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HYFLUX LIMITED AND WATER SUSTAINABILITY –
copy version: 9
Publication No: ABCC2009/12-003 TREADING BLUE OCEANS Print Mar 2012
Wee Beng with Mark
Geok, Ivy Buche Kroll and Timothy Chua
In 2009, Hyflux one of Asia’s environmental companies with Singapore, East, North Specialising in technologies, integrated municipal well as for manufacturing including the oils and
Ltd (Hyflux) was leading water treatment operations in China, the Middle Africa and India. membrane Hyflux provided solutions for water treatment as industrial processes, recycling of spent solvents.
Started in 1989 by entrepreneur Olivia an early mover into industrial water in 1993, servicing manufacturing plants widen Hyflux’s market accelerate growth, the municipal water in Singapore. With this,
Singapore-based Lum, Hyflux was China’s nascent treatment market numerous there. In 1998, to base and Lum moved into treatment market Hyflux sales revenue jumped from S$1 7.7 million in 2000 (nine months) to S$554 million in 2008 and despite the 2008 global recession during which its municipal business remained strong, the company was able to secure large-scale high value projects in North Africa.
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As a newcomer, Hyflux leveraged on its innovative water treatment technologies and entrepreneurial drive to grow the business. However by 2009, as a player in the global water treatment business, Hyflux had to prove that it could execute greenfield municipal projects in a far-flung continent and compete with other global water treatment companies in these new markets. To respond to these challenges, Hyflux had to rapidly grow its human capital and organisational capabilities to match the firm’s aggressive market penetration strategies.
Associate Professor Wee Beng Geok, Professor Mark Krol, Ivy Buche and Timothy Chua prepared this case based on public sources. As the case is not intended to ilustrate either effective or ineffective practices or policies, the information presented reflects the authors’ interpretation of events and serves merely to provide opportunities for classroom discussions. COPYRIGHT © 2012 Nanyang Technological University, Singapore. All rights reserved. No part of this publication may be copied, stored, transmitted, altered, reproduced or distributed in any form or medium whatsoever without the written consent of Nanyang Technological University. For copies, please write to The Asian Business Case Centre, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798 Phone: +65-6790-4864/5706, Fax: +65-6791-6207, E-mail:
[email protected] This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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INTRODUCTION
In June 2009, Hyflux Limited (Hyflux), Singapore ’s largest water treatment company, announced that it had signed an agreement with Libya’s state-owned General Desalination Company (GDC) to build two water desalination plants in the Tripoli and Benghazi municipalities. The Tripoli plant was slated to be the world’s largest membrane-based desalination plant with a capacity of 500,000 m per day. Together, the two plants would have a production capacity of 900,000 m of refined water per day.
The main driver for this growth was Hyflux’s successful move into the municipal water market. The company made its mark in the international water industry after winning the contract to build Singapore’s first plant that reclaimed and recycled used water into high-grade potable drinking water. It then went on to become a major partner in a consortium that won the bid to build and operate Singapore’s first water desalination plant, converting seawater to drinking water.
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Under the contract, which was estimated to be worth more than US$1 billion,1 Hyflux would undertake all engineering, procurement and construction (EPC) work. Although many financial and technical details still had to be resolved, Hyflux Deputy CEO Sam Ong expected the two projects to be fast-tracked with 80 percent of the project cost financed in Libya with help from its government.2 A joint venture company with GDC and Hyflux as partners would operate and maintain the plants for which the Libyan government had committed to a 25year agreement to offtake the water produced. Hyflux would take a minority stake in this joint venture.
T H E C O M PA N Y I N 2 0 0 9
In 2009, Hyflux was one of Asia ’s leading environmental and water companies with operations and projects in Singapore, the People ’s Republic of China, India, the Middle East and North Africa (MENA). It had its beginnings as Hydrochem (S) Pte Ltd, a small trading company in Singapore distributing water treatment equipment. The company’s fortunes turned in 1993 after it started operations in Shanghai, China. Renamed Hyflux, the company made its mark there as a provider of innovative solutions for industrial water treatment systems. A little more than a decade later, in January 2001, it became the first water treatment company to be listed on the Singapore Stock Exchange. Since 2000, the company’s growth had been phenomenal, with sales revenue rising from S$17.7 million in that year (nine months) to S$554 million in the financial year 2008.
Hyflux then moved quickly to secure a share of China’s huge municipal water market. The success of the Singapore desalination project also provided a showpiece that opened new opportunities for similar projects in the water-stressed MENA region. Prior to the 2009 Libyan deal, Hyflux’s EPC business had an order book of projects totalling S$1.15 billion. It also owned and operated 40 municipal and industrial water treatment facilities in 26 provinces in China.3 The operations and maintenance (O&M) contracts it managed generated a recurring revenue stream for the next 20-30 years. With a fast growing portfolio of facilities under its management, in 2007, Hyflux adopted an asset-light policy, spinning off 13 water treatment plants that it operated in China into a business trust. Hyflux had a 31.5 percent stake in the trust and continued to operate the plants. The company’s meteoric rise caught the attention of the international water industry. In September 2005, Lum’s entrepreneurial efforts earned her a place on Forbes Asia magazine’s list of Southeast Asia’s 40 Wealthiest, the first woman to make it, with a net worth of US$240 million. In 2006, Hyflux was awarded Water Company of the Year at the Global Water Awards by the Global Water Intelligence, United Kingdom. Hyflux was twice listed in Forbes Asia’s ‘Best Under a Billion Company’ (in 2005 and 2006) and in 2007, the company also received the Frost and Sullivan – Technology Innovation of the Year Award for Desalination Technologies (Asia Pacific). The Business
As Asia’s most integrated water treatment company, Hyflux’s operations spanned the entire value chain of the water-related infrastructure
1 Hyflux hits the jackpot with Libyan deal. (2009, June 25). The Business Times,Singapore. 2 Teo, M. (2009, July 1). Cover Story: Widening the gap. The Edge Singapore. 3 Hyflux Ltd. Annual Report 2008. p. 47. This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Cra Mayberry from July 2012 to January 2013.
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industry encompassing Design and Development; Manufacturing of Components; System Assembly; and Project Management, Operations and Maintenance. In 2009, the firm’s core businesses included: 1. The water business: · The provision of one-stop solutions to industrial and municipal clients in the areas of seawater desalination, water recycling, potable water treatment, wastewater reclamation, and raw water purification.
· The provision of water treatment O&M ·
services to municipal and industrial clients. Lifestyle water filtration and purification products for the consumer market.
2. Industrial manufacturing processes: Membrane technologies applied in manufactu ring process streams for the b io t e ch n o l o g y, pharmaceutical, agri-food, chemical, petrochemical, paper and electronics industries. 3. Specialty materials: Using membrane technologies to develop and commercialise polymers and specialty materials from natural sources such as sugar cane and corn.
4. Energy: The development and use of membrane applications in waste recycling and energy reclamation e.g. oil recovery and recycling, palm oil clarification, and biofuel processing. Hyflux’s water treatment technology was anchored on membrane technologies. Although membrane technology had been around for some time, Lum was the first to see its potential as an alternative water treatment system to the more conventional method of water purification using filter beds, which required more space and used more energy. From
being a trader and distributor of membrane products for wastewater treatment in the early 1990s, by the turn of that decade, Hyflux was developing its own membranes. Even as a start-up, Lum devoted resources for research and development (R&D) of membrane products and systems to treat wastewater and other liquids, that could be applied across a wide range of industries. By 2009, Hyflux had developed a range of proprietary filtration membrane products with different configurations using polymeric, stainless steel and ceramic materials. Hyflux membranes and systems had been installed in more than 1,000 plants in more than 300 locations across the world. (See Exhibit 1 – Hyflux Membrane Technology and Applications.) In the later half of the 2000 decade, the global municipal water business presented Hyflux with some of its biggest growth opportunities. Not only was Hyflux successful in securing municipal water projects in Singapore and China (see Tables 1 and 2), it was also winning water treatment projects in new markets such as the MENA region. In North Africa, besides the two contracts for the Libyan seawater desalination plants, Hyflux also won EPC contracts for two seawater desalination plants in Algeria, one in Tlemcen in 2006 (project value: S$328 million) and the other in Magtaa in 2008. The company beat contenders, including GE Water, to win the Magtaa project with an estimated project value of US$468 million. With these two facilities, Hyflux emerged as the largest desalinated water supplier in Algeria, providing more than 30 percent of the country’s total capacity. A regional office was set up in Algiers, Algeria, to oversee and manage Hyflux’s operations. In mid-2009, Hyflux had 22 Singaporeans on the Algerian projects, including two women.
