Takeaways From The Annual General Meeting Of Hong Leong Finance & Parkway Life REIT

Having invested for more than a decade (but only with a plan since late 2017), I have only attended one Annual General Meeting (AGM)/ Extraordinary General Meeting (EGM), which is prior the merger of Frasers Commercial Trust and Frasers Logistics and Industrial Trust in late 2019/ early 2020 to form the currently listed Frasers Logistics and Commercial Trust (FLCT).

This year, I decided to attend some AGMs if I my schedule allows, and hopefully get to enjoy some free food and drinks, or even some door gifts if available.  After looking through all the dates and time, and my work schedule, I can only attend two, for Hong Leong Finance (HLF) on 25th April 2024 and ParkwayLife REIT (PWLR) on 30th April 2024.  Currently, PWLR is my largest holding based on capital and third largest holding based on market value, and HLF is my fifth largest holding based on capital and fourth largest holding based on market value.

*Note that the following sharing is based on personal perspectives and understanding from what I hear from the response from the board.  I may not be entirely correct in my personal interpretation.  Feel free to correct me or ignore my personal perspectives if it is not what it is intended to be.  Thank you.*

Afterthoughts from Hong Leong Finance AGM

To be frank, it is a bag of mixed feelings.  On the negative note, Chairman Mr Kwek Leng Beng seems to be very conservative, and probably overly prudent.  Throughout the entire Q&A session, he highlighted the importance of remaining prudent in the business, and is reluctant to enter into the digital realm.  His main concern is the high cost required to innovate the business into this unknown territory, which will inevitably burn cash in the short term, while the long term remains uncertain.  My interpretation of what he says, is that his prudency lies in the need to be able to predict the profitability of the actions taken for the business, and if any actions done, especially those that requires large capital outflow, results in high uncertainty of profitability, then he prefers not to go ahead.  As such, I think it is unlikely for HLF to have any surprise on the upside in the short term.  As Mr Kwek says, remain patient.

In addition, he highlights that it is important to segregate the performance of the 3 Singapore banks from HLF, as they are governed under different laws (Banking Act versus Finance Companies Act).  As such, HLF's hands are tied from many perspectives with many restrictions in business activities.  However, compared to other financial institutions listed in Singapore, HLF is the largest by market capitalization.  When probed why HLF is not moving towards the direction of becoming a bank, through merger or cooperation of some sorts (like Grab and Singtel), Mr Kwek dismissed the idea immediately and noted that HLF will not work with another bigger competitor/company just to become a bank, especially when current business is still profitable.  This, to me, signals the pride that Mr Kwek has on HLF, and definitely refuse to "cooperate" with other companies in any sense that may put HLF in any disadvantaged position. 

On a more positive note, Mr Kwek is happy to share profits with shareholders.  HLF has never been stingy with its dividend payout and has been consistent in its dividend policy.  For FY 2023, HLF has a payout ratio of 60%.  One concern that Mr Kwek has, and that is stopping him from burning cash in digitalization, is he prefers to conserve the earnings and pay them out to reward shareholders for their loyalty.  No wonder, being my first year attending its AGM, I noticed that there are many seniors who have held the shares for decades (from visual inspection, I think the average age of the shareholders who attended the AGM will be around 60), and has remained loyal to HLF all these years due to its consistent dividend payouts, in times of good and bad.  

As a dividend investor myself, I believe this may be one main pull factor that kept me as a ongoing shareholder.  However, due to the lack of foreseeable catalyst to propel the shares to higher levels, I will probably hold on to the shares, and continue to reinvest dividends, but unlikely to inject new capital into HLF until new catalysts or budding prospects surfaced. 

Afterthoughts from ParkwayLife REIT AGM

It was a very different story and mood altogether at the AGM of PWLR.  The mood among the shareholders are evidently lighter and 'brighter'.  This could be due to the spectacular performance of the REIT since IPO, as the annual distribution per unit by the REIT has uninterrupted growth all these years.  The Chief Executive Officer of the REIT, Mr Yong Yean Chau, shared with the shareholders the current work to be done in the REIT for its future prospects, namely, continuing their discussion with the sponsor regarding the eventual inclusion of Parkway Novena Hospital into PWLR's portfolio, finding the third pillar of growth that PWLR can venture into besides Singapore and Japan currently, and prudent management of the finances and debt of PWLR.

The inclusion of Parkway Novena Hospital into PWLR has been in the minds of many shareholders, if not all.  However, as Mr Yong has shared, it is currently difficult for PWLR to execute this in one step, as PWLR wants a win-win situation for both the REIT and the sponsor.  If the REIT purchase the property from sponsor, how can the sponsor better utilise the huge sum of money for future growth?  On the REIT's side, how to buy over the property is an issue to be resolved as the valuation of Parkway Novena Hospital is almost equivalent to the market capitalization of PWLR currently.  It may be too hard for the REIT to execute that now, but discussions are nonetheless ongoing, and according to Mr Yong, this is the top of the list in his mind now.  PWLR still has about 8 years left for the right of first refusal to acquire the hospital from sponsor.

Consequently, to grow the REIT, besides the Asset Enhancement Initiatives (AEI) currently ongoing at Mount Elizabeth Hospital (Orchard), the REIT is also looking to expand into a third pillar of growth outside of Singapore and Japan.  Mr Yong mentioned that a matured market will be considered, without divulging which country could be the possible candidate.  According to this report by World Economic Forum, I personally think that the possible third pillar of growth could lie in South Korea.  This is just a pure speculation on my part, and hopefully the actual news will be announced soon.

The last focus is definitely on the performance of the Japanese properties.  The properties are doing well, but the Japanese Yen has plunged to 34 years low against the US dollar.  The Chief Financial Officer Mr Loo Hock Leong has emphasized the prudency of the REIT and how they pre-empt the volatility of the SGD/JPY pair, and has performed natural hedge (by taking loans in Japanese Yen for the Japanese loans) and additional hedging for the following 3.5 years on average.  To the majority of the layman like me who may not understand what the hedging is about and how it works, perhaps the Q1 2024 business update released can help us understand that better.

From the results above, it is clear that both the gross revenue and net property income has declined year-on-year, unsurprisingly due to the extremely weak Japanese Yen in the past year.  However, the preemptive hedging of forex by the management has helped to bring about growth in 'foreign exchange gain' and 'net change in fair value of financial derivatives' (this is from my personal understanding with no financial background.  If my interpretation of the results is wrong, please feel free to comment below to correct me, thank you).  As such, despite the weak performance of the currency, which resulted in decline in net income, growth is still registered in both the total returns for the period after tax, and distribution per unit, which shows the capability and prudency of the management team, which in turn benefits shareholders.

As a dividend investor, PWLR will remain one of the top holdings in my portfolio, because the management gave me confidence in their performance and the performance of the REIT moving forward.  DPU increment year-on-year is something a dividend investor yearn for, and besides the relatively lower dividend yield of around 3.5% to 4% currently, it is hard for me to find anything that I dislike about this REIT, at least for the next 5 years.  As such, I will continue to dollar cost average, and reinvest the dividends back into this REIT.

So, that is all I have to share regarding my thoughts and takeaways from these 2 AGMs.  As seen from the difference in the length of the post, its clear where my biasness lies.  Nonetheless, I remain a proud shareholder of these two counters, and will probably remain so till any fundamental changes occur.  In addition, the buffet line for PWLR is noticeably better than HLF's.  Barista FIRE, here I come...!