Haw Par Corporation: Crouching Tiger

For this writeup we return to the place where I’ve had so much success over the past year; Singapore. I was surprised I hadn’t come across this company before, however it is a little bit larger than the companies I usually look at. Regardless, it demonstrates that there’s attractive value to be found at all sizes in the Singapore market. For those who haven’t heard of it, I’d love to introduce you to Haw Par Corporation ($H02.si), a fascinating company at an extremely compelling valuation with some decent short term catalysts that I could see potentially unlocking value. Additionally, I see it as a great candidate to potentially benefit from the reform that is currently occurring across the Singaporean stock market.

The Singapore Thesis

Before getting into specifics about the company I want to give a bit of backstory on Singapore markets, which are going through a very interesting transition. For the last decade, the Singapore Stock Exchange has been plagued by a combination of illiquidity, cheap valuations and unimpressive economic growth. However, the Singaporean government has recently implemented a variety of initiatives that I believe will continue to serve as tailwinds across the whole market. Firstly, to counter slow growth in the years following Covid the government has enacted a variety of stimulus targeted at both corporations and individuals such as broad based infrastructure investment, Corporate tax rebates and Community Development Vouchers handed out to individuals. With inflation dropping quickly the Singaporean government has been able to invest aggressively, and they seem to be back on a path of strong economic growth after seeing GDP rise 4.4% last year. With good growth, a stable currency and strong rule of law I believe that Singapore is an attractive market to be investing in currently.

More interestingly, the Singapore Government has made improving the state of the SGX a top priority. The most notable policy is the ‘Equity Market Development Program’ (EMDP), which will see $5b allocated to asset managers with the explicit purpose of investing in Singaporean stocks to improve liquidity and valuations. Other policy changes include tax breaks for new IPOs, expanding the ‘Grant for Equity Market Singapore’ to expand research coverage for small and mid caps, and streamlining the listing process to make it simpler, faster and easier for new companies to list on the exchange. While these changes may seem minor, I think that coupled with the improving economic growth of Singapore (which is seeing many of its market constituents growing with it) I believe that there is a clear path to improved valuations and liquidity. The important thing to note is that while $5b may be small relative to some of the largest companies on the market, the EMDP will allocate investment towards small and mid cap companies, where even getting a small slice of the pie will hopefully improve liquidity.

The Company

While you may not have heard of Haw Par Corp, there’s a decent chance that you’ve seen their products. Haw Par’s staple product “Tiger Balm” is a muscular pain relief cream that traces its origins all the way back to the 1870’s. They have an iconic, well renowned brand that holds shelf space all over the world. I don’t really have any insightful qualitative analysis to add here. The reviews for Tiger balm are very good, the longevity and brand strength speaks for itself. I think that there is a very clear brand moat here with a very good product underlying it. I don’t expect explosive growth from Tiger Balm, but having grown from $25m operating profit in 2000 to $70m of run rate profit this year it’s reasonable to expect low to mid single digit growth to continue.

Interestingly, the majority of the value in Haw Par stock doesn’t come from Tiger Balm, but instead their $2.7b holding in United Overseas Bank ($U11.si) stemming from a complicated history involving the Wee family corporate empire. While this isn’t going to be a writeup of UOB, the thesis for Haw Par is clearly tied to its stock performance. UOB is one of the largest banks in the world, with a focus on Asian countries like Malaysia, Thailand, Vietnam and Indonesia. Long term returns are reasonable, with a 9% total return CAGR from 2000 and 12% over the past decade. The company has low double digit ROE (12%) at a PE ratio of 10 and a dividend yield of 5%. I see UOB as a large, safe bank at a fair valuation, I don’t see a huge amount of downside outside of a large macro event, but I also don’t see a lot of excess upside. I would guess that UOB will likely deliver high single digit, possible low double digit returns going forward over the long term. Through Haw Par, we are essentially getting to own a safe stable asset in UOB at a significant discount.

Haw Par has an eclectic collection of other assets such as shares in UOL, investment properties (which are low quality) and bizarrely an aquarium called Underwater World Pattaya. However, these are not a significant part of the company’s underlying value so I’m not going to be going into them in too much detail. Instead I want to look at the overall valuation. At a $3.4b market cap the company holds $3.2b in shares and $750m in cash and equivalents. Additionally, I will value the aquarium and property at 5x pre-tax earnings for a conservative $50m. Finally, I believe that Tiger Balm deserves a reasonable valuation for what is a steadily growing consumer staple. After doing $35m pre-tax earnings over the last 6 months ($70m annualised) I believe a 15x multiple is reasonable for a $1b valuation. Altogether, that puts my estimate of intrinsic value at $5b. While there are a lot of potential issues here that I am about to discuss, on face value that is a hefty 35% discount for what is a stable and transparent collection of assets.

Risks and Catalysts

On paper this looks like a fantastic, low risk opportunity, however there are a few risks to point out. The Wee family corporate empire is large and complex. With a web of complicated cross shareholdings intended to maintain control there is no clear path to minority shareholders realising value. Many sum-of-the-parts theses such as this tout a significant discount to assets, yet never see that discount close,disappointing expectations. This is especially a concern with a company such as this which has a history of holding excess, unproductive cash, with cash and treasury bills making up 15% of my intrinsic value estimate. Additionally, the large holding in UOB is unlikely to be liquidated anytime soon, so how do we realise value here? I believe there are a few things working in shareholder’s favour here. Firstly, without any specific changes I would be comfortable holding the shares with a long time horizon. The company pays a small 2.5% annual dividend, but has consistently grown it over time, while also opportunistically paying out special dividends when in comfortable cash positions. While I don’t expect the company to be run for aggressive shareholder value creation, it’s hard to see it significantly underperforming over the long term at the current valuation.

Additionally, last year saw the passing of the company’s long term Chairman Wee Cho Yaw at 95, the man who built the empire. With his companies now passing on to his 5 children it wouldn’t surprise me if they looked to begin simplifying the network of cross shareholdings, or even just running the companies a bit more efficiently. Management has also stated that they have specific plans to utilise the cash on acquisitions. While obviously this presents a risk in itself, that is better than letting it build up for too long on the balance sheet. While management has been stating this for a few years now with no moves, I am willing to give them a bit of breathing room due to first Covid (which significantly impacted sales) and then the death of the Chairman.

Finally, I see Haw Par as a clear potential beneficiary of the earlier discussed developments in Singapore. With 44% of the float free at a $3b market cap the company is at a perfect size for managers looking to deploy the EMDP funds. Large enough to have ample liquidity to build out positions, while not being too large. Additionally, the company is clearly much safer and higher quality than those at a similar size, with Singaporean mid caps being full on construction, property management and retailers. And even if the company doesn’t receive direct investment from the program, the general boost in liquidity that the Singaporean market is currently seeing will likely lift all boats with it. Momentum tends to work very well in undercovered markets like Singapore, as price increases breed liquidity and attention, which attracts more eyes.

Altogether, the main thing that I really like here is the margin of safety. With high quality assets making up the company, I’m not too worried about significant impairments. At the current valuation we don’t need a lot to go right to make a good return. In a world where the valuation gap doesn’t close, I would be totally comfortable holding the company over the long term collecting a steadily growing dividend along with the occasional special dividend. This is one of those lovely situations where Haw Par combines strong fundamentals with a fantastic technical setup, along with some clear short term catalysts. At the time of writing I have made it a modest 5% position, but I might look at increasing that if new developments emerge.