What’s brewing at Hong Leong?

  • Business
  • Saturday, 01 Oct 2016

Guoco poser: Is Guoco about to be privatised? Does it entail Leng Chan stepping down from the board?

Quek Leng Chan’s decision to quit from group’s flagship Guoco may lead to shake-up

IN 1965, barely past his 21st birthday, the young Tan Sri Quek Leng Chan took a bold step to ply his fortunes in Malaysia.

His cousins decided to stay put in Singapore while Leng Chan, with an initial capital of RM700,000 that came from the parent holding company, ventured out of Singapore to head the operations of the group here.

“Malaysia and Singapore split. Nobody wanted to come to Malaysia except Leng Chan,” says an executive familiar with the group.

Five decades later, the company, Hong Leong Company (M) Bhd, has amassed reserves of RM36.5bil and is said to be easily valued at RM50bil at a conservative 1.5 times book value.

Leng Chan did not stop with Malaysia. He built a bigger empire in Hong Kong, where the jewel in the crown is undeniably Guoco Group Ltd.

Listed on the exchange there, Guoco holds a multitude of companies with interests in real estate, property, gaming and financial services that span the globe.

The group is sitting pretty with a cash pile of US$2.5bil (RM10.27bil) based on Bloomberg data.

So when Leng Chan, who heads the Hong Leong conglomerate, stepped down as chairman and board member of Guoco earlier this month, it had the market guessing as to what’s next with the elusive tycoon.

Those who are familiar with the ways of the tycoon and his companies say the businessman is a strategist who does not jump into just anything.

It doesn’t help that he has always played his cards close to his chest.

About three weeks later, Leng Chan also relinquished his chairman and director position at Singapore-listed GL Ltd (formerly GuocoLeisure Ltd).

GL is the largest hotel owner-operator in London, operating 17 hotels across six brands including the well-known Thistle.

Both companies stated this one liner – “an internal restructuring of the Hong Leong group” – as the reason for Leng Chan’s departure.

Leng Chan’s younger brother, Kwek Leng Hai, 63, has since assumed the helm at Guoco and GL.

Besides Leng Hai, sibling Kwek Leng San, 61, also sits on the Guoco board.

They hold several board positions in the other companies under the group.

But what can this internal restructuring mean? Is the tycoon reducing his activities and passing on the reins, or is there more to it than meets the eye?

“For Leng Chan to relinquish his role at flagship Guoco is a big thing.

“Having no board position means no longer being in touch with management, officially that is. That’s surprising for a man who is still active and healthy,” quips the executive who has been following the 73-year-old tycoon’s corporate manoeuvres since his early days.

Leng Chan holds a 74.4% stake in Guoco through private vehicle Hong Leong Co (M).

A filing with the Companies Commission of Malaysia shows that the tycoon and his Malaysian side of the family hold 51% in the private vehicle. He has helmed it from 1990.

How Leng Chan ended holding a majority stake is not clear. But one explanation is that he has been putting more money in the Malaysian arm compared with the parent company in Singapore.

“Hence over the years, he ended up with a bigger stake,” says the executive.

Guoco’s prized assets are mostly outside Malaysia (see corporate structure chart).

Apart from GL, Guoco has a substantial stake in GuocoLand Ltd, a Singapore-listed property company with substantial land bank in Singapore, China, Malaysia and Vietnam. It controls Rank Group plc, a London-listed gaming outfit that operates gaming and betting services in Britain, including the Channel Islands, Spain and Belgium and has a strategic 14% block in Hong Kong-listed Bank of East Asia – one of only two remaining independent banks in Hong Kong.

Locally, its most valuable asset is Hong Leong Bank Bhd (HLB), which it owns through Malaysian banking arm Hong Leong Financial Group Bhd (HLFG).

However, HLB’s RM28.4bil market capitalisation is small in relation to the portfolio of assets outside the country.

