Updated: Feb 24
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Haw Par Corporation owns the Tiger Balm and Kwan Loong brands
Healthcare revenue grew at a CAGR of 10.0% from 2016 to 2019
Fair Value of its key investments in UOB and UOL make up 88.1% of Haw Par's market cap
UOB is poised to ride the uptrend of the Southeast Asia banking industry
UOL's commercial properties' committed occupancy rates have remained resilient
Led by a strong management team with Dr. Wee Cho Yaw as Chairman
Wee Family paid S$21,061,756.45 to buy back 2,000,000 shares at an average price of S$10.53
Strong net cash position of S$580,096,000
SOTP fair value estimate of S$12.82, representing a possible upside of 8.92%.
Haw Par Corporation Ltd, best known for its line of Tiger Balm products, was incorporated in 1932 and took over in 1981 by Dr. Wee Cho Yaw, Chairman of UOB from 1974 to 2007, who grew the company through organic growth of its core healthcare operations and selected acquisitions.
However, many might not know that the bulk of its value lies in its equity stake in UOB and UOL.
In this primer, I will break down its different business segments and analyze if there remains upside to this stock.
In 2019, Haw Par Corporation derived 38.3% of its pre-tax operating profit from its core healthcare business - Tiger Balm and Kwan Loong products, 58.5% from its investments - mainly dividend income, 5.5% from others (including property and leisure), and 2.3% of unallocated expenses.
Its healthcare business comprises 2 brands – Tiger Balm and Kwan Loong and focuses mainly on the pain relief segment.
Geographic Revenue Breakdown
In 2019, the ASEAN region was its largest healthcare revenue generator at 45.2% but is a mature market with little growth. The business instead seeks growth outside of ASEAN where its penetration rates are lower. Its FY2019 sales to other Asian countries increased 5% to S$76.9 million, and sales to other countries grew 6% to S$45.8 million. (pg33, AR2019)
Pre-Pandemic Financial Results
From 2015 to 2019, revenue grew at a healthy CAGR of 10.00%. This was supported by the introduction of new products into different geographic markets (such as Tiger Balm ACTIVE in Malaysia in 2017), strong outperformance of product range relative to competitors, and the expanding tourist market from which its products benefits from.
However, revenue growth slowed in 2018 and 2019 which management attributed to the US-China trade tensions dampening consumer sentiment, geopolitical tensions in one of its key markets, the Middle East, and the weak tourism business from which it benefits from. (pg18,AR2019).
Pre-tax operating profit grew at a CAGR of 11.65% as gross margin improved in tandem with top-line expansion. However, it decreased 3.3% from 2018 to 2019, as a rise in raw material prices compressed its gross profit margin and outweighed the modest YoY sales growth.
1H20 total group revenue declined 43.6% YoY, mainly affected by lower Healthcare sales.
Given that many ASEAN countries implemented lockdowns in 1H20 - Malaysia's MCO started in Mar and Singapore's Circuit Breaker in Apr, and countries like Indonesia had a high number of cases, it is not surprising to see a significant drop in revenue.
This was further compounded by the reduction in gross margin from 58.9% to 53.9% driven by lower utilization of production capacity from the decrease in demand. (1H2020 Earnings Release)
1. Rebound in Consumer Sentiment from Increasing Inoculation Rates
In UOB's Consumer Sentiment Study, all 5 ASEAN countries fared poorly, with Vietnam topping at only 62.4 out of 100 points. A key indication of the pessimism is that only 47% and 41% of those interviewed from Indonesia and Singapore respectively said they will be financially better off a year from now.
This shows that ASEAN, Tiger Balm's key market, is still wary of future economic conditions and may delay or cut back on spending until a clearer path to market recovery like herd immunity is achieved.
ASEAN will be kicking off their inoculation in 2021 and Singapore is expected to achieve herd immunity in 3Q2021. This should lift consumer sentiment and boost sales of Haw Par's healthcare products in 2021 and 2022 which will be discussed in more detail below.
