Six years ago, nobody would have thought that the financially struggling Tong Lung Metal Industry Co., a lock maker, would one day be the darling of the Cathay Life Insurance Group and Yulon Motor Corp. when it issued new shares to attain a capital increase (last October).

Part of the attraction was a promise by Tong Lung to attain earnings per share of NT$4 to NT$4.5 this year. In addition, P.C. Chen, the firm's vice chairman and president, made a commitment to pay the two big investors 4% annual interest on their shares, and to finally to buy them back at the original price.

The two companies subscribed to a majority of the new shares, issued at a premium price of NT$48. The issue raised NT$504 million (US$15.2 million at NT$33:US$1). The proceeds were used to pay off bank loans and make it possible for Tong Lung to declare a dividend for the first time in six years.

In May last year, Tong Lung carried out a capital reduction in order to pay off about NT$900 million (US$27 million) of its NT$1.46 billion (US$44 million) in debt. The October stock issue enabled it to pay off the rest of the debt, with enough left over for a dividend.

Tong Lung, now the second-biggest lock maker in Asia, is a rare successful turnaround case among Taiwan's financially distressed enterprises. Market analysts attribute the success to three main factors: involvement in the corporate restructuring of astute managers such as chairman C.Y. Wang, a former chairman of China Steel, president Chen, a former investment manager at HSBC, and S.L. Lin, a lawyer from the well-known firm Lee & Li; the acquisition of 75% of Tong Lung by HSBC; and the willingness of the founding Fang family to fade away from the company. Still, the turnaround attempt got off to a very bumpy start.



Decline for Asia's Biggest



The company was founded back in 1954, and went public in 1994 at a time when it was Asia's biggest lock maker. It reached its peak in 1997, with a net profit of NT$440 million (US$13.3 million) on revenues of NT$2.2 billion (US$66 million), an asset value of NT$10.5 billion (US$318 million), and a net worth of NT$5.4 billion (US$163 million). The following year the Fang family, two of whose members held the positions of chairman and president, embezzled NT$8.8 billion (US$266 million) from the company to pay for losses on personal investments.

The company's creditors, which included banks as well as underground investment companies, wanted to take the collateral offered on loans and dispose of it in order to recover as much of the outstanding debt as possible. The claims of the creditors were so conflicting, however, that this proved difficult. Recalls Lin, who as representative of HSBC had the job of convincing the creditors to accept a corporate restructuring instead, "Tong Lung was the most challenging restructuring case I had ever seen." She prevailed, and won a court ruling on the restructuring in January 2000.

HSBC had loaned the company NT$300 million (US$9.1 million) without collateral, and felt that it could get the money back only by turning the company around. Chen carried out an assessment showing that the U.S. lock market-the largest in the world-was growing at an annual rate of 5% to 6%, and that Tong Lung was one of only four or five competitive suppliers in the world. "It was a mature and steadily growing market," Chen recalls, "so it was not hard for Tong Lung to make money."

Chen also believed that the 100-odd loyal technicians who had stayed with the company in its hard times would preserve its core asset-outstanding manufacturing technology.

But Tong Lung's finances were in a terrible mess, with bank debt of more than NT$5.9 billion (US$180 million) and a net worth of minus NT$3.2 billion (US$96 million). Any restructuring, Chen realized, would have to begin with a financial fix. He urged HSBC to assume a majority ownership position so that it could spearhead the restructuring without interference, and the bank finally paid NT$1.8 billion (US$54 million) to buy a 75% ownership share.



Difficult Assignment



The bank designated Chen to run the company on its behalf. It was not a happy assignment. The company was losing customers, it had also lost nearly 40% of its business, and its employees were losing confidence in it. Its production lines operated only two or three days a week; worse yet, there were persistent rumors that Tong Lung would soon be shut down. Most of its workers began finding part-time jobs-working, for example, as roadside vendors when the production lines were idle.

The seriousness of the company's plight was driven home to Chen when no suppliers in Chiayi, where Tong Lung is headquartered, would sell it a computer for fear that they would not be paid. Chen realized that despite repeated statements that the company would stay in business and that it had NT$1 billion (US$30 million) cash in hand, a respected chief executive was needed at the helm.

The preferred choice for helmsman was Wang from China Steel. At first Wang kept his post as chairman of the steel firm and agreed only to act in a supervisory role. He launched a "company lite" streamlining program that entailed getting rid of unnecessary units and personnel. This program helped Tong Lung turn profitable in 2001, with a gross profit margin that improved from 20% in the first half to 25% in the second-an impressive performance that persuaded a leading American lock company to join with it in a strategic alliance. For all of 2001 net profit was NT$120 million (US$3.6 million), and the order backlog was cut by a third.

In May 2001, Wang left China Steel and became Tong Lung's chairman. To turn a company around, he says, you have to do five things: satisfy creditors, make employees feel secure, win the support of customers, satisfy shareholders, and fulfill your social responsibility. "In turning around an enterprise," comments Lin of Lee & Li, "a square, objective, capable, and popular leader is a critical element." Obviously, Tong Lung found that element in C.Y. Wang.

The new chairman immediately began examining the company's books as the first step in improving its finances. One day in February 2002 he discovered, to his amazement, that Tong Lung maintained 13 Mercedes-Benz luxury sedans for its directors, giving it more Mercedes than any other company in Taiwan. After the company failed, the cars were sitting idle in the garage.

He found that the company also had another idle asset-an NT$3 million (US$91,000) tow-truck for space capsules that the Fang family had bought, in the hope of winning orders, as a gift for a would-be supplier of capsule locks. Before the deal could be finalized, the company had collapsed. Wang decided to park the truck at the company's main gate as a reminder of its fiasco.



More Than Money Needed



Wang and Chen both knew very well that more than an improvement of finances was required to turn the company around. It needed more orders. "After restructuring the company's personnel, organization, and finances," Wang reports, "our next step was to boost business." In addition to making products under its own "EZSET" and "LUCK" brands, they also began expanding sales of OEM (original equipment manufacturer) and ODM (original design manufacturer) products.

Chen wants to boost the ratio of OEM and ODM products to half of total sales, from the current 30%. "Tong Lung right now is just like a patient who has been moved from intensive care into an ordinary hospital ward," he says. "It's hard for us to go head-to-head with big players in the brand-name market, so we need to enter into alliances with those big players and act as their contract suppliers."

The efforts of Wang and Chen have impressed institutional investors. H.W. An, chief financial officer of UBS Asset Management Taiwan, estimates Tong Lung's earnings per share last year at NT$4, and believes that the figure will be higher this year. J.Y. Wang, an analyst with ABN AMRO Asia Ltd., believes that Tong Lung will do well after writing off its losses and returning profits to their original level.

This June the company agreed to give most of its 830 employees 2,000 shares each as a dividend from last year's earnings, and has set aside NT$4.3 million (US$130,000) for that purpose. This will be the best employee dividend in six years.

Chen himself was granted a "Taiwan Business Award" for the success in turning Tong Lung around. The award was richly deserved. "That was the hardest time in my life," he states. "It was especially hard during the first year after our takeover, when I was plagued with pressures from inside and outside the company. That really tested my mental powers to the limit."