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Hoe Leong Grows Profit Despite Falling Revenue In FY2025 · Investor Exchange

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Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
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So I want to start today's deep dive by posing a classic investor riddle to you.
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Oh, I'm ready. Okay, consider this scenario.
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How does a company experience a pretty brutal 12.4 percent drop in its yearly
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revenue, but somehow at the exact
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same time managed to increase its profit before tax by over 26 percent?
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I mean, right away, that sounds like a math error waiting to be discovered by
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an auditor or, you know, some very creative accounting. Right.
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Because usually when the top line
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shrinks like that, the bottom line just falls right off a cliff. Yeah.
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Those fixed costs don't just disappear. It completely defies gravity.
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But today, we are actually going to look at a company that pulled this off in the real world.
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We are unpacking the just-released 2025 condensed interim financial statements
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for a company called Ho Leong Corporation LTD.
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And if you aren't familiar with them, they basically design,
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manufacture, and distribute heavy equipment parts.
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Right. So we're talking about the massive, incredibly durable metal tracks and
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undercarriage components, the stuff that keeps bulldozers, excavators,
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and all that heavy industrial machinery moving.
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It is a highly cyclical, super capital-intensive, nuts and bolts kind of business.
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It's usually a pretty good bellwether for global construction and mining.
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Yeah, and our mission for this deep dive is to look right past all the dense,
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intimidating accounting tables in this report.
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We really want to analyze these documents purely from an investor's perspective.
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Our goal is to figure out the true financial health of this company,
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decode all the corporate jargon, and understand their outlook for the future.
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We're basically acting as financial detectives today to see how top-line struggles
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were countered by, well, really aggressive bottom-line defense.
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Because the top-line struggle here is just undeniable.
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When you look at the raw data, total revenue for the full year of 2025 dropped to $38.5 million.
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Wow. Yeah, that is a steep decline from $44.08 million back in 2024.
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And if you break that down even further, the second half of 2025 was particularly punishing.
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Revenue in that six-month window just plunged 24.7%. The financial statements
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point directly to a slowdown in the Asian and North American markets as the primary culprits.
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When construction or mining activity cools down in those massive resource-hungry
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regions... The demand for replacement-heavy equipment parts dries up almost overnight.
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Exactly. I mean, a mining company isn't going to stockpile massive steel track
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frames if they're slowing down their extraction.
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They delay maintenance, they cannibalize idle machines for parts,
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and they simply just stop ordering from suppliers like Ho Leong.
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Okay, let's unpack this, because here is where we hit the first real paradox
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of this report. the big aha moment for an investor.
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Despite this massive drop in overall sales volume, their gross profit margin actually increased.
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It went from 22.7% in 2024 up to 24.9% in 2025.
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That is a really fascinating metric to dig into. And just to quickly translate
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that jargon for a second, gross profit margin is simply the percentage of revenue
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the company actually keeps after paying the direct costs of making their heavy machinery parts.
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So like the cost of the steel in the factory later. Right, exactly. Exactly.
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So when you're keeping almost 25% of your revenue after accounting for all those
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raw materials, it means you've managed to fundamentally shift the unit economics
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of what is leaving your factory.
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In a heavy equipment industry, where raw material costs usually just eat you
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alive during a downturn, seeing margin expansion on falling volume is incredibly rare.
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Well, the documents actually give us a brief but explicit answer on how they
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did it. They achieved this bump by driving, quote, sales of new stocks with higher margins.
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Which tells us this wasn't an accident. It was a very deliberate inventory strategy.
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It's kind of like a car dealership operating in a tough economy. Okay.
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Imagine a dealership that ends up selling significantly fewer cars overall this
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year compared to last year because, you know, foot traffic is just down everywhere.
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But the cars they did manage to sell were suddenly all the luxury models,
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the ones with premium leather seats, the upgraded sound systems, extended warranties.
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Their total volume of cars rolling off the lot is way down, but their financial
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cut on each individual sale is significantly bigger.
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Yeah, that's a great analogy. They essentially shifted their sales mix toward the premium tier.
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They didn't just slash prices across the board in a panic to maintain factory volume. Right.
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They focused entirely on the value of the specific items moving out the door. Oh, wait.
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Selling premium stock is a great survival tactic for right now, sure.
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But a shrinking pie eventually catches up to you, right?
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I mean, you can't rely on premium margins forever if your total volume just keeps dropping.
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There are only so many high margin parts you can sell to a mining sector that
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is actively slowing down. Oh, absolutely.
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That is the core vulnerability of this approach. Selling higher margin stock
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stabilizes the ship in the short term.
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It buys management some crucial time. Yeah. Yeah.
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True. Sustainable long-term growth requires market expansion,
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or at the very least, a stabilization in demand.
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You absolutely need the overall pie to stop shrinking.
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And management clearly knew they couldn't just rely on a temporary margin bump
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to save the entire fiscal year.
