Special Report: Eddie Ong continues to sniff out and seize opportunities

This article first appeared in The Edge Malaysia Weekly, on August 22, 2022 - August 28, 2022.

"We have about 30 stocks in our investment portfolio, with ownership ranging from 2% to 4.9%.” — Ong

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HEXTAR Group CEO Datuk Eddie Ong Choo Meng is probably one of the most talked about corporate personalities in the investing fraternity. Over the past few years, the 44-year-old businessman and his family vehicle, Hextar Holdings Sdn Bhd, have been actively buying into companies.

Today, Ong and his family control nine public-listed companies (PLCs) on Bursa Malaysia. They also have minority stakes in another 30 PLCs.

Ong has been involved in corporate actions ranging from mergers and acquisitions (M&A) to asset injections, asset sales, business diversification and takeover offers — all within a span of five years, if not shorter.

Some retail investors have been tracking his acquisition trail as they somehow believe he can provide the catalyst for a share price rally. However, conservative investors see him in a different light, to say the least.

So, just who is Ong?

In 1985, his father Datuk Ong Soon Ho started agrochemicals marketing firm Hextar Chemicals Sdn Bhd in Klang, Selangor. This gave him a base to grow the Hextar Group of Companies into the country’s largest pesticide producer. The group manufactures chemical fertilisers and industrial chemical products, among others.

Ong entered the Malaysian corporate scene by engineering a reverse takeover of Hextar’s rival Halex Holdings Bhd in 2017. Subsequently, Hextar’s agrochemical arm, Hextar Chemicals Ltd, was injected into Halex for RM596.79 million. The latter was then renamed Hextar Global Bhd.

But it was Rubberex Corp (M) Bhd where Ong made a massive killing as the share price skyrocketed from a low of 24 sen to a peak of RM2.95 (after price adjustment following bonus issue of shares).

The investment allowed him to ride the unprecedented glove mania during the Covid-19 pandemic in 2020. He made his name with that move.

However, Ong attributes the lucrative investment to luck. “Whether Rubberex was the Midas touch, if you ask me, the answer may be no. I was very lucky,” he says in an interview.

Notably, Ong bought a 27% stake in the Ipoh-based glove maker in late February 2020, a few months before the start of the global Covid-19 pandemic. Logically, the return on investment would have boosted his war chest, allowing him to be aggressive and bold in his ventures.

Ong also has under his belt companies such as Hextar Industries Bhd (formerly known as SCH Group Bhd), Hextar Technologies Solutions Bhd (formerly known as Complete Logistic Services Bhd), Classic Scenic Bhd, KIP Real Estate Investment Trust (REIT), Pekat Group Bhd, SWS Capital Bhd and Opcom Holdings Bhd. Recently, a series of corporate exercises involving Hextar Industries, Hextar Tech, Classic Scenic and KIP REIT cast the spotlight on him again.

What exactly does Ong want to accomplish?

Critics are likely to say that he is just another rogue investor who wants to make a quick profit on the stock market, that he is not serious about running the businesses.

“There have been a lot of questions raised. Who is this guy, Eddie Ong? Why does this young businessman keep buying into so many companies? Is he taking money out of the PLCs? The answer is NO. We reserve the money to grow the business, and that is our whole intention,” he clarifies.

Ong tells The Edge that he has been rejecting media interviews as it is not his intention to gain fame. “Our intention is to grow our businesses and, of course, that would attract some attention, whether you like it or not,” he says, adding that hundreds of deals come to him every year, many of which have been rejected.

“When we came into the market a few years ago, we kept buying into listed companies, so a lot of people categorised me as a person who manipulates or does some hanky-panky in the PLCs. It is very hard for me to go out there and respond. We would rather build our businesses, and I believe the result will speak for itself.”

Interestingly, Ong sees himself as a dealmaker rather than an entrepreneur. Nevertheless, he stresses that he will create shareholder value in the companies that he has invested in.

