Should You Invest in Haw Par Corporation?

If you didn't know, I've always been a big fan of Urban Exploration (Urbex) in Singapore, and by extension, have gained an appreciation for the history behind Singapore's iconic and forgotten sites. I don't think it'll be too much of a stretch to say that the great majority of Singaporeans have heard of the renowned Haw Par Villa, a theme park revolving around the central theme of Chinese mythology, illustrating various scenes from punishment in hell to certain aspects of Confucianism. Not to mention, it's an all-time favourite haunt (pun absolutely intended) for paranormal investigators, hoping to capture evidence of the notorious legend involving the park acting as the portal to hell. 

Have you ever actually wondered how is it funded though? I certainly do not see it being paraded around by the Singapore Tourism Board (STB), and it seems like too much of a niche to have been considered economically viable in the first place since entry to the park is free... Well, to be fair, it is funded by STB, but it was actually started by the Aw brothers, creators of Tiger Balm. Yes, that wonderful cream found virtually in every Singapore household used to relieve muscle and joint pain. On that note, I realised back in 2019 that the company behind Tiger Balm, Haw Par Corporation, was to my surprise, a publicly listed company. It's been on my watchlist ever since. 

Today, I thought it would be rather enlightening to conduct some fundamental analysis regarding the two-billion-dollar market-cap conglomerate giant, diving deep into its core business model. 

So... what does Haw Par Corporation actually do?

"Haw Par Corporation Limited, a Singapore-grown multinational Group, is listed on the Singapore Exchange since 1969. Over the decades, the Group has been disciplined in asset rationalisation, organically growing its core businesses, and making selected acquisitions."

According to the company's website, they conduct business in Leisure, Healthcare, Property, and Investments. 

*Before Tax, Unallocated Expenses and Profit Sharing

*Tax Income Liabilities and Expenditures do not have a material effect.

My first thought when compiling all this data from their latest FY2022 report is just wow. I did not know that they have so much funds tied up in investing. 

In light of this information, I think it would be wise for me to start analysing their "core" business model and investments.

"Our substantial investments, consisting mainly of strategic holdings in United Overseas Bank Limited, UOL Group Limited, and United Industrial Corporation Limited, have been a stable source of funding – through recurring dividend income – and financial strength – at marked-to-market valuations – over the years."

From the above excerpt from the company's website, it seems like the majority of the company's valuations come from the three aforementioned listed companies. So let's dig a bit deeper. 

Going by the above excerpt from their FY2022 financial statement, it seems like the bulk of the company's holdings comes from its investment in UOB, followed by UOL Group. I can only assume that Singapore Land Group (SLG) is simply classified as "others". Since SLG does not seem to have a material impact on the company's financials, I will solely discuss Haw Par's investment in UOB and UOL.

My initial impression upon realising that so much of Haw Par's assets consist of investments can be summed up in one word: "Why?" I simply... don't get it. If you believe that you have a great business, then why wouldn't you reinvest your profits back into it? That is of course, you don't believe that, which is what I'm inclined to believe in. Call me negative Nancy, but I don't see any benefit in adding yet another layer of management between me and my dividends. Not only do we need to count on UOB's and UOL's management to declare a decent dividend, but we now have to also count on the Haw Par management to distribute that income to us! I don't exactly like relinquishing control over cash, but I acknowledge when it's warranted, which I feel isn't the case here, with Haw Par purchasing publicly listed companies, which any Tom, Dick, or Harry could do. To provide some context, the group has a total of $334 Million in liquid cash equivalents, as opposed to $101 Million in liabilities, more than enough to cover any loans. Furthermore, if the company's asset allocation is anything to go by, I would much rather have a greater degree of control to use my cash however I wish, thank you very much. 

I would also like to point out that since Haw Par’s assets (and income) are inexplicably linked to its investments, then it would be wise to do a brief analysis of the corresponding companies as well.