Its other valuable asset in Malaysia is perhaps the insurance business that is parked under HLFG. But this is up for sale.

Consider this too: If Guoco were to be privatised, then it does not have to entail Leng Chan having to step down from the board.

About three years ago, the tycoon tried to take Guoco private but failed even though he had raised the offer price from the initial HK$88 to HK$100 per share four months later. At the time of writing, Guoco’s market cap stood at HK$28.73bil (RM15.32bil).

Growing family ties

Leng Chan has four surviving brothers, of which two at least are involved with the operations of the group.

Of his two sons, the youngest Quek Kon Sean seems to be pursuing his own interest in activities revolving around the new economy.

“So, breaking up the assets is not so straightforward. More difficult is to find a candidate who is able to lead the multi-billion powerhouse that has about a dozen companies listed on four stock exchanges,” says the executive.

Locally, HLFG and HLB would need to undergo a restructuring at some point to meet Basel III requirements.

Under Basel III guidelines, financial holding companies such as HLFG are required to have a core equity tier-1 ratio of at least 9.5% by 2019, inclusive of mandatory conservation and countercyclical buffers. A privatisation of HLFG makes sense, given that it is undervalued relative to its holdings, say analysts.

HLFG’s entire market cap at present is RM18.17bil, but its 64% stake in HLB is valued at RM28.4bil.

Recently, the company received the nod from Bank Negara to start negotiations for the possible sale of its 70% stake in Hong Leong Assurance and 65% stake in Hong Leong MSIG Takaful. This could be a step to make its corporate structure cleaner before any reorganisation.

The exercise, if it materialises, could unlock almost RM3bil for HLFG based on the three times book value of merger and acquisition transactions for life insurance companies here.

Bankers reckon that after the failed attempt to take Guoco private, Leng Chan needs to plan another corporate exercise.

Could his resignation be part of this bigger plan?

Without an executive position at Guoco, bankers say that the tycoon would be able to vote as a shareholder of Hong Leong Co (M) in any future restructuring exercise. However, this would depend on how the deal is structured, they say.

“It has to come from an independent party but friendly towards Leng Chan,” says a banker.

Singapore connection

The remaining 49% of Hong Leong Co (M) is still held by the Hong Leong family of Singapore. What this means is that they have a “claim or right” to the Malaysian business of Hong Leong.

CCM’s filing shows that Hong Leong Co (M) had a paid-up capital of RM16mil as of June 30, 2015, while reserves stood at a whopping RM36.5bil.

For the financial year ended June 30 last year, it made a profit after tax of RM4.9bil on a revenue of RM26.5bil.

Leng Chan’s cousin Kwek Leng Beng heads and runs Hong Leong Singapore, which is also a multi-billion business empire with interests in property development, hospitality, finance and gaming. It has gross assets of over S$40bil, according to its website.

Leng Beng is the son of Kwek Hong Png, who founded Hong Leong in Singapore together with his three brothers.

The Hong Leong families on both sides of the causeway are today among Asia’s richest. They were collectively worth US$18.9bil in 2015 based on a Forbes survey.

The magazine, meanwhile, listed Leng Chan as Malaysia’s third richest this year with a net worth of US$5.3bil (RM22bil).

Managing dynastic wealth is never an easy task, going by the anecdotal stories of tycoons locally and abroad who have tried and failed, resulting in family feuds.

Extended family ties between the families still run deep, although there is “healthy competition” between them, says the executive.

“They are neck and neck in everything... when there is a property tender in Singapore, both sides will put in a bid,” he recalls.

“Hong Leong Malaysia has come a long way. The issue is will the empire eventually have to be split as the business and family grow?” he asks.

From the original four brothers, there are 11 sons in the second generation, while in the third generation there are over 15 offsprings, excluding female members.

The Chinese dictum says wealth does not last beyond three generations. In the case of the Queks/Kweks, it will be hard to dispel the notion, considering the growing family tree.

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