ValueEdge

27th November 2014

Haw Par Corporation

Goh Tee Leng
Yeo Sui Chuan

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Investment Thesis:
Equity Investments worth SGD2,126m exceeds Haw Par Corporations current market
capitalisation of SGD1,879m.

Highly stable Healthcare business of household-brands analgesics with highly profitable and

strong cash-flow generation, 10-year average ROA and FCF/Total Assets of 29.0% and 26.1%
respectively. Tiger Balm and Kwan Loong Oil is ranked 2nd and 5th respectively within
Singapores analgesics space.

SGD223.6m property portfolio and Equity Investments provides a stable and recurring source
of income.

Company Overview
Haw Par Corporation (HPC) is a conglomerate involved in 3 main segments: Healthcare, Leisure
and Investments. Its healthcare products are manufactured under the Tiger Balm and Kwan
Loong Brand. The Group also owns and operates 2 aquariums in Sentosa and Pattaya.
Additionally, they manage a portfolio of investment properties and securities.

Healthcare
Tiger Balm products are distributed 74 countries worldwide with HPC the sole manufacturer and
distributer. HPC is manufacturing facilities are in USA, Singapore, Malaysia, China, Taiwan,
Thailand, Indian and Indonesia, with the latest factory in Xiamen commencing operations in 2013.
Their products, in the form of patches, rubs or sprays, are mainly for muscle aches and sprain
relief.

According to the data from the
Euromonitor, Tiger Balm and
Kwan Loong Oil is ranked 2nd
and 5th within the Singapore
analgesics space. Furthermore,
it is evident that there are only 3
major players in this market,
with HPC being one of them.

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The Healthcare segment has been fairly consistent throughout the years. We have adjusted
profits for one-o gains - the only one being in 2006 where HPC had a gain of SGD7.7m from the
divestment of its general pharmaceutical business. In 2007, revenue declined due to the
depreciation of USD and an unusually warm winter in Europe. Despite operating margins being
slightly on a downward trend, it has averaged around 18.5%, based on a 17% tax rate
assumption. For 1H2014, revenue and profit for this segment have increased 23.4% and 26.4%
respectively, indicating an improvement in margins compared to 2013 levels.

Economic Moat
The Tiger Balm brand has an established reputation in an otherwise very competitive market with
a wide array of brands oering the same type of product. Through the MD&A in HPC Annual
Reports, it is evident that there have been heavy emphasis on marketing in order to maintain its
brand image.

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Furthermore, we are able to observe that distribution and marketing expenses have accounted
for approximately 24% of combined revenue in the past 5 years. Omission of revenue
contribution from the Property and Investment division is due to the fact that these divisions
requires minimal marketing. New entrants would be deterred given the heavy marketing expenses
required in hope of matching Tiger Balms brand awareness.

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Having noted earlier that operating margins have been decreasing marginally, based on
Walgreens online store, we can observe that Tiger Balms Price/Volume is relatively on the high
side. We believe this premium is indicative of Tiger Balms brand strength. While it may have
eroded slightly over the years, it is nevertheless still substantial. The beauty would be that
consumers are unlikely to notice the Price/Volume dierence as the absolute dierence in volume
is minimal. Most products range between 3-4oz, while the pricing dierence is at most $2. For
new entrants, they would find diculty in convincing consumers to take a risk and switch over to
their product for the sake of a few cents of cost savings (assuming new entrants engage in price
undercutting). Overall, we believe that within the Healthcare segment, HPC has a considerable
moat and competitors would find it dicult to compete in terms of both price and non-price
factors. This can be further confirmed by the high ROA and ROE figures within this segment.

Valuation
Beginning with some peer valuation; GlaxoSmithKline (GSK) has been omitted as they operate
too many dierent product lines for meaningful comparison.

EBIT margins are based on 3-year averages, whilst the rest are current values. Based on a simple
average, we would achieve the following valuation for HPC Healthcare segment.

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Given HPC Healthcare segments superior EBIT margins of 22.7% (based on a 10-year average),
Price-to-Sale ratio would serve as a very crude price floor as it does not take into account the
dierences in margins. Hence, Price-to-EBIT would serve as a more suitable ratio here, giving us
a value of SGD270.4m for HPC Healthcare segment.

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Based on the fair value of SGD270.4m, we perform a sanity check using FCF yield. Change in
working capital was estimated based on the change in segments net assets after accounting for
CAPEX and Depreciation. The underlying assumption here would be that there were no disposals
of PPE. With the exception of 2006 where segment net assets fell by approximately 20%.
However, we believe the amount of disposal is generally minimal. Based on an 10-year average
EBIT of SGD18m, we derive a 9-year average FCF of SGD13.1m, corresponding to a FCF yield of
4.8% at fair value. We deem this FCF yield to be realistic and value HPCs Healthcare segment at
SGD270.4m.

Leisure
HPC Leisure segment operates Underwater World Singapore (UWS) and Underwater World
Pattaya (UWP).

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In FY2011, HPCs Leisure segment incurred impairment losses of SGD12.5m from the closure of
their oceanarium in Chengdu, China. Barring that, the Leisure segment has also been a
consistent performer historically. However, this changed drastically in 2012 when the new
oceanarium opened at the Resorts World Sentosa (RWS). This impact was visible in FY2013
results and 1H2014 results revealed further deterioration as revenue and profits fell by 23.7% and
38.8% respectively. We believe that UWS is not viable in the long run - Singapore being too small
for 2 oceanariums. While the outlook for UWP is supposedly brighter according to company
reports, it is clear that it is unable to cushion the poor performance of UWS - an adult ticket for
UWP costs 500 baht (SGD 20) versus SGD 29.90 for UWS. UWP would have to attract 1.5x more
ticket sales in order to match UWSs revenue contribution. The heyday for this segment is over
and we take it that only UWP is a going concern.

