Monday, January 03, 2011

The Reinvention Of Hap Seng Consolidated

You know some stock tips, you give to people, they will mostly not follow because they had a look at the chart. Hap Seng Consolidated is like that. The stock did not have any major corporate exercises in recent years. The deep embedded value of this company appeals to many. However, when it started moving about 6 weeks ago, many long term holders would have taken the opportunity to cash out. Why not, it gave more than a 100% return.

It is very natural to shy away from stocks that have had a run, thinking you were late in entering. That is a safe rule of thumb, but one which is tainted by our experience with speculative counters. When a speculative counter runs, say Iris, from 20 sen to 60 sen within a few weeks, to get a tip when its at 60 sen is akin to giving the person who gave the tip a tight slap.

When a counter is not a speculative counter but one which is fundamentals or value driven, e.g. DRB Hicom, Hap Seng Consolidated, BIMB, Kumpulan Fima ... we need to put on a different set of thinking cap. Look at the presumed catalysts, analyse the likelihood of these catalysts coming to fruition, assess the "character" of the stock (i.e. management and owners) ... you would be able to form a better view.

Another critical assessment is whether the stock is overbought, do you have a feel who is taking shares from the market at higher prices, do you have a sense of churning or stock distribution at certain levels ... Then you will get a better grip on whether the end buyers are solid or for trading purposes only.

Then analyse the presumed corporate exercise, not all are great value add, you have to distinguish between genuine unlocking of values or a meaningless exercise.

So the important question is who is still buying at RM6.50, RM7.00, RM7.35??? How in hell are you going to unwind those positions? If you can answer these two questions, then only go long. If not, please avoid.

I am focusing on Hap Seng Consolidated because I really like the purported corporate exercise. Whether its a share split or bonus issue, this seemingly benign thing will bring about substantial liquidity to the counter.

The reinvention includes institutionalising their shareholder base from a largely owner/retail to owner/institutional. Some of you may have picked up on the crossing of a 12m block to a new buyer, reported to be UBS. The involvement of the foreign investment bank may be the key to the entire exercise. UBS may hold, collect more shares or distribute to foreign institutional clients - all of which are highly positive to reinventing Hap Seng Consolidated.

Part of the exercise is supposed to include warrants and a special dividend of between 40-70 sen. Enough said.

Valuation wise, the counter has been below RM4.00 because research coverage has been poor, lack of institutional support, the size and liquidity have been lackluster for a long time... fundamentally every single business unit of the company is doing well. Its high time we have another Sime Darby, look at how dismal and disappointing Sime Darby has been and yet it trades at 18x forward earnings still. Hap Seng Consolidated is likely to make 50 sen per share in 2010 alone, which is why when all the cards fall together, it should go to RM8.00-8.50 as a base valuation (or 15x 2011 earnings, still a discount to Sime Darby).

Malaysian stocks are getting more attention and the timing is right to put Hap Seng Consolidated next to Sime Darby or Boustead as genuine options with sufficient liquidity and stellar management to boot.

To top it all off, the reinvention may only be just a makeover of the same old lady, but you end up with the same old lady - to that end, the company has embarked on a grand expansion plan into Vietnam and Indonesia. In particular Indonesia, where its range of business units appear to have marked out growth strategies to replicate their business model. This is a key attraction to foreign funds as it kills two birds with one stone. Indonesia is a more favoured market among emerging market funds, and Hap Seng is into the very critical businesses that will give them the right exposure.


HSC Businesses:

Quarry and Building Materials
Benefit from projects. The 2011 Budget announcement had largely focused on construction and development. Construction boom. Even without government support, private initiatives have been burgeoning with many property developments being sold and continued developments. Plans for towers of buildings in the Klang Valley had continued to surface constantly. With the ongoing and even more upcoming developments, demand for building materials could potentially accelerate. Hap Seng Trading was appointed by Malaysian Mosaics Bhd on 30 June 2009 as its sole and exclusive distributor of MML tiles in Malaysia. Recently there was a privatization of MML which indicates value in the company. This hints positively to the segment.

