Commercial Law: Sunway Construction Group Berhad (SunCon) Case Study

1.     INTRODUCTION

Sunway Construction Group Berhad (SunCon) is a Malaysian based company with 38 years serving experience offering a wide variety of services such infrastructural works, building, electrical, plumbing, geotechnical engineering, civil engineering, machinery and logistics. Sunway construction employs a Virtual Design Construction Technology (VDC) enabling a remarkable performance and output (Bradgate, White and Llewelyn, 2012). The VDC technology manages the Building Information Models together with the people in order to meet their standards and achieve project goals. There are several modeling types of VDC. The 3D modelling analyses the coordination between architectural, MEP and structural works. 4D modelling is in charge of progress, scheduling and planning whereas the 5D modeling enables accurate budget and control. Its experience in the market enables commendable execution capability (Commercial and company law services and sustainable development, 2017).

 Sunway Construction Group Berhad
Sunway Construction Group Berhad

2.     FINANCING TYPES

Sun Con company revenue for the past five years can be summarized below:

YEAR REVENUE (RM’ MILLIONS) PROFIT BEFORE TAX(RM’MILLION) PROFIT AFTER TAX AND MINORITY INTEREST
2014 1,881 139 113
2015 1,917 141 127
2016 1789 154 124
2017 2,076 169 132
2018 2,257 183 145

There has been an increase in profit for the past five years meaning there is stability in performance. Let us take for instance the financial year 2018 there has been an 8.7 % increase in revenue compared to the previous year. The dividends per share are 7 Sen with no number of work related fatalities. The monthly inspection score is 84.5 % ensuring safe working environment.

The five major business activities of SunCon are:

  1. Building and Construction Services

SunCon offers a diverse range of buildings (commercial, residential). The following projects has been completed: Kuala Lumpur and Sunway Pyramid Shopping Centre which has made RM1.29 billion revenues in 2017

  • Civil and construction services: The Company has been involved in building of roads, runways, airport and rail. The projects completed include the Kajang SILK highway and The South Klang Valley Expressway Making a total of RM 487.9 million revenue as at 2017
  • Mechanical, Electrical and plumbing Services with a wide a wide variety of services including gas piping, electrical systems, water plumbing and irrigation systems making a total of RM466 million in 2017 revenue.
  • Foundation & Geotechnical Engineering Services which provides design and pilling solutions. It made RM 202.8 million revenue in 2017 therefore it is a smaller sales contributor.
  • Precast and concrete products operate plants located in Senai, Johor and Tampines, Singapore and made RM144.9 million revenues in 2017.

The company major shareholders as at March 2018 are as follows:

  • Tan Sri Dato’Seri Jeffrey Cheah Fook Ling:65.11%
  • Employees provident Fund Board: 6.06%
  • Amanah Saham Bumiputera 2 :2.23%
  • Citibank New York (Norges Bank 14):1.28 %
  • Kenanga Growth Fund: 0.88%

The Economy of Malaysia is expected to grow at a moderate pace, especially the Construction sector which is expected to moderate to 4.7% in 2019 compared to 5.1% in 2018.SunCon however can sustain its result in the coming financial year as it has been awarded contracts i.e. the Project platinum main building from Tenanga national berhad for RM’ 781 million. This work is the phase 2 of the Tenanga Headquarters campus development and it will increase SunCon earnings (Construction company builds the managers of tomorrow, 2013).

With the continued support from the government, the construction center has been provided with a lot of opportunities. The construction of other facilities like Khazanah Nasional Berhad Hospital, the expansion Malaysia aerospace industry will benefit the construction sector (Davies et al., n.d.).

 The following table shows the SunCon activities since establishment.

YEAR                                                                                     ACTIVITY

1981-1996 Focused on foundation
1997-2004 Growth
2005-2009 International expansion
2010 Committing to sustainability
2011-2014 Cultivating infrastructure expertise
2015 to date Largest pure play construction company

 Best Financing types

In order for SunCon Company to grow/expand its operations, it has to invest in growth so as to generate additional profits. This can be through increase of assets (current and fixed), training and hiring more staff to increase productivity. The following financing type best suit SunCon Group.

  1. Commercial loans

It is a funding agreement between a business and a financial institution which is repaid within a specified time period. It is a suitable form of funding since it provides short term source of funds and most importantly the loan might be renewed and may extend for long period of time (Devlin, 1951). The business will be allowed to continue its ongoing operations and later repay the loan. The rate of interest payable falls in line with the lending rate at time of issue. The bank will require monthly statements from the company through the loan period (Eliot, 2019).

SunCon Company for instance might apply a commercial loan from a long term nature bank Treasury SukukSdn. Berhad to fund its objectives of sustainability through the employees, quality and innovation (Fehl, 2010).

There has been an increase in staff productivity since 2016 as shown below but in order to pose a remarkable increase in productivity there is to equip staff with proper knowledge (technological) and skills to provide effective services to the clients. Moreover, increase in their benefits and salaries will encourage hard work. Perhaps an increase of 40%-60% of the value generated should be given to employees. This will help to maintain the productivity of 15 times as stated for Financial Year 2019 to 2020 priorities (Frisby, 1990).