Valuation
We attach zero value to UWC based on the premise that it has no long term viability. With regards
to the valuation of UWP, we unfortunately are unable to discern its margins or net asset value as
no further breakdown was provided within the annual reports. However, we know that UWP cost
ash approximate SGD10m to build in 2003 and we will value UWP based on its replacement
value - the cost of reproducing the same set of assets today. Accounting for inflation (assuming
2% per annum), the cost of construction of UWP today would be SGD12.4m. This figure might be
lower in reality as we assumed that there are no technological advances and the cost of replacing
the same assets remains the same. However, we believe this more than osets the capitalising of
historical marketing expenses. The cost of reproducing the asset does not constitute only the
construction costs, but marketing expenses previously incurred that gives UWP its current
network, publicity and reputation. Otherwise, what one gets is simply an oceanarium with no
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publicity and visitors. We conservatively take it that the two eects negates one another (though
the value of marketing is likely to be higher of the two) and value UWP at SGD12.4m.

Property
The Groups investment property portfolio comprises of 45,816 square metres of commercial and
industrial space in Singapore, Malaysia and Hong Kong, which HPC earns rental income from.

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Furthermore, we can observe that rental income have been stable, with current rental yield at
7.7%, which is fair.

Valuation
We value properties at book value, given that it is revalued each year. Furthermore, a rental yield
of 7.7% suggests that the assets are fairly priced. Taking an extremely conservative approach
and valuing them at recession levels based on the rental yield of 11.6%, the price floor valuation
for the properties would be SGD148.3m. However, we believe this is a tad extreme; we adopt the
current valuation of SGD223.6m one we judge to be suciently fair.

Investments
HPC has an investment portfolio of listed equities, which provides the Group with a stable source
of recurring dividend income.

Valuation
Based on the most recent share prices (26/11/14), the portfolio has a market value of
SGD2,126m. This is already more than HPCs market capitalisation of SGD1,878.7m. One chief
consideration would be are they overvalued? Given that UOL Group (a property developer) is
trading at 0.7x P/B, UOB at 11.9x P/E and UIC at 12.9x P/E, we think that a situation of
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overvaluation to be unlikely. Assuming if we were to be holding the at their 5-year lows, their
combined market valuation would still be worth SGD1270.9m.

Associates
It is easy to overlook the fact that HPC has a 15.2% in a Hong Kong-listed company because it is
not held in the same account as HPCs equity investments. The company in question here would
be Hua Han Bio-Pharmaceutical Holdings Limited (HHBP).

Valuation
Similarly, if we value HHBP based on its current share price, HPCs stake would be worth
approximately SGD286.7m versus its current book value of SGD120.9m. However, its current
share price corresponds to 31.3x P/E. Hence, to be conservative, we will value HHBP at its book
value of SGD120.9m.

Sum-of-the-Parts Valuation
We value HPC using a SOTP method based on a bear and base case scenario.

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Using the base case scenario, we derive a SOTP valuation for HPC of SGD 12.8 per share,
translating to a 48.4% margin of safety based on current market prices. Even taking a
conservative approach, which is the most extreme of circumstances, the downside from its
current stock price is minimal 11.6%.

Investment Risks
We foresee issues being raised about the fact that HPC is a holding company and issues with a
lack of catalyst to unlock the value in the company. Accounting for a holding company discount
of 20%, the upside for HPC would be 19.1%. However, we do not think a discount is necessary
as all of HPCs subsidiaries are 100% owned, except for Haw Par Tiger Balm (Thailand).

The Wee family is the largest shareholder of HPC; some would say that the prospect of unlocking
value is minimal as they do not require the additional funds, especially given their current wealth
etc. These are all valid arguments. However, we personally believe that stocks will tend to the
intrinsic value over time and place little emphasis on catalysts. In the meantime, a stable dividend
yield of 2.3% oers some compensation for the wait.

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Furthermore, the same argument about the lack of catalyst could have been made at any point in
time during the last 15-years. Yet as we can see, HPC has outperformed the STI in both the last
15-years and last 5-years. Hence, we see no reason why this should impede HPCs value tending
towards intrinsic value in the long term.

Final Words
HPC has an upside of between 19.1% and 48.4%. At its current price, it will be a suitable
addition to a diversified portfolio of similar stocks. We consider HPC to a fair buy, not one that is
super spectacular (then again, such undervalued stocks typically looks stale). This is armed in
the following graph.

50%%

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2010%

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2012%

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2014%

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(Equity%Por4olio%Market%Cap%!%HPC%Market%Cap)/Equity%Por4olio%Market%Cap%

If we were to look at the percentage dierence between HPCs equity portfolio market
capitalisation and its own market capitalisation, the current dierence of 12.2% is neither
exceeding low (expensive) nor spectacularly high (cheap). Regardless, HPC is still a solid
company with good holdings and has a very low leverage (0.02x debt-to-equity); a worthy
addition to anyones watch list, even if one deems current prices to be not attractive enough.

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Disclaimer

All personal opinions are the authors own and do not represent any other individual, group or business. The authors
do not take responsibility for any factual inaccuracies made. Any opinions, conclusions or other information
expressed here does not constitute financial advice. They are given on a general basis and are subject to change
without notice. Past performance is no indication of future performance. You are recommended to verify all
information read and to consult licensed, professional financial services.

The authors do not take any responsibility for any loss or damage of any kind made based on the opinions or facts
published in this report

Copyright 2014, ValueEdge. All rights reserved.

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