Country Singapor e China
1999 2,450 4,147
Others
332
MENA
-
Table 1 Revenue Overview - By Geographical Segment (S$’000) 2000 2001 2002 2003 2004 2005 2006 10,91 11,21 23,90 48,40 9,117 33,923 27,018 6 9 2 5 72,88 73,463 92,221 8,586 12,36 19,82 32,09 4 0 8 5 1,257 3,652 1,545 669 6,653 24,118 10,598 -
-
-
-
-
-
-
2007
2008
27,623 156,93 3 -
31,248 299,96 5 223,01 1
8,230
Source: Compiled from Hyflux Annual Reports 2000 to 2008. This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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Table 2 Revenue by Region and Segments (January-June 2009) Revenue by Revenue by Segment RegionS$Millio % S$Million % Chin 3 Industri 30 1 85 a 8 al 192 4 131 ME 5 Municip 8 7 NA 9 al 6 1 Total 1 Total 223 222 0 0 Source: Hyflux Financial Results announcement. 2Q09 and 1H09 Results Review. (2009, August 6). The company also moved beyond water treatment into the collection and recycling of waste oil. To develop the oil recycling business, Hyflux collaborated and formed joint ventures with major players in Singapore, China, Saudi Arabia, and Vietnam. In 2007, Hyflux formed a joint venture with SEDCO (Saudi Economic Development Company) and LUBREC (Lube Oil Re-refining Co) to jointly invest S$45 million in a used oil recycling plant at Jeddah, Saudi Arabia. This joint venture was Hyflux’s first in Saudi Arabia, one of the world’s largest (per capita) consumers of lubricants.
THE START-UP In 1989, Lum stepped into the unknown when she decided to be her own boss. She was then a young chemistry graduate working at a multinational pharmaceutical company in Singapore. The first break came in 1992 when she secured the rights to distribute membranes and membrane filtration plants for an Israeli company, Membrane Products Kiryat Weizman Ltd (MPW), in Singapore and neighbouring countries.4 While installing these systems for industrial clients, Lum learnt more about the applications of membranes and membrane filtration technology: I found that membranes can do wonders, as they are just like our kidneys. This is how I ventured into the membrane business and later on, we had our own research facility.5
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Membrane filtration involved forcing raw water into the membrane filters, causing microscopic impurities to be trapped in the membrane’s pores. Treatment with ultraviolet light killed micro-organisms, and the water that was obtained from the process was of the “ultra pure” quality used in wafer foundries and pharmaceutical plants: At Glaxo,6 we had a lot of challenge in wastewater treatment, despite the fact that we had put in a lot of money. Even a big company like this finds challenge in treating their wastewater, what about all those smaller companies who can’t even afford to put up a water treatment plant? What will happen to al the wastewater… they just discharge the wastewater to the natural rivers. I told myself this might be a sunrise industry.7 The Move to China Although Hydrochem had some measure of success in Singapore, Lum felt that it was too small a market for the product. Furthermore, there were many large multinational firms competing for the same client base. She then decided that she “must open another market”.8 Her target was China: I could already foresee the environmental effects of pollution, a growing population and growing industrialization. And if you have a shortage of water, you cannot just manufacture water. You have to look for new sources or recycle water.9 In 1993, with little more than S$1 million from investor friends, Lum started a small operation in Shanghai and set about recruiting staff for the company: China was (then) just starting out and not on the same track as the rest of the world, unlike today. On top of that, she [Lum] was not familiar with how things were done in China. She must have been really brave to come at that time. Most would not have dared, especially when
4 History. (2001, January). Hyflux Prospectus. p. 47. 5 Taib, S. (2005, February 9). Olivia’s success. New Straits Times, Malaysia. 6 After graduation, Olivia Lum worked for three years as Chemist at Glaxo. 7 Discovery Channel. (2005, January 16). Crossings – Olivia Lum. Singapore: Discovery Channel. 8 ibid. 9 She saw need for water recycling 10 years ago. (2003, August 2). The Business Times, Singapore. This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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her business was about the environment and water. At that time, this was not an issue China was focused on.10
technical jargon in the English language manuals. She sat down and explained the various fabrication processes and procedures to us.12 Lum was quick to leverage on the ready pool of low-cost engineering talent and Hydrochem’s small team of engineers was led by their sifu and boss.
Chen Bao Liu, Former Chinese ambassador to They began by focusing on cost-effective Singapore. solutions for manufacturing plants looking for cheaper ways to treat water for their plant A few years later, Chinese authorities processes as well as to manage wastewater introduced regulations requiring overseas coming out of the plants. companies to install water recycling facilities in their industrial plants located in China. Building and branding Hydrochem membrane Overnight, the demand for water treatment systems expertise systems among foreign-owned factories shot up. Lum recalled: On the business side, to build awareness of the new technology, Lum offered to develop If not for the fact that we had got industrial-sized pilot plant trials to demonstrate there earlier, I suppose we would the capability and effectiveness of membrane have missed the boat.11 filtration technology to manufacturers in China and Singapore. Between 1995 and 1996, At that time there was abundant qualified and low- Hydrochem conducted more than 100 pilot cost engineering talent in Shanghai where Lum plant trials of membrane applications and water had set up her office. When Lum stuck a job treatment technologies for the 13pharmaceutical, advertisement for engineers on lamp posts near food and electronics industries. her office, more than 500 engineers turned up for the job interview. Among them was Ge Wen Payoffs from the pilot plant trials came in 1998, Yue, Hydrochem’s first employee in China, who when the company began securing orders for later became the General Manager of larger membrane filtration systems from Hydrochem China in 2001: industrial clients. The first integrated water treatment system project was in 1997 for an MNC joint venture manufacturing facility in When I first entered the room for the Singapore. interview, I was very surprised, not because she (Olivia Lum) was a woman but because she was so Besides installing de-ionisation water systems, pretty and young. She spoke with water systems for dicing machines, chemical passion about her company and it supply and collection systems, and wastewater was very inspiring. When treatment systems, Hydrochem also took on the distribution piping works from the treatment I first joined the company, my salary plants to the pointof-use, including equipment was half that of my previous job, but I hook-up. This capability to provide hook-up believed that this company had a installation services broadened Hydrochem’s future. range of services and set it on a path as an integrated water treatment provider. Similar Basically, she was our boss and also jobs were also secured in China in the years our teacher (sifu). Our staff then that followed. never learned the English language and hence could not understand the
Developing proprietary filtration membranes
control over the quality and costs of its products, a key component in the costs of Up till then Hydrochem was using filtration water treatment systems. membranes developed by other companies. To customise water treatment systems to clients’ The first two projects using Hydrochem’s inneeds, the firm began to develop its own house manufactured membranes went on filtration membranes which also gave it greater stream in 2000.
10 Discovery Channel. (2005, January 16). Crossings – Olivia Lum. Singapore: Discovery Channel. 11 Discovery Channel. (2005, January 16). Crossings – Olivia Lum. Singapore: Discovery Channel. 12 ibid. 13 History. (2001. January). IPO Prospectus. p. 47. This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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They were: (1) a wastewater treatment of textile dyeing water for a plant in Suzhou, China, and (2) a sewage water recycling project for a zoo (bird park) in Singapore.
