Nowadays, one of the Malaysia construction companies, Ho Hup constructions Berhad is one of the best and largest companies in construction sector which have also take place as being one of the contributor for government income every year. Ho Hup construction was established in year 1960 by Mr Low Chee with name Ho Hup construction Berhad . Ho Hup construction is a construction company with license and was certified by the ISO 9001:2000 (Provision of Construction Management and Services for Building and Civil Engineering Works). No matter projects from government or private sectors, Ho Hup construction Berhad implements it by following the ISO standard. Ho Hup construction Berhad is a public listed company in Kuala Lumpur Stock Exchange which also called as Bursa Saham Malaysia under the construction sector.
The primary activities of Ho Hup construction Berhad include a comprehensive range of competence in building, civil engineering, specialized intelligent building, trading, and related service. Ho Hup construction Berhad has wider experiences in construction sector through its hundred percent of wholly owned subsidiary company (Ho Hup construction company Berhad). Ho Hup construction company Berhad's primary service activities include building construction, earthworks, engineering, railway, water treatment plants, highway and works, building works, sports complexes, bridges, dams, steel pipelines, quarry operation, reservoirs , drainage works, manufacturing and oil & gas works, foundation as well as engineering (citation).
Ho Hup construction Berhad not only well-established in Malaysia, it also extended its business activities into other countries around the world. Ho Hup construction Berhad has its subsidiaries which called Ho Hup construction (Thailand) Limited company operate in Thailand, Shanghai San Ho Hup Pile Co. Ltd in China, Madagascar Malaysia Equipment Rental & Madagascar Malaysia Construction Company and Ho Hup Construction (Madagascar) SARL in Madagascar, Ho Hup Construction Company (India) Private Limited operated in India, Ho Hup Corporation (Mauritius) Ltd in Mauritius and Ho Hup corporation (South Africa) in South Africa Pty Ltd. Also, PT Halford Citra is one of the subsidiary company of Ho Hup construction in overseas.
http://www.hohupgroup.com.my/images/costructure.jpg
A question is regarding why Ho Hup construction Berhad and its subsidiary companies have the best of the remark and its achievement is better than other construction companies in this sector? It is because Ho Hup construction Berhad's construction projects are implemented with its company's professional work ethics and frequent close monitoring, by the onsite and offsite management team, to keep tracking of the work-in-progress and standard quality control, machinery maintenance and requirement ensures the successful completion of each and every project it undertakes. Employees of Ho Hup construction Berhad be trained to completed their jobs by following their company's mission that is "quality driven". With the company's mission, every project is completed by following the code of ethics. That is the reason why projects done by Ho Hup construction Berhad gained reputation for its company and Ho Hup construction Berhad are recognized by public and industry competitors. Besides that, Ho Hup construction Berhad from year to years obtained award and certificate recognition from certain departments and leaders. The obtained awards are the evidence to prove that Ho Hup construction Berhad are doing well to fulfill clients' need and at the same time, it caring the society needs as well.
Beside than mission of company, benchmark of Ho Hup construction Berhad is "the lifestyle of living" for customers who purchase the property from Ho Hup construction Berhad.
Ho Hup construction Berhad and its subsidiary companies been completed many successful and famous project such as Kuala Lumpur International Airport, LRT railways and mass rapid transit, national sport complex Malaysia and so on. Their successful projects are those public well known project.
Relevant financial ratio
Debt to Equity Ratio
2008
Total Liabilities/ Total Shareholder Equity
= RM 269,644,000/RM 18,769,000
= 14.36
2009
Total Liabilities/ Total Shareholder Equity
= RM 259,030,000/ RM 15,679,000
= 16.52
2010
Total Liabilities/ Total Shareholder Equity
= RM 239,488,000/ RM 29,112,000
= 8.23
Debt Ratio
2008
Total Liabilities/Total Asset
RM 269,644,000/ RM 289,683,000
= 0.93
2009
Total Liabilities/Total Asset
RM 259,030,000/ RM 244,444,000
= 1.059
2010
Total Liabilities/Total Asset
RM239, 488,000/ RM 211,530,000
= 1.132
Every business has its capital structure to help firm to generate difference sources of fund in order to extend their businesses. Capital structure defined as a mix of long term debt, specific short term debt, common equity and preferred equity.
Debt to equity ratio is a financial ratio used to indicate what proportion of equity and debt the company is using to finance its asset. Ho Hup construction Berhad consolidate company debt to equity ratio in year 2008 is around 14.36%, this ratio show that consolidate company financial leverage is lower and under healthy level. Next, in year 2009, debt to equity ratio is around 16.52%, there is some increasing from year 2008 to year 2009 due to consolidate company start to have long term borrowing in year 2009 (RM 5,037,000) and that is zero borrowing in year 2008(company annual report 2009 note 30). At the same time, there is also caused by the shareholder equity reduce from RM 18,769,000 to RM15, 769,000. In this stage, company still consider is having lower debt to equity ratio, because certain company among the market competitors are having debt to equity ratio more than 50%. Moreover, there is 8.23% of debt of equity ratio for year 2010. During this year, company decided not to have any long term bank borrowing and make repayment for loan principle and interest. This shows that Ho Hup Construction Berhad consolidate company have high cash flow to carry the debt even through much debt versus equity. A analysis found that when comparing the long term borrowing from year 2008 to year 2010 that is Ho Hup Construction Berhad only make borrowing on year 2009 is caused by company have few under construction projects that have to take 3years time to complete. So company has to borrow from bank to ensure have sufficient fund to ongoing these project until project completed.
Beside than debt to equity ratio, debt ratio is another important ratio to describe capital structure of Ho Hup Construction Berhad consolidate company. Consolidate company debt ratio is increasing from year 2008 - 0.93% to year 2009 - 1.059% and year 2010 - 1.132%.
That is not rules say that debt ratio increase year by year is a negative impact towards their company capital structure. Sometimes, company debt ratio increase can be explained as the debt is necessary to run a project in order to boost up company profit. Ho Hup Construction Berhad as a construction company in Malaysia has to follow the government policies as company must achieve minimum capital only entitle to bid a government project.
The relationship between equity and debt is defined as how much debt of company borrows to oppose with how much equity owned by shareholder. In this case, the debt to equity ratio and debt ratio of Ho Hup Construction Berhad consolidate company are under healthy level. Based on the ratio as calculated above showd that Ho Hup Construction Berhad consolidate company debt is constantly 3 years maintain at healthy standard. Through the calculation of the ratio, investor able to overview the financial status and investment policies of Ho Hup Construction Berhad consolidate company and then justify the ratio are generally with low volatility.
The Capital structure of Ho Hup construction Berhad for year 2008 cash flow statement shows that the loss before tax is from RM 55, 919,000 decreasing to RM 33,387,000 during year 2009. However, for year 2010 is achieving RM16, 093,000. Cash flow statement shows that Ho Hup Construction Berhad able to control its cost and expenses in order to gain more profit. Nevertheless, the figure from consolidated cash flow statement shows the continuous of three years loss not necessary mean the company does not make profit for whole year. In this case, Ho Hup Construction Berhad is a construction company which has much machinery, equipments, properties, plants for company to operate their business. Year by year, all the machineries and equipments facing depreciate on values. Furthermore, when some of the constructions completed, there will be some of the machineries and equipments to be written off or disposed. As a conclusion for above statement, company might make profit for the year, but when the year end, depreciation of machinery and equipment are being included in the cash flow statement. So the figures of depreciation will overridden the profit of the company.
After comparing Ho Hup construction Berhad 3 year's profit and loss, now is moving forward to gross profit margin of the company for year 2008 to year 2010. In year 2008, the gross profit margin for consolidated group is 22% (RM 20,371,000/RM 91,183,000 = 22), while in year 2009, gross profit margin for consolidated group is 18% (RM 14,619,000/RM 80,149,000 = 18%), in year 2010 gross profit margin for consolidated group also maintain in 18% (RM 11,789,000/RM 65,123,000 = 18%). In year 2008, financial crisis happened around the world including Asia, thus, Ho Hup Construction Berhad consolidate company in oversea also being influenced by the financial crisis. Lot of projects of consolidates companies in overseas facing capital and cost problem due to downturn of economics. The next year after that, Ho Hup Construction Berhad has the ability to maintain its gross profit margin at 18% for 2 years continuously by executing new strategies and policy.
A company capital structure is the most important item to determine performance of company; a healthy capital structure help company to perform well on good time, whereas in finance crisis time still can lead company to perform than market industries. Capital structure of company can influence taxes, interest payment and earnings per share of that company. Company can easily change their capital structure from time to time for getting short term equity or long term equity to finance overall operations expenses of company and getting growth in future.
Continue to next will analysis the operating and administrative expenses for consolidate company of Ho Hup construction Berhad from year 2008 to year 2010.
Administrative Expenses
2008 - RM 9,258,000
2009 - RM 29,490,000
2010 - RM 11,609,000
Figure above shows that consolidate company administrative expenses are increasing year by year where from the figure from below, the operating expenses is decrease more than half compare in year 2009 compare with year 2008. Whereas, in year 2010, the operating expenses is increased little but not much.
Operating Expenses
2008 - RM 65,267,000
2009 - RM 27,382,000
2010 - RM 37,683,000
Evaluation of the company capital structure and financial condition
In order to evaluate the capital structure with the Ho Hup Construction Berhad consolidate company financial condition, I will attach the ratio calculation include liquidity ratio, asset management ratio and profitability ratio.
Liquidity ratio
The primary liquidity ratio is current ratio:
Year 2008
Current ratio = Current asset/Current liabilities
RM 137,083,000/ RM 269,602,000
= 0.508
Year 2009
Current ratio = Current asset/Current liabilities
RM 81, 478,000/RM 253,958,000
= 0.32
Year 2010
Current ratio = Current asset/Current liabilities
RM 70, 358,000/RM 239,436,000
= 0.29
Liquidity ratio shows the relationship of company cash and other current asset to its current liabilities. Ho Hup Construction Berhad consolidate company current liabilities consist of provision for liquidated ascertained damages, borrowing, trade payables and others payables include sundry payable. The current ratio for 3 years as per above indicates that Ho Hup Construction Berhad consolidate company liquidity position is strong to support the capital structure. If any financial crisis or difficulty happens, Ho Hup Construction Berhad consolidate company able to carry the interest changes and pay off its debt as per contract in coming year.
Asset management ratio
Total asset turnover ratio
Year 2008
Total asset turn ratio = Sales (Revenue)/Total asset
RM 91,183,000 RM 289,683,000
= 0.31
Year 2009
Total asset turn ratio = Sales (Revenue)/ Total asset
RM80, 149,000/RM 244,444,000
= 0.32
Year 2010
Total asset turn ratio = Sales (Revenue)/Total asset
RM 65,123,000/RM 211,530,000
= 0.30
Total asset management ratio is use to determine turnover rate of the entire company asset. Ho Hup Construction Berhad consolidate company sales volume for continues 3 years is maintained around the percentage constantly. Ho Hup Construction Berhad consolidate company should generate more sales to increase company income together with dispose some asset from project side in order to reduce cost using to finance asset. If sales volume of company drops then the profitability of company will drop as well.
Even though company can change the structure of capital easily, there are some factors influences the capital structure also. Business risk is one of the main factor to influence capital structure of company. Business risk can be a variety among the industries and field. Ho Hup Construction Berhad main activity is doing construction, so the main factor of business risk is relevant to variability of earning and accumulation of fixed cost. A construction company has the possibility to bear more variability business risk than others field, this is because Ho Hup Construction Berhad consolidate company in Malaysia are handling lot of government project, there are many policies and regulation changing from time to time that contractor need to be follow. While, for consolidate company of Ho Hup Construction Berhad in oversea also facing variety business risk like global currency different and multiple country rules and regulation. Accumulation of fixed cost is another factor that influencing the capital structure of company.
Other than business risk and accumulation of fixed cost, operating leverage is influence the capital structure by change in sales volume, if high operating leverage, a little change on company sales volume will cause large changes in operating income. Moving forward to next factor that influence the capital structure of company is cost and period of financing, debentures of company are cheaper method versus than equity shares as a tool for financial. Then short term loan or long term loan from bank or others institution determine the risk of borrowing. Both of the items are affecting the capital structure from time to time.
Ho Hup Construction Berhad consolidates company cash flow is getting increase from year 2008 to year 2010. In year 2008, economic downturn was happened around the world. Bank Negara Malaysia adjusted the OPR rate by reducing the rate. Due to Bank Negara Malaysia reduce OPR rate, most of the banks reduce the lending interest rate as well. On that time, Ho Hup Construction Berhad consolidate company apply a long term loan with lower interest rate from bank. Refer to Ho Hup Construction Berhad consolidate company cash flow statement from year 2008 to year 2010 can know that company interest paid increase from year 2008 to year 2010 prove that company paying the repayment.
In year 2007 government announced that RPGT taxes for property dispose been waive starting from year 2007 immediately. Then the value and market of property increase year by year. With the announcement from government, Ho Hup Construction Berhad and its consolidate company take the opportunities to purchase new properties from year 2008 to year 2009. At the same time, the value of property goes up a lot, so company decided to dispose some properties which bought previously in order to gain profit on that.
Conclusion
As a conclusion, the capital structure for Ho Hup Construction Berhad subsidiary or consolidate company can be seen it is fulfill industry standard among the 3 years. Company's debt versus equity is under financial healthy level, cash flow of company is enough to cover the risk of borrowing interest increase. Company take the financial condition to apply loan on lower interest and able to make loan repayment as per period of financial. Ho Hup Construction Berhad consolidate company are well managed in business risk either on Malaysia or overseas and also very concern about fixed cost and operating cost expenses. Ho Hup Construction Berhad consolidate Company is walking on the right way to execute aggressive strategies to grow up company sales revenue in order to gain more profit.
