Haw Par Corporation

[d.o.g.]

Assuming that the company will take 5 years to reverse this undervalue situation.

Haw Par is a value trap that I held it for 3 years and gave up.
I think the probability of realizing its full NAV within say 5 years is very low, probably under 10%.

I personally believe the probability of Haw Par ever trading at 100% of NAV is essentially zero. To understand why we must look at the role that Haw Par plays in the Wee empire.

It is obvious at first glance that the 5% stake in UOB accounts for the majority of Haw Par's value. Less obvious is the fact that the UOB stake allows Wee Cho Yaw to cement his control of UOB. Drawing a map of the Wee empire with all the relevant companies and their various shareholdings will make clear that Haw Par's stake in UOB is needed to help ensure Wee Cho Yaw keeps control of UOB. UOB is the crown jewel of the Wee empire. Therefore anything that helps Wee Cho Yaw hang on to it will never be sold. That includes Haw Par.

The stake in UOL performs the same function - combined with UOB's stake in UOL and the Wees' direct stake in UOL, it allows the Wees to control UOL. But UOL is small potatoes compared to UOB.

Anyone who buys Haw Par hoping for the discount to vanish is in for a long wait. However the discount will vary over time, and a savvy investor could buy when the discount is large and sell when the discount is small, similar to how some people trade closed-end funds as the discounts to NAV change with time. But understand that the Wee family will never release the UOB shares (nor UOL shares) from Haw Par's grip.

As for Haw Par Healthcare, it used to be separately listed but was privatized. It is a fantastic cash cow - Tiger Balm sells itself and you spend basically nothing on capex, R&D or A&P. So it won't be sold.

Properly-run aquariums are actually low-capex businesses with significant cash flow. No reason to sell either.

Hua Han was an investment that turned into a homerun. It may be sold eventually. But even if the cash is paid out it is not much relative to the size of Haw Par.

As to WHY there is a discount, this is a common (even normal) situation for conglomerates with listed subsidiaries. The reason is that investors can recreate the conglomerate themselves by buying the appropriate subsidiaries. They can also tweak their exposure to have more of the "good" subsidiary and less (or none) of the "bad" one. So they demand a discount to own a conglomerate where the exposure is fixed. For Haw Par the same applies, one can almost replicate Haw Par by buying shares of UOB, UOL, Hua Han etc. So a discount is demanded to own Haw Par where the exposure is fixed. In fact, because Haw Par will never be broken up, I would argue that a larger discount should be required.

Also, previously Haw Par passed through all the UOB dividends it received. So owning Haw Par was a way to own UOB cheaply. But in recent years Haw Par took UOB scrip, which meant it did not have cash to pay dividends. So Haw Par's behaviour is more complicated now, which demands a further discount.

As usual, YMMV.

[smallcaps]

As to WHY there is a discount, this is a common (even normal) situation for conglomerates with listed subsidiaries. The reason is that investors can recreate the conglomerate themselves by buying the appropriate subsidiaries. They can also tweak their exposure to have more of the "good" subsidiary and less (or none) of the "bad" one. So they demand a discount to own a conglomerate where the exposure is fixed. For Haw Par the same applies, one can almost replicate Haw Par by buying shares of UOB, UOL, Hua Han etc. So a discount is demanded to own Haw Par where the exposure is fixed. In fact, because Haw Par will never be broken up, I would argue that a larger discount should be required.

This is a guess on the cause of the discount, right?

I personally would not attribute the discount due 'exposure is fixed' but more of due to the fact that there is an extra layer (the conglomerate) between me and the cash that hopefully gets into my pocket. This extra layer adds uncertainty and also due to my perception that it's more likely that the child companies gets GO, gives dividends than the conglomerate itself.

But then, again this is guessing when applied to current market perception since it is only my own thinking and it is not backed by any statistics...

[d.o.g.]

This is a guess on the cause of the discount, right?

