For the longest time, home-grown multinational group, Haw Par Corporation had been in laggard form. Although the business fundamentals had been consistently good over the years, the share price had been hovering way below its Net Asset Value (NAV) of $12.00. But in 2017, the share price suddenly came to life and roar ahead to reach a record high of $12.28 recently.
Founded by the Aw brothers in the early 19th century, Haw Par is well-known for its Tiger Balm oilment products. However, the family business went through a tumultuous period in the 1970s when massive irregularities almost led to a spectacular collapse of the company. The government of Singapore had to intervene and pulled in the late Michael Fam to restore order.
Following the crisis, there was a three-way battle vying for the control of Haw Par between Hong Leong Group, Jack Chia Limited, and United Overseas Bank (UOB) headed by Wee Cho Yaw. In 1981, merger wizard Wee Cho Yaw emerged victory in the fight and the rest is history.
Under the brilliant leadership of Wee Cho Yaw, Haw Par grew from strength to strength and was transformed into a diversified conglomerate with operating business in healthcare, leisure, property and investments.
Today, Wee Cho Yaw remains its Chairman and his sons, Wee Ee-chao and Wee Ee Lim are also among the board of directors. Notably, Lee Kuan Yew’s younger brother, Lee Suan Yew is also one of the directors. The reason for the Wee Cho Yaw to retain control of Haw Par is probably because the company held about 71.9 million shares of UOB through its Investment arm in 2016. The UOB shares provided $49 million worth of investment income in 2016.
According to the 2016 FY report, the Investment arm also owned 69.5 million shares in United Industrial Corporation (UIC) and 44.7 million shares of UOL Group. In mid-2017, there was a reshuffling of shares involving the three companies. 27.3 million new shares of UOL were issued in exchange of 60 million UIC shares from Haw Par. The transaction would result in UOL increasing its stake in UIC from 44.7% to 48.9%. The injection of the new UOL shares would also see Haw Par Capital, a subsidiary of Haw Par Corporation, increased in book value of $219 million.
The shares transfer only served to add fuel to fire as the share price had been in red hot form since February 2016. Within two years, the share price has surged from $7.36 to reach a record high of $12.25 in September 2017. Do I regret missing the boat? Of course I did! If I had bought 2000 shares of Haw Par last year, I would be staring at $9700 worth of paper gains. For such a short-term investment, the return is indeed explosive.
From an investor’s point of view, Haw Par may be a potential multi-bagger. However, from a business point of view, the management has not been extremely good at generating returns for the company. The Return on Equity (ROE) had been an average of 5% for the past five years. The figure is hardly eye-catching. On the other hand, there are no long-term debts and revenue had been growing consistently, from $141 million in FY2013 to $201 million in FY2016. These track records indicated that the management is prudent in growing Haw Par through the years but may have no aggressive plans to expand the business operations.
At times, Haw Par do seem like a company suffering from identity crisis. At one point, it was known for owning Underwater World Singapore, Chengdu Haw Par Oceanarium, L’Aquarium Barcelona, golf driving range and bowling centres. These were past investments and now the Leisure arm of Haw Par only owns and operates the Underwater World Pattaya in Thailand. But the company actually derives the bulk of revenue from the Healthcare segment.
For the 2nd quarter ended 30 June, revenue increased 15.0% to $60.5m mainly due to higher sales from Healthcare. Demand for Tiger Balm products grew following the expansion in distribution network and increase in marketing activities. However, the revenue growth was partially offset by lower revenue from Leisure.
Very impressively, Tiger Balm remains the biggest cash cow for Haw Par despite its diversified revenue sources. Gross profit for 6 months ended 30 June was $77.5 million, an increase of 21.8% compared to last year. The balance sheet remained one of the strongest among the SGX companies. With current assets of $840 million, Haw Par was holding on to $329 million of cash and cash equivalent. The total liabilities were only $174 million.
Cash flow from operations remained healthy at $34.8 million for 6 months ended 30 June. This suggested that its core business (Healthcare) was cash generative. However, investment income received decreased to $8.8 million from $28.5 million compared to last year. Investment income came from dividends received from investments in UOB, UOL and UIC. The volatile income from its Investment segment suggested that the share price of Haw Par might be intricately affected by the performance of UOB, UOL and UIC.
Following the recent approved disposal of 60m UIC shares in exchange for 27.27m UOL shares, Haw Par’ strategic investment portfolio had been changed accordingly to include a larger shareholding of 8.57% (from 5.51%) in UOL.
Read my other related articles:
- Haw Par Corp sealed the fate of Underwater World Singapore
- Haw Par stock analysis
- Haw Par an ultra value stock?
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- Is Haw Par Corporation a dividend stock?
Despite the share transfers, it does not appear to me that the Wee family had any grand plans to expand Haw Par Corp aggressively even though the core business operations had been growing well. Total revenue has been growing consistently, from $141 million in FY2013 to $201 million in FY2016. During this period, the share price had been hovering at the $7.00 level. So, it really caught me by surprise that the share price went on an explosive run and exceeded the $12.00 level.
Somehow, the share price had exceeded expectation but I could not identify a plausible reason to explain the bullish form. Perhaps the big boys were behind the surge in share price. Whatever the case, long-time investors should be happy.
As for me, the potential for upside is limited as the price has reached the peak. Would not enter this counter in the near term but is monitoring the situation closely.
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