A cash cow for Huaren

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The phenomenal success of Star Publications (M) Bhd has been a boon for its controlling shareholder.Huaren Holdings Sdn Bhd, the investment arm of the Malaysian Chinese Association (MCA), collected some RM270.7 million in dividends from its investments between 1997 and 2007, according to Huaren’s accounts filed with the Companies Commission of Malaysia (CCM).And a large part of it went towards paying off the loans taken to acquire Nanyang Press Holdings Bhd, amid much controversy, in 2001. The political party later disposed of its entire interest in the Chinese newspaper company. Filings also indicate that Huaren probably ended up with a loss upon divesting its interest in Nanyang. Huaren’s dividends came almost entirely from 42%-owned Star, the publisher of Malaysia’s best-selling English daily The Star.Dividend contribution from investments, chiefly Star, has grown tremendously, from RM8.2 million in 1997 to well over RM40 million a year between 2005 and 2007, in tandem with Star’s sterling financial performance.But despite receiving increasing dividend income from Star over the years, Huaren did not pay out bumper dividends every year to its sole owner, the MCA, over the 10-year period. The reason, to a certain extent, could be  due to the repayment of huge loans taken to fund the acquisition of Nanyang from the Hong Leong group.According to CCM filings, Huaren paid out RM49.6 million in dividends in 2007 and RM50.4 million in 2006. But the substantial dividends in the two years came only after the absence of dividend payments between 2000 and 2005 (see Table 1).Huaren was busy settling some RM363.6 million in loans between 2002 and 2007. The bulk of the loans, amounting to about RM296.6 million (with an interest rate of between 6.8% and 7.3%), was incurred in 2001 to finance the acquisition of Nanyang by wholly-owned subsidiary Huaren Management Sdn Bhd.In that transaction, Huaren Management acquired 41.84 million shares or a 72.4% stake in Nanyang from Hong Leong group’s Hume Industries (M) Bhd for RM230.1 million or RM5.50 per share. The acquisition triggered a general offer (GO) that resulted in Huaren Management ending up with a 92.1% stake in the Chinese newspaper publisher at a total cost of RM297 million. The acquisition was opposed by a large segment of the Chinese community and a faction of the MCA. Current MCA president Datuk Seri Ong Tee Keat had also opposed then-president Tun Dr Ling Liong Sik’s decision to buy Nanyang.In 2002, Huaren Management sold some 13.2 million Nanyang shares on the open market to comply with the public shareholding spread. It also placed out 14.74 million shares or a roughly 25.5% stake in Nanyang to businessman Mah King Hock.The value of these 27.94 million shares  was not disclosed to Bursa Malaysia. How­ever, filings with CCM suggest that Huaren Management may have sold the shares for about RM140 million. This is because Huaren Management was able to repay RM140 million to Huaren in 2002, which reduced the amount owed to its parent company to RM159.1 million.Huaren had earlier advanced RM299 million to Huaren Management for the acquisition. The former had taken a loan from Public Bank, with Star shares as collateral, to raise money for the acquisition.Based on the estimated disposal value of about RM140 million for the 27.94 million shares, the average selling price is estimated at about RM5.01. With the proceeds of RM140 million, Huaren was able to repay more than half of the loans it had taken in 2001 for the Nanyang acquisition. Filings with CCM reveal that Huaren repaid some RM155.4 million in loans in 2002. The repayment halved the company’s total outstanding loans to RM141.2 million as at Dec 31, 2002. Thanks to strong dividend income from Star, Huaren repaid another RM31.2 million of the loans in 2004 and reduced its outstanding loans to RM110 million at the end of the financial year. It repaid another RM40 million in 2005 but at the same time, borrowed another RM85 million, for unknown purposes, resulting in a net increase in total outstanding loans to RM155 million at the end of 2005.In 2006, Huaren repaid RM35 million, reducing its outstanding loans to RM120 million. Then, in 2007, the company repaid RM102 million, reducing its total outstanding loans to RM18 million. It was able to make a huge payment in 2007, thanks to the disposal of 15.4 million Nanyang shares (a 21% stake then) in March 2007 for RM67.7 million to Ezywood Options Sdn Bhd. Ezywood Options is a vehicle controlled by timber tycoon Tan Sri Tiong Hiew King. After the disposal, Huaren was left with 17.1 million shares or a 23.1% stake in Nanyang, which could be exchanged for new shares in Media Chinese International Ltd following a merger between Tiong’s Sin Chew Media Corp Bhd, Hong Kong-based Ming Pao Enterprise Corp Ltd and Nanyang in early 2008. Based on the exchange ratio of 3.53 Media Chinese shares for each Nanyang share, Huaren Management could end up with about 60.4 million shares or about a 3.5% stake in the enlarged media group. However, the company could have sold its remaining shares before or after the merger. Media Chinese’s annual report for FY2008 did not list Huaren Management as one of the 30 largest shareholders as of July 16, 2008 (the last of the 30 largest shareholders held a 0.27% stake), which means its interest, if any, is very small.The Huaren group would be better off financially had it not acquired Nanyang, which it subsequently sold for lesser value. Based on The Edge’s calculations, the total disposal value of Huaren’s Nanyang shares is estimated at RM279.5 million compared to its total acquisition cost of almost RM300 million (see Table 2). The acquisition could have restricted Huaren’s ability to pay dividends to the MCA, given the repayment schedule of the loans, before the group sold off its stake in Nanyang. For the period of investment in Nanyang — between 2001 and Huaren’s latest available financial information for 2007 — the MCA investment vehicle was less generous with its dividend payments. During the seven-year period, Huaren itself received total dividends of RM263.3 million, but only paid out RM100 million to the MCA. It was repaying RM363.6 million in loans (including an additional RM85 million drawn down in 2005) during the period.Despite owning a cash cow in Star, Huaren’s had only about RM11.5 million cash as at Dec 31, 2007. This article appeared in the Cover Story page, The Edge Malaysia, Issue 747, March 23-29, 2009