SINGAPORE (Sept 24): Dr Goh Jin Hian, CEO of Mainboard-listed New Silkroutes Group, is quick to acknowledge that the company’s shareholders are “long-suffering”, having been though its ups and downs. NSG was formerly Digiland International, a consumer IT business that incurred several consecutive years of losses. Goh became CEO in 2015, after Digiland acquired International Energy Group (IEG), an oil and gas trading company that Goh started.
That move had generated a fair amount of interest then. Goh, a medical doctor, held senior roles at Parkway Holdings (now IHH Healthcare), including CEO of Gleneagles Hospital at one point. He has been an independent director of Cordlife Group since 2011. He is also the son of former prime minister Goh Chok Tong. By his account, he started IEG — which has nothing to do with healthcare — to try something new.
After renaming the company NSG, Goh and then executive director Lee Soek Shen set up business units in energy trading, fund management and healthcare. At the time, shareholders were optimistic. A rights-cum-warrants issue completed in March 2016 raised $4.72 million in net proceeds. NSG shares more than tripled towards the end of 2016 to breach the $1 mark, and the company announced US$69.3 million in revenue for 1QFY2017 ended Sept 30, the highest quarterly revenue since 2004.
But since then, NSG shares have tumbled more than 75%. The fund management business did not take off as expected. “Unfortunately, in the last two years, we found that investors were — maybe it’s the climate — not so willing to part with the cash and entrust managers to invest without them having a say,” Goh says.
Meanwhile, in early January, NSG announced that it had terminated its service agreement with Lee, who had resigned. Goh says that this was due to differing views on whether NSG should be involved in fund management. “Certainly, the former executive director was a strong believer in the original path that we took… And that’s why towards the end of last year, when we decided to change the strategic direction, there was a parting of ways,” he says. The Edge Singapore was unable to reach Lee for comment.
Now, Goh is focused on growing NSG’s healthcare business, returning to the industry of his expertise. Over the past year, NSG has embarked on a string of healthcare acquisitions via its subsidiary Healthsciences International (HSI). Its healthcare portfolio now comprises 17 dental, family medicine, traditional Chinese medicine and aesthetic clinics in Singapore, and two dental supplies companies.
Notably, on Aug 13, NSG signed a sale and purchase agreement (SPA) for the $12.5 million acquisition of a Chinese manufacturer of non-woven fabric materials, which are used in hospital linen. This accompanies a proposed share placement that would hand a vehicle owned by the target company’s chairman a 14.86% stake in the enlarged share capital of NSG. It could become the second-largest shareholder after NSG’s former chairman Cai Sui Xin, who owns 15.49% as at Sept 20, 2017. Among other approvals, the placement will require shareholder approval at an extraordinary general meeting.
Ultimately, Goh wants to build NSG into a “vertically integrated healthcare player” that provides primary to tertiary healthcare services in Southeast Asia and China. Can the company live up to this ambition?
Growing with limited resources
While it is driving for growth, NSG has yet to break even since Goh took the helm. As at June 30, it had US$11.97 million ($16.35 million) in cash and US$18.4 million in debt. While the company could raise more funds for acquisitions through a rights issue, for instance, Goh reckons it will be difficult to receive support from shareholders. The company has turned to share placements and bank financing to support its expansion.
In June last year, NSG embarked on a spate of healthcare acquisitions, acquiring majority stakes in six dental clinics and two dental supplies companies through HSI. This was followed by acquisitions of a 70% stake each in another three dental clinics that were completed on Nov 1. In these acquisitions, the vendors were given a total of 14.3 million consideration shares in NSG.
“We were blessed because the dental surgeons all agreed to take our shares. They believed in the direction the company was taking, developing as a healthcare player. So they said, we don’t need cash, we’ll take your shares,” Goh says.
For the next round of acquisitions, however, the doctors were paid in cash. On Aug 2, HSI acquired majority stakes in six family medicine and aesthetics clinics — a 60% stake each in five of them and a 51% stake in the sixth — for a cash consideration of $11.35 million. This was financed by bank borrowings and internal funds. The clinics had adjusted aggregate earnings of about $2.4 million in their latest financial year.
