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A Profit Margin of 108% In 2015? How Does Haw Par Corporation Ltd Make Its Money?

At first glance, Haw Par Corporation Ltd’s (SGX: H02) results for 2015 look odd. The company had revenue of S$178.8 million (up 16% from 2014), but profit attributable to shareholders of S$183.3 million (up 54%), giving rise to a profit margin of 108%.

Put another way, Haw Par had earned more in profit than it has taken in in revenue. By way of analogy, it’s akin to a hawker selling a bowl of noodles for $1 and yet booking a profit of $1.08. How can this be?

Let’s first break down each of Haw Par’s business segments. Altogether, Haw Par has four main business segments, namely, Healthcare, Leisure, Property, and Investments. The table below shows how each of the segment’s revenue and profit from operations had changed in 2015 as compared to 2014:

Haw Par business segment revenue and profit table
Source: Haw Par’s 2015 annual report

The Healthcare segment, which includes Haw Par’s well-known Tiger Balm-related analgesic products, had benefitted from lower commodity prices and higher demand.

Leisure, in contrast, saw its profit from operations become a loss due to impairment charges. This segment is where Haw Par runs aquariums. In 2015, there were two, Underwater World Pattaya and Underwater World Sentosa, but the latter has ceased operations in June this year.

Property was also a laggard as it saw a 20% reduction in profit from operations as a result of lower occupancy and a subdued property market outlook. The property segment deals with Haw Par’s ownership of investment properties in the ASEAN region.

The Investments segment, which houses Haw Par’s investments in various securities, was another big winner. The important investments in the segment are Haw Par’s stakes in United Overseas Bank Ltd (SGX: U11), UOL Group Limited (SGX: U14), and United Industrial Corporation Ltd (SGX: U06). In 2015, Haw Par owned, respectively, 70.4 million shares, 43.6 million shares, and 68.8 million shares in the three companies.

You may notice that the four segments’ profit from operations only add up to S$142 million, which is a far cry from Haw Par’s S$183.3 million in profit attributable to shareholders. So what gives?

Turns out, a big chunk of Haw Par’s bottom-line came from its associates. In 2015, associates’ contribution amounted to S$56.4 million, a huge 373% jump from 2014. When this is added to the company’s profit from operations for its four segments, along with corporate expenses, fair value changes in its investment properties, and taxes, these all amount to S$183.3 million.

Haw Par various profit sources table
Source: Haw Par’s 2015 annual report 

The bulk of the increase in associates’ contribution in 2015 came from gains that were recorded as a result of a sale of Haw Par’s stake in an associate during the year. So, the big spike there is clearly a one-off phenomenon.

This tour of Haw Par’s various business segments and income statement serves two important purposes. First, it allows one to better understand how Haw Par makes its money; doing so can enable investors to make better-informed investing decisions when it comes to the company. Second, it highlights how some companies have other important sources of profit beyond revenue.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat does not own shares in any companies mentioned.