BREAKING INTO THE MUNICIPAL WATER MARKET By 1998, with a sizeable list of industrial clients in China, Lum set her sights on the municipal water market: We have established ourselves in China, but we are still a very small company. We know that we can do much bigger jobs. The big ones are like the municipal jobs where you really serve the entire township and so on. Going to the municipal jobs will widen our market share.14 Lum’s first target was her home base – Singapore and the first break arrived when a local zoo was looking for ways to save water. The Jurong Bird Park, one of Singapore’s major tourist attractions, relied on two sources of water: The first was secondary treated wastewater for watering plants and housekeeping and the second was expensive potable water for the park’s bird population. Hydrochem proposed an on-site sewage recycling plant, which involved taking the zoo’s sewage water through a hybrid membrane filtration system and by ultrafiltration and reverse osmosis processes, treat the sewage water to a standard comparable to potable drinking water. The zoo’s management was convinced and Hydrochem got the job. In March 2000 when the sewage water treatment plant started operations, Jurong Bird Park became the first zoological institution in the world to recycle treated water for use by its live exhibits. For Hydrochem, it was an important milestone too as it was the first time it had developed and used a bigscale membrane system for the recycling of sewage water. To Lum, this demonstrated that the firm could make use of membrane technology in an innovative way.
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With the success of the Jurong Bird Park project as well as new funds from IPO proceeds and venture capital investors, Lum was ready to move on to bigger municipal water projects - part of a stream of municipal water initiatives planned by the Singapore Government. Leveraging on the Singapore Government ’s strategy on sustainable water supply As a densely populated city, with no natural aquifers or groundwater, water had always been a scarce resource in Singapore. Historically the city state depended on its neighbour Malaysia to supplement its water needs. Concerned that the constraints in water supply could impact the country’s economic development and influence relations with Malaysia, the Singapore Government saw the need for new sources of fresh water for industrial and public use. (See Exhibit 2 – Singapore Strategy for Water Sustainability.) The city-state was ready to embrace new forms of water technologies and in the first decade of the 21st century, millions were earmarked for investment in water-purifying technologies, including desalination plants and reclamation of used water, as well as structures to collect rainwater and direct it to reservoirs. Singapore’s first used water reclamation/recycling project In 1998, the Singapore Government embarked on a study – The Singapore Water Reclamation Study - to determine the suitability of using used water as a source of raw water to supplement Singapore’s water supply. The aim was to take secondary treated used water and put it through a treatment process to arrive at potable water of a quality better than that of the World Health Organisation (WHO) and US Environmental Protection Agency (USEPA) Drinking Water Standards.15 Following the study, in 2001, Singapore’s Public Utilities Board (PUB), invited tenders for the building of two plants that would treat secondary water to become a new source of potable water, or NEWater as it was known. For Lum, it was clear:
14 Koh, J. (2005, March 31). Tale of true grit. T h e B u s i n e s s T i m e s , Singapore. 15 Singapore water reclamation study. Expert panel review and findings. (2002, June). Retrieved October 9, 2009, from http://www. pub.gov.sg/newater/AboutNEWater/Documents/review.pdf This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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I called all my people in and told them if we don ’t make it for this one, it will take us many years to make it. 16
However, Hyflux’s chances of winning the NEWater project seemed slim. Many of the world’s international water treatment firms were keen to be involved in the Singapore Government’s sustainable water supply strategy. The world’s biggest water treatment specialist, Paris-based Suez Lyonnaise des Eaux, had set its sights on the Singapore market. Suez Lyonnaise des Eaux had more than 222,000 employees and was engaged in big-city water projects worldwide, serving an estimated 100 million people. Other international competitors included Paris-based Vivendi Universal which employed about 275,000 people; UK-based Thames Water which had about 12,000 staff; and US-based Azurix Corp. Closer to home, Hyflux also faced considerable competition from two entrenched local conglomerates, each possessing extensive expertise in water desalination and infrastructure. Seghers, a subsidiary of Keppel Integrated Engineering (KIE) with 19,947 employees, was Hyflux’s main competitor. The Singapore Government’s investment arm, Temasek Holdings, was a substantial shareholder of Keppel Corporation, the parent of KIE. Temasek Holdings was also the major shareholder of the other local competitor, Sembcorp Industries, with 10,815 employees and a turnover of over S$4 billion for financial year 2002, far surpassing Hyflux’s earnings of S$45 million. At the time of the tender, Hyflux’s combined manpower strength in Singapore and China was 135 full-time employees. Its capital base was comparatively small with only a listing on Singapore’s smaller exchange, Sesdaq, underscoring its lightweight status in the water
Hyflux’s proposed system for the recycling plant was an advanced dual-membrane (ultrafiltration and reverse osmosis) and ultraviolet disinfection system, which complied with the rigorous specifications set by PUB.
In December 2001, Hyflux won the contract to supply and install a high-grade water treatment plant (capacity of 32,000 m per day) for S$16.1 million. The company completed the water reclamation plant in record time within a year of the contract award. The NEWater project received high media coverage and the media attention also extended to Hyflux and Lum. 3
The company went on to win two out of the three other projects awarded by the PUB between 2002 and 2003. The first, with a project value of S$27 million, was to supply an entire membrane filtration system for a raw water treatment plant with a capacity of 273,000 m per day. The other was the third NEWater plant commissioned by PUB with a contract value of S$27.8 million. The plant used Hyflux’s in-house developed ultrafiltration membrane system (Kristal 300TM) and produced a NEWater output of 24,000 m per day.17
was to recover seawater surrounding the island state. Hence in September 2001, the PUB put out for tender, a project to Build, Own and Operate (BOO) a desalination plant that would produce 30 million gallons of potable water daily. The plant would account for about 10 percent of Singapore’s water consumption and the PUB would buy water from the operator under a 20-year contract.
This was a much bigger project than NEWater. As it did not have a track record for such a large project, Hyflux looked around for a partner. The first partner it chose was US-based Mirant Corporation, one of the world’s largest providers of electricity and energy-related products and services. However in June 2002, six months before the tender closed, Mirant pulled out of the Singapore venture. The fallout from the Enron scandal had affected many US energy companies, including Mirant. Within a month, Hyflux found another partner - French Seawater Desalination Project – a first for water giant Ondeo. Jean-Marc Langard, Singapore and Hyflux marketing director for Ondeo Degrémont, said, “We actually looked at seven companies here ”18 Part of Singapore’s sustainable water strategy and thought Hyflux was the best for us. 3
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16 She saw need for water recycling 10 years ago. (2003, August 2). T h e 17 Hyflux Ltd. A n n u a l R e p o r t 2003. 18 ibid.
