Description

Haw Par is a Singapore-listed holding company with investments in two large blue-chip publicly traded equities, a portfolio of investment properties, significant net cash, and a 100-year old branded consumer healthcare business called Tiger Balm.  The company is well managed, cash flow generative, and trades at a substantial discount to NAV.  Haw Par has about 221.072 million shares outstanding, trading recently at $12.25.  The market cap would be $2.708B (please note all dollar amounts are in Singapore dollars).  

Valuing the assets owned by Haw Par at market quotes (for publicly traded holdings) or at conservative multiples (for real estate and the Tiger Balm operating business) and including balance sheet cash, Haw Par is likely worth between $18 and $20 per share, versus the current stock price of around $12.25. 

Haw Par was written up on VIC by eigenvalue a couple of years ago.  I liked it then, and I still like it now.  

Here is the quick run-down of the assets and my valuation estimates:

The investment portfolio is concentrated in two blue-chip Singapore-listed companies: United Overseas Bank (UOB), which trades at U11 on the SGX, and UOL Group (UOL, which trades as U14. Haw Par holds roughly 74.85 million shares of UOB.  The stock is about $26 per share, which makes for market value of S$1.95 billion. Haw Par owns 72.045 million shares of UOL, which trades for a little over $8 per share.   This is worth roughly $585M.  Together these two assets are worth $2.535 billion, or about $11.50 per Haw Par share. 

Haw Par’s Property and Leisure division owns and manages the company’s investment properties. Haw Par owns three modern office buildings in Singapore, a commercial building in Kuala Lumpur, and owns and operates the Underwater World Pattaya aquarium attraction located in the resort town of Pattaya on the coast of Thailand.  Prior to mid-2018, Haw Par carried these properties on its books at “fair value” which it recorded as $212.9M.  In 2018, the company changed its accounting method for these properties to “cost less depreciation” and recorded the value as $58.4M.  As a result, rather than carrying its property investment portfolio at fair market value of $212.9M, Haw Par now carries this portfolio at just $58.4M, or a reduction of $154.5M.   I have used the $212.9M as my “best guess” as to fair value today, since it is the most recent fair value appraisal I have.   However, this figure can also be reasonably supported by the income from the underlying assets.  The property and leisure group generated about $12.6M in after-tax profits over each of 2018 and 2017.  This would be equivalent to a roughly 6% cash return on my adjusted $212M book value, which given the unlevered nature of these investments feels about right.  For what it’s worth, Haw Par reported a ROA of 22% for the unit in its 2018 annual report based on the lowered $58.5M asset value, which seems way too high for unlevered real estate.  I think the $212M valuation is a conservative figure, and that comes to just under $1 per Haw Par share, but feel free to use your own valuation here if you think I’m being too optimistic.

As of 9/30/2019, Haw Par showed $440.7M of cash on the balance sheet and total debt of $24.2M, for a net cash figure of $416.5M.  Given the cash flow generative nature of the business, I’d expect more cash to be on the books at year-end 2019, but for now this is the most recent figure we have.  The $416.5M in net cash equals about $1.88 per Haw Par share.

So far, we have $11.50 per share in public equities, $1 per share for real estate investments, and $1.88 per share in net cash on the balance sheet for a total of $14.38.  If we stopped now, we’d be looking at a reasonable discount to the current stock price. 

So now we can consider the consumer health care business.  The Tiger Balm product was originally developed in the 1870s in China and has been a recognized consumer brand in Asia for at least 100 years.  The company’s products are distributed worldwide, though Asia remains the largest market (roughly 2/3 of total sales).  The business has minimal capital intensity – it looks like Haw Par spends less than $2 million on capex historically per year.  

Tiger Balm has been growing strongly over the past ten years or so as management has invested in product development, marketing and distribution efforts.  The table below shows the results of the Tiger Balm health care business from 2006 to 2018.  As one can see, the business has grown impressively in both revenue and profits over the past 13 years.

