International Healthway Corp (IHC) — Shareholder Activism in Progress

We usually invest in beaten down stocks which can be an uncomfortable endeavour for most investors.

We often hear remarks such as “there’s no volume, nobody buys them“, “earnings are bad, they lose money!“, “sunset business“, “good assets but never get unlock“, “bad management who do not give dividends” and “this is a value trap“.

It is normal that most investors do not get what we are doing. Each investor should have their own investment style and approach as long as it works for them — delivering desired returns. We talk about our strategy so that the audience can gain a workable investment approach, if it is suitable for them.

We have shared how our investment in TSH got unlocked previously. It was a rotten stock that most investors shunned. Earnings were bad and even worsening. Company was ‘diworsifying’ into too many loss making businesses. The shares were eventually priced below the value of their freehold building at Tai Seng and the amount of cash in the bank.

A twist in the tale, the management decided to liquidate all the assets and businesses and return the proceeds to shareholders. This drew a lot of attention and the demand for the shares pushed up the share price tremendously. Some people would say we are lucky — simpleinvestorsg said they wouldn’t have gone into the stock because it wasn’t good enough for them. We respect that as to each his own. I would like to take this opportunity to explain our philosophy briefly.

We believe we need some degree of luck in all aspects of life. For example, being good at your job does not guarantee success. One would need opportunity and timing for promotion to happen. The good news is we can position for luck. In stock investing, bad news are actually good news for us. Bad news cause stock prices to be undervalued excessively, which allow us to own a piece of business or asset for cheap. Because it is ridiculously priced, the chances for the events such as asset liquidation and acquisitions by competitors are bound to happen. It creates situations for good things to happen, which you can call luck.

Source: Yahoo Finance

The recent event at International Healthway Corp (IHC) is a great example. The share price plunged from $0.32 to $0.10 after the SGX cautioned that 60% of the trading volume was concentrated in a few investors. Investors fleed and the share price was trading at half the value of the Net Asset Value. It doesn’t make sense because the actual properties would fetch a higher price when sold.

The ridiculously priced IHC drew interest of a Swiss hedge fund, Quarz Capital. The Fund has issued an open letter and a set of presentation slides to argue that IHC was badly managed, and proposed a plan to enhance shareholder’s value. The main proposals are:

  • Spin off a Japan Nursing Home REIT in Japan comprising 12 nursing homes with 1,458 beds.

Quarz estimated the REIT to be worth S$362m, a valuation comparable to other similar REITs. Quarz proposed to sell down the ownership to 10% stake in the REIT and raise capital from the proceeds.

IHC would undertake the REIT manager role and grow the assets of REIT to increase recurring management fees. Quarz is also supportive if the management prefers to sell off the entire stake.

  • The Board has planned to develop a piece of prime land 600m from KLCC into a 33-storey complex integrating medical suites, retail space and serviced residences.

Based on a conservative RM3,200 psf valuation, the land value would be worth S$52.6m. Quarz proposed to sell 50% of this land to potential Joint Venture partners (with funding and development expertise) to jointly develop project.

  • Melbourne and Geelong properties were put up for sale and should raise proceeds of A$72m.

The proceeds from the various sales should be used to pare down debts. Alternatives include refinancing and rights issue could also be explored to strengthen the financial position of IHC.

  • Quarz proposed to deploy S$100m to fund development of China and Malaysia healthcare (hospital, medical suites, serviced residence) projects. IHC has plans to develop hospitals in Wuxi and Chengdu.

The EGM was held on 23 Jan 17 and approved the removal of the existing directors and the appointment of the new directors. Baker Tilly as the auditor was not approved though. The Straits Times covered the proceedings, which was described as a rowdy session.

The new board comprises the following directors, who were mainly the independent directors of IHC:

  • Tan Chade Phang, Roger — CEO and founder of Voyage Research since 2009 till present.
  • Sho Kian Hin, Eric — Executive director of China Farm Equipment Pte Ltd, a company formerly listed on the Main Board of SGX-ST.
  • Tay Eng Kiat, Jackson — Operation Director and Company Secretary of Hafary Holdings Limited.

I believe this is an interim board to handle the transition until suitable executive candidates are found.

On the same day of the EGM, a surprising announcement from OUE that they have taken a 12.54% stake in IHC at S$0.77 per share. OUE is related to the Riady family who controls the Lippo Group. The Group has experience developing medical facilities since they have built up the Siloam healthcare brand in Indonesia. They have experience launching a healthcare REIT (First REIT) and they are an established property developer. IHC has the resources while Lippo can provide the expertise. It seems like a good match and it would be a possibility that OUE or Lippo could appoint their people as IHC directors eventually.

We hope the above is a good case study of how an investor can get ‘lucky’ buying dirt cheap stocks despite its poor earnings and outlook. It drew the attention of shareholder activists and corporate investors to take over the control of the company.

As value investors, we welcome more shareholder activism in Asia.

We share our value investing strategy here: Access Now!

Originally published at on January 25, 2017.