Singapore Inc.'s First Lady

As a young electrical engineering graduate in 1976, Ho Ching was recruited into the Singapore government’s top- secret research unit that was developing weapons systems for her country’s tiny, 50,000-person military. These days, Ho, 51, who’s now the wife of Singaporean Prime Minister Lee Hsien Loong, is working on a less-covert government project: revamping the company that’s synonymous with Singapore Inc., Temasek Holdings Pte.

Temasek, which is 100 percent owned by the Singaporean Ministry of Finance, has 90 billion Singapore dollars (US$55 billion) of assets and controls companies that account for 44 percent of the Straits Times Index. These include 57 percent of Singapore Airlines Ltd., the world’s second-biggest airline by market value; 28 percent of DBS Group Hold- ings Ltd., Southeast Asia’s biggest bank; and stakes in dozens of other local icons such as the 118-year-old Raffles Hotel and the zoo. Temasek, through its Singapore units, controls international companies such as Global Crossing Ltd., the Hamilton, Bermuda–based fiberoptic telecommunications network operator, and the Singapore-based Swissôtel hospitality chain. Through Singapore Air, it owns 49 percent of Richard Branson’s London-based Virgin Atlantic Air- ways. And Temasek owns less than 2 percent of China Aviation Oil (Singapore) Corp., protagonist of the biggest financial blowup in Singapore since the 1995 collapse of Barings Plc.

Ho, who has a Master of Science in electrical engineering from Stanford University, ended 30 years of financial secrecy by publishing Temasek’s first-ever annual review in October of 2004, though it doesn’t provide an auditor’s report, information on directors’ pay or a balance sheet as detailed as those provided by publicly traded Singaporean companies. Ho says that Temasek plans at some stage to sell bonds, and she has opened the company’s books to Standard & Poor’s and Moody’s Investors Service, gaining a triple-A debt rating from both.

She says she wants to increase the amount of Temasek’s holdings outside the 680-square-kilometer (263-square-mile) island, which has a population of just 4.3 million. In the past two years, she’s spent US$2 billion buying stakes in banks, phone service providers, drugmakers, budget airlines, hospitals and other companies that provide services to the rising middle classes of China, India, Indonesia, South Korea and Malaysia. Those countries, which comprise 45 percent of the world’s population, will account for a third of Temasek’s foreign investments in the future, Ho says.

Parts of the region were hit by the Dec. 26 tsunami, which killed more than 170,000 people and left investors debating the financial consequences. Singapore- based Mark Mobius, who manages US$13 billion in emerging-market stocks for Templeton Asset Management Ltd., says he be- lieves that Temasek companies may not be badly affected and that its banks and construction units may even benefit from the rebuilding. “In some respects, there may be a positive impact,” he says. Others say the tsunami highlights the risks of emerging mar- kets. “Even beyond natural disasters, there are issues of terrorism and other external shocks,” says Talib Dohadwala, who helps manage US$5 billion of Asian stocks at First State Investments in Singapore, including Temasek-linked and Indonesian shares. “One has to have a strong stomach.”

Since Ho became Temasek’s chief in 2002, the group’s returns have soared, according to CLSA, the Hong Kong–based Asian investment-banking unit of Crédit Agricole SA, France’s biggest bank. “Historical returns in Temasek-linked companies have not been impressive,” says Prabodh Agarwal, CLSA’s Singapore-based head of research. That’s now changed, he says. “Temasek-linked companies are much better investment propositions than ever before,” he says. CLSA estimates total returns to shareholders of Temasek’s publicly traded companies were 15 percent over two years and 33 per- cent in the year ended on Aug. 31, 2004, compared with a 1.6 percent decline over the decade ended on Aug. 31.

Temasek declined to comment on the CLSA figures. It says its own returns on its entire portfolio, which includes unlisted companies such as PSA Corp., the world’s No. 2 port operator by cargo volume, were 3 percent over 10 years, 8 percent over two years and 46 percent in the year ended on March 31, 2004.

“Madam Ho is galvanizing Temasek,” says Andrew Bux- ton, 65, former chief executive officer of Barclays Plc, Brit- ain’s third-largest bank, who is now a director at CapitaLand Ltd., a Temasek-owned real estate developer. “There’s a real push for shareholder value. I have seen a real effort to im- prove return on capital.”