SELECTED FINANCIAL RESULTS – HEALTHCARE UNIT (Singapore $)

Year                                   Revenue ($M)   Pre-Tax Op Inc

2006                                  $   66.7                   $ 17.0

2007                                  $   70.5                   $ 14.4

2008                                  $   71.1                   $ 14.6

2009                                  $   74.1                   $ 15.5

2010                                  $   79.1                   $ 16.2

2011                                  $   81.4                   $ 15.6

2012                                  $   92.0                   $ 17.2

2013                                  $ 103.5                   $ 25.9

2014                                  $ 122.2                   $ 33.9

2015                                  $ 152.6                   $ 48.1

2016                                  $ 176.4                   $ 66.1

2017                                  $ 201.7                   $ 68.7

2018                                  $ 216.9                   $ 77.3              

Pending the release of full year 2019 business results, I’m valuing Haw Par within a range of 10-12X pre-tax income, which I think is very reasonable for a highly profitable, branded consumer products business that has shown decent revenue and profit growth.  I am probably too conservative here, but obviously if I am wrong on the low side than Haw Par is even more undervalued than I’m suggesting in this write-up. 

If we look at the value range at 10X and 12X pre-tax multiples on 2018’s full year pre-tax income of $77.3M for this business, the valuation would fall between $772.5M and $927M, or something like $3.50 - $4.20 per Haw Par share.  If we sort of split it down the middle, it adds $3.85 per share to the company’s value.   

When added to the $14.38 per share figure we provided earlier for the other assets, this brings my best-guess NAV for Haw Par to ~$18.25.  This $18.25 per share is comprised roughly ~50% by UOB, 20% Tiger Balm, ~15% UOL, ~10% cash, and the remainder in the property and leisure assets. 

Normally I would whack a little value for parent company costs and other liabilities, but in this case there are almost no liabilities that are not mostly offset by current assets not noted in the table above. Finally, it appears that most of the corporate level expenses are assigned to one or the other business units, so I don’t think this is a form of significant value leakage.  Unallocated corporate expenses have averaged about $3.5M per year over the past five years; if we assigned a 5X multiple to that we’d only be knocking off $17.5M in value, or less than 10 cents per share.  The entire company has roughly 590 employees.

BRIEF SUMMARIES OF UOB / UOL

Given the large percentage of the value comprised by UOB, one probably does need to have some comfort with this asset to be willing to own Haw Par shares.  I am personally comfortable with having the exposure to UOB via Haw Par, at least for the position size I’m holding.  I’m not going to go into a lot of detail about it since it is publicly traded and information is plentiful, but here are some quick notes. 

United Overseas Bank (Singapore: U11) was founded in 1935 by the grandfather of the current CEO (and father of the Chairman of Haw Par Wee Chow Yaw) and is today Singapore’s third largest bank. UOB has tremendous scale and efficiency benefits in its home market, but also seems to have done well throughout Asia.  UOB has ~500 offices in 19 countries and has made strong inroads into Indonesia (190 branches) and Thailand (157 offices) as well as Malaysia (47) and Greater China (28) and has recently been expanding to smaller markets like Vietnam and Myanmar.   This has allowed the bank to diversify its deposit and loan franchise by country and market (Singapore is heavily weighted towards real estate, shipping, and companies with exposure to oil and gas).   In reviewing the financial statements and recent presentations, the exposures to oil and gas, China real estate, and other potential areas of concern seem modest and manageable to me.  Also, the Singapore real estate market seems to have been cooling off for a couple of years, so investing at a boom time there is not as much of a concern as I might have thought (though Singapore real estate is quite expensive relative to many other markets due to the supply limitations of being a densely populated small island). 

To summarize, UOB appears to be a solidly run, pan-Asian bank with scale (over US $295B in assets and $227B in deposits) posting very solid ROA (better than 1% in the 9 months of 2019) and ROE of about 11%. The bank pays out about half of its earnings in dividends, and CapIQ shows the company having a dividend yield about 4.5%.  Looking back over several years, UOB has consistently generated ROA of 0.9-1%, ROEs of 10-11% with leverage of 11-12X and has shown a strong reserve profile which it appears to manage counter-cyclically.  I should also point out that the bank has a long history of absorbing economic shocks from back when Southeast Asia was itself almost a frontier market.  That said, if there is a terrible credit crisis emanating from China, UOB is not going to emerge unscathed, and there may be outsized impacts on many of the markets where it does business from various idiosyncratic risk events.    

The current stock price is about 1.15X book value, well below some of the higher ranges in the past when it was growing faster (the bank routinely traded at 1.5-1.8X book value in the early 2000s and right up to the financial crisis).  UOB announces special dividends every few years, usually when times are good or for special occasions (Asian stocks often pay special “bonus” dividends to commemorate milestones, as UOB did with a little 20 cent per share special distribution after 2015 to commemorate its 80-year anniversary).  Overall, while I am not sure I’d be compelled to own UOB stock at the current multiple, I have no problem owning it as part of a steeply discounted holding company basket at Haw Par.