Business Times,
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Out of 11 tenders,19 four were shortlisted by the PUB – Keppel Fels Energy, SembCorp Utilities, and Tuas Power Limited - all government-linked companies, and a consortium SingSpring, comprising Hyflux and Ondeo. Hyflux’s initial stake in SingSpring was 40 percent but this increased to 70 percent and subsequently Hyflux took over Ondeo ’s entire stake, after the latter restructured its worldwide operations. The bidders for the desalination project proposed different technologies and water treatment processes, from multi-effect distillation, multi-stage flash distillation and reverse osmosis to hybrid systems. SingSpring’s proposed technology was based on reverse osmosis using Hyflux’s proprietary filtration membrane systems. SingSpring submitted the lowest estimate of S$0.78 per m of desalinated water compared to Keppel Fels Energy’s bid of S$1 .41 per m . 3
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world demand.21 The MENA region was expected to invest US$30 billion in desalination projects by 2015, which would comprise more than 60 percent of the world’s desalination plants. Saudi Arabia, the largest market for water and wastewater in the region, was expected to invest US$28 billion by 2018, of which approximately US$6 billion will be allocated for building new desalination water plants. (See E x h i b i t 3 – Top 10 Desalination Markets and Companies in 2008.) New Markets Abroad
China Hyflux’s success in municipal projects in Singapore gave the firm the necessary credentials to tap into China’s huge municipal water market. In 2004, the company won a contract to develop, design, build, own and operate China’s largest 100,000 m per day seawater desalination plant in Tianjin, the sixth largest city in China with a population of more than 11 million. In the same year, it also won a contract to build a 50,000 m per day plant in the north-eastern province of Liaoning for S$240 million. 3
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In January 2003, SingSpring was awarded the desalination project for S$200 million. The award gave Hyflux the critical mass it needed to compete against international heavyweights like Suez Lyonnaise des Eaux and Thames Water for foreign projects. For Hyflux, revenue streams from the project included more than S$ 100 million for the supply of its proprietary membrane systems as well as a steady 20-year income stream from the minimum capacity water offtake guaranteed by PUB. In September 2005, the Prime Minister of Singapore speaking at the official opening of the SingSpring Desalination Plant said: Over the years, our water industry has grown into a dynamic and vibrant part of the Singapore economy. Hyflux, the parent company of SingSpring, is one of the leaders in this growing industry.20 Hyflux had made history in Singapore as a partner of the consortium that in 2005, built Asia ’s largest desalination plant and at that time, the world’s largest seawater reverse osmosis plant. the Asian Business Case Centre
More than that, the project gave Hyflux a foothold in the fast-growing global market for desalination plants. By 2008, there were more than 13,000 desalination plants operating in over 120 countries globally, producing about 12 million gallons of water per day. However, this made up only 0.4 percent of
The company continued to build on its success by offering integrated water recycling and desalination plants across many provinces in China. In 2006 alone, Hyflux secured seven projects in Jiangsu, Jiangxi, Hebei, and Tianjin, totalling RMB593 million. By 2007, Hyflux had a steady pipeline of 31 municipal projects comprising a total of 39 water treatment plants in China. In 2008, Hyflux secured RMB945 million worth of new water and wastewater treatment projects in the Jiangsu, Shandong, Tianjin, and Hebei provinces. In the same year, it also won five long-term O&M contracts increasing the number of total operating plants from 11 to 15. These contracts would generate recurring income for the next 25-30 years.
19 This included Vivendi, SembCorp Utilities, AES Corporation, Bechtel Enterprises/Power Seraya Ltd/Preussag Wassertechnik, Cadagua/Inima/Proyectos E Instalaciones De Desalacion, Ionics, Keppel FELS Energy, OndeoServices/Ondeo-Degremont, Tuas Power Ltd/Mitsubishi Corporation, and Union Fenosa Internacional/Jurong Engineering/IDE Technologies Ltd/Actividades De Construccion Y Servicios. 20 Speech by Mr Lee Hsien Loong, Singapore’s Prime Minister, at the official opening of the SingSpring desalination plant. (2005, September 13). 21 Desalination in 2008 - Global Market Snapshot. G l o b a l W a t e r I n t e l i g e n c e . This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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Middle East and North Africa Hyflux entered the Middle East market in 2004 through a joint venture with Dubai-based Istithmar PJSC, the largest property development conglomerate in the Middle East, to develop, own and operate water utility projects in Dubai, the UAE and the Middle East. In 2005, it won S$103 million contract to design, build and operate a 38,000 m3/day reverse osmosis seawater desalination plant at The Palm Jumeirah, (the world’s largest man-made island located off the coast of Dubai) and a 40,000 m3/day membrane bioreactor treatment plant for Dubai Metals and Commodities Centre. Armed with its experience in the Middle East, Hyflux next moved into municipal markets in Algeria and Libya in North Africa. (See Exhibit 4 – Water Management and Environmental Sustainability.)
INNOVATIONS IN MEMBRANE TECHNOLOGY Lum saw membrane technology as the key to growing Hyflux’s water treatment business: Our core business lies in the development and application of membrane technology. We firmly believe that the only way to maintain a competitive edge in business is through improving membrane technology and its innovative use in new markets. With the flexibility that comes from the continuous development of our proprietary membranes, the market potential is enormous. 22 However, R&D activities were costly and challenging for small start-ups with limited financial resources. Hence, whatever R&D work was done had to dovetail with the firm’s business strategies.
The journey to build a solid capability in membrane technology for use in water treatment systems and applications began when Hydrochem started operations in China in 1993. Lum saw membrane technology as the answer but the only problem was:
During that time membranes were so expensive, unavailable, and (the technology) so immature. But if you promote something that is so mature and available, where is your added distinct advantage ?2 3
Lum’s early R&D efforts were in China where she could leverage on a ready pool of low-cost engineering talent. In 1994 when the firm opened its Shanghai office, more than 200,000 engineering students graduated from tertiary institutions in China in that year.24 With her small team of engineers, Lum developed processes using membrane filtration technology for removing protein from fermentation broths in pharmaceutical plants and Hydrochem became the first to introduce this application to industrial customers in China. In Singapore, the company also sought and received grants from the government for specific R&D projects. The first grant in 1998 was for Hydrochem to carry out research on the purification of industrial water as an alternative
source to city water for industrial use and on the ozonation method for the treatment of dye effluent and refractory organics. Over these early years, the sums Hydrochem committed to R&D were as follows25 (see Table 3): Table 3 Hydrochem R&D Expenditure (prior to listing on Singapore Stock Exchange) Year
R&D expenditure (S$) 191,000
FY 1999
387,000
Source: Hyflux IPO Prospectus 2001.
By 2000, the firm had a team of six full-time R&D staff, headed by a scientist with a PhD in chemistry. The main thrust of R&D activities was on the development of hollow fibre membranes, pilot studies for water treatment systems, feasibility studies, and the troubleshooting of membrane separation systems to improve their performance in various
22 Group CEO and President’s Message. Hyflux Ltd. Annual Report 2003. 23 Discovery Channel. (2005, January 16). Crossings – Olivia Lum. Singapore: Discovery Channel. 24 Final Report of the Global Engineering Excellence Initiative. (2006). Hanover, Germany: Continental AG. 25 Hyflux Ltd. IPO Prospectus 2001. This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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applications. Membranes were configured differently, in order to obtain maximum exchange surface per unit volume, while limiting circulation polarisation and particle deposits by providing a sufficient flow of treated liquid. In part, this R&D work was facilitated by a three-year grant from Singapore’s Economic Development Board (EDB) to help subsidise the salaries of its R&D staff. In the same year, the company also began developing in-house membrane manufacturing capabilities. Lum explained: The technology to produce clean water has been around for some time. The challenge going forward is to produce the cheapest water.26 Collaborations with local and foreign academia and research institutes continued to complement and strengthen Hyflux’s membrane research. In October 2003, Hyflux collaborated with Singapore’s Nanyang Technological University’s Environmental Engineering Research Centre in water treatment research using membrane technology. The collaboration would allow Hyflux to tap on the centre’s staff and equipment – some of this equipment could cost hundreds of thousands of dollars to purchase. In April 2005, Hyflux signed an agreement with the National University of Singapore to collaborate on research into membrane and materials technology. Hyflux invested S$6.1 million in R&D in 2003 and in the following two years, it set aside five to eight percent of its total revenue for R&D activities. In 2004, in line with the goal of developing Singapore into a global hydrohub, Singapore’s EDB supported a Hyflux initiative to launch an advanced membrane and materials technology R&D Centre in Singapore – the largest in Asia outside Japan. EDB saw this as part of its strategy to spearhead the development of cutting-edge technologies in water and environmental engineering.27 The centre had more than 10 research labs, including a knowledge centre, an innovative process development centre, a novel materials and membrane products development centre as well as advanced machining, prototyping and industrial
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design functions. By 2005, Hyflux had more than 100 R&D staff comprising 50 research scientists and engineers.28 Research, development, and production of membranes were also carried out by Hyflux in China through its 55 percent-owned subsidiary, Hangzhou Zheda Hualu Membrane Engineering, providing access to a larger pool of R&D talent. In 2006, Hyflux secured an exclusive license to manufacture cutting-edge ceramic hollow fibre membranes with the right to sell the membranes worldwide (except Europe) through the acquisition of a 51 percent equity in CEPAration B.V., for 1.5 million euro – a leading Dutch technology institute which owned eight patents in ceramic membrane technology. The Dutch company’s award-winning InoCepTM membrane was reputed for being effective and environmentally friendly for a wide range of nonwater industries. In January 2009, Hyflux acquired the remaining shares of its partners in CEPAration B.V. for S$1 .6 million and the Dutch company and its European subisidiaries became part of Hyflux’s global platform.29 Six months later, at the International Water Week in Singapore, Hyflux CEPAration launched its second generation InoCepTM hollowfibre ceramic membrane. This membrane was capable of sustained filtration at temperatures of up to 1200C and could withstand the full range of pH values, whereas existing membranes could only withstand temperatures below 1000C and a smaller range of pH values. These characteristics made the membrane ideal for solving separation problems for a wide range of industries, from steel mills to food and beverage to biopharmaceuticals.30 In 2009, Hyflux signed two agreements for technology collaboration. The first was with Swiss engineering company – Zurich-based ABB. Under a S$40 million deal, ABB would provide power to a seawater desalination plant in Algeria. ABB’s energy-efficient technologies and solutions could help increase the energy and operational efficiency of Hyflux’s water processing plants. The second was a collaboration with the Dutch Technology Foundation – STW,
26 Lim, K. (2003, October 15). The challenge is to make cheap water: Hyflux CEO. The Business Times, Singapore. 27 Hyflux Ltd. Annual Report 2004. 28 Hyflux Ltd. Annual Report 2005. 29 Hyflux Ltd acquires remaining interest in Hyflux CEPAration BV. Retrieved October 11, 2009, from http://www.membraneguide. com/english/news/membrane-news-2009.htm 30 Hyflux Ltd. (2003, June 23). Hyflux’s revolutionary InoCep achieves significant energy and cost savings while separating liquids under extreme conditions [Press release]. This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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·
entrepreneurial spirit, embrace challenge, and master change. Satisfaction: Exceed internal and external customer satisfaction, take pride in work, and deliver excellence.
