SINGAPORE (Nov 5): Tiger Balm, synonymous with its manufacturer of old, Haw Par Brothers, used to come in just one form — a small, hexagonal tub. Not anymore. Visit any pharmacy and you will see its back pain patch, joint rub, plaster, mosquito repellent, neck and shoulder rub, and Tiger Balm with glucosamine. Of course, the multi-purpose balm in the hexagonal tub is still available.

Just as its product range has grown, the Haw Par Corp of today is a conglomerate. Tiger Balm, now grouped under healthcare, is just one of its many parts. And, interestingly, even as the Straits Times Index has fallen 12.7% this year, Haw Par is up 13%. Why? Haw Par comprises a few unrelated businesses. It owns a profitable leisure business mainly in Thailand, and a small portfolio of properties. Eighty per cent of its assets are long-term securities holdings.

Haw Par is owned and controlled by the family of veteran, maverick banker Wee Cho Yaw, who is also its chairman. The Wee family vehicles hold around 35.97% of Haw Par. Its deputy chairman is Wee’s second son, Ee Chao, and the CEO is youngest son, Ee Lim. Haw Par also owns a 4.2% stake in United Overseas Bank (UOB), 8.56% of UOL Group and 2.86% of United Industrial Corp (UIC).

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According to company records, healthcare is its outperforming segment. Sales of the Tiger Balm brand, perhaps the most well-known analgesic household brand in this region, has been growing at 14% annually since 2010. Income for the segment has grown by 22.9% a year since 2010, faster than sales growth. This is attributed to greater economies of scale from an increasing production capacity as well as expanding product mix. The company continues to extend Tiger Balm’s product line and geographical reach.

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Last year, Bombay Stock Exchange-listed Alkem Labs entered into an alliance with Tiger Balm to exclusively market, sell and distribute Tiger Balm products. Tiger Balm is among the top 10 brands in the topical over-the-counter analgesic market in India.

Last year, Haw Par swapped its shares in UIC for shares in UOL as part of an internal restructuring. In addition to its investment in UOL, Haw Par owns three commercial buildings in Singapore, which provide rental income and are near full occupancy: Haw Par Centre and Haw Par Glass Tower in Clemenceau Avenue near Orchard road, as well as Haw Par Technocentre in Commonwealth Drive. In Malaysia, Menara Haw Par in Kuala Lumpur was only 70% tenanted in FY2017 amid a supply overhang in office space.

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Following its exit from Underwater World in Sentosa in 2016, Haw Par now owns only Underwater World Pattaya, the main contributor to the 17% increase in revenue for the company’s property and leisure segment.

Haw Par’s biggest asset is its 73 million shares, or 4.2% stake, in UOB, Singapore’s third-largest local bank by assets and market capitalisation. The value of UOB shares accounted for 62% of Haw Par’s market cap at current prices. No surprise then, that the share price of Haw Par and UOB have a strong correlation of 79% over the past five years.

UOB was the first bank to report for the third-quarter earnings season. Net earnings rose 17% y-o-y, but fell 4% q-o-q to $1.04 billion for 3QFY2018. For the nine months to Sept 30, UOB recorded net earnings of $3.09 billion, up 22% y-o-y. Deposits and loans both grew 9% y-o-y to $294 billion and $255 billion respectively, with a conservative loan-to-deposit ratio of 85.7% as at Sept 30.

Although banks are being sold down currently, UOB is seen as more conservative and more stable than market leader DBS Group Holdings. While fee income is an important driver of non-interest income for banks, DBS’s larger presence in the wealth management business introduces a bit more volatility into its earnings. Since their highs in May this year, UOB had lost 19% as at Oct 30 compared with a loss of more than 22% for DBS. More recently, UOB has been gradually expanding into the region. It opened its first full bank branch in Vietnam this year, and was the first Singapore bank to receive a foreign-owned subsidiary bank licence from the Vietnamese government. In addition, it will be rolling out an Asean digital bank in Malaysia, Thailand, Indonesia and Vietnam shortly.

UOB’s payout ratio of around 40% to 50%, coupled with its steady growth path, implies that Haw Par’s share of UOB’s dividends is likely to grow. Last year, Haw Par received $50 million in dividend income from UOB, or around 40% of Haw Par’s earnings.

For 1HFY2018, UOB increased its dividend to 50 cents a share, from 35 cents a share in 1HFY2017. The bank is likely to maintain its dividend at this level for 2HFY2018, analysts reckon. Moreover, UOB has excess capital. Its common equity tier 1 capital adequacy ratio for 1HFY2018 was the highest among the local banks — as at Sept 30, CET1 stood at 14.1%. If UOB maintains its 1HFY2018 dividend per share, Haw Par would receive $73 million in dividend income.

UOL’s earnings could be volatile as they could be impacted by the government’s property cooling measures. Dividend income from UOL has been steady at 17.5 cents a share in the past two years.

Downside of a conglomerate

The problem for Haw Par is that investors prefer pure plays rather than conglomerates. A conglomerate usually owns sizeable or controlling stakes in numerous organisations; each business is often mutually exclusive and unrelated to each other. Without a core focus, conglomerates with different managers in different units may not possess the synergy required to create value for investors.

On the other hand, a conglomerate may be more resilient as it is less susceptible to cyclicality in a single business, unless all business units are cycle dependent. Instead of building a multi-asset portfolio or investing in a multi-asset fund with high fees, a single security can offer investors diversification.

On the whole though, just as a multi-asset fund hardly ever outperforms the market, a conglomerate often trades at a discount. Haw Par, too, trades at a discount to its book value of $14.34. The group’s investment in quoted securities, cash and investment properties combined already accounted for 95% of market cap, without the inclusion of its pharmaceutical and hospitality segment.

Haw Par has a long history. It was formed 100 years ago when brothers Aw Boon Haw and Aw Boon Par inherited and refined their dad’s formula for making ointments. In 1969, Boon Par’s son took control of the company and, in an effort to expand, invited the infamous Slater Walker Securities to invest in the company in 1971. Slater Walker took control of Haw Par, and pumped, then dumped shares in the company. Eventually, Richard Tarling, the man behind Slater Walker, was imprisoned in the UK and the Singapore government stepped in to rescue Haw Par. Hong Leong Group and UOB were among the investors vying for control of the company. In 1981, the elder Wee acquired a controlling stake in Haw Par.

Haw Par derives more than 70% of income from its investments in UOB and UOL. Its value may be “trapped” as the company is in a net cash position of $446 million. It announced a dividend of 15 cents in 1HFY2018. At an annualised 30 cents for this year, the dividend yield is a mere 2.3%. The dividend payout ratio last year was 35%.

The risk for investors is UOL’s cyclicality. Despite a large investment portfolio, property development still contributed 46% to 1HFY2018 revenue. Property development is lumpy, and demand is affected by business cycles and government policy.

While Tiger Balm continues to register strong growth, the pharmaceutical product sector is very competitive. Tiger Balm’s competitors include Salonpas and Deep Freeze. Like property, pharmaceutical products are also affected by government regulation.

On the other hand, Haw Par could use its cash hoard to acquire assets or securities such as UOL should its share price drop further. At $6 a share, UOL is trading at a hefty discount to its book value of $11.14.

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Healthcare division’s earnings growth, fortress-like balance sheet to shelter Haw Par from market volatility

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