Ong highlights that the currently weak market sentiment does not prevent him from sniffing out opportunities and grabbing every chance to expand his business empire.

“Hextar is still a small group, but we are growing at a very fast pace. Our vision is to grow Hextar [Group] into a conglomerate with diversified interests. We are definitely in it for the long haul as we intend to create about eight to 10 times market value from where we are today in 10 years’ time.”

Ong currently sits on the board of Hextar Global as executive director. He is also non-executive director at Rubberex and Hextar Industries, into which he is injecting his family’s fertiliser business for RM480 million (see “Second asset injection by Ong within two months” on Page 27).

“In terms of compound growth, we are looking at about 30% a year. We are a fast growing company, we have big ambitions, and we believe we can achieve that by not only organic growth, but also M&A,” he elaborates.

Ong holds a Bachelor of Business (Economics and Finance) from the Royal Melbourne Institute of Technology in Australia. He has been in the agriculture industry for more than 18 years, but he has specialised in finance and investments rather than fertiliser formulations.

Ong has a different business philosophy compared with his father, Soon Ho’s. “My dad doesn’t do M&A, he doesn’t like borrowing, the bank is never his buddy. We do entirely different things, I love M&A. From the day we go in, we know that M&A is only our way. So, the good thing is that a lot of M&A we [undertook] were very successful, and that gives us more bullets to go forward,” he says.

Nine PLCs being managed individually

Ong realises that he is said to control more than 20 to 30 companies. The dealmaker, however, wants to put it on record that he only controls nine PLCs, which are either directly under his name or companies that are majority-owned by him (see shareholding chart).

“The good thing about us is that all these businesses are being managed differently. We are very different from other [diversified] groups, we do not have any inter-shareholding structure between these nine companies,” he says, highlighting that there is unlikely to be systemic risk if one company in his portfolio fails.

Ong stresses that all nine PLCs have different offices, management teams, warehouses and factories. “We don’t even put the same people on the boards. They are all clearly professionally run based on industry standards. We will be expanding our businesses, but they will not be mixed together,” he says.

“Once all the businesses are mature, we will have a mix of old industries together with new-economy sectors that are booming. We intend to create a big and complete ecosystem for our group, enabling us to be a bigger player in Malaysia.”

At a time when global equity markets are tumbling as economic fears grow, Ong insists that he does not consider it a bad market from his point of view. “Of our nine PLCs, I think six of them had their best quarter in the entire history of the listed company. So, when people say the market is bad, I don’t think we are affected,” he says.

“Hopefully, when prices come down, it will give us an opportunity to buy more shares, because we are always a long-term player in the industry. If you look at my shareholdings, I don’t think I have sold any shares apart from Rubberex.”

To recap, when Rubberex’s share price was on the climb, Chin Hin group founder Datuk Seri Chiau Beng Teik, who had subscribed to a share placement, later sold his equity interest to Ong at 38% below market price. The transaction prompted many to wonder about Chiau’s rationale for selling at such a low price when the glove mania still had momentum.

Ong was then obliged to make a mandatory general offer that was substantially below market price, and raised his stake to 50.1% from 29% in the process. Given the low offer price, there were hardly any takers.

When asked whether he and Chiau were parties acting in concert as the duo have invested in a number of similar companies, Ong refutes the claim. “Yes, we are friends. And we believe in our business models. So, I also took a stake in a lot of his companies. I don’t think these are parties acting in concert.

“We are still looking for big investments together, not only Chin Hin. We are also investing in a lot of things together with other partners. Like the [Empire City] Mall, I only invested 20%. But I have other partners, so it is not only Chin Hin. I don’t think it is right to make that accusation.”

Ong admits that apart from his aggressive buying spree, he has nothing more to shout about. He sees that his efforts to create shareholder value are still a work in progress that have yet to bear fruit.

Will Ong’s aggressive M&A spree — something that his father and many entrepreneurs would never do — help him to build a solid diversified portfolio that yields sustainable returns rather than make a quick buck from share price movements? As the saying goes, only time will tell.