2. Increase in distribution channels and products
Furthermore, it is tapping on the wave of e-commerce to reach a wider audience and seek growth. It started listing Tiger Balm products on JD.Com, China's largest online retailer, to counter the decline in product sales to tourists and sell directly to consumers.
1. Slower than expected inoculation rates
Slow vaccine rollouts due to shipment delays, lack of access, or low take-up rates could cause a weak GDP and tourism market recovery which closely affects Haw Par's healthcare sales.
Also, slow inoculation rates could cause lengthened social distancing measures reducing access to brick-and-mortar shops that sell Haw Par's healthcare products.
Amongst its listed topical pain relief peers, Hisamitsu which produces Salonpas products is its closest competitor. Hitsamitsu outperformed Haw Par in its gross margin and had more resilient revenue in 2020.
Based on the 1H20 earnings release, I have projected a 45.0% decline in FY20E revenue which implies no HoH rebound for 2H20. I also reduced the PBT margin by 6.4% pts to account for the lower utilization rate of production capacity.
Given the timeline of developing herd immunity in ASEAN and other countries is projected to be between the end of 2021 - 2023, I expect the broad-based economic recovery to remain slow and the tourism market from which Tiger Balm benefits to be non-existent until 2022.
Thus, I have projected a 15.0% and 20.0% increase in revenue for FY21 and FY22 respectively as well as an increase in PBT margin as utilization rates increases.
Applying a tax rate of 17%, 2022E NPAT is S$43,041,680.
Given that Healthcare stocks on SGX trade between a wide range of multiples, I prefer to assign a more conservative P/E multiple of 9x, below the Singapore FTSE All-Share P/E of 14.985 in Jan 2021, which implies that the value of its healthcare business is S$387,375,120. This is a conservative multiple with potential upside revision given the continued YoY revenue growth and Tiger Balm's high brand loyalty and leadership position.
Haw Par is a substantial shareholder in UOB (1.37% stake) and added to its interest in UOL through a share-swap deal in 2017 with UOL.
Given that the fair value of its key investments makes up a significant proportion of its valuation, Haw Par’s stock price is closely tied to that of UOB and UOL.
From 2016 to 2019, dividend income increased by 82.0%. This was driven by the increase in UOB's NPAT and payout ratio in 2017 which triggered the 63.6% spike in 2018. In addition, UOL increased its dividend from S$0.15 to S$0.175 in 2017.
Its UOB stake contributed to 88.0% of its 2019 dividend income while its UOL contributed 11.9%. Thus, any change in UOB's dividend policy will have a significant impact on the total dividend income which will be elaborated in more detail below.
UOB has 3 main income streams - Net interest income, net fee and commission income, and other non-interest income, with net interest income generating the largest profit.
By Geographic Region
The importance of UOB's healthy geographic mix of operations showed its importance in 2020 when the pandemic caused Singapore's 9M20 operating profit, which accounts for more than half of total operating profit, to decline 23% YoY. But this was mitigated by the Rest of Southeast Asia's 9M20 operating profit increasing 10.2% YoY.
1. Trend of NPAT and ROE
From 2016 to 2019, NPAT grew YoY as net interest income, its main profit driver, improved as net customer loans increased. (AR19, pg26)
The pandemic caused central banks to cut interest rates which caused the compression of net interest margin on loans. This was the main reason for the 33% decline in 9M20 NPAT as net interest income fell.
This was slightly mitigated by a QoQ rebound in 3Q20 net fee and commission income led by wealth management and credit card fees as business activities across the region recover.
Its trading and investment income remained sluggish in 3Q20 which management attributed to the volatility of the markets.
2. Dividend Per Share (DPS)
From 2016 to 2019, DPS increased YoY as NPAT continued to grow. The payout ratio was increased to 49% in 2017 and had hovered at 50% until 2019.
In 2020, MAS imposed a dividend cap on local banks capping their FY2020 DPS at 60% of FY2019’s DPS. In line with the cap and lower 1H20 earnings, UOB paid out a lower interim dividend for FY2020 of S$0.39.