Ho’s plan to double Temasek’s presence in Asia outside of Japan and Singapore to 33 percent of its total investments from the current 16 percent may cost S$24 billion over 10 years, says Lim Jit Soon, head of Singapore research at Citigroup Global Markets. Greg Pau, S&P’s Singapore-based director of corporate ratings, says, “Any company going into unfamiliar territory typically pays a tuition fee.” Alan Cock- shaw, a director of CapitaLand, in which Temasek owns a 61 percent stake, says not expanding might be even riskier, particularly with a small domestic market such as Singapore’s. “If you stay at home and look at your backyard, people will come and take your backyard,” says Cockshaw, who’s based in Manchester, England, where he was formerly CEO of AMEC Plc, the world’s third-biggest engineering design company.

‘Madam Ho is galvanizing Temasek,’ a CapitaLand director says. ‘There’s a real push for shareholder value.’

One recent investment that soured: China Aviation Oil, which in November reported US$550 million of losses from trading oil derivatives, which are financial instruments whose value is based on the price of oil. The company, a unit of Beijing- based China Aviation Oil Holding Co., which supplies jet fuel to airlines flying through China’s airports, was first listed on the Stock Exchange of Singapore in 2001. Temasek was among the investors who bought a total of 25 percent of the company, Temasek spokeswoman Eva Ho says.

In 2004, the Singapore unit bet that oil prices would fall. As its trading losses mounted and oil prices reached record highs, the Beijing parent brought forward the sale of another 15 percent stake to European and Asian investors in October, raising US$108 million to cover margin calls, ac- cording to CEO Chen Jiulin in a Nov. 29 affidavit to the Singapore High Court. Again, Temasek bought some of the stock, ending up with a total of less than 2 percent, according to spokeswoman Ho. On Nov. 29, China Aviation Oil filed for bankruptcy protection. It was due to present a payment proposal to creditors on Jan. 24.

“The general lesson is that when investing in China, the focus on quality and due diligence has to be paramount,” Do-hadwala says. “China Aviation is listed in Singapore, but it’s still a Chinese company.” Temasek hasn’t been accused of any mismanagement or wrongdoing.

Temasek’s own companies stumble at times. “They’re very smart guys at Temasek, and you have some well-run companies in the stable, but you also have some not-so-great ones,” says Hugh Young, who oversees US$10 billion of securities in Asia as Singapore-based managing director of Aberdeen Asset Management.

Chartered Semiconductor Manufacturing Ltd., a Singa- pore- and Nasdaq-listed company that hasn’t made an annual profit since 2000, is one such example, Young says. The government’s dominant role in running companies may also be to blame, says Linda Lim, an expatriate Singaporean who is professor of corporate strategy and international business at the University of Michigan in Ann Arbor and a director of Woodhead Industries Inc., a Deerfield, Illinois, maker of electronic connectors. “Temasek’s overall rates of return may have been dragged down by the kinds of things they invested in for national strategy rather than pure financial return,” Lim says. “The role of the state in business has become at best unnecessary and at worst dysfunctional.” Chartered’s stock price fell 48 percent to 95 Singaporean cents in the 12 months ended on Jan. 11 compared with a 13 percent rise in the Straits Times Index.

Temasek’s annual review says the company’s returns were hurt by the 1997 Asian financial crisis, the global economic slump following the Sept. 11, 2001, terrorist attacks in the U.S. and the 2003 outbreak of the severe acute respiratory syndrome virus, which infected more than 8,000 people and killed 774, disrupting tourism and business travel and damaging the earnings of airlines, hotels, retailers and restaurants.

Nonetheless, Temasek made a profit of S$7.4 billion on revenue of S$56.5 billion in the year ended on March 31, 2004—30 times the S$241 million profit of the previous year, when it took S$2.5 billion in provisions and charges, according to its annual review. The group also has US$13.5 billion sitting in the bank, according to S&P. “They’re flush with cash,” Pau says.

“Temasek has done itself a great disservice by keeping its operations opaque,” says Ho Kwon Ping, 51, a director of three Temasek companies, including Singapore Airlines. He says Temasek companies are among the world’s few examples of successful state-owned enterprises. “In most countries, state-owned enterprises are opaque because they are corrupt, incompetent or money losing,” he says. “Given all its constraints, Temasek has performed excellently.”