I personally would not attribute the discount due 'exposure is fixed' but more of due to the fact that there is an extra layer (the conglomerate) between me and the cash that hopefully gets into my pocket. This extra layer adds uncertainty and also due to my perception that it's more likely that the child companies gets GO, gives dividends than the conglomerate itself.

There is no law that declares X to be the reason for the discount. Fixed exposure is one, uncertainty of dividends is another (which I mentioned applies to Haw Par also).

Dividends can be viewed in a few ways:

1. The controlling shareholder owns the holding company so that company is more likely to pay a dividend so that the owner can get the cash. So buy the holding company.

2. If the holding company has very little business of its own, its dividends must come from its subsidiaries. So buy the subsidiaries.

3. If the holding company has a large debt load and the owner himself is cashed-up, the subsidiaries will pay dividends to help the holding company pay its debts, while the holding company may not pay dividends as it is cash-strapped. So buy the subsidiaries.

Usually it is a better idea to buy the holding company as that is where the controlling shareholder has the most to gain or lose. The dividend payout is often lower (due to additional debt) but this is offset by the discount as well as the better alignment of interest. If there is any asset shuffling going on it usually hurts the subsidiaries rather than the holding company e.g. Henderson Investments lost Hong Kong & China Gas to its parent Henderson Land. Shareholders of Henderson Land (especially Lee Shau Kee himself) benefited at the expense of Henderson Investments shareholders.

[smallcaps]

This is a guess on the cause of the discount, right?

I personally would not attribute the discount due 'exposure is fixed' but more of due to the fact that there is an extra layer (the conglomerate) between me and the cash that hopefully gets into my pocket. This extra layer adds uncertainty and also due to my perception that it's more likely that the child companies gets GO, gives dividends than the conglomerate itself.

There is no law that declares X to be the reason for the discount. Fixed exposure is one, uncertainty of dividends is another (which I mentioned applies to Haw Par also).

Dividends can be viewed in a few ways:

1. The controlling shareholder owns the holding company so that company is more likely to pay a dividend so that the owner can get the cash. So buy the holding company.

2. If the holding company has very little business of its own, its dividends must come from its subsidiaries. So buy the subsidiaries.

3. If the holding company has a large debt load and the owner himself is cashed-up, the subsidiaries will pay dividends to help the holding company pay its debts, while the holding company may not pay dividends as it is cash-strapped. So buy the subsidiaries.

Usually it is a better idea to buy the holding company as that is where the controlling shareholder has the most to gain or lose. The dividend payout is often lower (due to additional debt) but this is offset by the discount as well as the better alignment of interest. If there is any asset shuffling going on it usually hurts the subsidiaries rather than the holding company e.g. Henderson Investments lost Hong Kong & China Gas to its parent Henderson Land. Shareholders of Henderson Land (especially Lee Shau Kee himself) benefited at the expense of Henderson Investments shareholders.

Agreed but I do have my doubts on point 1.

If controlling shareholder is using the holding company as his main investment vehicle for the long term, then he may be reluctant to give back much of the dividends received by the holding company. He gets to control the asset allocations anyway, right? If he takes it out, then he would have to find a way to invest back into the holding company. So why not just build a bigger company in the meantime and get a bigger paycheck (or bragging rights)

[paullow]

This is a guess on the cause of the discount, right?

I personally would not attribute the discount due 'exposure is fixed' but more of due to the fact that there is an extra layer (the conglomerate) between me and the cash that hopefully gets into my pocket. This extra layer adds uncertainty and also due to my perception that it's more likely that the child companies gets GO, gives dividends than the conglomerate itself.

There is no law that declares X to be the reason for the discount. Fixed exposure is one, uncertainty of dividends is another (which I mentioned applies to Haw Par also).

Dividends can be viewed in a few ways:

1. The controlling shareholder owns the holding company so that company is more likely to pay a dividend so that the owner can get the cash. So buy the holding company.

2. If the holding company has very little business of its own, its dividends must come from its subsidiaries. So buy the subsidiaries.

