The Roles of Corporate Governance and its Influences on Risk and Performance : Hup Seng Industries Berhad

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1 Universiti Utara Malaysia From the SelectedWorks of Husna Ramlan Spring April 10, 2017 The Roles of Corporate Governance and its Influences on Risk and Performance : Hup Seng Industries Berhad Husna Ramlan, Universiti Utara Malaysia Available at:

2 The Roles of Corporate Governance and its Influences on Risk and Performance : Hup Seng Industries Berhad Nurul Husna Binti Ramlan Universiti Utara Malaysia Abstract The paper had analyses few specific variable of company specific determinants macroeconomics determinants in a company performance. Few method of sampling has been chosen including descriptive statistic, regression, ANOVA and model summary to applied to Hup Seng company over the period between 2011 and Ratios including profitability ratio, liquidity ratio as well as leverage ratios has been applied for the five consecutive years Keywords: Specific Determinant Variables, Macroeconomic Determinant, Liquidity, Profitability, Leverage, Hup Seng 1.0 INTRODUCTION 1.1 Company Background When we mentioned biscuit, we straight away remembered Hup Seng. Hup Seng Industries Bhd. (HSIB) is one of the well-known company in Malaysia it was formed on 4 October, But then in 1974, Hup Seng Co. was then dismissed due to of the business expansion and the increased in capital requirements of equity interest in In-Comix. Initially, Hup Seng Co., were basically established from the formation of the partnership of the siblings of four brothers and they are the main people as the Director of the Group. HSIB has three subsidiaries companies which are Hup Seng Perusahaan Makanan (M) Sdn. Bhd. (HSPM), Hup Seng Hoon Yong Brothers Sdn. Bhd. (HSHY), and In-Comix Food Industries Sdn. Bhd. (In-Comix). HSIB is an investment holding company where their subsidiary companies is involving in the manufacturing and sale of biscuits and confectionery food items. Briefly about their product, the company operates in three segments which are the biscuit manufacturing segment, the beverage manufacturing segment as well as the trading division segment. The biscuit manufacturing segment is also engaged directly in the business

3 of manufacture and sales of biscuits. The beverage manufacturing segment is engaged in the business of manufacture and wholesale of coffee mix and all kinds of foodstuff while the trading division segment is engaged in the business of sales and distribution of biscuits, confectionery and other foodstuff. The products that are popularly being offered by Hup Seng are Special Cream Crackers, Marie Biscuits, Coffee Marie Biscuits, Coconut Cookies, Butter Cookies, Peanut Butter Sandwich, Lingo Assorted Biscuits and Fancy Assorted Biscuits. Hup Seng products has now entered international market where their product has been exported worldwide and not only domestically. The countries involve includes Asian countries, the United States, Africa and Russia. TABLE 1.2 : NET PROFIT AFTER TAX YEAR Net Profit after tax Net Profit after tax YEAR Net profit after tax or also known as net income after tax (NIAT) is the number of sales that remained after all operating expenses, interest, depreciation that has been subtracted form a firms total revenue. In finance, net profit after tax is one of the main important ratio that caught the eye of shareholders it shows the sources of remuneration and compensation of that particular company. A company must stressed the profit gained because if a company unable to generate enough profit to compensate shareholders, the value of shares will drop.

4 TABLE 1.3 : TOTAL ASSETS YEAR Total Assets Total Assets YEAR Based on the five consecutive years, we can see that year 2015 has the highest total assets of all while year 2011 has the most lowest one. High total assets is good as it guarantees there is a cash protection during tough times and it also gives companies more options for future growth. 2.0 LITERATURE REVIEW Based on the article of Bank Specific and Macroeconomics Dynamic Determinants of Credit Risk in Islamic Banks and Conventional Banks by Waemustafa and Sukri, both internal and external factors will results credit risk in the Islamic and conventional bank. It is very vulnerable for the Islamic bank to experience credit risk from the financing exposure such as those from real estate, property and residential since it is openly exposed to the price bubbles. However Hup Seng itself did not put any investment in the property in the five consecutive years as they also thought that it will be riskier for them to do so due to the economic condition presently where the real estate and property price is now is bubbling. (Waemustafa & Sukri, 2015) Systematic risk is defined in Investopedia (2017) as a market risk or undiversified risk where it is an uncertainty that arise from the overall market or only segment of market. As an unpredictable and impossible to completely avoid, it will affect the overall market and not only particular stocks or industry. Due to this effect, there is a need to control the management of liquidity as liquidity insufficient could insolvent a bank as they need to sell their assets below the their value in order to fulfil the current obligations. Despite that, Hup Seng has a liquidity problem for the last two years where they have a very low