UOL Group (Singapore: U14) was founded in 1963 and is also controlled by the Wee family. It is one of Singapore’s leading publicly listed real estate companies, with portfolio assets of about $19 billion, including operations in new property development, commercial real estate investment, and hotel ownership and management. Unlike most US-based REITs (but common for Asia), UOL uses very little leverage in its business and therefore earns relatively unexciting returns on equity – but it seems very safe and unlikely to suffer lasting damage from any temporary decline in property values.  As of Q3 2019, tangible BVPS was $11.69, up from $11.30 at December 31, 2018.  The stock trades for $8, or less than 70% of book value, so there’s already a discount at the stock level before accounting for the additional discount we get by owning it via Haw Par.  UOL also pays out a dividend that looks to be a little better than a 2% yield.

BRIEF HISTORY

I do want to provide a bit of what I’ve learned about the history of Haw Par so it will contribute to an understanding of how all these assets ended up under one roof. Haw Par has been listed on the Singapore Stock Exchange since 1969. Haw Par is one of several investment/holding vehicles run by the Wee family, which is one of the most successful business families in Singapore.

In 1981, United Overseas Bank (UOB) became the majority owner of Haw Par after what I can only gather was some event that put the company “in play”.   The Chairman of Haw Par is Wee Cho Yaw, who was also the CEO of UOB at the time it took over effective control of Haw Par.  After the ownership change, Haw Par apparently divested a few non-core and underperforming assets, and has since been managed effectively but conservatively, resulting in consistent growth in value over time.  One of Wee Cho Yaw’s sons, Wee Ee Lim, is now the CEO of Haw Par.

Wee Cho Yaw is now over 90 years old and as mentioned was also the Chairman /Chairman Emeritus of United Overseas Bank until he stepped down in early 2018.  The Chairman and CEO of UOB is now Wee Ee Cheong.  Wee Cho Yaw is also the Chairman of UOL Group (of which he and his family own about 34%) and Wee Es Lim is Deputy Chairman.  The CEO of UOL is Liam Wee Sing.

In addition to the various members of the Wee family, Haw Par’s board of directors includes Lee Suan Yew, the younger brother of Singapore’s first Prime Minister, Lee Kuan Yew.   

To summarize, Haw Par is one of several investment vehicles controlled by the Wee family, and that is the connection between these specific assets and how they ended up at Haw Par.    

NINE MONTH 2019 UPDATE

For the nine months ended September 30^th, Haw Par reported total group revenue of $200.4 million, up 8.3%, but gross profits grew only 2.2% due to higher input costs.  However, other income increased to $113.4 million due to higher dividend income from the investment portfolio.  Pre-tax profit at the group level was $181.6M, up 6.6% YOY, and net profits were $169.3M, up 6.8%.  Reported EPS was 76.6 cents versus 71.8 cents for the nine months.  In addition to the basic income shown above, Haw Par recorded a mark-to-market gain on its investment portfolio of $185M, such that total economic profit for the nine months was $354M.   However, some of this simply reflects the reversal of losses suffered on the publicly quoted securities in late 2018 when stocks fell sharply across the globe.

Cash flow has been strong so far in 2019, with pre-tax OCF of $77M versus $59M last year, and after-tax OCF of $62.6M versus $45.8M.  The difference is almost entirely accounted for by favorable working capital changes in 9M 2019 versus the prior period, however.  This cash flow is also almost entirely attributable to the health care business.  Under cash from investing, Haw Par reports its $106.2M of dividend income (up massively from $50.0M in the comparable period, so either UOB or UOL must have paid a special dividend in 2019); and interest income of $6.8M versus $4M.  PP&E was $1.6M in the first nine months of 2019, and maintenance capex for its real estate properties was $1.3M, for total capex of $2.9M in the first nine months.