Plantation
Owns 52.53% of Hap Seng Plantations. Hap Seng Plantations is predominantly an oil palm planter in Sabah. It is an efficient planter with large economies of scale. Earnings rerating. CPO prices has increased rapidly over the half a year. With the large increase, earnings of planters are expected to increase substantially. Stock price increase in the industry has currently lagged the potential increase in net profits. Moreover, the USD has been strengthening against the ringgit, giving strength and competitiveness to the CPO against other oils especially soybean oil.Hap Seng is synergistically tied to its fertilizer division as well. High Efficiency. HSP is one of the most efficient planters in the industry with FFB yields of 21.5 metric tons per hectare and an OER of 21.6%. Moreover, HSP has a contiguous plantation which offers far more efficiency and scale than planters with plots of land in various locations. The group has a FFB yield of close to 700,000 metric tonnes per year. The group also operates 4 mills.

Plantation land
The total area of Hap Seng Plantations estates is 39,803 hectares. Hap Seng Plantations operates on one contiguous block of plantation land of approximately 36,354 hectares between Lahad Datu and Sandakan region, in addition to two smaller plantations of 1,276 hectares in Tawau and 2,173 hectares in Kota Marudu. 34,467 hectares of planted area comprises 32,576 hectares of matured oil palm and 1,891 hectares of immature plantings.

Agrobusiness-Fertilizer
Malaysia and Indonesia. Hap Seng’s fertilizer business is primarily in Malaysia and
Indonesia. We do see some growth in the sector with higher CPO prices and as Indonesia’s plantation acreage increases and matures. Currently a very large amount of plantation land is maturing and coming onstream annually. The fertilizer business is complementary and synergistic to Hap Seng’s plantation segment. This is especially the case with rising CPO prices whereby demand of fertilizer normally increases.

Property development
Hap Seng’s property focus has been primarily on low-rise residential properties in major urban centres. Hap Seng’s key development area has been in Sabah. Hap Seng has developments in Tawau, Sandakan, Kota Kinabalu in Lahad Duta. Hap Seng has developments in all 3 key segments including residential, industrial and commercial. Branching out into Klang Valley. Hap Seng has ventured into the Klang Valley in recent years through D’Alpinia located in Puchong. It is located in the fringes of Puchong close to Seri Kembangan and Putrajaya. It is a relatively large development of 76 acres of land and is of a build and sell concept. The units are of modern contemporary design. Phase 1 was launched in late 2009.

Automotive
Hap Seng is involved in automotive through Hap Seng Auto Sdn Bhd,Hap Seng Industrial Sdn Bhd and Hap Seng Star Sdn Bhd. Hap Seng Auto is involved in the distribution of Mercedes-Benz logging trucks, general-purpose trucks, buses, passenger vehicles and spare parts in Sabah and Sarawak. Hap Seng Auto Sdn Bhd is also the sole distributor for Mitsubishi Fuso commercial vehicles in East Malaysia. Hap Seng Industrial Sdn Bhd fabricates and assembles logging truck trailers, tankers and other industrial transport vehicles. Hap Seng Star Sdn Bhd is an authorized dealer of Mercedes-Benz and Smart vehicles in the Klang Valley. In April 2010, Hap Seng Star Sdn Bhd took over Hap Seng Auto Sdn Bhd’s role as the sole authorized dealer of Mercedes-Benz and Mitsubishi Fuso in East Malaysia.

Group synergy
Hap Seng’s property arm plays a synergistic role with the group. Hap Seng’s property arm benefits directly from its quarry & building materials arm and provides the latter with ongoing orders. Hap Seng’s property arm could benefit from lead time, consistency in demand and product quality. Hap Seng’s property arm could also benefit indirectly from their Credit Financing arm as it also serves construction and property related businesses.

Property Holdings
The group’s flagship Menara Hap Seng has seen a high occupancy rate of 94% for its tower block and 88% for its podium. The division continues to contribute substantially to the division, providing it strong cash flows and relatively stable earnings. Hap Seng has a 1.1 acre freehold land adjacent to the building and the 31,000 sq ft 1 ½ storey Hap Seng Star Mercedes-Benz showroom. The showroom has very premium frontage of Jalan P Ramlee and Jalan Sultan Ismail in the Central Business District of Kuala Lumpur. The area has the potential to be redeveloped into a very premium and high visibility commercial block.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

4 comments:

Polite Market said...

yeah, one should base on target price and not sell base on cost.

Polite Market said...

After your post on KSL, today RHB just initiated coverage on KSL with fair value RM2.78.

emacro said...

Follow the longer term mov avg.... follow the $, Hap Seng.

bOcy said...

@edgemy Hap Seng to raise RM1.46b from private placement, rights issue http://t.co/mjQSY58

can the pros please explain what this means to the share?