Heartland Boy had previously analyzed Haw Par but could not totally comprehend its valuation as a conglomerate. To err on the side of caution, he decided not to proceed with his investment thesis further. However, the analytics team at InvestingNote did a brilliant report on Haw Par that clearly explained its business models as well as valuation. Therefore, their analysis is reproduced with permission on this post.
This column is jointly written by @fayewang, @calvinwee, @gordon_ong and @devinnath from InvestingNote.
- Faye is both a fundamental analyst and economist by nature. She is a global thinker who’s open-minded and enjoys learning from the market.
- Calvin is a fundamental analyst at heart and an ardent disciple of value investing. He relishes the process of searching for undervalued stocks and enjoys collecting dividends from his stocks.
- Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.
- Devin is a technical analyst who balances FA and TA in his investment decisions. He believes in using news and FA to spot the right stocks and rely on TA to give him the highest risk reward ratio possible.
Haw Par Corporation Limited is engaged in manufacturing, marketing and trading healthcare products; providing leisure-related goods and services, and investing in properties and securities. The principal activities of the Company are licensing of the Tiger trademarks and owning investments for long-term holding purposes, the history of the brothers Haw and Par traced back to the 19th century. The company distributes its products in the Americas, Africa, the Middle East, Asia, Australasia, and Europe.
Haw Par operates in four segments, namely
1) Healthcare – principally manufactures and distributes topical analgesic products such as Tiger Balm and Kwan Loong.
2) Leisure – provides family and tourist oriented leisure alternatives through its owned and operated oceanarium, including Underwater World Pattaya in Thailand.
3) Property – owns and leases out various investment properties in the Asia region.
4) Investment – invests primarily in quoted and unquoted securities in Asia region.
Haw Par recorded a dip in profit from operations and investments of 2% mainly attributable to lower dividend income from investments. However, it should be noted that all operating segments generated higher profits in FY16. The healthcare business segment continued to contribute significantly to the Group’s revenue with a 16% increase in revenue from $152.6 million to $176.4 million. Correspondingly, healthcare’s profit increased 37% from $48.1 million to $66.1 million with higher sales and reduced operating expenditure. However, revenue from the leisure business segment registered a sharp drop of 34% to $8.4 million due to the closure of Underwater World Singapore (“UWS”) in June 2016. Therefore, leisure recorded profit of $0.9 million in FY16 compared to loss of $4.3 million in FY15 due to the one-off impairment charge in fixed assets of UWS in 2015.
1. Operating performance
Haw Par Corporation’s revenue has increased steadily since 2012, and this is also reflected in its profit before taxes. However, PBT decreased slightly by 1.6% yoy due to the lower dividend income received from investments. In that light, it should be noted that all of its operating segments generated higher profits yoy, however the profit contribution from Investments dropped by 31%, leading to an overall decline in PBT.
2. Financial & cash position
Haw Par’s Operation Cash flow recorded yoy increase since 2012, and FY16 was no different since it reported higher profits across all its operating segments. However, there was a sharp drop in its total cash flow by 30% yoy. This is attributed by the decrease in financing cashflows by $24.8Million. Correspondingly, it recorded a fall in the lower cash and cash equivalent in the balance sheet by 0.51% yoy.
3. Segment performance
Traditionally, Haw Par Corporation derives its revenue from the investments income segment. The overall group revenue for FY16 at $201.6 million grew 13% yoy, with Healthcare and Property recording 16% and 25% increase in revenue respectively. Operating segment profits before interest expense and tax for Healthcare and Property grew 37% and 22% respectively. However, investments income decreased 31% due to lower dividend income from investments.
4. Stock information
Haw Par Corporation has a very low D/E ratio of 2%, hence it can raise additional financing if they wish to acquire more assets in any of their business segments. On the other hand, Haw Par does not have a remarkable ROE and ROA, hovering between 4-7% from 2012-2016. This is likely because most of its business segments are in the mature stage and have limited growth potential. However, it should be once again noted that it derives most of its revenue/profits from its interest in UOB, UIC and UOL group, hence its overall profits is highly dependent on the performance of these 3 companies. Haw Par has a dividend yield 1.9% for FY16. We were unable to find a comparable company for Haw Par Corporation in the SGX stock universe, hence, we decided to skip the peer analysis for Haw Par Corporation.
