Hap Seng Consolidated Bhd became one of the hottest stocks on Bursa Malaysia last week as its share price marched to a historical high of RM7.48 last Thursday after having hovered between RM2 and RM3 over the past decade.

The counter has more than doubled in three months, gaining some 165% in value.

A buying impetus could possibly be Hap Seng’s stellar financial performance so far. For the nine months ended Sept 30, 2010, the group’s net profit more than doubled to RM220 million from RM92.5 million in the previous corresponding period.

Earnings per share ballooned to 39.05 sen from 16.42 sen a year ago while revenue grew to RM1.97 billion from RM1.78 billion previously.
Annualising the group’s earnings would put its net profit at RM293 million and EPS at 52.06 sen.

To the long-serving employees of the company, the current investor attention on Hap Seng would be in sharp contrast to the Sabah-based group’s situation some years ago when it was barely known in Peninsular Malaysia.

Not many were familiar with the diversified group and the late tycoon Tan Sri Lau Gek Poh whose family is the company’s controlling shareholder.

“People did not have much confidence in us when we first started our auto distribution business and after-sales service in the peninsula. In fact, we had difficulties in hiring sales people,” the company’s managing director Datuk Edward Lee tells The Edge.

“Some even mistook us for biscuit maker Hup Seng,” he laughs.

The Lau family holds 67% equity interest in Hap Seng Consolidated via Gek Poh Holdings Sdn Bhd (56%) and Lei Shing Hong Investments (11.05%). It recently raised its shareholding by acquiring the company’s shares on the open market.

The move triggered speculation about a privatisation exercise by the Lau family, which took its flagship company Lei Shing Hong Ltd private in 2008. And in July last year, the family privatised Malaysian Mosaics Bhd.
“Privatisation is the prerogative of the shareholders. If the shareholders do not see value in a listed entity, like the Hong Kong one and Malaysian Mosaics, at the end of the day, why keep it listed if it’s undervalued all the time?” asks  Lee when asked to comment on the speculation.

Nonetheless, given the rally in Hap Seng’s share price, its privatisation would certainly cost a bundle if it were done now. 

Lee says Hap Seng, the market capitalisation of which stood at RM4.5 billion as at Jan 7, 2011, aims to be among the top 20 companies on Bursa Malaysia.

In fact, last Friday, the group proposed a new share placement of 20% of its paid-up capital and a bonus plus rights issue that comes with free warrants.

Hap Seng has five core businesses in its stable: trading, including the distribution of Mercedes-Benz vehicles; plantations, housed under listed Hap Seng Plantations Bhd; finance services; property, quarry and building materials; and fertiliser manufacturing.

It is worth noting that the group is a top player in several of the areas it engages in. For instance, it is the second largest quarry operator in Malaysia and the leading manufacturer of fertiliser in Malaysia and Indonesia.

Focus on auto division
The cool response to Hap Seng’s arrival in Peninsular Malaysia did not jeopardise its expansion plan.

Lee, who joined the group’s property division some 30 years ago, was made Hap Seng’s managing director five years ago and tasked with strengthening the company’s presence in the peninsula. “We realised the limited growth prospects for the group in East Malaysia. So, we decided to come over to the peninsula,” says Lee.

In 2005, after DaimlerChrysler Malaysia took over the distributorship of Mercedes-Benz vehicles, Hap Seng was made the authorised dealer for the marque and Smart vehicles in the Klang Valley — a lucrative market that was dominated by Cycle & Carriage Bintang Bhd for 50 years.

Subsidiary Hap Seng Star Sdn Bhd is the sole authorised dealer of Mercedes-Benz and Mitsubishi FUSO vehicles in Sabah and Sarawak while Hap Seng Industrial Sdn Bhd, a wholly-owned subsidiary located in Tawau, Sabah, fabricates and assembles logging truck trailers, tankers and other industrial transport vehicles.

The Mercedes-Benz dealership in the Klang Valley helped pave the way for Hap Seng to expand beyond Borneo.

“In these five short years, we have managed to capture 30% of the market. When we first built our workshop, we thought it might be too big, but today it is at maximum capacity and we are expanding the workshop,” says Lee.

While working hard to win a bigger slice of the domestic luxury car market, Hap Seng is also making its way abroad.

