Hai Leck

[tonylim]

You are quite right on the cash numbers, provided of course the company does not spend the existing cash reserve and the additional cash coming in from the warrants, on some fixed assets or new investments which do not contribute to earnings any sooner. If and when this happens, you will have to drastically adjust your assumptions on cash per share and "Adjusted PER, nett of cash".

Hai Leck just got listed no too longer ago, and does not yet have a proven generous dividend payment track record. Besides, management will likely spend at least a portion of the existing cash reserve and of the additional cash coming in from the warrants, on expansion projects. So is it wise for us to attach full value on the cash in the company? Probably not.

The coming conversion of the 130.0m warrants - and the resulting dilution impact on EPS and earnings for existing shareholders - does add a dynamic factor and a degree of uncertainty to investing into Hai Leck or holding on to the counter in the next 12 months.

A few more things.

1. The controlling shareholders collectively hold about 78% of the company issued capital. If dilution from the conversion of outstanding warrants is of any bad, they will be the ones hardest hit. Most importantly, they hold the key to whether or not such dilution will occur.

2. The conversion price of $0.26 is the same as the IPO price. The warrants were not issued with a "discount", at least to the IPO price. Together with the $0.01 that was already paid in for taking up the warrants, minority shareholders should not feel that they have been shortchanged.

3. Although Hai Leck has a short history as a listed company, its Chairman and CEO were sitting on the board of Hiap Seng Engineering before the former disposed a substantial stake in the latter prior to the IPO. I think it will not be too farfetched to assume the continuation of the dividend "habit". The dividend payments for the first few years after listing do not support the rejection of such assumption.

4. Capex. Scaffolding traditionally contributes one third of Hai Leck revenue. It is also the most capital intensive because of the need to be equipped with scaffolds and equipment. Insulation and Maintenance run on labour and expenses. If the company sticks to its core, the capex to watch will be on the scaffolds. Indeed, in the prospectus, they indicated to use only $2m (out of the $22m IPO proceeds) for scaffolds but they added $18m of it instead. The good news is that scaffold depreciates on the book real fast , as fast as writing it to zero as soon as the project ends. In essence, project based capex should be considered as project expense. An experienced manager simply prices that in during the project bid. If the scaffolds can be reused or survived after 5 years (max depreciation), then it will be a bonus. The risk of over committing in excess scaffolding capex is very much manageable.

Well said cif5000, many thanks for your in-depth analysis .