- Renown of brand. Brand of Haw Par retains a history over 100 years that can be traced back to 1920s. With famous Tiger Balm as its representative product, Haw Par held competitive advantages of competition in the healthcare industry considering exceptional brand awareness. Despite the long history, Tiger Balm became iconic for the sake of its incorporation in Singapore traditional culture. Brand loyalty is another benefit from well brand management. It is brand loyalty that become a significant obstacle for new entrants, as they may fail in the competition due to strong brand loyalty of customers to existing players.
- Uniqueness of products. Haw par differentiates its Tiger Balm from other healthcare products with secret herbal formulation. Therefore, the effect of substitution seems limited to Tiger Balm. For sure there are other pharmaceutical manufacturers who provide analgesic products, for instance, liniments or oils made by using Chinese medicine. Nevertheless, they can merely bring competition but cannot replace Tiger Balm. In Singapore market, the uniqueness of Haw par is more apparent, it is difficult to find a listed company that operate similar business as Haw par does.
- Organic Growth of Core Business. Though Haw par is involved in various industry such as property, leisure, and investment, its core competency is derived from healthcare segment. Growing proportion of profit from investment segment has been observed in recent years, which makes Haw par looks like an investment holding firm. However, it is worth noting that revenue generated from its healthcare products enjoy continuous growth with an average rate of 40% over 5 years.
- Haw Par’s leisure segment. Main business of Haw par’s leisure segment is its Underwater World Pattaya (UWP) in Thailand and Underwater World Singapore (UWS) in Singapore. Profit contributed from Leisure segment has experienced continuous decline since 2012. The segment suffered from loss in financial year of 2015, which is related to the terrorist attack at Bangkok in August 2015 and flash flood in Pattaya. Leisure’s profit swung to black in 2016, while Haw par decided to close UWS afterwards. The close was claimed due to the expiry of lease contract on Sentosa island, albeit more likely to be for profit improvement purpose.
- Investment portfolio. In Haw par’s balance sheet, financial assets occupied 81.9% of its total net assets. In other words, majority of its net assets is made of securities of UOB, UOL, and UIC, which worth $2 billion in 2016. Therefore, Haw par’s profitability is closely tied to the performance of UOB, UOL and UIC. The investment portfolio cannot be considered as absolute ‘weakness ‘of Haw Par, but it exposes Haw par with greater volatility to the performance.
- Further expansion. To fully utilize the renown of Haw par’s brand, Haw par can make more efforts to expand their business for greater presence in the global market. At the current stage, income generated from local market merely occupies 18.6% of the total number, meanwhile 35% of the revenue contributed by other Asian countries outside the ASEAN area. Based on the data, we can conclude that Haw par has exploited and penetrated the Asia market, but seems has not started its exploration in other potential countries. With sufficient cash in hand and light debt burden, Haw par is at an appropriate position for global expansion. The expanding strategy can be introducing new products in various markets through franchise.
- Segment restructuring. Haw par has closed the Underwater World Singapore (UWS) in Sentosa island, thus the segment of leisure greatly shrunk in 2016. As mentioned in the weakness part, the leisure segment suffered from plummeted revenue and the loss even eroded profit from other business. It might be wiser if Haw par gradually shift their investing emphasis to healthcare and investment business only.
- Long-term flourish healthcare industry. The growing number of aging population and better awareness of healthcare jointly lead to stronger demand for healthcare services in the future. Advanced technology allows Haw par to extend its products line and seek for more opportunities in this resilient industry.
1. Increasing competitors. Rapid growth in healthcare industry has attracted more companies to enter and share the market pie. Increasing number of competitors is the biggest threat Haw Par is facing now. Products such as Yunnan Baiyao from China and Mopidick’s from Japan have brought intense competition to Tiger Balm.