5 liquidity and it could results in a high risk towards the company. (Waemustafa & Sukri, 2016) Ahmed (2014) in his Journal of Islamic Finance has opined that how Shariah Supervisory Board(SSB) plays an important role specifically in harmonizing the rules and guidelines regarding Islamic in Islamic banks as Shariah-compliance gatekeeper. However, Hup Seng, there are currently only 3 committee which are nomination, audit and remuneration but there are no shariah committee. Since Hup Seng product is already capture local customers regardless their races thus they should probably start to think of establishing a shariah committee in order to attract more customers in terms of confidence especially towards Muslim consumers. (Waemustafa & Abdullah, Mode of Islamic Bank Financing: Does Effectiveness of Shariah Supervisory Board Matter?, 2015) Construction industry is identified as one of the most challenging and dynamic industries in Malaysia. The differences in term of its uniqueness and complex structure of this industries from other industries requires the need of risk management. Yet, there are still companies that has not established their own risk management department event it is crucial to do so. Nevertheless, Hup Seng is one of the company in Malaysia that exporting their products globally and they surely faces risks and challenges. However, there are no Risk Management Committee for the past five consecutive years. It is crucial to understand and manage the risks in a company so that it will not affect the company s return. This is because higher risk is not always result in higher return but also higher probability in company s failure. (Abdul-Rahman, Wang, & Sheik Mohamad, 2015) The journal of Risk Management in Food Supply Chains by Japanese Food Companies in Malaysia has opined on how risk management has strong impact in attracting shareholders in investing in the company and it is well known that investment are crucial as it helps in exploring a better opportunities in helping companies to stay longer in industry. Basically high risk will results in high return, but yet it still need to be well maintained because too much risk will also leads to the company s collapse. Apparently, Hup Seng should know and apply the effective management since it reduces the percentage of bankruptcy and cost of acquiring capital, in fact it can also stabilize earnings. Thus, when incomes and earning are stable, the organizations has enough to

6 repay claims in timely which it indicates a lower company and market risk. (Saidon, Ab Ghani, & Mat Radzi, 2016) 3.0 DISCRIPTIVE ANALYSIS 3.1) ROA YEAR ROA Return on assets(roa) measures on how much profitability a company s assets are in generate revenue in percentage. In a simple meaning, ROA gives an idea on how a company is efficiently and effectively making use the investors assets to generate income. Based on the five consecutive years of Hup Seng ROA values, we can see that year 2015 has lead the ROA at the rate of 48.47% which makes it the best as compared to other years. The higher the ROA, the better it is as it means that the company is generating more money on less investment. Thus year 2015 shows better performance at converting their investment into profit. If we were to link with corporate governance, in order for a company to raise good net income, a good managements and operations of the company is very crucial since it tells investors that the company is making profit and well-managed.

7 3.2) LEVERAGE YEAR LEVERAGE Leverage or also known as debt- to-equity(d/e) ratio means how much debt a company is used to finance its assets which the amount of value is represented in shareholders equity. In a simple meaning, the company is taking debt through leveraging which means raising he company s value through borrowed money in funding projects. As in Hup Seng company, we could see that there are a huge differences between year 2012 and 2013 with year 2014 and In year 2012, the d/e ratio is 1.20% whereas 19.80% in year 2015 indicates that year 2015 is using too high leverage or debt in financing their operation and vice versa for the year Thus when a company are heavily taking debt in financing, there is also higher risk towards the company and in the worst case, it may led to bankruptcy which would leave shareholders with nothing.

8 3.3) LIQUIDITY RATIO YEAR LIQUIDITY RATIO In a simple words, the liquidity ratios show the cash levels of a company and their obligation to turn other assets into cash to pay off liabilities and other current obligations. By comparing the five consecutive years, the investors are able to track the changes in the business. Based on the graph, in year 2012, Hup Seng has higher liquidity ratios as compared to the other four years following by year Thus it generally shows that in year 2012, Hup Seng is more liquid and they has better coverage in outstanding debt. 3.4) ROE YEAR ROE Return on equity is the amount of net income returned of shareholders equity where it is being measure in percentage. In simple term, it means how much a company is generating

9 income and profit using the money that shareholders have invested. ROE is very crucial measurement for potential investors as they want to see how efficiently a company are in using their money to generate net income. The higher the ratio, the better the company efficiency as it is an indicator that the company is using the shareholders money effectively in generating high income. As for the Hup Seng, year 2015 show the highest ROE at 58.07% and the lowest among the five years is at year 2011 at 22.47%. 3.5) ROI YEAR ROI Return on investment (ROI) is another type of profitability ratio in calculating gains of the original cost in percentage. In simple words, it shows how much money was made in investment as a percentage of the purchase price. It is another one indicator for the investors as it shows how each dollar are efficiently that are invested is producing profit. The higher the ROI, the better it is. As for Hup Seng, year 2015 shows the highest significant ROI at rate of 82.61%.