For UOB, although I think it's a solid investment given that you can't go wrong with the Singapore banks, I foresee a potential loss in valuation from Haw Par's investment in the short term. Currently, banks are poised to (and have been) doing well due to higher net interest margins arising from higher interest rates. Of course, we've all seen the rather hot CPI data recently, with inflation yet again running rampant. In my opinion, Jerome Powell is going to go ham on future interest rate hikes. He reveres Paul Volcker, and I think we'll see him try to overcompensate for his mistakes by overdoing the rate hikes, leading to an imminent economic recession. Of course, I could be wrong, but exceptionally high-interest rates are definitely not good for banks. We can see that loan volume has dramatically decreased, which may be explained by more people holding off on making large purchases, coupled with higher amounts of early repayments. Not only that, but to exacerbate things further, we can expect more loan defaults to occur as a recession plays out. Nevertheless, although I see a probable significant downside for UOB and the banks in general, I do believe the banks are a good long-term hold.

I must profess that I'm not all that familiar with UOL though. I think this is the first time I've ever even heard about it, so I'll do my best to understand its business. From what I can gather, UOL (and its subsidiary Singapore Land Group) mainly operate in the property industry. The three main segments are Property Development, Property Investments, and Hospitality. 

Source: UOL Website 

Like I said in my recent Keppel Corp update, I really like recurring income. Hence, you could naturally deduce that on the flip side, I hate lumpy profits. That is exactly what property development is. Don't get me wrong, I do believe in property as an asset class. But I think there are just a bit too many variables when it comes to property development for it to be sustainable - Location, design, marketing, etc. Not to mention, with most of UOL's portfolio being comprised of Singapore properties, I foresee some potential headwinds due to recent property cooling measures undertaken by the government. I would say property is a form of art, and you can't properly evaluate art. It truly is very hit or miss. 

OCR has recently experienced a drop in prices, could this be a sign of what's to come?

Both of UOL's newest property developments are located in the CCR and RCR, hence, there is no sign of impending price decrease. UOL could continue to benefit from the property uptrend, especially since the floodgates have opened for affluent foreign investors.

Moving on, office properties are fine in my opinion. Many people are concerned about office properties being negatively impacted by a culture change brought about by the Work From Home model, but I think Singapore has been relatively unaffected. If you're a "peasant" like me, taking public transport will reveal the sheer absurdity regarding how many people are commuting to work every day. Lastly, I don't really like the hospitality segment. Since it's consumer discretionary, there will surely be headwinds faced by UOL when a likely economic recession hits us. Overall, as a company, I don't view UOL all too favourably. I rather buy property companies that specialise in one specific segment of the market so that I'm able to have a greater degree of control. 

Strangely, Haw Par (H02) has strongly underperformed against its underlying assets, decreasing by 14.43% in share price in the last two years. Could the market potentially have underpriced Haw Par? Let's continue to find out. 

Note: I'd just like to point out that UOB owns 7.88% of Haw Par, whereas Haw Par owns approximately 4.61% of UOB. When two companies have a stake in one another, it is called Reciprocal Cross Holding. To be honest, I don't understand the implications of this. The only thing I can think of is that calculating book value would possibly be affected by double counting. Nevertheless, I found a 2021 paper that contained claims about how such a phenomenon would result in increased profits, prevent corporate takeovers, and reduce transaction risks. I can't really validate or rationalise such claims, but I will update this article if I ever found out. 

Review of Haw Par's Leisure & Property Segment:

Currently, Haw Par only operates one recreational facility, Underwater World Pattaya which was launched in 2003. Since leisure is considered to be rather negligible in terms of earnings contributions, it is very hard to accurately gauge the performance of the asset. However, we could perhaps use figures of the yearly number of tourists to Thailand as a proxy for the asset's performance. 

Not very pretty at all. 

