How Man Fai Tai released trapped liquidity
DBS' solution for construction materials supplier Man Fai Tai Group improved its working capital efficiencies and cash flow so it can fund its business expansion in Hong Kong
Being fast and nimble in a competitive market is the key to success for privately-held Man Fai Tai Group, one of the top construction materials suppliers in Hong Kong.
The current outlook for Man Fai Tai's core business – the wholesale trading of sand, aggregate and concrete - is promising as the city has continued to pursue an increasing number of megainfrastructure and housing development projects even as the global economy slows down.
With the demand for construction materials continuing to outstrip supply and in anticipation of further growth in demand, Man Fai Tai is looking to raise capital to fund a new construction materials production plant in Hong Kong to expand supplies to its customers, including the government and property developers.
For Man Fai Tai, the logistics of transportation play a key role in the movement of materials between the source of the supplies and the customer sites. It must locate the production plant near the customers’ projects as construction materials delivery has a relatively short turnaround time of about two to three hours.
As the company is planning to fund 30% of the business expansion from internal resources, it sought to identify and release trapped cash at various points in its cash conversion cycle.
The company sources for sand and aggregate from Mainland China and Hong Kong, and it has been challenging to lengthen the DPO and improve its cash flow.
For example, Mainland Chinese suppliers typically demand cash on delivery for crossborder and cross-currency transactions. For its Hong Kong customers, the need for due diligence and requirements for audits before making payments can sometimes hold up Man Fai Tai's receivables, extending its DSO.
Man Fai Tai, which has had an ongoing relationship with DBS for over 20 years, sought the bank's advice for financing solutions. Utilising its Working Capital Advisory programme, DBS helped Man Fai Tai optimise its working capital efficiency to fulfil its business and trade finance needs, in addition to providing financing for the new plant.
Through industry benchmarking and analysing how their receivable days and payable days affect the business as a whole, DBS identified and advised the company on opportunities across their physical and financial supply chains.
In the construction material supply industry, the median cash conversion cycle is two days, DSO is 61 days and DPO is 58 days.
Using actionable insights from the benchmarking exercise, DBS uncovered a specific opportunity to improve DSO to accelerate the company’s cash flow, including the introduction of an Accounts Receivable Financing facility. With this approach, DBS helped improve Man Fai Tai's DSO by about 25 days, helping Man Fai Tai to outperform the industry's median in DSO. Through the engagement with DBS, Man Fai Tai has changed the way they approach their strategic planning for working capital management and adopted industry best practices to improve their liquidity management.
"DBS worked closely with us and gave us in-depth analysis of our challenges and our financing needs," said Ken Lai, Group Financial Controller at Man Fai Tai. "The bank had looked into our cash management needs and took the initiative to begin the advisory work even before we formally engaged their services." Lai added that DBS had customised solutions that are built around Man Fai Tai’s operations and are specific to addressing its cash management concerns. "We felt that DBS is a true working partner."
Man Fai Tai foresees more opportunities to improve its operational efficiencies as it seeks to maintain a leading position in the construction materials supply industry in Hong Kong.
The company is looking at further discussions with DBS on its plan for standby financing as it pursues new projects to gain a competitive edge in the industry.
One of the projects in the pipeline includes bidding to supply construction materials for the proposed third runway at Hong Kong's international airport. In addition, industrial land available for building of construction materials plants is limited in Hong Kong, and any potential sites must also meet strict environmental regulation and other industry specific requirements, for example, proximity to customers' development projects and loading bays for tankers and barges.
Once the potential sites are identified, companies, including Man Fai Tai, have to move in speedily to secure the plots. That also means having the financial resources readily available when the company decides to make such moves.
Going forward, DBS is working closely with Man Fai Tai on cash management and other debt financing opportunities.
"Time is money in our business," Man Fai Tai's Lai said. "We want to become bigger and better in the construction materials supply industry. The support from DBS gives us the confidence to pursue the mega-infrastructure projects as the opportunities arise."
(This article was first published in Corporate Treasurer, Jun/Jul 2016.)
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