I believe that the payout ratio will return to 50% once the cap is lifted as UOB chairman Wong Kan Seng stated in the 2020 virtual AGM that UOB intends to maintain its payout ratio subject to the CET1 CAR remaining above 13.5%. As of 3Q20, the CET1 is at 14.0%.
3. Financial health
As loan moratoriums and reliefs phase-out through the end of 2020-2021, asset quality is expected to worsen. In preparation for this, UOB has been pre-emptively increasing loan provisions and currently remains in a healthy financial state.
Its leverage ratio of 7.4%, above the minimum 3.0% set by the Basel lll framework, is comparable with its local peers and its CET1 Capital Adequacy Ratio is also in line with the local banks.
As of 5 Nov 2020, Moody's has assigned UOB the best baseline credit assessment of Aa1.
1. Expecting a GDP recovery in 2021
Governments have been pro-active in employing expansionary fiscal and monetary policies in a bid to soften the downturn and ensure a quicker GDP rebound in 2021. Packages such as wage subsidies and cash reliefs should provide short-term support for the economy.
As inoculation across ASEAN starts in 2021 and herd immunity could be developed by 3Q2021 in Singapore, I am optimistic that regional business activities will recover and boost the need for banking services such as loans.
OCBC's 2021 Outlook outlines YoY GDP growth for ASEAN with Singapore expected to grow 5%, further strengthening the case for a recovery in UOB's revenue.
2. Strong growth in wealth management fee income
From 2016 to 2019, its wealth management fee income grew at a high CAGR of 16.73%.
It continues to remain resilient as seen from the 2.7% YoY increase for 3Q20.
Southeast Asia's asset management industry is expected to grow to USD 3.5 to 4 trillion in assets under management (AUM) by 2025 representing a high ceiling for continued growth.
UOB's strong regional interconnectivity with 500 offices in 9 countries gives it a competitive advantage against other wealth management firms.
3. Well-positioned to ride the uptrend of Southeast Asia
Southeast Asia boasts the 3rd largest population globally and has a "young demographic, with 384 million below age 35". Its GDP is expected to more than double from US$3.2 trillion in 2019 to US$6.6 trillion in 2030.
UOB has both a physical and digital presence in high potential markets like Indonesia and Thailand through its regional offices and its TMRW mobile-bank application which has gained industry-leading net promoter scores.
TMRW - ASEAN’s first mobile-only digital bank, gives UOB the first-mover advantage and hopefully the ability to integrate more users into its ecosystem.
1. Interest rate environment is expected to remain weak
In Mar 2020, the Fed cut the benchmark borrowing rate to 0-0.25% and Fed Chairman Powell has stated his intent to keep the rates low for the foreseeable future.
The prolonged low-interest rate environment will continue to have a significant impact on UOB's net interest income. Even with the cut in bank deposit rates, UOB's 3Q20 NIM remains compressed at 1.53%, down 0.24% pt YoY.
A positive sign is that NIM has possibly bottomed out in 2Q20 with NIM improving QoQ by 0.05% pt in 3Q20. In addition, management is focused on keeping costs low as seen from a competitive 44.6% cost-income ratio.
However, without a rise in interest rates, it can be expected that UOB's NPAT will continue to remain low.
2. Digital-Only Banks disrupting the sector
With the issuing of digital banking licenses in Singapore, will the traditional banking sector be disrupted?
Digital banks such as Kakaobank, a mobile-only bank launched in Korea in July 2017 acquired 300,000 customers on its first day and is "now on its way to 10 million customers, that in a country of just over 50 million people (economically active population is 25 million)".
Despite the rise of Kakaobank, the 3 largest listed South Korean banks' net income continued to increase from FY16 to FY19, showing that digital banks will not completely disrupt the entire sector yet as traditional banks still attract more institutional funds and have been investing in digitalization.
UOB has introduced 2 key digital products - UOB Mighty and TMRW. In 2015, it launched UOB Mighty – an all-in-one mobile banking app available in Malaysia, Singapore, Thailand, and Vietnam and in 2019, launched TMRW.
