Haw Par ($3.46): Oversold; Embedded with Solid Value. BUY (TP: $5.25)

• Haw Par (HP) is trading at the widest discount of 0.4x NAV compared to the historical 5-year band of 0.6-0.9x.

• 60% of HP’s valuation is derived from its stake in UOB, whose price performance is highly correlated with the former. However year to date, HP’s stock has under-performed UOB, declining by 50% vs 34% in UOB’s stock price.

• At the current market cap of S$700m ($3.53/share), HP’s 4% shareholding in UOB is literally free if we strip out its investment holdings in UOL (5% stake), UIC (5%), investment properties, leisure and healthcare businesses.

• Balance sheet is strong and debt-free. We estimate dividend income from investments and operating earnings to generate free cash flow of $80-90m p.a., which is more than adequate to fund dividend payments of $49m (S$ 25c/share). Stock also offers a decent 7% yield based on the current market price.

• We expect corporate earnings to decline sharply in 2009. Against this backdrop, companies like HP with strong free cash flow and are attractively priced, are likely to outperform the broader market. Our sensitivity analysis shows that even if we were to assume sharply lower investment income from UOB; our worst case scenario indicates that net profit should still remain comfortably above $60m.

• We expect corporate earnings to decline sharply in 2009. Against this backdrop, companies like HP with strong free cash flow and are attractively priced, are likely to outperform the broader market. We stress-test earning impact in an downturn assuming sharply lower investment income from UOB; our bear case scenario indicates that net profit should still remain above $60m.

• Stock is trading at a 53% discount to our SOTP target of $7.51. Applying a 30% holding company discount, we derive a fair value target price of $5.25.

Recommend buy with 48% upside.

Negatives
Segmental earnings
•Stock is thinly traded with large institutional holdings (25% ofo/s stock), leading to wide bid/ask spreads.

•HP was removed from the MSCI Singapore in mid 2008; the lack of index inclusion could lead to low trading interest in the stock and consequently, price performance could lag broad market rallies.

•Earnings from Underwater World Sentosacould be impacted by lower tourist arrivals.