3. If the holding company has a large debt load and the owner himself is cashed-up, the subsidiaries will pay dividends to help the holding company pay its debts, while the holding company may not pay dividends as it is cash-strapped. So buy the subsidiaries.

Usually it is a better idea to buy the holding company as that is where the controlling shareholder has the most to gain or lose. The dividend payout is often lower (due to additional debt) but this is offset by the discount as well as the better alignment of interest. If there is any asset shuffling going on it usually hurts the subsidiaries rather than the holding company e.g. Henderson Investments lost Hong Kong & China Gas to its parent Henderson Land. Shareholders of Henderson Land (especially Lee Shau Kee himself) benefited at the expense of Henderson Investments shareholders.

I think i sort of understand ur strategy, d.o.g.


Allow me to summarise it in basic terms, do correct me if I am wrong.

1) the rich get richer. the poor remains so or get even poorer.

A number of forbes list, eg Wee CY wealth doubles every few years. Some even more. But some less. So we piggy back on them to ride the market long term.

2) understand fully their wealth structure. Where their money comes and goes.


3) buy according to their allocations. but can never be exactly the same as them cos their shares are worth only a song decades ago.


4) enjoy the same replication in wealth or near.


If Wee CY wealth was say 1B 10 yrs ago, and we place 1M in exactly the same allocation as him, we would not be far off from our 4M as he is from his 4B.

Regards,
Paullow

[specuvestor]

http://www.nextinsight.net/index.php?opt...2&Itemid=1 - Analysis from NextInsight

Wonder where he got the share numbers of UOB UOL UIC and whether its accurate.

Yea, the number seems ok. CEO mention that these 3 companies will NEVER be sold. The main growth we should expect is coming from Hua Han.

Never say never. Orchard Parade rose like a Phoenix from the ashes after the old man's demise. So is Lucio Tan's empire as he plan for his end

That's an unfortunate morbid conclusion but looks most likely catalyst for any long term holders

[d.o.g.]

I think i sort of understand ur strategy, d.o.g.
...
If Wee CY wealth was say 1B 10 yrs ago, and we place 1M in exactly the same allocation as him, we would not be far off from our 4M as he is from his 4B.

Regards,
Paullow

That's an interesting way to look at it.

I've never focused on tycoons per se. Generally we look at the business first, and only if it passes muster do we look at the owners/managers. We don't have a strategy of cloning (to borrow a term from Monish Pabrai) Wee Cho Yaw or Carlos Slim or whoever. We buy them where we find them: conglomerate units, state-owned enterprises, owner-managed companies, professionally-managed companies etc.

If the corporate structure is not simple, then we need to understand where the owner's interests lie. If they are not aligned with minority shareholders then there is a problem e.g. I want Haw Par to liquidate to remove the discount, but Wee Cho Yaw will keep Haw Par intact to maintain control of UOB, so I walk away from Haw Par. Laxey learnt this the hard way with UIS.

I think ultimately it is not either business or management but both. We have owned good businesses that were not managed well - we did poorly. We have owned poor businesses that were managed well - we did poorly. The good results ultimately came from good businesses that were managed well. Over the long term these 2 factors combined to make the price premiums we paid look cheap in hindsight.

For the other 2 groups, the eventual problems made the cheap prices we paid look expensive in hindsight. Perhaps we would have been fine if we'd paid 50% less, but that's a skill I just don't have - how to buy at the bottom. Some people have a purely quantitative approach where they mechanically buy/sell everything that meets certain criteria, and they do well, but I am not one of them.

I prefer to buy companies where I can theoretically go on a 5-year cruise and come back to see the companies in better shape than before, with increased sales, profits, and dividends. If these do occur, generally there will be a significant increase in market value also. All the work is front-loaded, once the purchase is made life gets a lot easier as we have very low turnover (which reduces the need to constantly find something new) and monitoring is limited (we just keep an eye on industry news and update the spreadsheets as results come out over time). We sleep very well.

As usual, YMMV.

[freedom]

This is a guess on the cause of the discount, right?

