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3 Risks Which May Slow Haw Par Corporation Ltd’s Strong Growth

Haw Par Corporation Ltd (SGX: H02) is a multi-national Singapore-grown conglomerate with businesses in healthcare, leisure, property investments and security investments. The group owns the iconic Tiger Balm brand, which is arguably the world’s leading topical analgesic brand.

In its most recent first quarter 2019 earnings release, the group reported strong growth in revenue, contributed mainly by the Healthcare segment. The group, however, did warn of lingering risks due to global uncertainty (as a result of the US-China trade war) which may affect its business. Here are three risks which may slow or dent Haw Par’s steady growth.

1. A rise in raw material prices

Tiger Balm is a best-selling brand for Haw Par, and the 2018 annual report shows that the Healthcare segment accounts for 91.7% of total revenue for the group. Segment margin also remained high at 35.6% and was an improvement over 2017’s segment margin of 34.0%. A quick check shows that Tiger Balm ointment lists camphor, menthol, clove oil and mint oil as key ingredients. If these raw materials experience a significant price increase, Haw Par may be unable to pass these costs on to consumers. Their segment margin will be negatively impacted should this happen, and earnings for the division will decline.

2. Global slowdown affecting demand

With the current US-China trade tensions, many supply chains are being impacted, and the tariffs imposed by the US are also leading to rising costs for many industries. When these effects eventually trickle down to individuals and families, it may cause them to cut back on spending due to rising prices and weaker job prospects.

As pain patches and ointment are considered discretionary items in many Western countries (for sports and exercising), this may lead to a decline in demand for Haw Par’s products, which will impact revenue for the Healthcare division.

3. Underlying investments

As of 31 December 2018, Haw Par owns a total of 74.8 million shares in United Overseas Bank Limited (SGX: U11) and 72 million shares in UOL Group Limited (SGX: U14). Together, these investments contributed S$97.6 million worth of dividends for Haw Par, which was a significant increase over the S$57.5 million which Haw Par received in 2017.

Should global growth slow down, it would negatively impact the business of UOB and UOL, and these two companies may reduce their dividends. Haw Par’s cash flow from investments would thus decline as a result.

Mitigating factors and resilience

While these three risks are looming over the horizon for Haw Par, investors should not be overly worried as there are mitigating factors in place. Tiger Balm, being an established brand, could still see resilient demand in Asia for its ointments, pain patches and mosquito patches. The raising of prices to offset a higher cost of materials may be palatable to long-time users of the products, though there is a limit to how much price increase consumers are willing to absorb.

As for Haw Par’s underlying investments, these are blue-chip companies with a long history and track record. While near-term dividends may be reduced, the long-term growth prospects for both UOB and UOL still look bright.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Haw Par Corporation Ltd and United Overseas Bank Limited. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.