· Testimony: Be the face behind the brand, to jointly fund a three million euro (S$6.1 million) partnership research programme on advanced membrane separation technologies. The programme was expected to last two to four years, and Hyflux’s role was to commercialise the research work.31 Lum’s role as a technopreneur adept at combining business and sustainable development was recognised in 2009, when she was ranked by the United Kingdom ’s Sunday Times, as among the world’s 100 richest eco-pioneers. As Hyflux charted a new course for itself in the areas of water treatment and membrane technologies, global competition was gathering momentum. This included: The ZeeWeedTM Membrane Bioreactor (MBR) system launched in 2009 by General Electric’s Power and Water Division. This system combined proven ultrafiltration technology with biological treatment for water purification. Similar to Hyflux’s membrane technology, GE’s technology allowed scalability of the MBR systems according to the needs of the client. Other competitors in this sector included Canada’s UV Pure, which relied on ultraviolet technology to treat water, featuring a proprietary self-cleaning mechanism that allowed it to operate effectively regardless of the mineral content of the water being processed. (See E x h i b i t 5 – Hyflux Ltd Competitors.)
H Y F L U X – P E O P L E A N D O R G A N I S AT I O N
Hyflux’s vision was “to be the leading company that the world seeks for innovative and effective environmental solutions”. The key values espoused by the company were:
· Boldness: Dare to dream, dare to do, and dare to excel.
· Entrepreneurship: Nurture the
excel in business conduct, and embrace best practices in corporate governance.
This philosophy made Lum drive her people hard, and herself even harder. She admitted that she was a hard taskmaster and that her staff called her ‘pressure cooker’, “Since day one, I have been moving very quickly. Our people understand the pace”.32 She expected design work for a typical new product, for instance, to be completed within two weeks, during which the team had to report to her every two days. The time needed for a product to reach the market was about six months, but she thought this was not good enough as some large companies could do it in three months. You must embrace this passion, you must enjoy this pressure. When you wake up, you must be happy thinking about going to work. If you can’t have that feeling, then forget it…I try to push their abilities to the limits. I tell my people, I’m trying to expose your best performance. If you can’t go beyond that, then let’s stop there. But before that, let’s explore the limits.33
had inspired many to follow her lead, she played many roles - entrepreneur, CEO, technology visionary as well as the public face of the company: People say I seem to be the only one running the company. That’s not true. I have a whole throng of people helping me. A company is like a caterpillar. You have the head moving, but the legs must be moving together too.34 Training had been the key for building the critical knowledge, skills, and competencies required to grow the business. Knowledge transfer was critical and engineers were carefully matched with appropriate mentors to impart technical knowledge on the job. In-house seminars were conducted regularly by the various heads of departments to keep everyone updated in their area of work.
A multi-disciplinary approach was also adopted by rotating staff to different departments to enable them to acquire skills in at least two As the person whose vision for the company different disciplines. Staff from Shanghai were occasionally posted to
31 STW Partnership Program Plan: STW - Hyflux CEPAration Inorganic and Hybrid Membranes. Retrieved October 9, 2009, from http://www.stw.nl/NR/rdonlyres/CD96C725-A920-48D5-9C36-BEC4AD888CC8/0/Hyfluxprogramplan.pdf 32 Wong, W. K. (2003, August 2). Grace under pressure; Olivia Lum wears many hats. T h e B u s i n e s s T i m e s , Singapore. 33 ibid. 34 ibid. This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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Singapore to learn from the senior engineers while engineers from Singapore were sent to China for job exposure and to help train their counterparts there. In order to keep technicians and engineers abreast of new developments and technologies in the field of water treatment and advanced membrane filtration, senior engineers and technicians were sponsored for external courses conducted by local institutions.35 They were also sent overseas to attend international conferences and seminars to enable them to exchange information with other experts.36 Many of Hyflux’s professional and technical staff were from China where a major proportion of the company’s jobs were located (see Table 4). As Hyflux projects moved further afield, Hyflux staff had to venture out to work in unfamiliar terrain on jobs in the MENA. This was especially so for those in systems integration, project management and business development. Hyflux’s headcount grew from 465 in 2004 to 1,899 in 2008, reflecting the rapid growth in projects secured by the firm. Technical and engineering staff accounted for a major proportion of this increase. Singapore and China accounted for the bulk of the increase. Despite the punishing pace, staff turnover was reported as only three to four percent.37 From 135 full-time employees in Singapore and China in 2000, Hyflux’s workforce grew to 1,228 at the end of 2007 and increased almost 50 percent a year later, to 1,899 employees in 2008.