“Not only have we expanded to the peninsula but we are also looking at Vietnam,” says Lee.

Hap Seng has already captured 60% of the Vietnamese market for Mercedes-Benz vehicles.

Lee says he believes in the potential of the Vietnamese economy, which he expects to grow at the same breakneck speed as China.

“If you look at Malaysia, the sale [of Mercedes-Benz vehicles] is about 4,000 units a year … the growth is rather limited,” Lee observes.

With that in mind, Hap Seng is looking elsewhere for opportunities, such as Indonesia, Thailand and central Australia.

The auto division, which now accounts for less than 10% of group profit, is the main focus of Hap Seng’s expansion plan. However, Lee stresses that this is unlikely to give the group’s bottom line an instant boost because new investments need a long gestation period. Nonetheless, he adds, such a move will benefit Hap Seng in the long run.

Holding prime property assets
The investing community seems to have overlooked the prime assets and landbank Hap Seng holds in its portfolio.

In fact, the company surprised the property market in August 2009 when it announced the acquisition of 50% of Menara Citibank in Jalan Ampang, Kuala Lumpur, after IOI Group pulled out of the deal.

Hap Seng bought a 50% stake in Inverfin Sdn Bhd, which owns the prime office block, from CapitaLand Ltd (30%) and Amsteel Corp Bhd (20%) for RM303.7 million.

Before that, it bought another prime asset — the former MUI Plaza located near the junction of Jalan P Ramlee and Jalan Sultan Ismail — which is now the group’s headquarters and is called Menara Hap Seng as well as two tracts adjacent to the building.  

The group also acquired the plot adjacent to RHB Centre and the Royal Selangor Golf Course near Jalan Tun Razak for development.

“In the Golden Triangle, we have almost three acres of prime development land. Moving forward, we have a gross development value of RM5 billion under planning and development. On top of that, we have 2,000 acres of landbank — 500 acres in the peninsula (50 acres in Kulim and over 400 acres in Sepang) and 1,500 acres in Sabah,” comments Lee.

“In terms of investment, we would want offices to be in the city centre but housing in good suburban areas. We are concentrating on areas that are popular. I don’t think we want to buy huge pieces of land because the holding cost would be very high. We want to have a quick turnaround.”

Finance services — another jewel in the crown
Financing is the second most profitable business in Hap Seng’s stable, with a profit contribution of nearly 17%.

The group has a loan portfolio of more than RM1 billion for the financing of heavy industrial equipment such as trucks and printers. Its targeted clients are small and medium enterprises.

“We concentrate on areas that we are familiar with … I don’t think we want to be in the consumer credit segment which appears to be saturated. We cannot compete with the banks which have lower costs of fund,” Lee says.

Hap Seng saw a window of opportunity when the commercial banks in the country merged with their finance companies which were mainly involved in hire purchase loans. The group’s finance services are governed by Bank Negara Malaysia’s Money Lending Act.

“We are serving a niche market that was formerly served by the finance companies,” Lee says.

“We really grew this business when the banks and finance companies merged. And we saw that a lot of the SMEs were left out. They didn’t know where to turn to. We recruited some people who were very experienced in the business and we grew it.” 

Leveraging shareholder strength
According to Lee, since Lei Shing Hong and Hap Seng share many similarities in terms of core business, the controlling shareholders plan to have the Malaysian group focus on the south of Hong Kong while Lei Shing Hong will serve the market in Hong Kong and the north, namely China.

The group’s recent related-party transactions also raised eyebrows, but Lee says the RPTs are part of an exercise to rationalise the business. “We are not doing this for the sake of RPT. We are talking about restructuring and streamlining the business between North Asia and Asia-Pacific.” 

One example is the divestment of a 35% stake in Hap Seng Star to Lei Shing Hong for RM103.8 million.

“With the divestment, we in fact become part of a bigger group which will benefit us in regional expansion … the (Lau) family is the biggest Mercedes-Benz distributor in the world,” says Lee. 

“Even our board members have said our shareholder is very fair to us. It is very transparent, at arm’s length and always benefits the listed company. Our shareholder doesn’t want to be seen as taking advantage of the public company. The strength of Hap Seng is that we have a good shareholder who always puts the company first,” Lee observes.

This article appeared in Corporate, The Edge Malaysia, Issue 840, Jan 10-16, 2011