Updated: Aug 1
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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.