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FINANCIAL MANAGEMENT In early 2001, Hyflux raised S$6.8 million from its IPO on Sesdaq, the second board of the Singapore Stock Exchange. This was followed by three rounds of share placements which raised almost S$30 million between 2001 and 2002. In January 2003, through a private share placement, Temasek Holdings, a Singapore government-owned investment company, bought 11.8 million new Hyflux shares at S$ 1 per share. This was after the Hyflux-led consortium was awarded PUB’s desalination plant project. Hyflux announced that the proceeds would be used to fund acquisition of new technologies.38 However, in January 2004, Temasek pared its stake in Hyflux from five percent to three percent.39 In 2002, Hyflux made it to Forbes Global magazine’s list of the world’s 200 best small companies and the company moved to the mainboard of the Singapore Exchange in April 2003.40 In the municipal market, Hyflux balanced revenue from the project-based EPC business with regular income streams through the management of plant operations. However, as the pace of EPC business accelerated, Hyflux moved towards an asset-light strategy divesting 50 percent of its interest in the SingSpring Desalination Plant and through the sale and leaseback of Hyflux Building in Singapore. To aid business expansion in China and beyond, it continued to adopt an asset-light strategy by divesting its interest in capital-intensive Build-
Country 2004 2005 2008
Singapore 229 404 NA NA
Table 4 Human Capital – Global Headcount China India Middle-East 164 2 248 9 21 NA NA NA NA NA NA
Others 70 NA NA
Total 465 682 1228 1899
Source: Hyflux Ltd. Annual Report 2005-2008. 35 Such as the Environmental Engineering Research Centre (EERC) at Singapore’s Ministry of the Environment and Environment Technology Institute (ETI). 36 Hyflux Ltd. (2001, January). IPO Prospectus. 37 Wong, W. K. (2003, August 2). Grace under pressure; Olivia Lum wears many hats. The Business Times, Singapore. 38 Teh, H. L. (2003, January 20). Hyflux-led consortium wins $250m desalination project. The Business Times, Singapore. 39 Ng, S. (2004, February 28). Temasek sheds stakes in 12 companies;It will divest further in the years ahead, says DPM Lee. The Business Times, Singapore. 40 Companies listed on the SGX-Sesdaq may apply for transfer to the SGX main board when it meets the Mainboard ’s requirements and have been listed on the SGX-Sesdaq for at least two years. For details, see http://www.business.gov.sg This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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Own-Operate/Build-Operate-Transfer (BOO/BOT) projects. This strategy allowed it to unlock financial resources and release debt capacity to take on new projects and expand into new markets. A joint venture, SinoSpring, was set up to bring in partners to invest in BOO/BOT projects in China. By late 2005, Hyflux’s combined BOO/BOT projects under construction when completed would yield 500,000 m per day. These projects were progressively scheduled to commence operations and with it the company would have a recurring income stream of S$80 to S$90 million annually for the next 20 to 30 years.41 In the longer term, Hyflux’s goal was to establish itself in the BOO/BOT market, with recurring income making up 30 to 40 percent of total group revenue.42 3
To enable this, while ensuring that its financial resources were not tied up in expensive BOT projects, in 2007, Hyflux announced the IPO of Hyflux Water Trust, a business trust structure which would own completed water plants on long-term O&M contracts (see Box). In 2008, the water industry was not spared the effects of the global credit squeeze, especially the capital-intensive BOT and Transfer-OperateTransfer
(TOT) market segments. Smaller firms in the sector faced financing problems at a time when their order books were slowing down. Some China-based water companies faced with working capital funding constraints had to put up their plants (which were under construction) for sale. In contrast, Hyflux’s project financing strategy had the backing of national and regional governments in China and Algeria, which protected it from the credit crunch, and the company was able to secure loans to complete projects. However, as Hyflux planned to grow its order book, its gearing could rise to over 50 percent in 2008.43 (See Exhibit 6 – Summary of Hyflux Profit and Loss Statements and Balance Sheets.) Full Annual reports and prospectus are available at http://www.hyflux. com/annualreports.html
FUTURE PROSPECTS The impact of the 2008 global recession was felt by manufacturing industries and affected Hyflux’s membrane sales to the bio-technology, F&B, and petrochemical industries. Revenue from the industrial water segment, mainly water and wastewater treatment facilities in China, fell from 50 percent of total sales revenue in 2007 to 14 percent in 2008.
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HYFLUX WATER TRUST In November 2007, Hyflux announced an initial public offering (IPO) of 165 million shares or 68.5 percent of Hyflux Water Trust (HWT) at an offer price of S$0.78 per unit. It was the first pure-play global water business trust in Asia to be listed on a securities exchange. Although the business trust was a relatively new investment instrument for retail investors in Singapore, the company’s high media profile facilitated investor interest. The business trust targeted water infrastructural assets in regions such as the People’s Republic of China, India, the MENA, as well as other highgrowth markets. HWT’s objective was to expand its assets through selective yield-accretive acquisitions from Hyflux and from other third party owners of water-related infrastructure assets. On listing, HWT would own 13 water plants in China with a total capacity of 445,000 m3/day. For Hyflux, the business trust was to enable the firm to extract some form of rental income through the sale of ownership shares in the trust and helped mitigate the risks associated with physical asset ownership, such as depreciation and fluctuations in land value by transferring and spreading the risks over a large group of investors. The trust could also provide Hyflux more scope to acquire water infrastructural assets without first having to design and construct the physical premises. 41 Hyflux Ltd. A n n u a l R e p o r t 2005. p. 2. 42 ibid. 43 Water industry still ’liquid’: Credit Suisse. (2008, December 10). T h e
Business Times,
Singapore.
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However, Hyflux’s long-term R&D strategy had moved the goal post between itself and other upand-coming industrial water treatment firms in Asia. The firm’s R&D initiatives into membranes capable of withstanding higher temperatures meant that it could offer innovative separation solutions and present opportunities for the company to move beyond water filtration to the treatment of other fluids. The municipal water sector remained the growth driver for the company. Long-term government development strategies were driving demand in this market segment. Hyflux’s municipal sales to China and the MENA region accounted for 86 percent of total revenue in the first half of 2009 as compared to 80 percent in the first half of 2008. The company was also pursuing new markets and regions. In June 2009, it announced that it was exploring the eastern European municipal market, and identified Russia, Hungary, and Ukraine as possible targets. To manage the business risks of long-range BOT water projects in newly developing countries, Hyflux was expected to continue its business model based on partnerships with governments or governmentlinked municipal organisations.
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In 2009, the key issue for Hyflux was whether the development of its internal organisation could keep pace with the aggressive market penetration strategies. With large-scale high-value projects extending from China to North Africa, the challenge was how to grow enough breadth and depth in its organisational capabilities to execute these projects. While in the past, it had leveraged on innovative technology development and entrepreneurial drive, these were no longer sufficient for a company competing in the global municipal water business. Hyflux’s market expansion strategy required the recruitment and retention of talent in its engineering and projects management corps to implement EPC projects across geographically far-flung and culturally diverse regions. Furthermore, to continue the success rate in securing municipal projects abroad, the company would require more business managers with the requisite competencies to meet the demands of bidding for such jobs in the international arena. In essence, Hyflux needed to have an effective human capital management strategy to keep pace with the company’s fast growth strategy.
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EXHIBIT 2 SINGAPORE STRATEGY FOR WATER SUSTAINABILITY Singapore’s national water agency PUB built a robust and diversified supply of water known as the Four National Taps:
· Local Catchment Water: In the mid-80s, rainwater was harvested through a comprehensive network of drains, canals, rivers, storm-water collection ponds and reservoirs and then treated for drinking water supply. By 2009, more than half the island was used for water catchment and with two more reservoirs and a barrage by 2011, the area would be increased to two-thirds.
· Imported Water: Singapore had been importing water from Johor, Malaysia, under two bilateral agreements. These would expire in 2011 and 2061.
· NEWater: High-grade treated used water purified using advanced membrane technologies and ultra-violet disinfection. NEWater was primarily for non-potable industrial use; a small amount was also processed for potable use. By 2011, with the expanded capacities of the existing four NEWater plants and the completed fifth plant, NEWater would meet 30 percent of the nation’s water needs. NEWater, a Singapore’s success story, was a key component of the country’s water sustainability model. (See Figure 1.)