 

Second asset injection by Ong within two months

Businessman Datuk Eddie Ong Choo Meng is keeping himself on his toes.After completing the purchase of a 14.94% stake in wooden picture frame maker Classic Scenic Bhd less than a month ago, Ong is now busy with a bigger deal — selling his family’s fertiliser manufacturing business to Hextar Industries Bhd for RM480 million.

Ong, who is the single largest shareholder of Hextar Industries with a 45.7% stake, will see his shareholding increase to 77.3% after the deal. He will be getting 1.6 billion new shares at 30 sen each in settlement. The company’s share price had more than doubled year to date from about 15 sen to 37.5 sen last Friday.

The latest asset injection is a related party transaction (RPT), as was the sale of the Classic Scenic shares. Ong controls a 71.5% stake of the seller of the shares, Hextar Technologies Bhd.

He is also in the midst of injecting real estate assets worth RM78.7 million into KIP Real Estate Investment Trust (REIT) Bhd, in which he has a 19.1% stake.

Those who are familiar with Ong are likely to say he does this often, and that eyebrows are raised over his aggressive acquisition trail.

Coming back to the new multi-hundred million deal, Hextar Fertilizers Ltd (HFL), which Ong intends to sell, is a British Virgin Island-incorporated company whose core unit is Hextar Fertilizers Group Sdn Bhd (HFGSB), which has several units involved in fertiliser manufacturing operations.

The RM480 million price tag is based on a profit guarantee of RM94 million for the financial years ending Dec 31, 2022 (FY2022) and FY2023. The fertiliser business is valued at a price-earnings ratio of 10.21 times on a guaranteed annual net profit of RM47 million.

For FY2021, HFL posted a profit after tax of RM48.16 million, up 32% from RM36.59 million in FY2020, while revenue grew 24% to RM611.39 million from RM494.43 million. The increment was partly boosted by a capital gain of RM14.6 million on a reduction of share capital in a subsidiary plus divestment gain of RM5.4 million as a result of an internal reorganisation.

Notably, the company recorded negative operating cash flow of RM36.3 million as a result of rising raw material prices and the building up of its raw material inventory in anticipation of further rises in prices, according to Hextar Industries in an announcement.

Indeed, HFL borrowed to finance its inventory building. Its gearing ratio shot up to 6.28 times as its total borrowings swelled to RM338 million at end-2021 from RM218.6 million a year ago. The high gearing ratio was partly attributed to a reduction in shareholders’ funds caused by an internal reorganisation.

The announcement says Hextar Industries’ debts will also balloon to RM363.9 million upon completion of the acquisition from RM25.9 million. Its gearing ratio will rise to 1.4 times from 0.13 times.

HFL, however, was in the red in 2019, incurring a net loss of RM2.69 million.

According to HFGSB’s filings, the core unit of HFL made a net profit of RM2.48 million in 2019 compared with RM0.71 million in 2018 and RM1.12 million in 2017.

Nonetheless, Ong’s profit guarantee to HFL for FY2022 and FY2023 offers some earnings visibility in the near term.

Hextar Industries explains that the acquisition provides immediate market presence in Peninsular Malaysia and Sabah, expanding from its current operation that is focused in Sarawak only. HFL is expected to be its key growth driver moving forward.

Because of the profit guarantee, Ong will not receive 313.3 million of the 1.6 billion consideration shares (equivalent to about RM94 million). This chunk of shares will be allotted and issued and held as security by the stakeholder who is instructed and authorised to deal with the security shares, according to the announcement.

If HFL’s cumulative audited profit after tax for the guaranteed period is less than the guaranteed sum, Ong will have to pay cash to make up for the shortfall. Such a cash payment, if needed, will only be made after FY2023 has concluded. He will then receive the remaining consideration shares that have not been released to him.

