Lam Soon generates investment value out of the ordinary

The food and edible oil producer’s profit declined 3% in its latest fiscal year, but its total returns from share price gains and dividends are nearly 80% over the past decade

Key Takeaways:

• Lam Soon reported a modest revenue gain in its latest fiscal year, but its profit was undermined by rising raw material prices
• Trading volume in shares of the food and edible oil producer is extremely thin, amid speculation the company may be privatized

By Cheng Shui Tong

It’s a household name in Hong Kong, known for such everyday items as its Knife-brand cooking oil and Axe dishwashing liquid. But that everyday consumer nature – and the slow but stable growth it usually brings – doesn’t excite investors these days, and even has some betting on a future privatization bid for Lam Soon (Hong Kong) Ltd. (0411.HK).

The company’s latest financial results, released last week, contained more of its time-tested formula, including a 5% revenue increase to HK$5.06 billion ($649 million) for its fiscal year through June. Its profit declined by 3.2% to HK$293 million, while it boosted its final dividend to HK$0.35 per share from HK$0.33 HK a year earlier. The dividend hike got investors excited, lifting Lam Soon’s shares by nearly 4% to HK$11 after the announcement.

While it’s well-known locally in Hong Kong, Lam Soon is entirely inconspicuous in the eyes of investors in the city’s more international stock market. It went public in 1972, around the same time as other local corporate luminaries like conglomerate Cheung Kong, as well as property developers Sun Hung Kai and New World Development.

Lam Soon may fail to match the other big names in terms of stock performance over the last 50 years, especially the property stocks that thrived off the city’s booming real estate market and later parlayed that success into Mainland China. But the company has excelled nonetheless because its business is steady and unaffected by economic cycles. And if calculated over the past decade, its returns have actually outperformed many much larger companies.

Market outperformer

Lam Soon’s shares have generally hovered around the HK$10 mark over the last decade. The stock stood at around HK$8.50 some 10 years ago, meaning it’s currently up about 30% from that at the current HK$11 price. And after adding the HK$4.28 in total dividends over the last decade, anyone who bought the stock 10 years ago and held it has earned a roughly 80% return over that time.

Compare that with the benchmark Hang Seng Index, which even after adding an average annual dividend yield of more than 3%, still falls short of Lam Soon in terms of returns. Major real estate developers mostly trade lower now than they did a decade ago due to the recent property slump, meaning their total returns similarly fall short of Lam Soon.

Lam Soon’s bread-and-butter, so to speak, is food and edible oil products, as well as cleaning supplies, which are daily essentials in economic good times and bad. That may be relatively dull for investors chasing high growth, and the stock is likely to underperform when the broader market and the economy are trending upward. But it also tends to deliver stable returns in more volatile times.

Lam Soon’s financial position has also been relatively solid in recent years, with the company operating essentially with zero debt. It had HK$2.06 billion in cash at the end of June, underpinning its ability to keep paying high dividends with yields around 4% in recent years.

One of the stock’s biggest drawbacks is its extremely low trading volume, making it less suitable for short-term investors. Another Achilles heel is its susceptibility to fluctuating prices for raw materials like wheat, peanuts, and palm oil used to make its products, as well as petrochemicals used to make detergents.

Family feud

Lam Soon was founded in Singapore in the 1930s by Ng Keng Soon, initially trading in edible oil, rice and copra. It launched one of its key products, Knife cooking oil, in 1948. Following Ng Keng Soon’s death in 1955, the business was inherited by his two sons, Whang Tar Choung and Whang Tar Liang. The company expanded into Hong Kong in 1961, introduced Axe in 1969, and acquired Hong Kong Flour Mills in 1987.

In the 1990s, Lam Soon was managed by Whang Tar Choung’s son-in-law, Raymond Chien. Chien, often referred to as the “king of public service,” who once served as a member of Hong Kong’s Executive Council, attempted to transform Lam Soon from a traditional food and oil enterprise by expanding into high-tech fields such as telecommunications and the internet. He also relocated the company’s production lines from Hong Kong to Mainland China, a migration that lowered production costs but also required massive spending that came back to haunt the company when banks tightened credit during the Asian Financial Crisis of 1997.

Making matters worse, a feud broke about between the two Whang brothers, who took some of their disputes to court. At that time, Quek Leng Chan, chairman of Malaysia’s Hong Leong Group, recognized the value of the company’s core brands and seized on the Whang family discord to launch a takeover bid in 1997. He accumulated enough Lam Soon shares in the market to make him the majority shareholder.

Following that takeover, Lam Soon returned to its core business. The dispute between the brothers was finally settled in 2000, but by then they had already been reduced to minority shareholders.

Privatizing peers

Other edible oil companies have listed in Hong Kong over the years, but many have recently privatized and delisted after failing to attract much investor interest. Lam Soon’s main competitor, Hop Hing Group, producer of Lion & Globe cooking oil, privatized in 2022, and China Agri-Industries Holdings, a subsidiary of foodstuffs giant Cofco, was also privatized in 2020. Well-known corn oil producer Changshouhua Food was similarly privatized and delisted in 2020. That shows that edible oil stocks have fallen out of favor with investors, resulting in sluggish share prices and thin trading volumes.

Arowana (300999.SZ), a leading Shenzhen-listed edible oil company, currently trades at a price-to-earnings (P/E) ratio of 47 times and a price-to-book (P/B) ratio of 1.56 times. Lam Soon is smaller in scale, with far lower P/E and P/B ratios of 9 times and 0.85 times, respectively. Its market capitalization is also relatively low at HK$2.68 billion.

Quek Leng Chan’s family currently holds about 61.2% of Lam Soon’s shares, while the Whang family’s Whang Sun Tze and related parties hold 11.28%. The company’s resulting low free float, coupled with its sluggish trading volume and depressed valuation, could indeed make it an easy privatization target if the Quek Leng Chan family decides that Lam Soon is better off out of the public eye.

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