I personally would not attribute the discount due 'exposure is fixed' but more of due to the fact that there is an extra layer (the conglomerate) between me and the cash that hopefully gets into my pocket. This extra layer adds uncertainty and also due to my perception that it's more likely that the child companies gets GO, gives dividends than the conglomerate itself.

There is no law that declares X to be the reason for the discount. Fixed exposure is one, uncertainty of dividends is another (which I mentioned applies to Haw Par also).

Dividends can be viewed in a few ways:

1. The controlling shareholder owns the holding company so that company is more likely to pay a dividend so that the owner can get the cash. So buy the holding company.

2. If the holding company has very little business of its own, its dividends must come from its subsidiaries. So buy the subsidiaries.

3. If the holding company has a large debt load and the owner himself is cashed-up, the subsidiaries will pay dividends to help the holding company pay its debts, while the holding company may not pay dividends as it is cash-strapped. So buy the subsidiaries.

Usually it is a better idea to buy the holding company as that is where the controlling shareholder has the most to gain or lose. The dividend payout is often lower (due to additional debt) but this is offset by the discount as well as the better alignment of interest. If there is any asset shuffling going on it usually hurts the subsidiaries rather than the holding company e.g. Henderson Investments lost Hong Kong & China Gas to its parent Henderson Land. Shareholders of Henderson Land (especially Lee Shau Kee himself) benefited at the expense of Henderson Investments shareholders.

Agreed but I do have my doubts on point 1.

If controlling shareholder is using the holding company as his main investment vehicle for the long term, then he may be reluctant to give back much of the dividends received by the holding company. He gets to control the asset allocations anyway, right? If he takes it out, then he would have to find a way to invest back into the holding company. So why not just build a bigger company in the meantime and get a bigger paycheck (or bragging rights)

I tend to agree with you on point 1.

It is unnecessary for the holding company to pay any dividend even if the subsidiaries do well and pay good dividend to the holding company. It is more likely, the holding companies will just pay enough, and utilize the rest for expansion.

look at Berkshire and its subsidiaries.

[zerobeta]

got a quick question about Wee's rationale for holding Haw Par...

if the reason he's holding Haw Par is to gain indirect control at UOB, why didn't he just increase his stake at UOB directly? is it because there's a cap in stock ownership? or is it because obtaining control of UOB through Haw Par is cheaper? or other reason?

thanks...

[mobo]

got a quick question about Wee's rationale for holding Haw Par...

if the reason he's holding Haw Par is to gain indirect control at UOB, why didn't he just increase his stake at UOB directly? is it because there's a cap in stock ownership? or is it because obtaining control of UOB through Haw Par is cheaper? or other reason?

thanks...

Controlling UOB through Haw Par is indeed cheaper, albiet probably not in the sense you understand it, i.e. cheaper stock price. Such complicated schemes of arrangements are largely a result of Singapore regulations not allowing different classes of shares with different voting rights.

In US for instance, the head honcho can own significantly <50% of the outstanding shares and still retain majority voting rights by creating "superior" shares (usually known as Class A) that give for instance 100 votes for every 1 Class A.

For better or worse, Singapore does not allow that. Haw Par is about 30+% owned by Wee & affiliates which in turn owns 4% of UOB. However, do not be misled into thinking Wee does not have effective control over Haw Par because certain UOB fully owned subisidiaries in turn effectively owns 10% of Haw Par. Non fully owned subsidiary UOI and associate UOBKH also have significant stakes in Haw Par as well. It is commonly believed that together with other interest that Wee has that falls outside the narrow definition of deemed interest prescribed by the Companies Act & Listing Manual, Wee in all likelihood has control of >50% voting rights in Haw Par.

To sum up, Wee is able to control 4% of UOB through the Haw Par vehicle which he only supposedly has economic interest of 30+% of that vehicle as opposed to owning directly the 4% UOB interest which will require a far larger captial commitment.

Above is a back of the envelope highly simplified summary. The actual cross holdings and matrix structure that Wee has over a large umbrella of companies is I believe significantly more complicated.