It seems like Thailand has yet to recover to its pre-pandemic figures in terms of Tourist arrivals, which doesn't bode well for the country since Thailand's pandemic measures have more or less eased off. In fact, I've recently visited Phuket with no trouble whatsoever. When taking this into account, I think I am correct to say that perhaps there has been a fundamental shift in Thailand's desirability as a tourist destination. I can only think of one reason to explain this: Due to most people not being able to travel during the pandemic, many have not travelled for at least two years. That means that people should have "saved" two years' worth of travelling expenses. Thailand isn't exactly known to be a particularly luxurious tourist destination, and hence, trips to Thailand may have been put on the back burner in favour of more expensive locations such as Japan. If this is true, we could see tourism numbers rise to pre-pandemic highs as time passes, which may bode well for Haw Par's leisure segment. 

Recent concerning google reviews of Underwater World Pattaya that indicate that the property's conditions have deteriorated. A quick estimate for the recent google review ratings would be an average of 3 stars. Not good.

As an avid Google reviewer myself, I do consider reviews before actually heading to the place. If the property has indeed been improperly maintained, it could spell disaster for Underwater World Pattaya's reputation as a tourist destination, leading to lower revenues but the same operating costs. Although the attraction will most likely stand to benefit from the border reopening of Thailand, profit will most likely be dampened by the negative reviews should they continue. 

In terms of property, Haw Par directly owns four buildings: Haw Par Centre, Haw Par Glass Tower, Haw Par Technocenter, and Menara Haw Par (Malaysia). All of them are considered office buildings. 

Revenue decreased by approximately 5.2% YoY from 2021 to 2022, which is definitely not negligible. I am not entirely sure whether it is due to negative rental reversions or a drop in portfolio occupancy. This puzzles me since as far as I am aware, Work From Home has not especially become popular with Singapore and Malaysia employers, and even if it did, it does not explain such a high drop from 2021 to 2022, since 2022 should have more spending by companies to reintroduce employees back to the physical workplace.

Overall, my outlook on Haw Par's Leisure and Property segment is a muted one. I am skeptical that the business will improve in the foreseeable future.

Review of Haw Par's Pharmaceutical Sector:

I think Haw Par's Pharmaceutical sector is the one the company is most famous for. Who hasn't heard of the ubiquitous tiger balm? 

"We are the owner of the iconic Tiger Balm Brand. With a unique herbal formulation that has over 100 years of proven success in 100 countries, Tiger Balm’s world renowned ointment is arguably one of the world’s leading and most versatile topical analgesic brand."

According to FY2022 financial results, the Healthcare segment of Haw Par has reported improved earnings, benefitting from economics of scale due to increased sales volume, improving gross margin to a high 54.1%. With countries imposing fewer restrictions on gatherings and relaxing mask requirements such as Singapore, it is no question that a higher number of sporting events will take place. However, I do have some concerns. According to Singapore's Ministry of Health (MOH), the proportion of Singapore residents engaging in leisure-time regular exercise declined from 35.2% in 2019 to 32.5% in 2021. Could this be attributed to the COVID pandemic lockdowns destroying exercising habits? I'm not sure. Could this apply to other countries as well? Again, I'm not too sure, but it is best to take note that humans as a whole could lead increasingly sedentary lifestyles, reducing the need for products such as the Tiger Balm brand. From Tiger Balm Website's Press Room, I estimate that the average new product release is around 6 years apart. Personally, I think that the brand is not conducting enough Research & Development to increase their high margin business, which I think is a shame. Nevertheless, I like the idea of investing in the pharmaceutical segment to further diversify one's portfolio, since such products are typically needed all the time, offering stable profits.

Okay, now that Haw Par's businesses are out of the way, let's take a look at the company's management!

Currently, Mr. Wee Ee Lim is serving as the company's President and CEO. 

"He joined the Company in 1986 and was appointed to the Board in 1994 and to his current role in 2003. Mr. Wee has been closely involved in the management and growth of the Haw Par Group for more than 30 years. Mr. Wee is also a Director and Deputy Chairman of UOL Group Limited, and a Director of Singapore Land Group Limited, United Overseas Bank Limited, and Wee Foundation. He holds a Bachelor of Arts (Economics) degree from Clark University, USA."