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Which means if the top line is bleeding and you can't control the global macroeconomic
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slowdown in Asia and North America, you have to ruthlessly control your own house.
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And Ho Leong went on a serious operational diet to protect its bottom line.
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To achieve that 26.5% increase in profit before tax, which reached $755,000 for the year.
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By the way, they slashed their operating expenses across the board.
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The discipline there is really notable.
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I mean, distribution expenses dropped by 6.4 percent and administrative expenses
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fell by 9.5 percent. Wow.
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When a company is facing a revenue drop of over 12 percent, cutting admin costs
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by nearly 10 percent shows they are acting quickly rather than just waiting
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around and hoping for the market to magically turn around.
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And the financial statements actually give us the tangible realities of those
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cuts. It isn't just a spreadsheet adjustment.
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Right. The most glaring example is in their physical real estate footprint.
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The report highlights that they closed their Clementi warehouse in Singapore
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after the lease expired in the second quarter.
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Closing a major logistics hub in a place like Singapore is a massive structural change.
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Singapore real estate is not cheap, and industrial warehousing carries some
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really significant overhead.
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So what does this all mean? Think about the cascading financial effect of closing
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a major facility like that.
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You aren't just saving on the monthly lease payment. Yeah, you've got utilities. Exactly.
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You are eliminating the industrial utility bills, the property insurance,
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the maintenance contracts.
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And as the report specifically notes, this closure significantly reduced their
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packing, delivery and warehouse personnel salary expenses.
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It really adds up. It's like moving out of an expensive, sprawling downtown
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apartment into a smaller, highly efficient place further out in the suburbs.
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You save a ton on rent and utilities and suddenly your bank account looks a
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lot healthier at the end of the month. even if your actual salary hasn't changed.
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Yeah, it is an immediate forced injection of operational efficiency.
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They look at their lowered sales volume and correctly realized, hey.
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We no longer need the massive storage capacity we are paying for.
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But doesn't permanently cutting warehouse space and reducing logistics staff
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kind of hamstring them for the eventual rebound?
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As an investor, I have to ask, if you trim the fat too aggressively,
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you eventually cut into the muscle.
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You can't sell parts to the Asian market if you don't have the capacity to store
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or ship them when demand finally returns.
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You're right, and this is the classic tightrope walk of managing a cyclical
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industrial business. What Ho Leong is executing here is a strategy purely designed
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to strengthen liquidity during a period of profound uncertainty.
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In a highly volatile global climate, the cost of maintaining empty excess warehouse
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capacity for some theoretical future rebound is a luxury they simply cannot afford.
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Preserving cash today ensures they actually survive to see that future rebound.
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So they saved on rent and they protected their margins on paper.
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But as an investor, paper profits and accounting adjustments don't pay the bills.
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Let's look at the actual cash hitting the bank account. Let's do it.
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Because this is where the 2025 report reveals something genuinely surprising.
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Their net cash generated from operating activities absolutely skyrocketed to
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$4.58 million. dollars.
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Compare that to just 1.62 million dollars in 2024.
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That is an enormous jump. A massive jump in liquidity. And that number is critical.
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Just to define operating cash flow for a second, it's the actual hard cash the
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business generates from its day-to-day operations. Right.
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Generating 4.58 million dollars in actual cash, not paper profits suggested
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by accountants, but hard cash hitting the bank account is the ultimate proof
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that their survival strategy is functioning.
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It proves the profits we discussed earlier aren't just an accounting illusion.
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Here's where it gets really interesting, though. When you dig into exactly how
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they generated almost $5 million in cash while their overall sales were dropping
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by double digits, you find hidden treasure in a section most people completely
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gloss over. Oh, the impairment section. Yes.
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In 2024, they took a hit, an allowance for bad trade receivables,
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basically customers who owed them money for heavy equipment parts but weren't paying.
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The company had to conservatively assume that money was just gone.
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But in 2025, they report a reversal of impairment of trade receivables, amounting to $335,000.
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They essentially managed to collect debts they had previously written off as
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entirely uncollectible.
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Yeah. And in the heavy machinery space, where invoices can be massive and payment
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terms can be stretched out for months by struggling clients,
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recovering that cash is a major operational win.
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It's the corporate equivalent of finding a crisp $100 bill in the pocket of
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a winter coat you haven't worn in years. Yeah, exactly.
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You thought it was lost forever, but suddenly it's spendable cash right in your
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hand. And it goes much further than just that reversal.
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Their overall trade on other receivables dropped by a staggering $4.4 million.
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They aggressively shook the couch cushions and collected the money they were
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owed across their entire client base.
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That requires really aggressive credit management. It means getting on the phone,
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renegotiating payment terms, and forcing clients to settle their accounts.
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It is a very proactive way to generate cash without needing to manufacture and
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sell a single new product.