10 3.6) OPERATING PROFIT MARGIN OPERATING PROFIT YEAR MARGIN Operating profit margin shows the amount of revenue left after paying all the operating costs and other variables. Operating profit margin also shows how much amount of revenue left to be covered other non-operating costs. As for the investors, they are looking forward on the movement of the these ratio as it shows that particular company on how strong and profitable the company operation are making right now. In Hup Seng, year 2012 shows the most favourable profit margin at 49.50% as Hup Seng is making enough money from their operations to pay off they operating cost. Thus, higher operating profit margin is more preferable than lower profit margin.

11 4.0) DISCUSSION AND RECOMMENDATIONS. 4.1) Discussions Descriptive Statistics ROA ROE Mean Std. Deviation N Liquidity Ratio LEVERAGE GDP Inflation Rate ROI TABLE 1 The descriptive statistic of the Hup Seng company are as table above. We can see that the mean on ROA is 36.72% which indicates the company is making 36.72% of profit while its standard deviation is 0.11 which are small value. Thus, small value indicates that there is a slight difference between the company average profitability and it clearly shows that they are making good. As we can see on the graph, the profitability for the five consecutive years are not far differ among each other. Refer to appendices for TABLE 2: There is a positive correlation between profitability and leverage. This shows that every one dollar is sponsored by equity of average only 9.8%. The percentage shows that Hup Seng has very low risk in average. When the company has lower risk, the interest rate on cost of fund is lower thus it results in higher profit gained by the company. In simple, Hup Seng will only need to pay less amount on interest and they could utilized the assets and company s operation efficiently.

12 If we were to look upon the external factors, there is a negative relationship between performance and Gross Domestic Product (GDP). When average of GDP is lower, the exchange rate in exporting is lower as well. Thus when the exchange rate is low, Hup Seng could export more at a lower price and they can gain higher profit as more and more company s products could be sold overseas. In addition, when Hup Seng is exporting their product in large amount internationally, they could get resources at lower price. This somehow shows the corporate governance members are doing well in facilitating their company operations in inducing GDP. Based on table above, it could be seen that there is a strong negative relationship in Hup Seng between the company performance and the inflation rate where this is might due to the reasons that the company is not immediately aware of the increment of inflation. When there is an inflation, it will results in the high interest on loan and high income as well. As refer to table 4.2 in appendix, there is a positive correlation between the company performance and the board remuneration where it is at rate of The correlation between both variables are significantly high which means the company board is doing good in term of their performance as the profitability is increase. This might due to each board committee is getting motivated when their remuneration including, salaries and bonuses are increasing yearly and so their performance. Other reasons of the positive correlation is that the company performance is in line with the board interest. In Hup Seng, majority of the board has their self-interest fulfilled and this hold them from getting into other company. TABLE 3: Model Summary c Model R R Square Adjusted R Square Std. Error of the Estimate a Durbin-Watson.999 b a. Predictors: (Constant), ROI b. Predictors: (Constant), ROI, GDP c. Dependent Variable: ROA

13 In model summary, indicates the percentage of variation of response. Generally, the higher the percentage, the better the goodness of fit. Based on the in table of model summary above, the percentage is 98.70% and it has been noted that R square is increased by 98.20%. TABLE 4: Model 1 Regression ANOVA a Sum of Squares df Mean Square F Sig b Residual Total Regression c Residual Total a. Dependent Variable: ROA b. Predictors: (Constant), ROI c. Predictors: (Constant), ROI, GDP As for the definition, ANOVA is the statistical models that is being collected which are being used to analysed the difference among group means. In general, when the sigma is less than 0.05 it means that there are no statistically significant between the means where they are not likely due to change and this is probably due to other IV manipulations. Based on table above, the sigma of the company is which are less than 0.5. When sigma is less than 0.5 thus there is a significance difference between the mean number of Return on investment (ROI) and GDP. 4.2) Recommendations. In the leverage ratio, it seems that there is huge differences between two years which are 2012 and This is due to the amount of debt being used to finance the project is very high in that two years. Hup Seng board must know that when they are borrowing too much in funding their operations and project, they will involve high risk. In the worst case, they might default that will lead to bankruptcy. Thus, it is recommended that the company should have their own company limitation in using amount of debt, so that bad issues including inability to pay back could be avoided. However, the increment of liabilities is because of they are