The parent company has no obligation to disclose as much as a public company, though investors would like it to. “Temasek’s annual accounts are really an aggregation of all its subsidiary companies and therefore do not reveal anything,” CLSA’s Agarwal says. “What Temasek ought to do is give its own profit and loss and balance sheet showing how much dividend and other income it earned, what were its major expenses and a composition of its balance sheet assets and liabilities.” Temasek spokeswoman Rachel Lin says the company’s consolidated, group-level overview accurately reflects performance.

“They’re as transparent as they want to be,” Dohadwala says. “But it seems to be going in the right direction.”

Ho, who declined to be interviewed for this article, has said repeatedly in speeches that all Temasek decisions are made to ensure the best possible shareholder return. “The commercial principle underpins all our activities in Temasek,” Managing Director for Strategic Development S.

Iswaran, 42, says.

The Lee family is at the apex of both the government of Singapore and of Singapore Inc. Ho’s 52-year-old husband is both prime minister and finance minister. His father, Lee Kuan Yew, 81, who was the founding prime minister of Singapore in 1959, oversaw its independence after it was expelled from the Federation of Malaysia in 1965, and he ruled until 1990. Today, he’s chairman of Government of Singapore Investment Corp., which manages Singapore’s US$100 billion of foreign reserves, and he retains a cabinet seat as minister mentor. The prime minister’s brother, Lee Hsien Yang, 47, is CEO of Singapore Telecommunications Ltd., the country’s biggest publicly traded company, of which Temasek owns 63 percent.

Lee Hsien Loong said in a 2000 interview with Bloom- berg News that it was no coincidence that he, his brother and his wife had risen so high. “We have a family where everybody is competitive and has tried to do well,” he said, restating Singapore’s commitment to meritocracy. Chen Hwai Liang, Lee’s spokesman, says the prime minister has nothing to add to the 2000 interview.

Temasek’s CEO has been doing well since her days as a student at Singapore’s Crescent Girls’ School, which promises to prepare students to be “the ladies and leaders of tomorrow,” and later at National Junior College, where, outside of classes, she was a drum majorette. In 1972, Ho won a president’s scholarship, awarded each year to the five or 10 Singaporean students with the best final high school exam results, and a place at the University of Singapore. She graduated with first- class honors in electrical engineering in 1976.

While Ho was in college in 1974, Lee Kuan Yew founded Temasek—which is Malay for sea town, an old name for Singapore—as a holding company to manage the country’s most- important industries and utilities. Temasek’s investments, then valued at S$350 million, consisted of utilities, military industries such as the former British naval dockyard, the Development Bank of Singapore (now DBS Group Holdings Ltd.) and Singapore Airlines.

After graduating in 1976, Ho joined Singapore’s Ministry of Defence, where she was assigned to the Defence Science Organization, which adapted and developed weapons systems for Singapore’s fledgling military. The branch specializes in electronic warfare, guided systems and cryptography, and it was so secret that its existence wasn’t made public until 1989, according to its Web site.

Interviewed for a 2002 commemorative book on the DSO, Ho said her first assignment was to digitize artillery training radar. “The biggest value from DSO was the confidence we gained,” she said. In 1980, Ho went to Stanford, California– based Stanford, where she earned her master’s degree in elec- trical engineering, and then returned to Singapore to become deputy director of the DSO.

In 1985, she married Lee Hsien Loong, whose first wife had died in 1982, three weeks after giving birth to the cou- ple’s second child, according to the second volume of Lee Kuan Yew’s autobiography, From Third World to First (Times Media, 2000). Lee Hsien Loong graduated from Cambridge University in England in 1974 with a bachelor’s degree in mathematics with first-class honors and a diploma in computer science. In 1979, he earned a master’s degree in public administration from the Kennedy School of Government at Harvard University in Cambridge, Massachusetts. Before entering politics, he had been an army officer and had known Ho while she was at the defense ministry. “It was a happy choice,” Lee Kuan Yew wrote. “They have two sons, and Ho Ching embraced Loong’s two other children as her own.”

In 1987, Ho joined a Temasek unit, Singapore Technologies Pte, an unlisted holding company for Temasek’s engineering, technology, military and property companies, where her first job was deputy director of engineering. She rose to president and CEO before “retiring” in 2001 at the age of 48, according to her official résumé.

