Wednesday, March 02, 2011

Haw Par

Could Haw Par stock be a ten dollar note available for sale at $6? Book value as at end 2010 is roughly $9.8 while stock is selling at $6. For seasoned investor, we know the pitfall just by simply investing based on discount to book value, no matter how huge the gap is. Let's start valuing instead by dissecting Haw Par. There are basically two parts to Haw Par core business: 1) Operating businesses including property rental and sale of healthcare consumer products (mainly Tiger Balm's line of products); 2) Equity investments.

Market value of Haw Par = 197.9m shares x $6 = $1187.4m

The company owns 4% of UOB (62.88m shares), 41.4288m shares of UOL, 67.558m shares of UIC and 277.9m shares of Hua Han biopharmaceutical which is listed on HKSE.

Market value of listed equities

1) UOB - 62.88m shares x $18.3 = $1150.7m
2) UOL - 41.4288m x $4.5 = $186.4m
3) UIC - 67.558 x $2.8 = $189.2m
4) Hua Han - 277.9m x HK$2.4 = HK$667m or SG$109m

Total market value of listed equities = $1635.4m

Based on this, the business is already discounted at a rate of 27%.

Not cheap enough? Here's some more icing - the company owns no debt except tax both current and deferred but for deferred, it probably isn't payable till its investment properties are sold but those are held for rental yield; then, it holds another $110m of cash. Add on this cash, the business is selling at a discount of 32%.

In fact, the whole of Haw Par just selling at slightly above the value of UOB shares that the company owns. So, as in investor, at $6, you simply pays for the UOB stake, and are getting the rest - UOB, UIC, Hua Han, cash in bank & investment properties + the tiger balm business which generates $79m in sales yearly - for free.

Another method of valuation I use is based on earnings of both the operating business and the proportional share of earnings of its equity investments.

1) Operating business - Operating earnings excluding dividend from investments come up to about $36.5m. At a tax rate of 17%, net profit = $30.3m.
2) Proportion share of earnings from equity investments:
a) UOB - EPS $1.6 x 62.88m shares = $100.6m
b) UOL - EPS $0.55 x 41.4288m = $22.8m
c) UIC - EPS $0.172 x 67.558 = $11.6m
d) Hua Han - EPS HK$0.146 x 277.9m = HK$40.6m or SG$6.6m
*UOL and UIC eps are excluding fair value gain/loss on investment properties.

Total earnings from operating business + earnings from equity investments on a look-through basis = $141.6m

On this basis, at $6 a pop, PE is less than 9.

Other considerations? Surely, there are. Are the equities that the company holds really valuable or undervalued for the matter? To be sure, it looks reasonable for the most parts, in particular, UOB - priced roughly 11x earnings.

What's the prospect of UOB? As long as Singapore and the region grows, UOB will grows too as assets in the region grows. Banks is simply just the money grid that helps to allocate and distribute capital from those who have them but don't need them to those that need them but don't have them. Not long ago, Singapore government hope to increase the nation average salary by 30% on a real term in 10 years time or something. This looks like one factor that looks favorable for banks to grow its asset base. Total assets was $214b at end 2010. ROA of 1.2% will produce $1.65 in eps. In 2001, UOB total assets was $114b. In 1992, was $28b. Part of it was due to merger like with OUB and most part to organic growth.

Need further proof? Here are some. Singapore GDP measured at current price was $84.7b and $304b in 1992 and 2010, respectively. A growth of 259%. UOB share price grew from $4.5 to $18.3 in the same period. A growth of 300%. Almost mirroring the country rate of growth.


Take Wee said...

beautiful write out on Haw Par evaluation. It is really undervalued and there are recent buy in by the Wee family to increase their Haw Par shareholdings. This shows their faith in this stock. I wonder if you have invested in Haw Par?

Brian Chan said...

Thank you. Yes, I've exposure to HP. Actually, it doesn't matter if the Wees increase their stake. Even if they do, it isn't much on a relative basis to their wealth. I think HP is just a low risk investment with minimal chances of permanent losses.

Take Wee said...

The effect of japan's disaster did not affect HP much on friday afternoon and yesterday's trading close at $6.01.