For Goh, acquiring these clinics, especially those in heartland locations, is a clear strategy to tap the rising demand for healthcare in an ageing population. He particularly sees primary care as a direct means to penetrate the market.
In the short term, however, the acquisitions have weighed on NSG’s results. For FY2018, the company saw a 60% y-o-y rise in revenue to US$692.5 million, boosted by a US$77.4 million increase in revenue from oil trades in 4Q. However, losses deepened to US$3.1 million, compared with US$1.8 million a year ago. This was exacerbated by expenses for the acquisitions, as well as US$1.18 million worth of receivables written off.
Goh says it was a deliberate move to clear the acquisition-related expenses in FY2018. “Then we start off with a clean slate,” he explains. “The question now is, are the operating units profitable? Yes, we did acquire profit-generating clinics. Our existing energy piece is profitable… For now, we are taking stock of what we’ve done.”
Eye on China
Shareholders may want to pay attention to the company’s planned moves abroad. NSG is hoping to clinch regional hospital management contracts with the long-term goal of taking on permanent equity in these hospitals.
But for its first venture in China, the company has signed an SPA to acquire Shanghai Fengwei Garment Accessory Co, a manufacturer of the base materials used for making hospital gowns, disposable shoe covers and linen drapes, for a cash consideration of $12.5 million. Goh says the acquisition will be “synergistic” with its broader plans in China. Shanghai Fengwei has operated for 17 years. For FY2017 ended Dec 31, it had a profit before tax of US$1.8 million and an adjusted net tangible asset value of US$3 million.
Concurrently, NSG is proposing to raise $10 million via a placement of 29.6 million shares to SYY Capital and 5.47 million shares to WTL Capital, at an issue price of 28.5 cents a share. That would be a 4.31% premium to the weighted average share price on Aug 13. SYY Capital is owned by Shen Yuyun, the chairman of Shanghai Fengwei, his nephew and brother-in-law. Shen and his nephew collectively own 88.3% of Shanghai Fengwei. Goh says he got to know Shen during business trips to China. WTL Capital’s owners include two individuals who own 11.7% of Shanghai Fengwei.
The placement exercise will hand SYY Capital a 14.86% stake in the enlarged share capital of NSG, while WTL Capital would have a 2.75% stake. Goh says the vendors did not request a seat in the management or board.
When asked if shareholders would nevertheless be concerned about parcelling out such a significant stake to a third party, Goh adds: “I don’t think they would be, insofar as I hope the shareholders continue to back the existing management team executing the strategy. As long as shareholders believe in the direction the company is taking, and the fact that the management remains in control, then I believe they will not be concerned.”
Goh also acknowledges that margins in the making of the fabric could be thin. “The [margins] would be competitive, but this particular factory does not produce the end product; they produce the [intermediate] material… In that sense, the margins are dependent on the cost of raw materials. In a very unusual way, the raw materials are naphtha and diesel… Our energy division trades those products. There could even be opportunities where we negotiate with the suppliers of the factory,” he says. “This factory could be a link between our energy piece and healthcare piece [of the business]. But I also want to stress that is not the reason to acquire the factory.”
In the near future, NSG will focus its efforts on persuading shareholders, Goh says. “Our immediate focus is to convince shareholders of the acquisition of the China factory and we don’t foresee any other expenses coming up in the near future. In terms of our acquisition, we want to get that across the line first.”
But on his broader plan to make NSG a bigger healthcare play, Goh is taking on the pragmatic view that shareholders will have to see results before they believe in his strategy.
“I can only hope that in the not-too-distant future, when the company starts producing the profits that we said we will produce starting from 1QFY2019 — only then can I say that I hope the shareholders will believe in the new direction,” he says.
Indeed, until NSG delivers the results it promises with its new business direction, investor interest could be moribund.