YEAR STAFF PRODUCTIVTY(TIMES)
2014 10
2015 11
2016 10
2017 12
2018 13

Innovation: The Virtual Design and Construction technology since its launching in 2010 having invested RM31 million, the turn over to date is RM’27 billion which explains that it has been a key source of profit. VDC is widespread and has been implemented internal as well as on external projects including offices, hotels, malls and hospitals. Its improvement will therefore pose a greater benefit to the company (Ganaway, 2016). The collaboration with the stakeholders to develop 6Dmodels, integrating facilities management and Internet of things as well as the developments of BIM models that are capable of performing efficient energy, heat emission, light and sun path analyses on buildings require funding provided by the commercial loans (Goode, 2009).

2. Revenue based financing

This is an agreement to sell a part of your future revenue or company for funding. It usually provides about a third of your annual revenue. Repayment time or cap mostly ranges from one to three years depending on the debt. It is taken as percentage of your revenue each month. SunCon might use a revenue based financing to meet its aims of global expansion and new product. Due to its international projects in Tobargo, Taiwan, India, Singapore and United Arab Emirates it is easier for them to exploit the global market upon previous exposure to the risks, market and challenges (Goode, 2009).

The funding can also contribute in the launching new product (solar energy) favored by the Malaysian aspiration to increase the renewable energy ratio from 2% in 2016 to 20% by 2025 of the country’s total energy generation mix. The company however should find proper ways of managing the risks involved and come up with strategic plans (JeongWan Kim, 2008).

Some of the risks involved are:

Cost: The lack of consistency in the raw material prices can cause unnecessary costs and delays to the projects. The company can negotiate with suppliers for constant supply of raw materials.

Project completion: The Company should ensure smooth running of operations from negotiation with clients to delivery of services in time.

Human capital

There should be constant training of employees and team building and other benefits apart from their wages for instance health benefits (Lucas, 1986).

Capital and debt management.

There is a strict management system to maintain daily operation without failure. The excess funds are properly managed and invested. Payments is planned ahead of time in order to settle debts with the bank in time. The constant checking of foreign currencies provides first-hand information in case of an opportunity (Lucas, 1986).

The company is able to maintain a net positive cash position

  • COMPANY’S MARKET SHARE

Sunway Construction Group Berhad has a strong market position which has helped in the sale of even new products. SunCon has undertaken a lot of projects since its establishment and operates both in the local and international market. The ongoing projects together with upcoming project will increase the company’s performance as billings for new projects take charge for example the Putrajaya Parcel F building works. The outstanding order book is at RM 4.9 billion, which is 2.6 times Financial year 2015 revenue with more potential wins. This shows the earning visibility for probably the next 2 years (Managing the small construction business, 2006).

Sunway Construction Group seen banking on overseas jobs (the edge financial daily Pg11). The group expects to maintain hold with an unchanged target price of RM 1.81 which is based on the constant 16.5 times Price Earnings multiple tagged to the Financial year 2019 earnings. SunCon plans to bid for the large scale solar scheme jobs(LSS3) such as construction and engineering through joint venture with foreign partners who want experience and experts .For the LSS3 The quota given to each developer is 100MW in a total  of 500MW (Managing the small construction business, 2006) .SunCon therefore has not been limited on the job sizes and considering it is looking for a lot hospital job opportunities given the RM29 billion government budget for new hospitals, this is a great opportunity.

The company is set to explore into other Asian counties and India given the slow domestic construction industry. The company is bidding for the highway construction company in India worth RM 900 million. It has also signed an agreement with Myannar conglomerate Capital Diamond Star Group evaluating the internal projects undertaken by CDSG and its member companies. (The star 2ndApril 2019 Pg. STARBIZ,4).

The SunCon company and CDSG are planning for a jointly bid in case of projects such as offices, hotels and hospitals (in Yangon and Mandalay). Moreover, the companies will explore infrastructural projects together (Mäntysaari, 2009). This marketing strategy will promote growth in the Myanmar construction sector as well as SunCon. The working together will promote exchange of knowledge and ideas in order to come up with suitable developmental strategies. Considering the positions of the two companies in their countries market now (Manmar involvement in projects such as Kokkhine flyover, Shwe Gon flyover, hypermarkets, schools and SunCon as a largest pure play in Malaysia) the collaboration will ultimately produce platinum results. SunCon has also explored the Singapore market understanding a marketing niche in the pilling supply thus it is working to acquire pilling jobs in the country. Based on their financial year (2019) target, the order book is set to hit RM 1.5bilion and so far RM 967million has been achieved. The parent market is currently not expecting more contracts in this financial year hence to meet the set target, overseas contracts, piling jobs and precast orders are required to chip in (Mäntysaari, 2009).