I was shopping at DFS over the weekend and was pleasantly surprised that tiger balm products are being sold in attractive packaging and advertised as a remedy for discomfort. With numerous DFS outlets worldwide, it's great that HP's products are placed on a global platform for sale.

Hopefully, this gem will shine, when the global economy outlook starts to be brighter after natural disasters, middle east crisis, etc.

Anonymous said...

I think the biggest risk is whether the Wee family will try to takeover at a cheap price.

Would anyone know what is their average buying price over the years?

Can they crash the stock and then offer a cheap price to take it private later?

How to avoid such a risk?


Brian Chan said...

I don't know if they can crash the HP stock. But even if they do, can they also crash the book value of the stocks (i.e. UIC, UOL & UOB) which HP owns?

Now assuming, HP stock crash to $2, and yet the 3 stocks that they own didn't crash, and book value still maintains at $9 or so, do you think they can offer at double or triple, say $4 to $6 to buy out all the others?

Unless they can also try to crash the other 3 stocks as well, in particular, UOB, which UOB cannot be crash just by an individual because it is a bank and is not majority owned by an individual, the share owner-based are quite diverse and many funds owns and moreover, the bank fundamentals will follow the region or country economic fundamentals provided it is prudently managed.

Then, even if they offer to buy out at a low price in relation to the book value, not all investors will go quietly. I remember one of the major investors is a US-based valued fund, First Eagle, which used to be managed by Jean-Marie Eveillard.

Hope to hear what you think of such risk - the possibility that the deal will conclude if the Wee play such a dirty hand.

Brian Chan said...

So far, I cannot remember there're deals where stocks are crash due to the makings of an individual and then successfully being bought out. If there're, firstly, to crash a stock by an individual's making is tantamount to manipulation which is possibly illegal. And I'm unsure what methods are available to crash a stock without raising a doubt on manipulation which I would like to learn about if there're.

Second, even the stock manage to be manipulated to crash, what are the chances the buyout would succeed if the book value of the holdings do not crash commensurately so as to justify that the offer price is a fair deal for the other shareholders?

The buyout offer would have minimal chances of success if UIC, UOB and UOL do not crash by as much.

It is hard to crash UOB in my opinion unless due to economic circumstances.

8percentpa said...

I think the most impt question would be what is their average price? If they bought HPar say, on average at $5, it is safe to assume they will not be buying out below that. In fact, it would also be safe to assume they cannot buy out at $6. At least they need to offer a 20% premium at today's price.

As for crashing stocks and buying them out cheaply, there are a few examples, one being CK Tang, of course one can argue if they did delibrately mis-manage for 10 yrs, let the earnings suffer and finally bot out the minority. Or was it just genuine poor management mistakes and wrong moves that caused the stock to falter over 10 yrs, and then management decided to call it quits as a listed co.

In any case, the minority shareholders were short-changed big time bcos of the land value of CK Tang. The buy out price did not factor that in...

There are other examples, the most impt case in point being UOL, or was it UIC, it happened some time back, I keep forgetting the whole story. But the Wee tried to buy out the co. cheap.

In any case, I think it's difficult to predict this, so most impt is what average price did they buy? If we can know that, we can know how safe is it to buy.

Brian Chan said...

UIC deal happens early 2009. Well, he offered a low-ball price but was totally unsuccessful with only 3% or so of shares tendered. And then the share price then was not a manipulation, it was simply a market-driven event. So the key to a successful buyout is to offer a decent price.

Moreover, Wee used UOL as a vehicle to buy UIC, not as an individual. So it was easier for UOL to lever up to buy UIC in which UOL was already a 30% or over shareholder. But in HP case, Wee does not have this privilege of using a corporation to buy out the rest of the company. He either got the $800m of excess cash in his pocket or he gotta raise the fund somewhere on his personal basis.

NVI said...

Sounds like you have definitely done your homework on Haw Par! I will look into this.

Thanks for the resource! It's always great to see like minded value investors out there.

Please feel free to check my site, The New Value Investor, and let me know what you think.

Have a great one

Brian Chan said...


Thank you. Looks like your blog is pretty new. Enjoy the process and keep it up.

