The danger of over expanding in business

The danger of

over expanding

in business

Being in business is never easy especially when one is helming a public listed company. It comes with great responsibilities and major decisions are needed to be made decisively at times.

The decisions could not be a perfect one, it could even turn out to be a disastrous one that can send the company into deep, deep trouble.

Decision such as expanding or over expanding is never an easy one. When there is a big demand for a certain product and this company is one of that product manufacturer that is running at full capacity. What should you do if you happens to be the number one head honcho man?

Do you just maintain business capacity as it is or do you order more machineries, increase staff counts, invest in latest software, buy even more raw materials to increase your output capacity to cater to more demands?

It is my personal opinion that most ambitious entrepreneur business man if he is the big boss of that company (running at full capacity) would choose the later step i.e. invest more in the needed areas to increase production even more.

It is alright as long as the extra demand for the products is still there. The company would be raking in more profits for its shareholders. Everyone including staff and shareholders would be happy.

But what if after investing so much to increase capacity only to see that the demand has softened down due to competitors also producing more and at cheaper price or unexpected poor economic situation? Not only that, the less demand also prolonged into months or even years?

It could be disastrous for not rich companies that take big loans as they might have to pay interest for the loans, besides the cost of maintaining its new acquired machineries and even forced to retrench its redundant staffs.

If one is an investor in a public listed company, one should take note with caution when that company is embarking on a major expansion, taking on big loans as well. The slightest news you read or hear about slower demands that might affect the company, you must make a quick simple decision whether to sell your shares or to hang on.

Recently when there was news of Tek Seng Holdings Berhad reducing its 180 head count from production line (due to slower demand) in September.

It came as a shock to investors as Tek Seng was expanding several new additional lines to cater to strong demand for its polyvinyl chloride related products.

A quick Google search on related solar power issues seemed to portray that many similar overseas big players were experiencing slower demands due to massive overcapacity productions.

As I am just a "kacang putih" investor, I decided to dispose of all my shares and free warrants on that day. Of course it was easier for me to sell because my entry cost was just below 40 sen. It would be more difficult if late comers buying at RM1.20 and above as they might be reluctant to cut losses hoping for an eventual rebound.

It has been almost three months and it was a decision I was grateful I made. The share price of Tek Seng is now hovering above just 70 sen range.

Another lucky company I was very lucky to get out with good profits was now the defunct shipping and logistic services provider, Swee Joo Berhad. Its main focus was on providing containerized shipping services between Peninsular and East Malaysia, in the coastal waters of Sarawak as well as between Malaysia and regional destinations such as Bangkok, Ho Chi Minh City, Jakarta and Surabaya.

Listed on Oct 17, 2006, it closed above 80 sen on its maiden debut and went on to record as high as around RM1.60 two years later. After its listing, Swee Hoo embarked on aggressive expansion riding on shipping boom. It borrowed heavily for fleet expansion, including the acquisition of the four chemical tankers and container ships.

But the unforeseen 2008-2009 global financial crisis caused a sharp decline in freight rates. Shipping industry was adversely hit. Swee Joo was caught sadly. Business was bad and there was little cash flow left, but short-term loans and long-term liabilities of RM500mil as at Sept 30, 2009. Interest expenses amounted to RM28mil a year.

Eventually it went into bankruptcy and there was nothing left anymore for minority shareholders.

Yours truly was one investor who invested on its maiden listing day buying at 86 sen. But I was most truly lucky to sell off my 3,000 Swee Joo shares at around RM 1.50 plus two years later shortly before the start of the global finanical crisis. At that time, I was just in the mood of profit taking and not knowing anything about the coming global financial crisis.

Even more lucky was that when its share price tumbled down, I did not enter at all although I was very tempted to buy back especially when it was selling at my original purchase price of 86 sen. If I had done so, I would have given back everything I profited earlier. This is called luck.

Well, this will be my last article for 2016, I like to wish everyone good health, more wealth and ONG & HUAT in 2017. Happy New Year to you. Thank you so much for being with me since the middle of 2013. The journey has been wonderful for me so far. I hope you my loyal readers/followers enjoyed too regardless of what happened to the stock market.

See you again soon in 2017!