Haw Par Corporation

[ghchua]

Hi weijian,

I dunno about you, but I find that the company's response to shareholders' opinion on share buyback is not convincing enough. For example, "the CEO replied that the Company had carried out share buybacks in the past but found it to be ineffective as the Company’s shares did not have sufficient liquidity in the market." Couldn't they consider an off-market purchase like EAO? Many companies are now doing that, the latest being OUE.

Then the CEO also said "Furthermore, share buybacks will shrink the balance sheet of the Company, making it worse off in the long term.". How could the company be worse off if you buyback your shares at below NAV? In fact it is net positive in terms of EPS, NAV, ROA and also ROE since there is lesser cash drag. A key to effective capital management is to raise funds at above NAV and buyback when shares are depressed. How could these actions be shrinking the balance sheet?

[Shiyi]

Hi weijian,

I dunno about you, but I find that the company's response to shareholders' opinion on share buyback is not convincing enough. For example, "the CEO replied that the Company had carried out share buybacks in the past but found it to be ineffective as the Company’s shares did not have sufficient liquidity in the market." Couldn't they consider an off-market purchase like EAO? Many companies are now doing that, the latest being OUE.

Then the CEO also said "Furthermore, share buybacks will shrink the balance sheet of the Company, making it worse off in the long term.". How could the company be worse off if you buyback your shares at below NAV? In fact it is net positive in terms of EPS, NAV, ROA and also ROE since there is lesser cash drag. A key to effective capital management is to raise funds at above NAV and buyback when shares are depressed. How could these actions be shrinking the balance sheet?

Companies buy back and cancel shares, thus shrinking the balance sheet.
As most of the sellers in the open market are likely to be retail investors, this would mean that the free float will shrink too. That would further affect the trading liquidity of the stock.

[Corgitator]

Hi weijian,

I dunno about you, but I find that the company's response to shareholders' opinion on share buyback is not convincing enough. For example, "the CEO replied that the Company had carried out share buybacks in the past but found it to be ineffective as the Company’s shares did not have sufficient liquidity in the market." Couldn't they consider an off-market purchase like EAO? Many companies are now doing that, the latest being OUE.

Then the CEO also said "Furthermore, share buybacks will shrink the balance sheet of the Company, making it worse off in the long term.". How could the company be worse off if you buyback your shares at below NAV? In fact it is net positive in terms of EPS, NAV, ROA and also ROE since there is lesser cash drag. A key to effective capital management is to raise funds at above NAV and buyback when shares are depressed. How could these actions be shrinking the balance sheet?

Companies buy back and cancel shares, thus shrinking the balance sheet.
As most of the sellers in the open market are likely to be retail investors, this would mean that the free float will shrink too. That would further affect the trading liquidity of the stock.

What's the issue with a leaner balance sheet? Excess and unproductive capital that don't earn a return above the required return on capital should be paid out either by way of dividends or repurchase (if shares are undervalued).

Co A has a $100 balance sheet, consisting entirely of cash making $1 in interest income per annum vs Co B with a $50 balance sheet, consisting of inventory, receivables, equipment that help generate $10 of income per year. Would you say that the "smaller" balance sheet is bad?

On the issue of free float, around 60% of the shares outstanding are deemed as free float by Yahoo Finance. That's not too bad of number, so I don't see the need to be overly concerned over liquidity issues arising from a smaller float. Further, it's important to use the right tools for the right problem. Liquidity issues shouldn't be commingled with capital allocation decisions.

[weijian]

SBB in the past was ineffective due to insufficient liquidity in the market - is probably right because it boosted share prices and conflicts with Wees (or their proxies) who prefer to buy cheap (just like us).

SBB shrinking the balance sheet and worst in the long term - Is mathematically right too. Seems like Wee prefer bigger balance sheet for them in the long term. After all, they need to get past the 3 generation curse, don't they?

Excess and unproductive capital that don't earn a return above the required return on capital should be paid out either by way of dividends or repurchase - Is how a rational/brilliant capital allocator will think. I wonder if the Wee proxy is allowed to act like that, despite having the capability to think like that.

On the issue of free float, around 60% of the shares outstanding are deemed as free float by Yahoo Finance - Not sure if Yahoo Finance could actually untangle the cross-holding structure. Could the "insufficient liquidity" comment be a hint that Yahoo Finance is grossly wrong?

So depending on which side one is on, everything is "rational" and "right". After all, discussion was already done 10years back with the below conclusion:

Wait for the eventual catalyst to come. The annc with
1 picture and lots of names.

[Shiyi]

SBB in the past was ineffective due to insufficient liquidity in the market - is probably right because it boosted share prices and conflicts with Wees (or their proxies) who prefer to buy cheap (just like us).

SBB shrinking the balance sheet and worst in the long term - Is mathematically right too. Seems like Wee prefer bigger balance sheet for them in the long term. After all, they need to get past the 3 generation curse, don't they?

Excess and unproductive capital that don't earn a return above the required return on capital should be paid out either by way of dividends or repurchase - Is how a rational/brilliant capital allocator will think. I wonder if the Wee proxy is allowed to act like that, despite having the capability to think like that.

On the issue of free float, around 60% of the shares outstanding are deemed as free float by Yahoo Finance - Not sure if Yahoo Finance could actually untangle the cross-holding structure. Could the "insufficient liquidity" comment be a hint that Yahoo Finance is grossly wrong?

So depending on which side one is on, everything is "rational" and "right". After all, discussion was already done 10years back with the below conclusion:

Wait for the eventual catalyst to come. The annc with
1 picture and lots of names.

The free float given by Yahoo Finance or annual report is probably over-stated. We will not know the precise number until a corporate action is launched. In addition, it is interesting to note that the chairman described Haw Par's stake in UOB as "strategic investment", i.e. not for sale for whatever price. I guess UOL is also a "strategic investment", i.e. not for sale even the yield is low or zero.