Haw Par provides its own accounting NAV per share disclosure in the financial statements, and this figure came to $13.71 as of 9/30/19 versus $13.26 as of 12/31/18.  However, Haw Par is missing $157M of asset value due to the accounting change back in early 2018 that had the effect of valuing its real estate portfolio at cost – depreciation instead of market value.  Adjusted for this, the company’s accounting NAV would be $14.42.  Also, this NAV really doesn’t include Haw Par at all, since Haw Par’s market value vastly exceeds its relatively small accounting book value. The share count is up by about 300K YOY, as Haw Par does issue between 200K and 500K shares under its stock-based comp plan each year.  This is obviously tiny compared to most U.S. company share comp plans.  Normally Haw Par has declared two dividends per year, one of which has been about 10 cents and the other 15 cents. However, in early 2019 Haw Par paid out a special 85 cent dividend to commemorate the 50^th anniversary of the company.  My assumption will be that HP pays out 25 cents in dividends this year, which puts the dividend yield right at 2%.

It does appear that after generating very strong sales in 1H 2019 (albeit with lower gross margins), Tiger Balm sales declined by about 7% in Q3 and gross margins declined to 57% from 60%+ last year.  The company mentioned in the Q3 report that “the Group’s business may face stronger headwinds if the US-China trade conflict and a slowing global economy persist, and the healthcare segment may also be affected if trade sentiments and domestic issues in certain regional markets worsen.”  So the recent price weakness may reflect some expectations of slowing growth or rising costs at Tiger Balm.

THOUGHTS ON THE DISCOUNT

One explanation for why Haw Par is valued cheaply by the market is because it is a family-owned and controlled company and only about 43% of the shares are owned by the public. However, the “effective float” is probably lower when one considers that many of the non-insider owners are probably very long-term owners of the stock.  The only major institution involved (per Cap IQ) is US-based First Eagle Investment Management (which owns 11.4% of the shares).  The lack of any meaningful float probably also helps to explain the discount, as the stock probably doesn’t have enough liquidity to make it into index-related products or into the portfolio of larger institutional investors.  Of course, it isn’t uncommon for even well-managed holding companies in Europe and Asia with strong track records of value creation to trade at “holding company” discounts.    

However, I would argue that a company whose underlying business is increasing intrinsic value with a well-known brand and capable management should not be trading at such a large discount as Haw Par does today.  The management team is one of the best-connected families in Singapore (if not all southeast Asia) and seems to be both conservative and long-term thinking. On the flip side, I don’t foresee them doing anything foolish. This is not a management team that deserves a big discount, in my view.

The second reason that I feel a 33% discount to NAV is too large is that the underlying assets that comprise the NAV also seem to be very inexpensive at the recorded NAV value. UOB is about as blue-chip as an Asian bank can be, and it trades at a very reasonable 1.15X book value and pays a 4%+ dividend yield.  UOL trades at ~0.70X tangible book value.  The investment property owned by Haw Par (plus the aquarium) seems reasonable at the 2018 market value appraisal, and my guess is that CFFO for the real estate is much higher than recorded after-tax net income of $12.5M.  Tiger Balm is probably on the cheap side at 11X pre-tax earnings.  And then we apply our 33% discount to already very reasonable prices. There is even a bit of double discounting going on, as UOB owns about 9.8% of Haw Par shares. 

Finally, Haw Par is a cash flow positive basket, with the FCF generated by the healthcare business and real estate properties, plus the substantial dividend income from the public equities.  Note that this latter form of income only shows up in cash from investing activities, not cash from operations.  Through the first nine months of 2019, dividend income was over $100M, so this is a very hefty amount of income relative to Haw Par’s EV of $2.27B enterprise value.  Add this to the $70M+ of free cash flow from the healthcare business, and you can see that Haw Par represents a significant positive carry on that NAV.

As mentioned above, I am using $18.25 as a conservative NAV estimate.  I do realize that to some extent one might wish to view Haw Par like a closed end fund, where you don’t really expect to see the stock trade at full NAV.  Nonetheless, the combination of reasonable value accretion and closing of the discount to 15-20% over 18-36 would still produce a decent IRR.   

Catalyst

As far as catalysts, I don’t see any obvious event that might close the NAV discount in any sort of dramatic fashion.  I could certainly see the company using its cash to increase the dividend more aggressively.  An acquisition is possible if it were a good fit with either the health care or property/leisure operations Haw Par already owns.  If Haw Par’s management got inspired to do something to highlight the value and narrow the discount, it might get interesting.  Also, it would really be interesting to see what Tiger Balm would be worth as a stand-alone business, particularly to a strategic acquirer.  I don’t expect any of these things to happen, but you never know.