extreme System, as we do not want to be biased in our decisions. We are ultimately doing it for the benefit of all Ho Hup shareholders. At this point in time, I am happy to say that we have the support of most shareholders," said Wong.

The par value reduction would require approval from 75% of Ho Hup's shareholders, while the other proposals under the regularisation plan only need 51% approval.

"In any case, the other proposals are not conditional on whether the par value reduction proposal goes through," said Wong.

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