 

Diversification started in 2018

This is not the first time Hextar Industries has bought a fertiliser firm. It ventured into the fertiliser industry four years ago by buying an 83.33% stake in PK Fertilizers (Sarawak) Sdn Bhd in a multi-proposal exercise, including a private placement and acquisition of two companies, in 2018.

Ong’s investment vehicle Hextar Holdings Sdn Bhd took part in the private placement and subscribed to 60 million shares, or a 12.7% stake, in Hextar Industries, which was then known as SCH Group Bhd. Since then, he has gradually increased his stake to over 40%.

The investment vehicle, meanwhile, sold TK Rentals Sdn Bhd — which rents mobile air conditioners, tents and event-related equipment — to Hextar Industries.

Interestingly, the transaction was structured in such a way that the placement would be offered to Ong only if the latter accepted the offer to sell TK Rentals for RM50 million cash.

Two years later, TK Rentals’ earnings fell short of the profit guarantee provided. Ong’s investment vehicle then paid RM10.2 million to Hextar Industries in FY2020 for the shortfall.

It is worth noting that the auditor brought attention to Hextar Industries’ goodwill of RM28.75 million arising from the takeover of TK Rentals in the financial year ended Aug 31, 2019. The auditor also highlighted the potential impairment of non-current assets with a carrying amount of RM24.83 million as PK Fertilizers incurred losses that year, according to the company’s annual report.

HFL is the second asset that Ong is injecting into Hextar Industries. The latest deal is a lot larger in terms of value.

Bluntly put, whether or not HFL will be able to achieve the profit guaranteed by Ong would indicate if he is a smart businessman or an opportunist making money by flipping assets.

 

‘I am more of a dealmaker than an entrepreneur’

 

Hextar Group CEO Datuk Eddie Ong Choo Meng’s aggressive acquisition spree has not only drawn investors’ attention but also questions on his ultimate goal of pouring money into that many companies. Today, the chemical tycoon controls nine Bursa Malaysia-listed companies.

As at last Thursday, the nine companies had a combined market capitalisation of RM4.728 billion. Ong’s stakes are worth RM2.378 billion.

The 44-year-old businessman does not hide the fact that he is a dealmaker who is always on the prowl for investments, rather than an entrepreneur who focuses on running the companies.

Here are excerpts from an exclusive interview with Ong.

 

The Edge: Besides Hextar group, you have been actively acquiring more companies. What exactly do you wish to accomplish? Is your focus on the Hextar Group? Or that you are an opportunistic investor?

Ong: Five years ago in 2017, we bought into our first listed company, Halex Holdings Bhd. We then injected our agrochemical business into the company and converted it into Hextar Global, which is our flagship company today.

That was our first foray into the corporate scene. Subsequently, we acquired our second listed company, SCH Group Bhd, which was later transformed into Hextar Industries Bhd. And then, the third, fourth and fifth ones came in.

Due to the economic downturn over the past two years, we became a little bit more aggressive in buying listed companies. The good thing is that we were buying during a time when people loved to sell.

For instance, when we bought into Rubberex Corp, we said, ‘Wow! This will give us a platform to grow into healthcare’. And suddenly, Covid-19 happened, and rubber glove prices went up, and a lot of people said I got (the) magic touch. The rest became history, we made a lot of money.

But our intention (in buying into Rubberex) had always been to go into healthcare because we find it a sustainable business going forward. Everybody needs healthcare.

 

How many PLCs do you intend to invest in?

We don’t have a number. We want to be in the industry that enables us to grow, so the number (of companies) is not so important for us, but the industries are. We also invest in a lot of other businesses. Apart from these nine, I think we have about 30 stocks in our investment portfolio, with ownership ranging from 2% to 4.9%.

 

Which other business segments are you interested in but have not invested in yet?

We are always looking at new things, like fintech (financial technology). We applied for a digital banking licence, but we didn’t get it with our partner. Fintech remains something that we are targeting to do. I think digital transformation is the future.

