Cheng Hsu is the CEO of Huan Hsin Holdings Ltd (SGX:H16), which has recently grown to a market capitalization of S$7.20M. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. Today we will assess Hsu’s pay and compare this to the company’s performance over the same period, as well as measure it against other SGX-listed CEOs leading companies of similar size and profitability. Check out our latest analysis for Huan Hsin Holdings
What has been the trend in H16’s earnings?
Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. Most recently, H16 produced negative earnings of -S$20.59M , compared to the previous year’s positive earnings. However, on average, H16 has been loss-making in the past, with a 5-year average EPS of -S$0.13. During times of negative earnings, the company may be incurring a period of reinvestment and growth, or it can be an indication of some headwind. In any event, CEO compensation should be reflective of the current state of the business. In the most recent financial statments, Hsu’s total compensation grew by a mere 4.33% to S$461.27K. Although I couldn’t find information on the composition of Hsu’s pay, if some portion were non-cash items such as stocks and options, then fluxes in H16’s share price can impact the true level of what the CEO actually collects at the end of the year.
Is H16’s CEO overpaid relative to the market?
Though there is no cookie-cutter approach, since compensation should account for specific factors of the company and market, we can gauge a high-level thresold to see if H16 is an outlier. This exercise can help shareholders ask the right question about Hsu’s incentive alignment. Generally, a SGX small-cap is worth around SG$396M, produces earnings of SG$29.7M, and pays its CEO at roughly SG$1.2M annually. Usually I would look at market cap and earnings as a proxy for performance, however, H16’s negative earnings lower the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Hsu is being paid within the bounds of reasonableness. Putting everything together, though H16 is loss-making, it seems like the CEO’s pay is appropriate.
Next Steps:
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in H16, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. If you have not done so already, I urge you to complete your research by taking a look at the following: