Haisan Resources Bhd - 2009 Credit Commentary Report

MARC has downgraded its rating on Haisan Resources Berhad’s (Haisan) outstanding RM12 million bonds to BBB- from A-. The rating outlook is negative. The downgrade followed the company’s announcement of its second-quarter earnings for the three months ended June 30, 2009, its fourth consecutive quarterly loss since the third quarter of 2008. Although its quarterly loss shows signs of narrowing, the continued weak performance has resulted in a faster-than-anticipated decline in the company’s available liquidity. The lowered rating reflects MARC’s expectation that Haisan will be challenged to meet its scheduled minimum principal redemption of RM3.0 million on the remaining outstanding bonds totalling RM12.0 million every three months commencing September 2009 through the maturity of the bonds on June 21, 2010. Haisan’s vulnerability stems from its onerous debt levels, difficulty accessing external finance and delay in the ramp-up of its new cold storage facilities in China.

Haisan, which is mainly involved in temperature-controlled-logistics, industrial refrigeration and ice industry, registered a loss before tax of RM5.5 million for the six months ending June 30, 2009 (1HFY2009), (1HFY2008: RM2.0 million) on the back of revenues of RM44.9 million (1HFY2008: RM52.3 million) on account of competitive market conditions, fewer engineering projects undertaken and significantly higher operating expenses. Delay in the generation of earnings and cash flow by its new cold storage facilities in Guangzhou and Shanghai was also a contributing factor in its continuing weak financial performance. As at end-June 2009, the group had available cash of only RM4.7 million vis-à-vis short-term borrowings of RM68.7 million, including RM38.1 million of bank overdrafts. And with Haisan’s debt-to-equity position remaining unfavourably high at 2.52 times in the period, its ability to leverage further would be severely restricted.

MARC has been informed that the group has initiated measures to address its liquidity situation which include disposing its non-core assets. Management is also seeking closer collaboration with the end-users of its facilities and providing technical expertise to other start-ups in the refrigeration industry in the region to improve its trading prospects. However, uncertainty remains as to whether these endeavours would be sufficient to alleviate immediate concerns about Haisan’s tight liquidity position.

MARC will continue to monitor the progress of Haisan’s efforts to ease its currently tight liquidity profile, and absent progress, would likely downgrade the rating further.