Its banking technology continues to gain traction with UOB Mighty App and PayNow transactions increasing 14% and 2.4x YoY respectively for 1H20. Thus, I do not see the 3 local banks being completely disrupted.
UOB trades in line with the Singapore average P/B and P/E and has a competitive cost/income ratio.
According to DBS Research, UOB is currently trading above its 5-year historical forward P/E of 11.2x but I believe it is justified by the expected earnings uplift once interest rates and regional business activities recover as well as the dominant industry position UOB holds in ASEAN.
However, there is still an overhang on the stock price as seen from it trading at -1 S.D. of its historical P/B which I believe is from the uncertainty over the length of low-interest rates and the lower dividend yield as a result of the dividend cap.
I expect further upside once the dividend cap is possibly lifted in 2H2021 as the Singapore economy would be more stabilised due to higher inoculation rates and more clarity on the asset quality deterioriation of local banks would be provided.
In 2019, hotel operations generated the largest pre-tax income at 58.1%, followed by property development at 19.9% and property investments, investments, and management services and technology.
UOL has been diversifying its income streams to include more recurring income such as through hotel operations to ensure less chunky revenue due to one-off gains caused by property development.
The pandemic caused 1H20 revenue to decline by 27.5% YoY led by property investments which declined 56.51% YoY.
Overall, from 2016 to 2019, pre-tax income from property development spiked by 152.8%. This large increase was from a low base in 2016 where the group recorded poor property sales which had declined by approximately half from the year before.
However, it decreased 15.5% from 2018 to 2019 due to property cooling measures imposed in July 2018. Significant changes were imposed such as the increase in ABSD from 7 to 12% for Singapore citizens buying a 2nd property and ABSD for foreigners increasing from 15 to 20%.
1H20 property development revenue decreased 29.2% as the pandemic affected buyer sentiment and national lockdowns affected physical viewings. In addition, construction timelines were delayed which will affect the progressive revenue recognition model it adopts.
Analyzing its launches as of 3Q20, both The Tre Ver and Amber 45 have sold well since their launch in 2018. MEYER HOUSE is struggling to sell as a result of its high price quantum as it has a large starting unit size of 1,862 sqft and a high psf of above S$2,000. UOL is releasing units in Avenue South Residence in phases which started in Sep 2019 and has received a strong response with 26% of the development sold on launch day.
Overall, its launches as of 3Q20 have done decent with the majority being priced attractively and in good locations.
Tapping onto the recent fever of new launches, UOL sold more than 70% of its Clavon development on the first day of launch in Dec 2020 with its competitive pricing and quality of the project. The average psf of units sold was S$1640 and it bought the plot for $788 psf ppr.
In its pipeline is a Canberra Drive site set to launch in 1H2021 which it bought for S$650psf ppr. It has a good location near Canberra MRT station and is estimated to yield 448 residential units.
Its property investments comprise commercial properties and serviced suites which are mainly situated in Singapore.
Pre-tax income increased 45.1% from 2016 to 2019 as UOL increased its portfolio through acquisitions and continued to maintain high occupancy rates.
1H20 revenue declined 13.8% YoY due to rental rebates of S$26.3 million extended to tenants affected by COVID-19 social distancing and other restrictive measures.
Despite the pandemic, its retail committed occupancy rate continues to remain high at 93.5% supported by strong performance from key malls such as United Square and West Mall.
However, shopper footfall has only recovered to 56.9% of 9M19 figures but I expect it to improve as inoculation rates increase and the public becomes more comfortable with gathering in groups again. Return of shopper traffic should improve rental reversion rates and the expiry of rental rebates should be a revenue boost.
Its office portfolio has remained resilient with a 0.4% pt QoQ increase for its Singapore office committed occupancy rate.
However, 12 of its 14 offices in Singapore are located in city/city-fringe locations which are amongst the hardest-hit locations as seen from the 10.2% rental contraction in 2020 for Prime Grade office rents in the Raffles Place / Marina Bay precinct. In addition, its Singapore Land Tower property suffered in Q4 2020 as Sompo Insurance trimmed 40% of its 26,000 sqft office space as staff transitioned to a hybrid work model.
