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Haw Par Corp an ultra value stock?

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I was doing research on Haw Par Corp recently and was surprised to discover that the company hold large amount of shares in UOB (68 millions), UIC (67.5 millions)  and UOL (41.4 millions).
According to Haw Par Corp’s website, their substantial investments consist “mainly of strategic holdings in United Overseas Bank Limited, UOL Group Limited and United Industrial Corporation Limited. They have been a stable source of funding – through recurring dividend income – and financial strength – at marked-to-market valuations – over the years.”
Based on the annual report, these shares contributed about 60.2% of the profits in 2013. This is a significant amount of income source from a non-core business segment. After all, Haw Par has always been regard by many investors as a healthcare company which manufactures the famous local brand, Tiger Balm ointment. Who would have guessed that it is actually an investment holding company with billion dollars worth of shares in blue chip companies? It seems that investors may not fully understood the true value of Haw Par Corp. Read on to find out more about my personal view on this often overlooked stock.
Haw Par stock
Before you become too excited about the stock, it is important to examine the concept of companies with investments in other companies. Usually there are many ways for companies to re-invest their excess capital. They can choose to buy back their own shares, hold the cash for better investment opportunities, acquire real estate assets, return the cash to shareholders through capital reduction exercises or in this case, purchase shares in other companies. If you belong to the category of investors who read only the quarter financial statements and not the company’s annual reports, then you would likely overlook some of the hidden assets of deep value companies – accumulated shares in other companies.
Now, hidden asset stories can be alluring to discerning value investors, but it can also be a value trap. For Haw Par Corp, it make sense to invest in UIC and UOL because it already has competencies in property investments and thus, there may be potential synergy to derive in terms of operational efficiency (several Wee family members sit in the board of these companies). But what about UOB?

Banking is traditionally a volatile segment and holding large amount of UOB shares may make Haw Par Corp more prone to market uncertainties, given that UOB is currently one of the most expensive stocks in SGX. One major market correction would easily wipe out a huge chunk of Haw Par Corp’s portfolio value. Furthermore, the banking business is not aligned to Haw Par Corp’s operation and so, I don’t understand how UOB can fit into Haw Par Corp’s investment framework. This is an aspect which I feel the management of Haw Par Corp needs to address. Otherwise investors would continue to lack understanding in this stock.

If investors don’t understand your business, they would not be interested in trading your company’s stocks. This explains the poor liquidity of Haw Par Corp. For far too long, the average daily trading volume amounts to less than 50,000 shares, in spite of above average company’s performance. Liquidity is an important factor to consider even for super long-term investors. Just imagine if the stock reaches the target price which you have set but you are unable to offload the shares because of the lack of takers in the market. You would have missed the boat when someone eventually buys from you, albeit at a lower price. Furthermore, poor liquidity can be a pain in the ass, if you need the money badly for other purposes.

Another no good factor about Haw Par Corp is that the management has made no plans to expand its core businesses – healthcare, leisure and property.The leisure segment would face stiff competition as the Underwater World Singapore begins to lose its novelty. This is especially so with the opening of Resort World Sentosa’s SEA aquarium. There is also limited room for growth engine in the property investment segment, given the current market sentiment. This means that Haw Paw Corp needs to bank on the healthcare segment and develop more products through in-house research and development. The company should also reach out to more consumers through bloggers and social media.

Financial Highlights

Result (S$’000) 2013 2012
Group turnover 141,176 139,349
Profit from operations 96,574 84,526
Financial Position (S$’000)
Shareholder’s funds 2,444,721   2,253,217
Per Share*
Earnings (cents) 49.4 55.1
Net tangible assets ($) 11.13 10.28
Shareholder’s Value
Return on equity (%) 4.4 5.3
Dividend net* (cents) 20.0 18.0

My conclusion is that I would invest in this counter only after SGX changed the board lot trading from the existing 1,000 shares to 100 shares in January 2015. This is because while I like this stock for its hidden assets and stable businesses, I want to limit my risk exposure as well. The poor liquidity, lack of expansion plans and questionable business focus are concerns that one needs to factor in before investing in this stock.

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