Her retirement was brief. The following year, Temasek Chairman Suppiah Dhanabalan appointed Ho as executive director. Initially, Ho’s husband, then deputy prime minister, objected to her appointment. “He did not want a situation where his wife reported directly to him,” says Chen, Lee’s spokesman. Dhanabalan eventually got the approval of then Prime Minister Goh Chok Tong after setting up a system that ensured Ho would report to Dhanabalan, not to Lee. In June, 2002, Dhanabalan told the Straits Times that he had been impressed with Ho’s performance at Singapore Technologies, whose value had grown under her watch to S$20 billion from S$1.5 billion, even though Ho made some unsuccessful moves, such as buying a U.S. computer disk drive maker, Micropolis Corp., in 1996 that was closed 19 months later with debts of S$575 million. “I felt that Ho Ching had the qualities necessary to do the job,” Dhanabalan said in an e-mail.

Inderjit Singh, 44, a member of Singapore’s Parliament who’s a former Texas Instruments Inc. executive, an entrepreneur and a critic of government involvement in business, says of Ho, “One of her very important qualities is that she is able to make decisions fast.”

Since taking over Temasek, Ho has invested in 35 companies, many of them in banking. In June 2003, Temasek teamed with Deutsche Bank AG to begin acquiring what is now a 66 percent stake in Jakarta-based PT Bank Danamon. Four months later, Temasek joined Seoul-based Kookmin Bank and London-based Barclays to buy what is now 56 per- cent of Jakarta-based PT Bank International Indonesia, that country’s sixth-largest lender. Temasek built up a 10 percent stake in Mumbai-based ICICI Bank Ltd., India’s largest private lender, and in 2004 bought 10 percent of Seoul-based Hana Bank, South Korea’s No. 4 lender, and plans to buy 5 percent of Beijing-based China Minsheng Banking Corp., China’s only private lender. On Dec. 29, Ho received Malaysian central bank approval to acquire 30 percent of Malaysian Plantations Bhd., which owns the country’s smallest lender, Kuala Lumpur–based Alliance Bank Bhd.

The banking acquisitions will enable Temasek to profit from the growing middle class in three of the world’s four most-populous countries, says Iswaran, the Temasek managing director. “If you believe in Asia’s growth, with the emergence of the middle class and small and medium-sized enterprises and high-net-worth individuals, then the financial sector offers attractive opportunities,” he says.

The Indonesian banks were also a bargain, says Marc Faber, who manages US$300 million at Hong Kong–based Marc Faber Ltd. “They bought at distressed prices,” Faber says. “They are definitely doing the right thing investing in countries like Indonesia and India.”

Temasek has also acquired stakes in two Singapore-based budget airlines: Tiger Airways Pte and Jetstar Asia Airways Pte. Singapore Airlines already owned 49 percent of Tiger, so Temasek’s purchase of 11 percent increased the government’s stake to 60 percent. Jetstar Asia is 49 percent owned by Qantas Airways Ltd., Australia’s biggest airline, of which Temasek owns 3 percent. Temasek owns 19 percent of Jetstar Asia.

Temasek is trying to increase Singapore’s importance as an airline hub, says Mark Tan, a Singapore-based analyst at UOB Asset Management Ltd., which manages US$3.5 billion. Temasek’s Iswaran says investing in competing airlines makes sense. “It’s a growth sector,” Iswaran says. “If you have a belief in a sector, you will expose yourself to opportunities in the sector. It’s not like you have to take a single bet.”

Ho last year also approached the region’s biggest budget carrier, Kuala Lumpur–based AirAsia Bhd., says AirAsia CEO Tony Fernandes, 40. The talks ended after the two sides couldn’t agree on price, Fernandes says, and AirAsia subsequently went public on the Kuala Lumpur Stock Exchange. “She is open, down-to-earth and willing to listen,” he says of Ho. “I have never not enjoyed talking to her.” Temasek declined to confirm or deny any past interest in AirAsia.

Singapore Airlines CEO Chew Choon Seng said at an October news conference that the rise of budget carriers was one of the challenges his company faces. It has also been buy- ing stakes in airlines. In 1999, it paid too much—US$900 million—for the Virgin stake, CLSA’s Agarwal says. Singapore Air’s subsequent purchase of 25 percent of Air New Zealand Ltd. was diluted to 6 percent after the bankruptcy of the carrier’s Australian subsidiary, Ansett Airlines.