I expect rental and occupancy rates to remain under stress for a prolonged period due to the work from home trend and the inability of tenants in Singapore to absorb the increase in new supply of offices as seen from the Capitaspring development.
UOL owns and/or manages over 30 hotels in Asia, Oceania and, North America. Through subsidiary PPHG, it owns Pan Pacific, PARKROYAL COLLECTION and PARKROYAL. It has also interests in 4 other hotels.
Pre-tax income from Hotel Operations increased 155% from 2016 to 2019 through the increase in management contracts and opening of owned properties.
1H20 revenue declined 56.5% YoY as the pandemic halted travel. In addition, "closure of PARKROYAL COLLECTION Marina Bay and PARKROYAL Kuala Lumpur for major refurbishments, and the absence of revenue from Pan Pacific Suzhou, which was sold in December 2019, also affected hotel revenue." (1H20 Media Release)
Occupancy rates have dropped significantly across all regions as business and leisure travel halted. Correspondingly, RevPar has declined which is compounded by the lower fees charged for travelers under quarantine and discounted rates are offered to entice staycations.
With inoculation rates spread out amongst different countries - the USA is predicted to achieve herd immunity by 2022 New Year while the Philippines is only expected to achieve it in 2023, it is unclear when travel will completely recover but STB Chief Keith Tan has stated that it could take 3-5 years.
This long recovery period will have a strong impact on the group's financial position but management is taking advantage of this time to re-brand through initiatives like its PARKROYAL COLLECTION.
1. Total Revenue
From 2016 to 2018, total revenue registered healthy YoY growth led by strong improvements in property investments, property development, and hotel operations revenue.
2019 saw a YoY decline mainly driven by property development which suffered from cooling measures imposed in July 2018.
The pandemic negatively affected all revenue streams except management services and technologies. The most severe of which was hotel operations which registered a 56.5% YoY decline in 1H20 revenue.
2. Tangible Book Value per share
From 2016 to 2019, the tangible book value per share increased due to factors including gain on valuation of investment properties, acquisition of new properties, and fair value gain on investment securities.
It declined by 4.8% from 4Q19 to 1H20 as the independent valuation of its investment properties at the end of June 2020 saw a decrease for all commercial properties and serviced suites which have been hard-hit by the pandemic.
UOL continues to maintain a healthy financial position with gearing slightly increasing in 2020 to 0.32 to "fund the acquisition of the residential site at Canberra Drive and the development of Clavon." (1H20 Media Release)
Its average debt maturity as of 3Q20 is 1.7 years and it still has S$2.8 billion in unutilized credit facilities which could be tapped to replenish its landbank.
4. Dividend Per Share (DPS)
The DPS increased in 2017 to S$0.175 on improved Profit (before fair value gains/losses) driven by increased property sales.
Despite 1H20 Pre-tax Profit (before fair value gains/losses) declining 30.6% YoY, management did not decrease the dividend. Assuming no HoH change in Pre-tax Profit (before fair value gains/losses) and had there not been any fair value change, the S$0.175 dividend paid represents a payout ratio of 45.2%.
This payout ratio may not be sustainable if NPAT does not recover due to the high capital intensity of property development and the borrowings UOL has to repay.
1. Low-interest rates will spur more home buyers
The current low-interest rate environment has spurred more property buyers. This is seen from the YoY increase for 3Q2020 new private home sales in spite of the national GDP contraction.
This bodes well for UOL's Clavon launch as well as the upcoming 1H20 launch of its Canberra Drive site which is expected to deliver strong performance.
1. Additional property cooling measures
It was speculated that a round of property cooling measures would be announced during Budget 2021, but it did not. However, I will not be surprised if it indeed is introduced later this year as the private residential property index is approaching the record high of Q3 2013.
Property cooling measures have a substantial impact on UOL's property development revenue as seen from the 9.95% decline for 1H2019 compared to 1H2018 which was before the measures became effective in July 2018.