· Desalinated Water: Freshwater was obtained by desalting seawater through the reverse osmosis process. Singapore had one of Asia’s largest seawater reverse-osmosis plant (set up in 2005), producing 30 million gallons of water a day to meet 10 percent of Singapore ’s water needs. A second desalination plant, with production capacity of 70 million gallons per day, was expected to be completed in 2013. Figure 1 The Water Loop
Source: Water for all. Public Utilities Board, Singapore. Retrieved October 10, 2009, from http://www.pub.gov. sg .water/Pages/singaporewaterstory.aspx This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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EXHIBIT 3 TOP 10 DESALINATION MARKETS AND COMPANIES 2008
1) 2) 3) 4) 5) 6) 7)
Saudi Arabia 10,759,693 m3/d 17% UAE 8,428,456 m3/d 13% USA 8,133,415 m3/d 13% Spain 5,249,536 m3/d Kuwait 2,876,625 m3/d Algeria 2,675,958 m3/d China 2,259,741 m3/d
8) Qatar 1,712,886 m3/d 9) Japan 1,493,158 m3/d 10) Australia 1,184,812 m3/d 2) Fisia Italimpianti 3) Doosan 4) GE Water
8% 5% 4% 4% 3% 2% 2%
1) Veolia Environement 5,420,072 m3/d 3,025,344 m3/d 2,852,305 m3/d 2,471,987 m3/d
6) Befesa Agua 5) Suez Environment 8) Hyflux
1,528,710 m3/d 1,387,624 m3/d
9) Acciona Agua 10) IDE 7) ACS (Cobra/Tedagua/Drace) 1,312,347 m3/d 1,121,508 m3/d 1,111,516 m3/d 1,001,730 m3/d
Source: Desalination in 2008 – Global Market Snapshot. G l o b a l
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EXHIBIT 4 WATER MANAGEMENT AND ENVIRONMENTAL SUSTAINABILITY At the beginning of the 21st century, populations worldwide were increasing at a phenomenal rate, causing the emphasis on water sustainability to shift towards the viable production and treatment of drinkable water. There was a growing consensus that the water crisis was not so much one of availability of water, but rather, in the management of water, especially in the cities. As industrialization spread to every corner of the earth, many governments moved to implement regulations on the treatment of effluent wastewater and other fluids from industrial processing. Manufacturers faced not only costlier water supplies, but the need to find efficient and effective methods to manage wastewater. As a result, a number of such companies (ranging from global water giants such as GE Water to small start-ups such as Sinomem Technology, a China-based water company), began moving into this greenfield industry. Municipal and Industrial Water Market Globally, 1.2 billion people in 2006 lacked access to clean drinking water, and the United Nations indicated that by 2025, water scarcity could affect close to 40 percent of the world ’s population, a high proportion living in Asia. The region had become increasingly affected by growing water scarcity, water pollution, the increasing pace of economic growth, as well as population growth. China China accounted for 22 percent of the world ’s population, but it was endowed with only seven percent of the world’s freshwater. The Ministry of Water Resources predicted that by 2030, per capita water resources among China’s projected 1.6 billion inhabitants could fall to 1,760 m per capita, nearing the water stress benchmark of 1,700 m per capita. 3
3
By 2015, China was expected to have over 109 cities, each with a population of more than one million, placing enormous demands on the supply of urban water services. The Ministry of Water Resources indicated that 400 of China’s 660 cities had insufficient water supplies, and that 100 of these cities faced extreme water shortages. China’s water consumption was expected to reach 1,068 billion tons by 2030, fuelled by strong industrial demand growth. In addition, there was increased demand by residential consumers, due to the country’s rising middle class as well as rural migration patterns into urban centres. The total amount of wastewater discharged stood at more than 70 billion m in China in 2005 - industrial wastewater made up about 60 percent, while domestic wastewater contributed the rest. The treatment rate was about 40 percent with the rest discharged untreated. The State Environmental Protection Agency of China estimated that the country would need to invest US$50 billion to build 10,000 wastewater treatment plants just to reach a 50 percent treatment rate. 3
The aim of China’s 11th Five-Year Plan (2006-2010) was that by 2010, all cities and seats of county governments would have wastewater treatment facilities with a treatment rate of not less than 70 percent. By then, investment in urban water supply and urban wastewater segments were expected to be RMB 143 billion and RMB330 billion, respectively.1 Global Water Intelligence estimated China’s desalination market growing 160 percent between 2005 and 2015.
1 Investing in Asia’s water sector. (2007, February). Association for Sustainable and Responsible Investment in Asia. This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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EXHIBIT 4 (CONTINUED) WATER MANAGEMENT AND ENVIRONMENTAL SUSTAINABILITY A number of global multinationals such as Suez, Veolia, and Thames were active in both municipal and industrial markets of the Asian water sector. An increasing number of small and mid-capitalisation water companies such as locally listed Beijing Capital, Tianjin Capital, and Guangdong Investments as well as Singapore-listed Bio-Treat, Epure, and Sinomem, had also moved into these markets. Middle East and North Africa According to Arab Water World, MENA had five percent of the world’s population with less than one percent of the world’s available freshwater resources.2 In 2008, average per capita water availability in the region was about 1,200 m per year while the world average was close to 7,000. By 2025, the regional average water availability was projected to be just over 500 m3/person/year. According to the WHO, Algeria was a waterstressed country. The total value of water and wastewater projects planned for the MENA region over the next decade was approximately US$120 billion. 3
India The Indian water market was estimated to be worth about US$1 billion per annum in 2008 (split equally between water provisioning, municipal water treatment, and industrial water treatment) and was expected to grow 15-20 percent annually. India, with a billion-plus population and economic growth rates of eight percent, was on the verge of a water crisis. Several areas, including some of the most densely populated and economically productive, were already experiencing a water crisis. By 2020, India’s demand for water was expected to exceed all sources of supply.3
2 Singapore company focus: Hyflux. (2008, June 30). D B S 3 ibid.
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EXHIBIT 5 HYFLUX LTD – COMPETITORS INTERNATIONAL PLAYERS
Veolia Water: at 159 years old, this French company is also the world ’s largest provider of water services with 4,400 contracts around the world. Employing 93,433 people, Veolia Water ’s revenue in 2008 hit 12.5 billion euro. Its China-based water-engineering subsidiary, OTV-Kruger, had been active in China since the 1980s. In 2002, leading Veolia Water was awarded the 50-year full service water contract for Shanghai’s Pudong business district. This was followed by another 50-year municipal contract for water and wastewater in Shenzhen in 2003. Over the next few years, more full service long-term contracts were signed in other major cities such as Kunming, Lanzhou, Haikou, and Tianjin. In 2009, with a headcount of 9,000 in China, it managed 20 municipal contracts and 5 industrial contracts in 20 provinces. Suez Environment: a leading global French player with 65,400 employees and revenue of 12.4 billion euro in 2008. It planned to invest 65 million euro in R&D in 2009. Its subsidiary, Ondeo IS, served the industrial water market with over 200 O&M contracts while another subsidiary, Lyonnaise des Eaux, managed 2,600 long-term (averaging 12 years) municipal contracts. It had been in China for over 30 years through its main subsidiaries: Sino French Holdings and Sino French Water Development in the water management business; Swire SITA Waste Services in the waste management business; and Degrémont, which offered technologies, design and construction expertise for water and wastewater treatment plants. Siemens Water Technologies: a subsidiary of Siemens AG with seven major business hubs in Australia, China, The Netherlands, Saudi Arabia, Singapore, South America, and the United States. It had 6,000 employees at 179 locations worldwide with revenue of S$71 2 million in 2008. Its global R&D headquarters, set up in Singapore in 2007, signed a Memorandum of Understanding with local Public Utilities Board (PUB) to collaborate on water R&D projects. In 2006, Siemens acquired CNC Water Technology Inc., Beijing. In mid2009, the company won one of the largest membrane-based drinking-water treatment projects in China worth RMB40 million from Jiangsu province’s Wuxi Water Supply General Company. GE Water & Process Technologies: a business unit of GE Energy, headquartered in Philadelphia, USA. In 2008, the global supplier of water treatment, wastewater treatment, and process systems solutions had 8,000 employees and generated revenue of US$2.1 billion. In China, it had created a broad solutions portfolio for industries including steel, power, chemical, petrochemical, general manufacturing, food and beverage, oil and gas, as well as municipalities and government agencies. GE ’s membranes were used at the Bedok NEWater plant and the nation ’s first large-scale membrane bioreactor plant at Ulu Pandan, as well as at two important potable water plants: Chestnut Avenue Water Works and Choa Chu Kang Water Works.
