This article first appeared in The Edge Malaysia Weekly on October 14, 2024 - October 20, 2024

HOVID Bhd’s flagship Ho Yan Hor tea may help cool the body and soothe “heatiness”, but it appears the temperature is rising in the boardroom of the Ipoh-based pharmaceutical company.

A tussle is brewing between two major shareholders — Hovid managing director and chairman David Ho Sue San and Southeast Asian private equity firm TAEL Partners — as differing views on the company’s future come to a boil.

At the heart of the dispute is the question of whether Hovid, potentially valued at RM850 million to RM990 million, should be sold, with TAEL Partners ready to cash out, whereas David remains steadfast in holding on to his stake.

For perspective, TAEL Partners’ special-purpose vehicle Fajar Astoria Sdn Bhd (FASB), via UOBM Nominees (Tempatan) Sdn Bhd, has the lion’s share of 63.47% in Hovid, making it the controlling shareholder.

David — the eldest son of Hovid’s founder, the late Dr Ho Kai Cheong — is the second-largest shareholder of the company, with a 34.01% stake. The remaining 2.52% stake is owned by minorities.

Notably, David and TAEL Partners teamed up in October 2017 to privatise Hovid at 38 sen a share, or RM243 million in total.

The voluntary takeover offer came nine months after its two manufacturing licences were revoked by the pharmaceutical services division of the health ministry in January 2017 over compliance issues, leading to panic-selling of Hovid shares that saw prices plunge to as low as 24 sen.

Hovid’s two production licences were reinstated separately in March and May 2017. Subsequently, its share price regained most of the lost ground.

Fifteen months after the takeover offer was launched, David and TAEL Partners had secured 94.94% of Hovid shares by the close of the offer in January 2019. The company was privatised and delisted a month later, marking the end of its 14-year run on Bursa Malaysia.

The offerors had failed to trigger a compulsory acquisition, as they did not achieve an acceptance level of more than 90% of shares they did not already own at the time the offer was made. As a result, they were left with minority shareholders who declined to sell their Hovid shares.

It did not take long, however, for David and TAEL Partners to realise that the minority shareholders were the least of their problems. The two major shareholders of Hovid would soon discover that they were stuck with each other.

The rift between David and TAEL Partners appears to have begun in 2021 when the latter informed the former of its intention to conduct a trade sale. Strangely, David and FASB made a voluntary general offer in March 2022 to purchase all the non-listed shares from remaining shareholders at 38 sen each. The status of that offer remains publicly unknown.

In November 2022, a potential buyer of Hovid made a site visit and met with David in Ipoh, in the presence of FASB’s representatives.

Finally, in February 2023, the potential buyer made an indicative and non-binding offer of up to RM990 million, or RM1.20 a share, for Hovid.

Since then, TAEL Partners has appeared determined to exit Hovid, especially considering that the price tag of RM1.20 represents a threefold increase from its entry price of 38 sen.

For reasons unknown to the public, however, David is reluctant to let go of his stake in the company. Some speculate that this could be due to his attachment to the business founded by his father or simply because the offer price of RM1.20 was not attractive enough.

Kai Cheong set up Ho Yan Hor in 1941, establishing the household brand of Chinese herbal tea known for relieving body heat and curing the common cold. The herbalist passed away in 2007 at the age of 97.

His son, the 75-year-old David, was registered as a pharmacist with the Pharmaceutical Society of New Zealand in 1974 and as a pharmaceutical chemist with the Pharmaceutical Society of Great Britain in 1977. David succeeded his father and has managed Hovid since 1980, transforming the herbal tea business into a modern global pharmaceutical manufacturing company.

Hovid is now one of the country’s largest pharmaceutical manufacturers of medicinal preparations and health supplements, with more than 400 products distributed in 50 countries globally.

Suffice it to say, David has been the talisman of Hovid over the past few decades. Given that the potential buyer who made the non-binding offer intends to acquire the entire stake in Hovid, one could assume that the buyer is a pharmaceutical company capable of running Hovid without David.

When contacted by The Edge, David declined to comment and, at press time, TAEL Partners had not responded to a request for comment.

Over the past two years, David has strategically used legal means to block the trade sale of Hovid by TAEL Partners. His efforts began in October 2022 when he filed a lawsuit against FASB, alleging minority oppression.

When the High Court dismissed his case in January 2023, David quickly filed an appeal. In June that year, when FASB attempted to convene an extraordinary general meeting to move the trade sale forward, David successfully secured an injunction from the Court of Appeal to prevent the meeting from taking place, effectively halting the sale process.

David escalated his legal actions in July 2024 by filing an application for an injunction at the Federal Court. This injunction aimed to restrain Hovid’s directors from passing resolutions, appointing new directors or holding meetings without his approval.

By doing so, David has not only delayed the sale but also maintained control over the company’s operations. With his appeal scheduled to be heard in October this year, the trade sale remains in limbo.

Interestingly, at the company’s 43rd annual general meeting on March 8 this year, Hovid’s minority shareholders urged the major shareholders to resolve their ongoing disagreements.

Documents sighted by The Edge show that TAEL Partners, via FASB, stated on Sept 9 that it was willing to transfer 48.29 million shares, or a 5.84% stake in Hovid, to David for free, along with a payment of RM10 million, if the trade sale is conducted professionally and successfully.

FASB also offered David a right of first refusal at the non-binding offer stage to match any valuation bid acceptable to FASB. It remains to be seen whether David will reconsider and accept these offers.

A search of its filings with the Companies Commission of Malaysia (SSM) found that Hovid’s financial performance had shown fluctuating, but generally strong, results over the past five financial years.

The company’s revenue saw a significant jump from RM218.14 million in the financial year ended June 30, 2019 (FY2019), to RM376.29 million in FY2020. Its turnover dipped to RM240.17 million in FY2021, however, before gradually recovering to RM273.8 million in FY2022, and improving further to RM296.42 million in FY2023.

Earnings trends have mirrored revenue gains, with Hovid recording RM7.17 million in profit in FY2019, which surged to RM61.45 million in FY2020. Profits then more than halved to RM27.9 million in FY2021, but rebounded to RM40.16 million in FY2022, stabilising at RM38.69 million in FY2023.

As at June 30 last year, Hovid’s net assets stood at RM406.31 million, while its retained earnings amounted to RM256.64 million.

Back-of-the-envelope calculations show that the potential valuation of RM850 million to RM990 million represents a price-earnings ratio (PER) of between 22 times and 25.5 times, against its annual profit of RM38.69 million in FY2023.

In comparison, the mid-cap pharmaceutical stocks YSP Southeast Asia Holding Bhd (KL:YSPSAH) and Kotra Industries Bhd (KL:KOTRA) are trading at historical PERs of 11 times and 14 times respectively.

Meanwhile, the larger-caps Apex Healthcare Bhd (KL:AHEALTH) and Duopharma Biotech Bhd (KL:DPHARMA), both valued above RM1 billion in market capitalisation, are trading at PERs of 22 times and 26 times respectively.

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