Compared to its Singapore developer peers, UOL is trading above the average TTM P/E. However, it must be noted that UOL is unlike a traditional developer in that it has a more diversified income portfolio that generates recurring income that provides more resilience during the pandemic.
In addition, UOL's P/B is trading near its 5-year historical average which is above the Singapore average. This is due to its lower gearing as compared to the above-listed peers.
With the overhang of additional property cooling measures and uncertainty over tourism recovery timeline, I believe UOL is currently fairly valued. However, re-rating catalysts such as a sharp increase in inoculation rates or high sustained property development sales could change my opinion.
Its property portfolio comprises 4 commercial and industrial buildings in Singapore and Malaysia with a total lettable area of 45,398 sqm. (Pg 24, AR2019)
The average occupancy rate of its Singapore properties was 85.3% in 2019 while the Menara Haw Par building has an occupancy rate of 66.5%. I expect the occupancy rate and average rental of the building to be under stress due to more firms adopting hybrid work models, thus reducing the existing demand for offices.
In 2019, the book value of the properties was S$56,263,000 (pg30, AR2019) and it generated S$8,300,000 in operating profit from rental services.
Haw Par has been led by Dr. Wee Cho Yaw since 1978. Dr. Wee has been instrumental in the success of UOB serving as Chairman and CEO from 1974 to 2007. In addition, he has been the Chairman of UOL since 1973.
The President and CEO is Mr. Wee Ee Lim, Dr Wee's son. Mr Wee is simultaneously serving as Deputy Chairman of UOL and Director of UOB.
During the global equity crash in Mar 2020, the Wee Family spent S$21 million buying back shares in Haw Par through Wee Investments at an average of S$10.53 per share.
Prior to the share buyback, the Wee Family already had a high interest in Haw Par with Dr. Wee Cho Yaw holding the highest stake at 35.59%. Thus, I believe they saw meaningful value at their buy-in price as they added to their stake using personal cash instead of just using company reserves to buyback.
Overall Financial highlights
NPAT spiked 46.2% in 2018 as the special dividend given by UOB for FY2017 was only paid out in Jun 2018 and interim and final dividends paid out in 2018 were substantially higher.
NPAT continued to increase in 2019 as an increase in dividend income outweighed the decline in profit from healthcare.
1H20 NPAT decreased by 19.1% mainly driven by lower healthcare revenue as consumer sentiment declined and lifestyle changes from lockdowns caused less to buy pain-relief products.
Haw Par will bear the brunt of the dividend cap in 2021 as it is when UOB's final and special dividends for FY2020 is expected to be paid and will cause a significant drop in NPAT.
2. Net Cash Position
Haw Par's net cash has been increasing YoY from 2016, except in 2019 when a special 50th-anniversary dividend was paid out. This strong cash position ensures it tides through the pandemic and allows it to engage in value-accretive acquisitions.
3. Tangible book value per share
Haw Par's tangible book value is largely tied to the value of its investments in UOB and UOL. Thus, when the equity markets drew down in Mar 2020, its tangible book value declined correspondingly.
To determine the value of Haw Par, I used a sum-of-the-parts valuation. I applied a 20% holding company discount to its UOB and UOL stock and a 40% discount to its properties given their low occupancy rate and short lease remaining which will cause high illiquidity.
This gives a fair value estimate of S$12.82, representing a possible upside of 8.92%.
I did not add the value of its leisure business or its associates' contribution as I forecast they would offset the annual unallocated expenses.
In my opinion, there remains upside to UOB stock and I have confidence in the long-term prospects of the Healthcare business driven by recovery of Tiger Balm sales.
Tiger Balm products have been a mainstay in my life and thus, I became inclined to research about Haw Par Corporation. I was surprised to learn that the bulk of its value lay in key investments instead of healthcare products. After conducting due diligence, I believe there is potential upside from the sum of its key investments and healthcare business.
As its key investments account for a significant proportion of its value, investors need to be wary of any negative UOB and UOL stock price drivers.
Thanks for reading,
Disclaimer: I am long Haw Par at an average price of S$11.73. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.