Bursa Malaysia although has to overcome challenges to continue gaining in the market i. e

Sluggish domestic corporate earnings growth

Security analysts have posted that the unattractiveness valuations of the neighboring countries amid sluggish corporate earnings growth is the major contribution the benchmark index’s performance has slowness.  According to (Rosen, 2014), Trading at a price earnings ratio of 16.3 times and 15.3 times for the coming years (2019 and 2020) slightly below the five-year average of 17.4 times will promote the key index. Other competitors most of which their indexes were affected are trading at appealing levels. For example, Shanghai Composite traded at 11.8 times compared to its five-year average of 15.8 times, Hang Seng traded at 10.2 Index’s PER as compared to the previous five-year average of 12 times.

In the review of revival of the East Coast Rail Link project but the market already priced in the positive news (the edge 16th April 2019), the revival of the project is of great importance to the construction sector although the market has factored it in. The rise of the share prices of rail contractors 44% in one year might have reflected the optimism on the project revival. The government however reduced the cost from RM 65.5 billion to 44 billion (Rosen, 2014).

  • ANTI-COMPETITIVE PRACTICES

Bid rigging

Occurs when one of the competitors agree to submit a high bid with no intention of winning. This provides the lowest bid among them in order to win a contract and inflated tenders (cover prices). Bid rigging deceives buyers making them believe that the prices are good when actually the winning price was lower. Loses might be incurred against one party

Price fixing

It is the setting of minimum prices by the competitors to avoid competing with each other. This gives a standard price to all competitors.

Market sharing

It is the setting of boundaries or territories by agreeing creating your own customers/buyers hence your competitors will not pursue your customers. This reduces choice of obtaining good services (Rosen, 2014).

5.     CONCLUSION

In line with the bank of Malaysia (Negara) the real Gross Domestic Product Growth is expected to increase further from 4.3 to 4.8 % in 2019 even with the decline in inflation. The major infrastructure projects have been called off thus there is a lack of new growth catalyst, the Malaysian Construction sector therefore is expected to experience expansion challenges. Despite this there are still other opportunities for instance the Large Scale Solar 3 worth RM2billion, the Subang Aerotech Park by Khazanah and developments of hospitals.

SunCon is expected to Mitigate the slow growth in the local construction sector through proposed expansion to other regions. The parent Company too is expected to expand its centers and ensure its bank development (Rosen, 2014).

Following the involvement in the Singapore Market the company is expected to analyze the Gross Domestic Product of Singapore to come up with proper strategies. Singapore’s GDP expanded by 3.2% in 2018 compared to the 3.6% in 2017 with the construction sector experiencing negative growth (-2.2% in the fourth quarter of 2018 and -2.5 % in the third quarter). Although there has been an assurance of growth by the Ministry of Trade and Industry of Singapore with the GDP growth maintained at 1.5% to 3.5%. The operations already in Singapore should be maintained to cope with the challenging external environment. The continued launching of new flats (15000) offered across SengKang, Jurong West and Kallang Whampoa will be able to meet the housing needs of the people of Singapore.

With the advancement in technology over the years, SunCon is expected to install measures that will enhance higher productivity a good example of this is their establishment of the basics of organizing the workplace through 5Spractices which will lead to greater outputs and better for everyone. They have signed a Memorandum of Understanding with Malaysia’s Productivity Corporation to establish a Quality environment for the Malaysian Construction Industry. This initiative allows the implementation of 5s approach in workplaces and a criterion is set that requires every construction organization in the country to meet for a safe and healthy working environment.

References

Bradgate, R., White, F. and Llewelyn, M. (2012). Commercial law. Oxford: Oxford University Press.

Commercial and company law and sustainable development. (2017). Commonwealth Law Bulletin, 43(3-4), pp.362-402.

Construction company builds the managers of tomorrow. (2013). Industrial and Commercial Training, 45(7).

Davies, P., Gower, L., Worthington, S. and Micheler, E. (n.d.). Gower’s principles of modern company law.

Devlin, P. (1951). The Relation Between Commercial Law and Commercial Practice*. The Modern Law Review, 14(3), pp.249-266.

Eliot, G. (2019). The Mill on the Floss. La Vergne: Neeland Media LLC.

Fehl, P. (2010). Business & construction. New York: Ferguson.

Frisby, T. (1990). Survival in the construction business. Kingston, MA: R.S. Means Co.

Ganaway, N. (2016). Construction business management. New York, NY: Routledge.

JeongWan Kim (2008). Local Share Tax Needs to Meet Specific Regional Administrative Demand Focusing on Gyunggi-do. The Korean Governance Review, 15(3), pp.29-56.

Lucas, C. (1986). International construction business management. New York: McGraw-Hill.

Managing the small construction business. (2006). Williston, VT: Journal of Light Construction.

Mäntysaari, P. (2009). Commercial Law and the Theory of Management-Based Commercial Law. SSRN Electronic Journal.

Rosen, K. (2014). Company Law and the Law of Succession Droit Commercial/Commercial Law. American Journal of Comparative Law, 62(1), pp.387-405.

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