It seems like he has a say in all the companies Haw Par has a stake in. Could this be a possible conflict of interest? I'm not sure. Additionally, the company has so far not made many significant acquisitions under his reign, which indicates that he is rather conservative and prefers saving cash for a rainy day. Although prudence is a great quality to have as a leader, one should not be overly cautious and miss out on opportunities to grow the business further. The company's recent dividend payout ratio of 44.8% further proves my point that the company prefers to hoard cash. To be very honest, I think the management's reluctance to distribute cash or acquire businesses does not reflect too well on them, since it indicates that there are no further plans to reinvest into the business while also not rewarding shareholders substantially, although I do acknowledge it is a family business. To end off, there is not really anything noteworthy regarding the management as well.

How has Haw Par Corporation historical performance been like then?

* Payout Ratio exceptionally high due to special dividend declared

It seems like the company's operations had taken a massive hit during the COVID-19 pandemic, massively decreasing revenue in the pharmaceuticals segment. The company's relationship with UOB becomes even more clear when you see how the NAV of the company fluctuates. Gross margin, as expected, benefits from economies of scale when mass production of pharmaceutical products is higher. In conclusion, we can expect massive improvements in EPS as the pharmaceutical segment of Haw Par rebounds from border re-openings and restriction lifts. 

Now, with the current macroeconomic climate of high-interest rates coupled with a possible economic recession, can we predict how Haw Par could fare?

Due to Haw Par's strong balance sheet with cash on hand greatly exceeding its current and non-current liabilities, it is safe to say that high-interest rates would not affect the company directly. However, it is important to note that UOL has $3.73 Billion in non-current bank loans, which may be affected by rising rates in the foreseeable future. It is unclear whether these loans are fixed, but given that fixed loans are typically specified in UOL's balance sheet, I think it is a safe assumption to assume that UOL will be materially impacted by rate hikes. Not to mention, should the property market continue to cool down, we could see UOL's performance drop in the near term which may lead to a sharp drop in UOL's price, affecting Haw Par's NAV and dividend income. 

As for an economic recession, I am heartened to see that Haw Par's revenue was not significantly impacted during the 2007-2008 Global Financial Crisis. Skimming through Haw Par's financial reports during those times does not yield any specific comment regarding the recession. Other than Haw Par's leisure segment, all its other segments may be relatively cycle agnostic. 

Overall, we can more or less predict that Haw Par's performance will remain relatively stable no matter the economic condition.

With all this coming to light, is Haw Par Corporation a good buy at its current price? 

From some rough calculations, the historic PE valuation of Haw Par seems to be at around x18, with the historic P/B ratio being x0.77. At the current price of exactly $10, with a PE ratio of 15.029 and a P/B ratio of 0.628, Haw Par seems to be a decent buy. Not to mention, the potential increase in EPS with border restrictions being lifted further adds to the argument for buying Haw Par. Also, notice how Haw Par's market capitalisation is 2.21 billion, which is lower than its UOB stake valuation of $2.3 billion! This means that technically, you are getting both its investments in UOL and other segments for free! However, do note that the P/B ratio could rise if book value decreases due to potential headwinds for UOB in the short term. 

My Closing Thoughts:

Haw Par Corporation seems to be a decently attractive buy at its current P/B ratio of 0.628. However, it is a boring business, with little growth prospects coupled with low dividends. It seems that the management is unwilling to distribute cash to shareholders despite possessing hefty coffers. Nevertheless, if you are willing to add one more layer of management decisions to your investment, then you will be rewarded with discounted UOB shares and other businesses. I must confess that I really do want to like Haw Par, but after reviewing its business, it seems like it is more of an investment and property business instead of a pharmaceutical one. Personally, I think Haw Par is a "mid" buy for me and will be in the middle of the pack in terms of buying priority. Dividends have been increasing which may be attractive to dividend growth investors looking for a nice blue chip company to park their funds in. 

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Disclaimer: Please take everything published within this blog with a pinch of salt. Nothing I say here should be misconstrued as any form of financial advice whatsoever. In fact, I am probably the absolute last person you should approach for any sort of advice. All self-computed figures are calculated to the best of my ability, but I cannot guarantee they are 100% accurate.

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