Timothy Ross, Asian aviation analyst at investment bank UBS Securities Asia Ltd., says the impact of the Asian tsunami will be minimal on Singapore Airlines and more substantial on budget carriers such as Tiger that are more dependent on service to the affected tourist areas.

Ross says Temasek’s ownership gives the airline tacit government backing, which helps its ability to raise capital. “Temasek has the national interest at heart, but smaller shareholders don’t do badly out of it,” he says. “It’s the best of both worlds: It operates in a laissez-faire competitive environment with a government guarantee.”

Chew says Singapore Airlines gets no government money. “Unlike other airlines that have been able to seek government-sponsored financial assistance when all else failed— sometimes many times over—we’ve never had that ability,” Chew said in a written response to questions. “We’ve had to stand on our own two feet.” In the year ended on March 31, 2004, the company reported a profit of S$849 million on sales of S$9.7 billion—a 15 percent drop in profit from the previous year, as the impact of SARS stopped Asians from traveling. Still, Singapore Airlines is Asia’s most profitable carrier and was airline of the year in 2004 based on passenger satisfaction surveys conducted by Skytrax Research, an independent London-based consulting firm.

Cockshaw, the director at real estate company CapitaLand, says Temasek doesn’t interfere in the company. “Ho Ching has a term she uses: ‘Let go, and grow,’” he says.

CapitaLand is spread across 79 cities around the globe and makes more than 60 percent of its profits outside of Singapore, according to CEO Liew Mun Leong, 58. Its investments range from shopping centers in Shanghai to apartments in London to penthouses beside Sydney Harbor. On Dec. 23, CapitaLand said it would pay US$120 million for controlling stakes in six shop- ping malls in China that have Wal-Mart Stores Inc. as the big- gest tenant. It has options to buy 14 more.

CapitaLand also has two listed real estate investment trusts in Singapore and 37 Swissôtel and Raffles hotels, in- cluding the Raffles L’Ermitage in Beverly Hills, California, and the original Singapore Raffles, a Victorian-era hotel where, 100 years ago, a bartender named Ngiam Tong Boon invented the gin-and-Cointreau-based Singapore sling. In 2004, CapitaLand’s share price rose 57 percent to S$2.13 from S$1.36, the best return of Temasek’s major Singapore- based companies. On Jan. 11, it traded at S$2.12.

DBS Group’s ambitions are only regional, says Jackson Tai, 53, the bank’s U.S.-born CEO, who was appointed in 2002. In 2003, DBS reported a profit of S$1.02 billion on as- sets of S$160 billion and, in the third quarter of 2004, in- creased profit by 24 percent to S$362 million from the same period a year earlier.

Tai says Temasek doesn’t try to set the agenda at DBS, even though Temasek Chairman Dhanabalan is also the bank’s chairman. “Temasek is a supportive institutional investor,” says Tai, a New Yorker of Chinese descent. “They behave like any other very sophisticated, constructive investor.” Western institutions, he says, now own 60 percent of the stock, which rose 9.5 percent to S$16.10 in 2004. San Mateo, California–based Franklin Resources Inc. and Denver-based Janus Capital Management LLC are among them, according to data compiled by Bloomberg.

SingTel, which is by far both the biggest Singaporean and Temasek-controlled company, with a market value of S$40 billion on Jan. 11, earns two-thirds of its S$12 billion in sales out- side the country. In 2001, it acquired Cable & Wireless Optus Ltd.—since renamed SingTel Optus—Australia’s second-biggest phone company, after Telstra Corp., and it also has investments in India, Malaysia, the Philippines and Thailand. “The name SingTel is now almost a misnomer,” CEO Lee says in an inter- view, adding that almost 90 percent of the company’s customers are outside of Singapore. In the year ended on March 31, 2004, SingTel posted net income of S$4.45 billion on sales of S$12 billion—a threefold increase on its 2003 net of S$1.4 billion. Its share price rose 13 percent in 2004 to S$2.38 from S$2.11.

With Temasek’s airlines, land, banks and phone companies, Ho is delivering on her promise to make the company more international. As for her pledge of openness, investors are still waiting for more.

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