Key Drivers & Limitations
Expanding to new markets and modernizing the Tiger Balm brand
Haw Par’s strategy of widening Tiger Balm’s product offerings to include Medicated Plasters, Mosquito Repellents, Cooling Patches and Lotions, as well as modernising the packaging and marketing strategies, seems to have revitalised its attractiveness to consumers. Haw Par has also successfully capitalised on the recent ASEAN mosquito virus outbreaks to increase sales. With such outbreaks being frequent within the region, Haw Par has a consistent sales driver.
Haw Par has also capitalised on Tiger Balm’s brand strength to attract distributors and remain asset-light – recently, it has partnered with Alkem to expand its distribution network in India. Haw Par’s distribution network remains formidable throughout the world. Such a business model means that Haw Par can sustain its high margins in the foreseeable future.
Acquisition for growth in Healthcare/Leisure segments
Haw Par is currently seeking acquisition targets to utilise its net cash position. It has stated that it may do horizontal integration of other healthcare products to add to its Tiger Balm brand. Such an acquisition will support the overall business-level strategy of dominating the topical analgesic market through consolidation under a single brand. Haw Par also seeks to acquire leisure destinations to utilise its decades-old expertise of running tourist attractions. Depending on the acquisition target, this will most likely increase Haw Par’s low ROE and unlock shareholder value. Haw Par seeks to maintain its low profit margins; hence it will most likely acquire products rather than expand overseas using physical stores.
Exposure to Banking and Real Estate Sectors
Haw Par not only has equity investments within banking and real estate, but also has its own property division. Hence, its asset value and investment income stream are exposed to the high earnings expectations on SG banks, as well as occupancy rates/rental yields from its SG and MY properties.
Key takeaways by @calvinwee
Haw Par is a household brand synonymous with its flagship product: Tiger Balm. However, with deeper analysis, one will realize that over the years, Haw Par Corporation has diversified into different business segments such as leisure and property. Also, management has shown great prudence in maintaining a strong balance sheet and free cash flows. Most importantly, it derives a substantial portion of its profits from UOB, a big 3 bank in Singapore. I am of the view that its healthcare segment has the potential to grow, albeit at a slower rate, with its expansion into European and US markets. Barring no major changes in the 3 companies that it is vested in, Haw Par Corporation is a safe haven amidst the volatility in the market.
Comments below is written by @Gordon_ong:
Haw Par is a Portfolio of UOB, UOL and UIC at deeply discounted values
To find out what is Haw Par’s current equity stake in UOB, UOL and UIC, we first assume that there are no changes in shareholdings since FY16 annual report. To test this assumption, we will see what is the fair value change on these financial assets (FVOCI) for 1Q. If there are no changes in shareholdings since the last annual report, the fair value change should be 182m.
The actual fair value change as stated in 1Q report is 189m, almost the same as assumed. Hence, we can conclude that there are no significant changes in Haw Par’s investment holdings.
Hence, based on the share price of $10.43 and market cap of $2.290B, the Total Enterprise Value is $2.015B. This TEV includes a liquid portfolio of 3 shares with combined market value of $2.2B, Investment Properties of $200M valuation, and a business worth about $1B. Based on a sum-of-parts valuation, TEV should equal to $3.4B and market price should be ≈$15. It can be argued that the market has grossly undervalued the price of Haw Par. In fact, purchasing Haw Par shares means acquiring an investment portfolio for cheap, as well as a stake in the investment properties and the underlying Haw Par business for free.
Usually, stocks that trade at a discount to NAV have negative operating profits. However, in Haw Par’s case, not only is the Tiger Balm healthcare business still profitable and growing, the net assets are not hard-to-dispose-of fixed assets, but equity stakes in other businesses.
One consideration is whether Haw Par is a “value trap”, a.k.a Haw Par will hoard the dividends paid by its investments within its business without distributing to its shareholders. Even in this worst-case scenario, as Haw Par’s main businesses are profitable, defensive and secured by a deep economic moat (brand strength), Haw Par’s cash position and equity stakes will just grow indefinitely until a catalyst unlocks value for shareholders e.g. continued growth of healthcare product segment or some form of M&A. To test whether Haw Par hoards cash, we simply measure the investment income received vs. dividends paid out.
While Haw Par does retain a portion of its investment income, its other business segments contribute such that the total dividends paid is higher than an equivalent weighted portfolio consisting of UOB, UOL and UIC. Notably, healthcare segment’s growth in new markets support Haw Par’s ability to pay out higher dividends recently.
The Dividend Payout Ratio and Historical Dividend Yield also show that dividends from Haw Par is near equivalent to investing in a weighted portfolio of the 3 stocks. Even though the dividend yield of Haw Par is slightly lower, the excess cash is going into Haw Par’s cash reserves. Hence, the 48 b.p. is not lost, but merely locked up within Haw Par’s cash reserves, which shareholders still own a stake of.
Overall, Haw Par does indeed distribute its investment income from its equity portfolio to its shareholders. A shareholder of Haw Par will gain more dividend benefits compared to directly holding an equivalent portfolio of the three shares. As the risk of Haw Par suddenly hoarding investment income is negligible given its track record, there should not exist such a discount on valuation for Haw Par’s equity portfolio
Unless you believe that UOB, UOL and UIC are grossly overvalued by the market, as long as Haw Par’s TEV remains lower than the market value of its equity portfolio, it makes complete sense to buy more of Haw Par. While acknowledging that Haw Par has been consistently undervalued for the past 10 years vis-à-vis its equity holdings, the gap between Haw Par’s value and its equity holdings has narrowed, signaling that the market has taken notice
Investors should view Haw Par primarily as an Investment Holding company at discount prices, with its success as a healthcare product company as a pure bonus.
For investors interested in $UOB(U11), can consider purchasing shares through $Haw Par(H02) for greater value. A portfolio of banks, real estate and healthcare seem to fair well against interest rate risk. A point to note is that Gordon is vested in Haw Par; DYODD.
Downsides: During expansion, management may decide to modify Haw Par’s healthcare segment from an asset-light distribution model to an asset-heavy model, requiring cash. However, unlikely based on conservative management’s previous reinvestment rate. Also, SG Banking and Real Estate sectors may weaken affecting value of equity holdings – yet holding an isolated UOB/UOL/UIC stock will be even worse in that scenario.
Technical Analysis Segment
From TA (Technical Analysis) perspective, followings are the analysis of Haw Par as of 23rd May 2017
This part is written by @devinnath
- Taking highest high and lowest low from 12 month time frame (July 2016), it appears that Haw Par stock price has been testing the resistance line at $10.500 since the beginning of May 2017.
- Channel width is considerably wide, contributed by the bullish steam at the start of 2017 (Jan-Feb). Although an untested weak support range is formed between $9.745 and $9.837, strong support remains low at $9.360
- Stochastic Oscillator (14,3,3) and MACD (12,26,close,9) both agree that there is no apparent highlight of trend being formed in the past month, although both indicators signalling a slight uptrend (MACD : 0.1117) and minimal buying pressure in the market (slow %K = %D : 65).
- Parabolic SAR on the other hand acknowledges the position of the price on upper boundary of Bollinger Band (20,2) by showing a possible price stop and reversal, hence the stock price might be taking a bearish stance in the near future.
I believe that it is rather reasonable for investors to expect a significant attempt to break the strong resistance line at 10.500. This attempt will be indicated by a sharp hike in price above $10.500, which the result will determine the future trend direction of Haw Par stock.
Best case scenario: If price manages to break the resistance line and stays there for at least 2 days, then high chance it will continue to take its bullish stance. Once its position is reinforced, it will be the perfect time to enter the trade.
Worst case scenario: If price fails to stay above the resistance for 2 days, similar event with 12th May might reoccur, e.g. price broke through the resistance but failed to maintain its stance as bearish engulfing pattern appears the following day. It will form a double top pattern which might impose a very strong selling pressure. This might be followed by breaking the weak support towards the strong support line.
Conclusion: In order to mitigate risk, It will be in our best interest to wait and see how the market behaves around the resistance and let time reveals itself.
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