Haw Par Corporation Ltd (SGX: H02) is the maker of the Tiger Balm brand of ointment. In addition to its healthcare arm, it also has strategic stakes in UOL Group Limited (SGX: U14) and United Overseas Bank Ltd (SGX: U11).
In a previous article, we looked at Haw Par’s revenue streams to better understand its business. Now, we’re looking at the other important part of the equation: its cost structure.
Source: Haw Par Annual Report 2018
The above is a breakdown of Haw Par’s costs for the year ended 31 December 2018 (FY2018).
Inventory costs accounted for the bulk of Haw Par’s operating costs, accounting for about 37% of the company’s cost structure (total operating expenses were S$154.6 million).
The second biggest cost is sales and marketing expenses. Together, these costs accounted for 27% of Haw Par’s total expenses. This is followed by employee costs, which accounted for 22% of Haw Par’s cost structure.
Thirdly, Haw Par’s cost of sales (S$92.1 million) accounted for 39% of total revenue. This indicates that Haw Par has a high gross margin of 61%.
Lastly, the bulk of Haw Par’s cost structure in FY2018 is made up of fixed costs. This includes sales and marketing, staff costs, depreciation, amortization, and most other operating expenses. A quick and dirty calculation will indicate that fixed costs will likely account for at least 55% (if not more) of Haw Par’s cost structure.
In other words, the high fixed cost as a proportion of the total cost means any change in sales volume will disproportionately affect the profitability of the company. In other words, Haw Par should benefit as it scales up its production in the future.
The Foolish bottom line
By understanding the different components within the cost structure, investors can better forecast the future costs and, subsequently, the profitability of the company, allowing investors to form a better opinion on the attractiveness of Haw Par as a long-term investment.
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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 Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore recommends Haw Par Group Ltd and United Overseas Bank.