Anonymous said...

Hi, I fairly agree with 8percentpa.

Risk-Averse Value Investing Strategies for the Thoughtful Investor
Seth A. Klarman.

“Once a security is purchased at a discount from underlying value, shareholders can benefit immediately if the stock price rises to better reflect underlying value or if an event occurs that causes that value to be realized by shareholders.

Such an event eliminates investors’ dependence on market forces for investment profits. By precipitating the realization of underlying value, moreover, such an event considerably enhances investors’ margin of safety. I refer to such events as catalysts.”

Sad to say there is no catalysts for HP.

“Some catalysts for the realization of underlying value exist at the discretion of a company’s management and board of directors. The decision to sell out or liquidate, for example, is made internally.”

So how much is Mr Wee's indirect or direct holding in HP?

“Other catalysts are external and often relate to the voting control of a company’s stock. Control of the majority of a company’s stock typically allows the holder to elect the majority of the board of directors. Thus accumulation of stock leading to voting control, or simply management’s fear that this might happen, could lead to steps being taken by a company that cause its share price to more fully reflect underlying value.”

Again how much is Mr Wee's indirect or direct holding in HP?

“Value investors are always on the lookout for catalysts. While buying assets at a discount from underlying value is the defining characteristic of value investing, the partial or total realization of underlying value through a catalyst is an important means of generating profits.

Furthermore, the presence of a catalyst serves to reduce risk. If the gap between price and underlying value is likely to be closed quickly, the probability of losing money due to market fluctuations or adverse business developments is reduced. In the absence of a catalyst, however, underlying value could erode; conversely, the gap between price and value could widen with the vagaries of the market.

Owning securities with catalysts for value realization is therefore an important way for investors to reduce the risk within their portfolios, augmenting the margin of safety achieved by investing at a discount from underlying value.”

If there is to be another finical crisis will Mr Wee try to take HP private and force others to sell at a low price?

So the MOST important question is how much of the HP is Mr Wee's indirect or direct holding in HP?

Hmmmm…. Jean-Marie Eveillard, I remembered him said that HP was undervalued and that it was a backdoor way of owning UOB.

But I need to know how much he owns?

A better undervalued company is UIC, cased I know that Mr Wee is not directly or indirectly the major holder of UIC.

There is a Philippines tycoon fighting to be the major holder as both of them know that UIC is undervalued.

Hope someone can do an analysis of UIC.

Anonymous said...

“Other catalysts are external and often relate to the voting control of a company’s stock. Control of the majority of a company’s stock typically allows the holder to elect the majority of the board of directors.

Thus accumulation of stock leading to voting control, or simply management’s fear that this might happen, could lead to steps being taken by a company that cause its share price to more fully reflect underlying value.”

It seems that management is not too worried that the share price is low, so Mr Wee should be indirectly or directly the major holder.

DonClang72 :)

Brian Chan said...

Hi DonChang72,

I'd respectfully disagree with the catalyst part because personally I don't understand the game to timing of catalysts. But you may understand it more than I do. I try to analyze a business based on what I pay to what I'd get in return even if the advertised price is perpetually lower than its intrinsic value (for which HP is historically been priced below its BV). As a matter of fact, HP has always been selling below its BV, but it has never been available at such a huge discount (almost 40%).

Even if the gap don't ever close up, I'm fairly certain that if held for the long term, UOB would grow roughly at the rate of the region. So the key to sound investing is to evaluate the business fundamentals and let the business nurture itself so as to deliver sound returns to the stakeholders.

Anonymous said...

Hi, you seem to miss my main point and that is the management is not shareholders friendly, as what you have indicated "HP has always been selling below its BV" and have you ask the question why is that so?

Ben Graham enticed investors to be more vocal and active in enforcing their rights as shareholders, however in the case of HP, the question is who is the majority shareholder.

There is little chance that minority shareholders could force the management to rise the dividend or to cause its share price to fully reflect underlying value to reward loyal shareholders.

It seems that HP is PRO majority shareholders and in the LONG TERM who knows, due to market fluctuations or adverse business developments, the share price might be even lower that management would like to do a TANGS act.


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