MAJOR PLAYERS IN SINGAPORE Keppel Integrated Engineering (KIE): was the environmental technology and engineering division of Keppel Corporation Ltd, a leading SGX-listed company in Singapore (with market capitalisation of S$10 billion in May 2009). By 2009, its subsidiary, 38-year-old Keppel Seghers, had completed more than 350 water and wastewater projects and more than 100 waste-to-energy projects in 25 countries. In Singapore, Keppel Seghers built the second largest fourth NEWater plant (at Ulu Pandan).
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EXHIBIT 5 (CONTINUED) HYFLUX LTD – COMPETITORS Sembcorp Industries Ltd: a top 20 listed stock on the SGX with a market capitalisation of S$5.8 billion in October 2009. In 2008, Sembcorp achieved a turnover of S$9.9 billion and its utilities business (which included water management) was its second-largest revenue generator contributing S$4.5 billion or 45 percent to the group turnover. Its Utilities division pioneered Singapore’s water recycling business in Singapore in 1999 with its first high-grade industrial water plant on Jurong Island. In 2009, it built Singapore ’s fifth and largest NEWater plant in Changi, which is also among the world’s largest recycling plant. Sembcorp’s water management capabilities have been successfully exported to China (Nanjing Chemical Industrial Park, Zhangjiagang Free Trade Port Zone, Tianjin Lingang Industrial Area, Shenyang, and Shanghai), the UK and the UAE (a combined power and desalination plant in Fujairah). SMEs IN SINGAPORE Epure International Ltd: a China-based turnkey water and wastewater treatment provider listed on the SGX in 2006. Despite the financial crisis in 2008, its number of EPC projects stood at 49 (of which 31 were new initiatives) which was a 69 percent increase from 29 projects in the previous year. Total revenue for 2008 was RMB1.02 billion with net profit after tax of RMB231.64 million. Epure was also included in Forbes Asia’s ‘Best Under A Billion Top 200 Companies’ as well as ‘2008 Forbes China Potential Enterprises’. Epure was the only environmental protection company selected to become part of the FTSE ST China Top Index, which included the top 20 Chinese companies listed on the SGX. United Envirotech Ltd: another China-based company listed on the mainboard of SGX since April 2004. As an EPC contractor, the company served clients such as petrochemical giants China Petrochemical Corporation, China National Petroleum Corporation, and China National Offshore Oil Corporation, as well as large industrial parks such as those in the fast developing Economic Development Zones (EDZ), namely, Daya Bay Hui Zhou, Guangzhou Nansha, and Tianjin EDZ. It also invested in wastewater treatment plants under BOT, and TOT agreements (e.g. in Liaoyang and Shandong), typically municipal plants backed by offtake agreements from the Chinese Government. Revenue for the financial year ending March 2009 was S$42.9 million with profit after tax of S$3.7 million. Sinomem Technology Ltd: was a China-based water treatment company established in 1996 and listed on the SGX in 2003. Sinomem reported revenue of S$107.2 million in financial year 2008 with S$2.9 million in profit after tax. Since 2006, with its development of advanced membrane materials and processes, Sinomem had secured 15 BOT/TOT municipal wastewater treatment projects in China with more than 600,000 ton/ day treatment capacity. Dayen Environmental Limited: a Singapore-based company listed on Singapore’s second exchange, SGX Sesdaq, in April 2002. Revenue in 2008 was S$29.5 million with a loss before tax of S$14.9 million. Since its inception in 1986, Dayen had repeatedly secured substantial local contracts which included Singapore’s PUB. The company had started expanding to the Middle East and China. Sources: Company websites and annual reports.
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EXHIBIT 6 HYFLUX PROFIT AND LOSS STATEMENT (2000-2003)
Revenue Other operating income Raw materials and consumables Personnel expenses Research and development costs Depreciation and amortisation Other operating expenses Profit from operations Financial expenses Financial income Profit before share of results of associate Share of results of associate Profit before taxation and minority interests Taxation Profit after taxation and minority interests Minority interests Net profit for the year
Earnings per share (cents) - Basic - Fully diluted
2003 S$’000 81,17 2 758 (36,67 9) (7,283
2002 S$’00 0 45,26 7 1,541 (18,53 5) (6,890
2001 S$’0 00 27,2 35 212 (8,71 4) (4,79
2000 S$’0 00 17,5 71 15 (5,71 4) (2,43
) (568) (2,164 (15,06)
)(2,301 (6,959)
8) (298) (1,39 4) (2,88
1) (141)
8) 20,16 8 (341) 183
) 12,12 3 (353) 83
0) 9,36 3 (64) 176
20,01 0
11,85 3
9,47 5
(69) 19,94 1
(50) 11,80 3
6,79 1 (1,85 3) 4,93 8
(301) (2,23 2) 6,76 724 6,79 1 -
(677) 19,26 4
11,85 9
(28) 9,44 7 (2,09 7) 7,35 0
246
402
5
-
19,51 0
12,26 1
7,35 5
4,93 8
6.27 6.17
5.33 5.24
3.38 3.38
9.65 9.65
56
* Figures are for the period from the date of incorporation, 31 March 2000 to 31 Dec 2000. Source: Compiled from Hyflux Annual reports 2001 – 2004.
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EXHIBIT 6 (CONTINUED) HYFLUX PROFIT AND LOSS STATEMENT (2004 –
2008 S$’000
2007 S$’000
554,22 4 3,710
192,78 6 1,246
(387,76 7) (52,606
(107,24 4) (33,852
(9,718)) 4,770 (10,222 (680))
Share of profit/(loss) of associates, net of tax Other operating expenses Other income / (expense)
Revenue Changes in inventories of finished goods and work-in-progress Raw materials and consumables
2006 S$’000 (Restated ) 142,379 -
2008)
2005 S$’000 (Restated) 131,504 -
2004 S$’000 (Restated) 88,655 -
(77,767)
(69,434)
(35,917)
(7,198))
(20,042) (4,969)
(16,676) (4,001)
(9,302) (3,533)
2,548
5,534
2,700
-
(8,878) (3,532)
(9,078) 115
(2,547) 12,945
(360) -
(1,400)
1,277
(910)
(93)
-
(30,388 ) 494 -
(9,369) 108 8,185
(17,166) (314) -
(14,458) 793 -
(10,611) 472 -
(42)
(4)
52
8,198
103
Negative goodwill on acquisitions
-
3,839
-
-
Cost of share-based payments Gain on sale of subsidiaries and associate
-
2,620 -
-
-
(3,150) 1,655
(2,325) 3,768
(663) -
Profit before taxation Taxation
70,375 (8,157)
38,693 (2,048)
20,178 (4,821)
50,374 (1,071)
28,844 (968)
Net profit for the year
62,218
36,645
15,357
49,303
27,876
59,036 3,182 62,218
32,949 3,696 36,645
15,473 (116) 15,357
46,393 2,910 49,303
26,104 1,772 27,876
11.25 10.99
6.32 6.23
3.00 2.97
9.24 9.01
5.55 5.44
Personnel expenses Depreciation, amortisation & impairment Finance income Finance expenses Fair value gain/(loss) on derivative financial instruments
Gain on sale of partial interest in a joint venture Gain/net (loss) on sale of property, plant and equipment
Attributable to: Shareholders of the Company Minority interests
Earnings per share (cents) - Basic - Fully diluted
Source: Compiled from Hyflux Annual reports 2005-2008. This document is authorized for use only by Daman Wandke in Managing Organizations and People taught by Craig Mayberry from July 2012 to January 2013.
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EXHIBIT 6 (CONTINUED) HYFLUX BALANCE SHEETS (2000 – 2001)
Source: Hyflux Annual report 2001, p. 24.
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