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Studying ARA’s Management Like Buffett
Corporate Digest | 29 September 2014
Related stocks:
S20
C31
By: Shane Goh
Articles (99) Profile

In our prior articles, we touched on the four tenets used to measure a public-listed company and understanding its revenue drivers through business tenets.

Next, we’ll seek to understand a company’s management.

In equity analysis, there are two aspects: Quantitative and Qualitative. The former touches on financials and market share while the latter addresses the management and business outlook.

There’s a tendency to focus on a business and its financials when deciding to invest in a company since these are usually backed by numbers. However, we should also understand the people running it.

Ultimately, the management team is the driving force behind a company’s success or failure. While we may never know their next move, their past performance could provide some insights on future direction.

Importantly, we like to know that the management team’s interests are aligned with its shareholders.

The Big 3
In ARA Asset Management’s case, excluding fund management firms, their top three shareholders control 46.4 percent of the total outstanding shares as of 11 March.

They are The Straits Trading Company (STC), Cheung Kong (Holdings) and Lim Hwee Chiang John. The latter is the firm’s chief executive officer.

Lim began his career in DBS Land (now known as CapitaLand) straight after graduation in 1981 before moving to GRA Singapore, a subsidiary of US-based Prudential Real Estate Investors.

In 2002, a contact within Asia richest man’s team, Li Ka-Shing, suggested forming a Hong Kong real estate fund.

Having spent his career in real estate suggests that Lim may be well versed with the industry and potentially has a network which he can tap on to gain access to deals or provide expertise. This is crucial in a field where different countries pose different challenges and it’s a tall order for one to fully understand every single detail.

But having the technical know-how does not mean the management will serve the interest of its shareholders, it must be appropriately incentivised as well.

A check with Forbes shows that Lim ranks on the 44th position in Singapore’s rich list with a net worth of $565 million.

Based on ARA’s latest annual report, Lim owned 155,814,184 shares in the firm. If we use ARA’s 26 September closing price of $1.74, we’ll get a figure close to $271.1 million.

This means that about half of Lim’s net worth is derived from his holdings in ARA. Thus, his alignment of interest for the firm to succeed is high.

Additionally, the firm’s chief financial officer, Cheryl Seow, has been with the entity since inception. This displays a sense of loyalty among ARA’s senior management.

Asia’s Richest Man
In Cheung Kong, ARA has Li Ka-Shing has a backer. Based on Forbes’s richest list, Li Ka-Shing ranks as the 15th wealthiest person on the planet and number one in Asia.

Through ARA’s chairman, Chiu Kwok Hung Justin, Cheung Kong has arguably the most important seat on the board of directors. Chiu has been an executive director in Cheung Kong since 2000 and boasts more than 30 years of international experience in real estate in Hong Kong and various countries.

Although it’s unclear the involvement of ARA’s daily operations by Cheung Kong, having someone to help open doors for you never hurt.

STC’s Strategic Alliance
Among the three, the most recent addition is STC, helmed by Chew Gek Khim. In October 2013, STC bought a 20.1 percent of ARA from Lim and Cheung Kong for $294.4 million through a combination of cash ($244.4 million) and shares ($50 million).

At the same time, STC formed a 90:10 co-investment vehicle with Lim with capital commitment of up to $950 million to undertake new fund product launches by ARA Private Funds. Additionally, STC agreed to allow ARA to manage its entire investment property portfolio (other than its hospitality-related assets).

Although STC appears to have taken a hands-off approach in terms of the day-to-day management of ARA and its property assets, the commitment to fuel capital towards ARA’s future property funds and having ARA manage its portfolio (i.e. increased management fees) shows a clear alignment of interest from STC.

SI Research Takeaway
The common disclaimer we read at the footnote of any investment prospectus is that “past results do not guarantee future performance.”

The same could be said for the management of any company. However, if we had a choice between a turnaround potential or a steady hand at the helm, I would err to the side of caution and stick with the latter, unless proven otherwise.

In our next instalment, we’ll dive in the financial performance of ARA and look at the key figures.

Disclaimer: The author owns a stake in ARA.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

Straits Trading Co, The  2.090 +0.01 +0.48%   
Business: Co is an investment company with stakes in real estate, hospitality, resources, and investment businesses in the Asia Pacific region. [FY17 Turnover] Resources (96.7%), real estate (3.3%).

Insight: Aug-18, 1H18 total revenue rose marginally by 2.2%... Read More
CapitaLand  3.530 +0.02 +0.57%   
Business: Co develops, owns, and manages real estate properties. [FY18 Geographical] China (41.2%), S'pore (38.5%), Europe & others (18.6%), Vietnam & Others (1.7%).

Insight: Apr-19, 1Q19 revenue fell 23.8% while net profit d... Read More


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