14 borrowing in increasing the production which are for the good purposes, so it does not always mean bad for the company. We could see that there are few issues that needs to be stressed on in order for the Hup Seng to be more productive in the industries. So, here are few recommendations that could be used by Hup Seng. Firstly, after analysed the full financial report for the five consecutive years, it could be seen that there are lack of important board committees that are actually need to be whenever there are a big companies. For instance, there are no risk management committees for all the five years. Hup Seng must know that the risk committee is important as it functions in assisting the board in the discharge of its duties and responsibilities in this regard. Risk committee is also responsible in reviewing the risk philosophy, company strategy and policies as well anything relating to the risks recommended by the management. Thus, existing of risk committee is very crucial in this company. Next, we also can suggest that there should be an existence of Shariah Board Committee in Hup Seng company. This is because Hup Seng is now acceptable by Malaysian communities regardless of their races which including Muslim themselves are now consuming the Hup Seng product. So, with the shariah body in the company that responsible in monitoring the company s production, it could create confidence and attract more customers especially Muslim community. 5.0) CONCLUSION Based on the overall report, Hup Seng is basically a Malaysian consumer industry that are popularly known in their the food making industries. In Malaysia, if we said best biscuit taste, surely people will refer to Hup Seng. In fact, Hup Seng is now involved in coffee mix, confectionaries and beverages which means they are now expanding their business product and are no longer focus on their traditional main products. As for the analysis of ratios, we can conclude from the correlation that the average changes in the profitability for the five years is only 11% which is relatively small. Thus, it means that there is only slight changes of profits earns by Hup Seng from 2010 to By looking upon the standard deviation, it can also be concluded that the risk is lower in earning profitability. In this report, few recommendations also has been suggested for the Hup Seng company that can be used to avoid bad issues to the company. These includes embody another two committees which are Shariah Board Committee and Risk Management Committee which

15 both are responsible to ensures the company to become effectively managed since they are expert in their area. The recommendation also suggested on the leverage ratio of the company that they should reduce their extreme usage of debt in year 2014 and 2015.

16 6.0) REFERENCES Bibliography Abdul-Rahman, H., Wang, C., & Sheik Mohamad, F. (2015). Implementation of Risk Management in Malaysian Construction Industry. Journal of Construction Engineering, 1. Debt to Equity Ratio. (2017). Retrieved March 25, 2017, from INVESTOPEDIA : Hup Seng Industries Berhad Essay Sample. (( )). Retrieved March 29, 2017, from BlaBlaWriting: HSIB. (2001). Retrieved March 4, 2017, from HUP SENG: Investopedia. (2017, March 25). Retrieved 2017, from Investopedia: Liquidity Ratio. (2017). Retrieved March 25, 2017, from My Accounting Course: Net Income After Taxes (NIAT). (2017). Retrieved March 27, 2017, from InvestingAnswers: Operating Margin Ratio. (2017). Retrieved March 25, 2017, from My accounting Course: Quick Ratio. (2017). Retrieved March 25, 2017, from My Accounting Course: Return on Assets. (2017). Retrieved March 25, 2017, from INVESTOPEDIA: Return on Equity. (2017). Retrieved March 25, 2017, from My Accounting Course: Systematic And Unsystematic Risk. (2017). Retrieved March 30, 2017, from Investopedia: Saidon, I., Ab Ghani, N., & Mat Radzi, R. (2016). International Journal of Business Management and Economic Research. Risk Management in Food Supply Chains by, Waemustafa, W., & Abdullah, A. (2015). Mode of Islamic Bank Financing: Does Effectiveness of Shariah Supervisory Board Matter? Australian Journal of Basic and Applied Sciences 9 (37), Waemustafa, W., & Sukri, S. (2015). Bank Specific and Macroeconomics Dynamic Determinants of. International Journal of Economics and Financial, Waemustafa, W., & Sukri, S. (2016). Systematic and Unsystematic Risk Determinants of Liquidity. International Journal of Economics and Financial,