Cover Story: Guoco Group sitting pretty on HK18.94b cash

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It has been a long time since Tan Sri Quek Leng Chan last hogged the limelight over a super major deal. The last time was in 2001 when his overseas flagship Guoco Group Ltd sold its Hong Kong-based Dao Heng Bank Group Ltd to Singapore’s DBS Group Holdings Ltd for a HK$41.9 billion cash windfall that created a buzz in the banking circles  of Hong Kong, Malaysia and Singapore.
Eight years on, Quek is making waves once again in Hong Kong as speculation heightens that he may soon launch a takeover of Hong Kong’s third largest bank, Bank of East Asia Ltd (BEA), using cash-rich Guoco Group as the vehicle. Before this, the cigar-chomping tycoon had been mostly biding his time between 2002 and most of 2009 happily collecting an estimated US$697 million (HK$5.4 billion) in dividends from Guoco Group over the last seven years.
Hong Kong-listed Guoco Group, now 74.8% controlled by Quek, sold an 80% stake in Dao Heng to DBS in 2001 for HK$41.9 billion cash. It was a pleasant exit, as it left the group flush with billions from the sale of the bank that Guoco acquired in 1982. Dao Heng was subsequently merged with two other Hong Kong banks — Hang Lung Bank in 1989 and Overseas Trust Bank in 1993.
After the sale of Dao Heng, Guoco Group in 2001 paid HK$5.4 billion to repurchase some 25% of its own shares at a 12% premium to its then market price. This was to give an exit to minority shareholders who didn’t like the fact that Guoco Group was changing its core business from banking to one that utilises the Dao Heng proceeds to conduct investing activities, including stock investments and treasury operations. The group categorised such new activities under its principal investment division.
Investing was supposed to be a mere past-time and was never meant to be Guoco Group’s new core business after the sale of Dao Heng, industry observers say. This was evident because Guoco Group had actually tried to buy back another bank in Hong Kong. The group was reported to have made some moves for International Bank of Asia (HK) in early 2002 — a year after it sold Dao Heng, Chekiang First Bank (HK) in 2003 and Asia Commercial Bank (HK) in 2006 — but nothing came of it.
Without any landmark acquisitions, investments and treasury operations under Guoco Group’s “principal investment” division continue to be the mainstay and a core earnings contributor for the company, utilising largely the remaining proceeds from the Dao Heng sale as base capital.
In Guoco Group’s annual report, its principal investment division carried out via 100%-owned subsidiary GuocoEquity Assets Ltd, ranked as a core business, along with the group’s investment holdings in various other listed companies.
In terms of corporate holdings, Guoco Group controls 65.2% of Singapore-listed property development arm GuocoLand Ltd (which in turn holds 65% of GuocoLand (M) Bhd), 56.4% of GuocoLeisure Ltd (listed in Singapore), and 25.4% of Hong Leong Financial Group Bhd — the Malaysian banking arm that in turn controls 64.3% of Hong Leong Bank Bhd and 75% of Hong Leong Capital Bhd (see chart).
Although Guoco Group serves as Quek’s listed flagship in Hong Kong, it doesn’t own significant stakes in other listed Hong Leong units such as Hong Leong Industries Bhd (HLI), which houses the Hong Leong group’s manufacturing businesses including motorcycle manufacturing, building materials and semiconductors.
HLI is 71.73%-owned by Quek through his ultimate private vehicle Hong Leong Co (M) Bhd (HLCM), which he personally controls with more than a 98% equity stake. Note that Quek’s holding in Guoco Group is also majority-held through HLCM.
There have not been significant changes in Guoco Group’s structure or its businesses, apart from organic growth, over the past seven years. In recent years, Quek attempted to transform GuocoLeisure, which owns a chain of hotels in the UK, into a gaming play by opening casino halls inside the hotels.
However, the plans did not quite take off as planned due to the smoking ban in UK casinos. Such a ban had also hit a similar business plan by the Genting group in the UK.As a matter of fact, a look at the changes in Guoco Group’s consolidated shareholders equity between FY2002 (FY ended June 30) and FY2009 would reveal that the group had been distributing a chunk of its earnings rather than reinvesting most of it back into expanding its businesses.
For instance, Guoco Group’s consolidated shareholders’ equity has grown only a modest 42.2% over the last seven years, between FY2002 and FY2009, from HK$27.91 billion in FY2002 to HK$39.69 billion as at June 30, 2009. Meanwhile, at the non-consolidated level, which excludes its subsidiaries’ balance sheet, Guoco Group’s shareholders’ equity had only grown slightly from HK$25.62 billion as of FY2002 to HK$28.57 billion as of FY2009.
The stagnant shareholders’ equity at Guoco Group’s level might have indicated that the company’s “principal investment” activities had not been churning substantial earnings. But that was not the case.
In fact, the “principal investment” division under Guoco Group, and overseen by Quek — being the company’s executive chairman — had performed well. According to segmented profit breakdown disclosed in Guoco Group’s annual reports from FY2002 to FY2009, the principal investment division made a total of US$1.97 billion (HK$15.27 billion) in profits over the last seven years.
Profits from the division averaged about US$230 million each year from FY2002 to FY2005, but jumped to US$636.49 million in FY2006 due to the stock market bull run.
The division continued to earn sizeable profits of US$447.45 million in FY2007, but then saw profit shrink to US$59.1 million in FY2008, and subsequently posted a loss of US$80.36 million in FY2009, largely due to the impact from the global financial crisis.
Thanks to prudent investment strategy, Guoco Group was lucky to escape relatively unscathed from the stock market meltdown. Quek could have smelled trouble in the stock market as early as the middle of 2007.
This was evident as Guoco Group was scaling down its “trading financial assets” from a peak of HK$9.19 billion as of June 2007 to HK$5.86 billion as of December 2007, pulling out 36% of funds in six months. Guoco Group further reduced its exposure to the financial market to HK$4.16 billion as at June 2008, and to HK$2.79 billion as at June 2009, its annual report showed.
But still, where have the HK$15.3 billion investment profits earned over the last seven years gone?
The answer lies in Guoco Group’s generous dividends. According to data provided in Guoco Group’s annual reports, the company paid a total of US$1.02 billion in dividends between FY2002 and FY2007. Quek’s share of the dividends could amount to some US$697.3 million, which took into account the changes of his shareholdings from 2002 to 2009. Quek has raised his shareholdings (deemed and direct interests) in Guoco Group from 42.5% in 2002 to 74.79% currently.
Nevertheless, while it has been paying generous dividends, Guoco Group retains a respectable balance sheet, with consolidated cash balance of HK$22.8 billion and marketable securities of HK$2.8 billion as at June 30, 2009, versus total borrowings of HK$19.5 billion.
Note that the war chest is huge at Guoco Group alone, which held HK$18.94 billion cash as at June 30 and is debt-free. The total borrowings of HK$19.5 billion shown on a consolidated basis (as mentioned above) are actually held under listed subsidiaries (see chart) such as Singapore-listed GuocoLand, which has HK$16.15 billion debt versus HK$3.25 billion cash.
Having said that, the fact remains that Guoco Group, as well as Quek, has been sitting on too much cash for a long time. Looking at BEA’s China appeal and Guoco Group’s financial muscle, Quek may be tempted to make another bid at owning a Hong Kong bank again, this time one that is far more attractive than Dao Heng. But if nothing happens, he would still be sitting on a hefty paper profit from the big rise in BEA shares in recent months. For someone with a reputation for enjoying a punt, Quek probably sees his foray into BEA as “heads or tails, I win”.

This article appeared in Corporate page of The Edge Malaysia, Issue 782, Nov 23-29, 2009.