 

You were involved in quite a number of related party transactions (RPTs) recently. People may see you as flipping assets to make money.

We always put our PLCs as our primary goal. When we took over KIP REIT, the REIT only had retail properties, but they’ve already got the mandate to move into industrial properties. Meanwhile, we have industrial assets, such as factories and warehouses. It makes sense if I put all these good assets into the REIT, so we can monetise these assets and we can do a lot with the cash and rent it back from the REIT. That is our intention.

(Note: Both Hextar Global and Ong are injecting real estate assets into KIP REIT.)

 

What have you got to say to people who think you are using PLCs to unlock your own assets’ value?

We cannot deny that the REIT’s job is to acquire properties. In future, we might move more property assets into the REIT if it is possible, then whichever entity that sells the property will get the cash, and then we will use the cash for further investment for the listed company. It’s not so much about my personal properties, but also the properties of our listed companies.

 

Would you increase your stake in KIP REIT?

The answer is yes, we will be acquiring more shares so that we will get the benefit out of the REIT portion, together with our partner. The other reason is that KIP REIT is one of the top three REITs in Malaysia, offering an attractive dividend yield of over 7% a year.

 

What about the issue of corporate governance? You bought into KIP not too long ago, followed by asset injections. Did you already have a portfolio of assets ready for injection?

That was definitely our plan from the beginning. Before that, we were looking at whether we should list our properties as a new REIT. Last year, we had an opportunity to acquire units in KIP REIT because one of the co-founders passed away, so the block [of units] came into the market. Since it was available, why not? Instead of going for [listing] a new REIT, why shouldn’t we put our good assets into the REIT? I think it is a perfect marriage from there.

 

It is not that you bought the properties ahead, before you bought into KIP, and [to pave the way] to inject the assets?

No. Before the co-founder passed away, I didn't think the stake was available, so, coincidentally, it happened together. We didn’t buy new properties [just for injection into KIP]; all these were our existing properties, which would eventually go to the new REIT if this KIP deal didn’t happen.

With the combination of the malls and the REIT, our intention is to grow our property assets, to achieve RM1 billion market cap in the very near future for the REIT itself.

 

Will Empire City Mall (ECM) be injected into KIP REIT?

We will only consider that if there is a yield. I think we are still at a very early stage. Firstly, KIP’s management has to feel comfortable with the property. Secondly, we (Rubberex) only have a 20% stake in ECM. We still have other partners. Whether they want to put the mall into the REIT, it has not been deliberated.

But the reason why we bought into ECM is that Rubberex had made a lot of money (during the pandemic). Luckily, we invested into a mall and not further into rubber gloves. I think that itself shows that we had made the right decision.

 

What is the status of ECM?

We are still in the midst of touching up. It will only be ready in 18 months, so we are looking at opening the mall in 2024/25. Hopefully, we will be one of the top three largest malls in Malaysia by lettable square area.

 

Speaking of timing, you bought into Complete Logistic (Services Bhd) in March last year, now known as Hextar Tech. And it declared a bumper dividend this year. Did you foresee this happening when you bought into the company?

It was not foreseen. Complete Logistic will eventually divest some of its assets gradually because we intend to transform it into a tech company. So, why should it have so many assets, like Classic Scenic shares, sitting inside? A lot of people will say we use the listed company for our own motive to buy properties or to buy shares. We say ‘No, no, no, that is not our way, we have to clean up [restructure the company]’. After cleaning up, we have a lot of cash. To go into tech, you don’t need a lot of cash, you need a good and viable business project. That’s why we declared the dividend.

 

How do you fund so many acquisitions?

A lot of the acquisitions were funded by cash and debts. It is not funded by 100% cash, the bank gives us very good support in funding these acquisitions.

 

Do you pledge your shares for borrowings?

Yes, we do pledge our shares. Some also involve pledging our assets, shares, properties, all that.

 

Did you get any margin calls over the past few years and did you have to top up?

