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Vivocom hopes for better sentiment with new Chines
Lim Cian Yai 
Choo says CNQC intends to tap on the host country’s construction market
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Vivocom International Holdings Bhd hopes to regain investor confidence with the entry of Hong Kong-listed CNQC International Holdings Ltd as its major shareholder following earlier setbacks in previous deals with Chinese parties.

Its executive director Choo Seng Choon says the parties are ironing out some details before sealing final share swap agreements by the end of this year. On Oct 13, Vivocom announced to Bursa Malaysia that its major shareholders - Ang Li-Hann and Golden Oasis Resources Sdn Bhd – had signed indicative term sheets with CNQC for the share deal.

The latest deal has failed to excite investors despite heavy trading in the counter. The share price did not see any significant rise following the announcement of the CNQC deal.

Vivocom closed at 14.5 sen on Oct 13 and 15 sen on Oct 16, but declined the next day to 14.5 sen with a volume of 21.31 million, 126.03 million and 13.79 million shares respectively.

The tepid response may be due to past collaboration with another China-based company in 2015. Vivocom had attracted investors’ interest at the end of 2015 and early last year when it formed a partnership with CRCC Malaysia Bhd – a unit of China Railway Construction Corp Ltd. During that time, it also signed several heads of agreement (HOAs) with various parties.

Vivocom’s share price surged to a two-year high of 30 sen in the middle of last year. However, the CRCC deal fizzled out, and the counter hit a low of 11.5 sen on June 5.

Commenting on the latest corporate exercise, Choo says if the deal goes through, CNQC will give Vivocom a big boost as a significant construction player.

“Upon completion of the deal, CNQC will be the largest shareholder in Vivocom with a 29.15% stake while the two shareholders (Ang and Golden Oasis) will hold a certain percentage of shares in CNQC.

“The discussion also includes a moratorium period of about three years that sets to limit the disposal of Vivocom shares to ensure certainty and stability of the share price,” Choo tells FocusM.

CNQC is listed in Hong Kong with a market capitalisation of about RM2.18 bil, while Vivocom’s market capitalisation stood at RM485.6 mil as of Oct 17. This makes CNQC almost 4.5 times bigger than Vivocom.

CNQC, part of China’s Shandong-based construction and engineering firm Qingjian Group, is said to have a good reputation as it has developed several condominiums in Singapore. It is also said to rank tops in Singapore in terms of property sales among foreign developers.   

It is likely that CNQC will appoint representatives on Vivocom’s board once the share swap agreement is signed. It is also expected to appoint an adviser to assist Vivocom in corporate strategy planning.

As for the vacant position of CEO, Choo says it is up to CNQC to decide on the ideal candidate. Vivocom’s previous CEO, Datuk Seri Yeoh Seong Mok, retired on June 23, and there has been no replacement.

Choo says the share swap will create synergy as CNQC is keen to tap on Malaysia’s construction market via Vivocom. “Hopefully that will translate into a better success rate (when bidding for projects),” he adds.

The Malaysian entity will in turn have access to the industry technical knowledge of CNQC, which has significant presence in Hong Kong, Macau and Singapore via operations in the construction and real estate sectors.

For the year ended Dec 31, 2016, CNQC made a HK$585.38 mil net profit on the back of HK$8.6 bil revenue. Cash and cash equivalents totalled HK$1.8 bil while total borrowings came to HK$6.7 bil for the period. 

 

Synergy with CNQC

The entry of CNQC is seen as a positive surprise. It is learnt the company had been looking for an opportunity to establish its presence in Malaysia for some time. MIDF Investment Bank analyst Fadhli Dzulkifly, in a recent report, noted the move will complement Vivocom’s construction capability in areas such as substructure, water infrastructure construction, real estate financing and residential development.

“CNQC’s track record will strengthen Vivocom’s expertise to bid for higher-scale projects such as the East Coast Rail Link,” said the research house, issuing a buy call on the stock with a target price of 39.5 sen.

For now, Vivocom is banking on the potential synergy to be created once CNQC is on board.

“It could help us move up the value chain to be a developer instead of being just a contractor. As a contractor, we do not have the financial muscle to hold land for the long term. But it (CNQC) has the ability. If we want to buy land, CNQC can provide the guarantee. There are various structures and strategies to explore,” says Choo.

According to him, there is good chemistry between CNQC and Vivocom as they complement each other’s strengths. CNQC has a big presence in Singapore, having completed 10 property projects there.

 

CRCC deal

On the CRCC deal, Choo explained that Vivocom initially wanted to leverage on the Chinese party’s expertise in the railway and property industries to grab some opportunities.

“But some of the projects did not materialise, hence there was no knowledge transfer.”

In November 2015, CRCC awarded subcontract works for Gateway Klang to Vivocom. The subcontract was worth RM195.52 mil. However, in June this year, Vivocom said work on the project had been temporarily halted. It claimed this was due to payment delays by project developer Lagenda Erajuta Sdn Bhd to CRCC Malaysia, which was the main contractor.

Lagenda Erajuta is part of Sagajuta (Sabah) Sdn Bhd which developed property in Sabah like 1Borneo Hypermall.

Since then, Vivocom has not received any update from CRCC Malaysia on the status of the project. However, Choo says the company is not impacted by the hiccup.

“We have collected quite a substantial portion (of payment). We are not worried and nothing has started on the site.”

As of now, Vivocom’s outstanding order book stands at over RM2 bil, consisting of HOAs and letter of intent it signed last year. The value of these non-binding collaborations amounted to about RM1.27 bil, with many pertaining to property development and construction.

Choo reckons some of the HOAs the company signed earlier with multiple parties have gone back to the drawing board due to the slowdown in the property sector.

“Some projects in Perak are facing delays. Some developers we work with have gone back to redesign phases to revise layout and size. Besides, they also find it challenging to sell property in the current environment, so commencement of projects has been delayed,” says Choo.

 

Performance suffered

These developments have taken a toll on Vivocom’s performance. For the first six months ended June 30, revenue slipped 67% year-on-year to RM86.96 mil from RM263.1 mil a year earlier. Net profit declined by 73.2% to RM10.95 mil from RM40.88 mil last year.

Among Vivocom’s three businesses, the construction segment experienced the biggest decline in revenue – from RM219.87 mil to RM94.06 mil in the six months. Aluminium design and fabrication was the only segment that recorded yoy increase in revenue to RM27.96 mil from RM19.82 mil. 

The outstanding order book of RM110 mil for the aluminium division is expected to last for the next three to four years.



This article first appeared in Focus Malaysia Issue 255.