The margin call is on a very short-term basis. For example, if the price drops today, then a margin call happens. We will top up the next day. We didn’t default on any loan, but definitely there were margin calls, but I don’t see that as an issue.

The companies are all doing very well, that is the most important thing. When you talk about share prices decreasing, I don’t think all our companies have any big declines. The biggest decliner was Rubberex, which already declined before this year, so we are not affected at all.

 

Did you pledge shares in all the nine companies you invested in?

Some of the shares.

 

You have pledged your shares in all these nine listed companies?

Yes. Correct. But not all, not fully.

 

Are you comfortable with such leveraging?

Yes, we are very comfortable because we are only buying into good assets. If you ask me whether I’m worried or not, we are still looking at good assets to purchase, to be frank. We are not stopping.

 

For the individual companies, do you gear up their balance sheets as well?

Companies’ borrowings are supported by their own cash flows, and all our companies are doing very well. All nine listed companies are profitable and all have very good cash flow. You can see there is a lot of cash in our listed companies. We have good listed companies, so banks are confident to fund us on a personal level to buy into good companies.

 

Would you say you are a high risk taker?

It is not so much about high risk, but it is calculated risk. If you buy into a good asset, how can it be high risk? We are just afraid that there is nothing to buy; we are still very aggressively looking and buying.

 

You will diversify your investment portfolio, but the nine PLCs will specialise in their respective industries?

Yes. From now on, you will see a lot of corporate exercises. We are still looking into buying a lot of companies and, definitely, M&A is our play going forward. No doubt you will see a lot of corporate moves, a lot of acquisition plans happening throughout all of my nine listed companies.

 

How do you manage the nine PLCs? Are you involved in the day-to-day operations?

All the nine PLCs are professionally run. We have good and capable people to oversee them; I don’t myself. We have a group of professional managers to make sure all our forecasts are achieved, our budget is accurate, cash flow is good and things like that. We are a prudent management company. It’s not just about me, it’s about us.

 

Do you spend more time seeking investment opportunities?

Yes.

 

So, you leave it to the managers to run the businesses?

Yes, correct. That’s why a lot of people say I’m more of a dealmaker than an entrepreneur.

 

What do you think about that remark?

I think it is (true).

 

So, you won’t deny that?

Yes, I don’t deny that because we have been aggressively buying and a lot of people are looking for me if they want to sell their assets or project. They know we are genuine; we have integrity and we can buy. A lot of deals come to me personally, so I spend a lot of my time analysing these deals.

 

So far, have there been any resource constraints on your side?

At the moment, luckily, we still have a lot of bullets to buy. Until you see all these activities stop, then you know it is a constraint. Currently, we are still able to replenish, we are still buying.

 

For the Rubberex episode, do you think you were lucky?

Of course, luck played a big part. That time, we were very decisive that this was the company that we wanted, and we went in and closed the deal within a month. Because we were decisive, we got the deal. If we had dragged [our feet] a bit, then I think we might have lost it.

But we were also decisive in other companies, so whether Rubberex was a Midas touch, if you ask me, the answer might be no, it was very much luck.

 

There were many corporate figures in the past who were active in M&A activities but most of their ventures didn’t succeed in the end. Do you think you are any different from them?

We will not know what the end will be like, but a lot of people have different agendas in buying, some are cashing out, some have a lot of money, and some just want the shell.

But we are more of an industry play, we buy into an industry where we think we can do well. And we are not focusing on our own industry, but an industry that is needed in the market. That gives us creativity.

A lot of people are not flexible enough to move. Some family offices have very rigid structures where they have a lot of cross holdings, but we don’t. Our nine PLCs are all individually run without family members, so that gives us a new way of managing the businesses rather than a complicated structure.

Good or bad? We don’t know. I might be getting a big project and fail.

But the good thing about our structure is if any company fails, we can carve it out without burning the rest; there is no domino effect.

I think we structured it in a very good manner.

 

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