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But hold on. If their operating cash flow is jumping largely because they are
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aggressively collecting old debts, this cash influx is a one-time trick, isn't it?
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Yes. You can't squeeze the same stone twice.
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Once those old invoices are paid, they can't collect them again next year.
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Exactly. That's a great point.
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Squeezing out old debts provides a vital, one-time safety net,
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not a recurring revenue stream.
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Once that sponge is dry, the cash flow relies entirely on generating new sales.
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Right. And that brings them right back to facing the reality of their falling top-line revenue.
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They have bought themselves liquidity, but they haven't solved the underlying demand problem.
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Which brings up a glaring question for anyone holding this stock.
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If the company just generated $4.58 million in fresh operating cash.
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Normally investors would expect a dividend.
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Oh, sure. If the company is suddenly flush with liquidity, shouldn't shareholders
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get a piece of that action?
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But management is hoarding it, and that leads us directly to the massive legal
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anchors tying up their resources.
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Yeah, the litigation detailed in these financial statements is really complex,
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and it completely explains why management is guarding their cash reserves so fiercely.
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They are currently entangled in two massive ongoing legal battles in Malaysia.
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Let's break them down, starting with what I'd call the risk,
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the auspicious journey case.
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Ho Leong was forced by a high court order to pay a massive sum,
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9.27 million ringgit. Which is huge.
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Yeah, which represents half of the general damages in the case into a stakeholder account.
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And they had to secure this funding by March 2026 just to get a stay of execution
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while they appealed the judgment.
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And a stakeholder account functions basically like an escrow account.
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The company still technically owns the money, but it is entirely locked away.
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Right. They cannot use it for daily operations. They cannot deploy it for research
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and development, and they certainly cannot distribute it to shareholders as a dividend.
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It is exactly like having a massive chunk of your life savings locked in an
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escrow account that you cannot touch just to keep the bank from taking your
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house while you spend years arguing over the fine print of a contract with lawyers. That's spot on.
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The opportunity cost of having almost 10 million ringgit sitting idle is staggering.
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Now, on the flip side, case two is the win.
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The Tan Srihalim bin Saad case. In November 2025, the court actually ruled in Ho Leong's favor.
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They dismissed the plaintiff's claim entirely and even awarded costs to the
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company and its directors.
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Securing a complete dismissal and having costs awarded is basically the best
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possible outcome in corporate mitigation.
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It removes a massive contingent liability from their balance sheet.
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But even with the decisive win in the second case, having millions of ringgit
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completely frozen in the first case sort of paralyzes their ability to operate,
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doesn't it? Yeah, really does.
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I mean, how can you confidently invest in designing new heavy machinery parts
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or open new sales channels when a legal guillotine is hanging over a significant
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portion of your bank account?
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The paralysis you are describing is the exact reason why the report explicitly
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states, and I quote, No dividend has been declared as the group would like to
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conserve cash for its working capital requirements. It is pure financial self-preservation.
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Investors absolutely despise uncertainty.
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And massive multi-year litigation in foreign jurisdictions is the ultimate form of uncertainty. Yeah.
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Until that auspicious journey case is fully and finally resolved,
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that locked away cash is essentially a hostage.
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And the cash they do have on hand must be kept totally liquid to fund their
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daily operations and any potential strategic shifts. Which makes their future
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strategy absolutely vital to understand.
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Because if traditional markets in Asia and North America are cooling down and
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millions of dollars are tied up in Malaysian courts...
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Where's the growth going to come from? They need a catalyst.
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And that brings us to their outlook and a really massive strategic pivot happening down under.
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Yeah, when you analyze the geographic segment data in the report,
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one specific region shines significantly brighter than the rest,
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the Australian division.
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It was the largest single revenue source, pulling in $14 million for the full year 2025.
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That's a big chunk. It is. And the outlook section of the document reveals exactly
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why Australia is sustaining this strong performance while other regions falter.
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They aren't just selling individual replacement parts in Australia anymore.
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They're undergoing a major strategic pivot toward a service-focused model,
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specifically leveraging their expertise in what they call track frame solutions.
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This is a fundamental shift in their core business identity.
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Moving from being a simple product supplier to a comprehensive service provider
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changes everything about how a company operates, how it bills,
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and how it interacts with its clients.
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Let's use an analogy to make the mechanics of this crystal clear.
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The old model was just selling you the parts.
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You are a mining company. You need a new massive steel tread for your excavator.
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Here it is. We ship it to your site, wave goodbye, and hope you call us again
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when it breaks in five years. Right. Highly transactional.
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Exactly. You are entirely expendable. The new Australian model is different.
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They are basically becoming the specialized mechanic. They come in,
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evaluate your specific heavy machinery needs, engineer a custom track frame
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solution, physically install it, and then sign an ongoing contract to service
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and maintain that whole system.
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The financial magic of that pivot is the concept of sticky revenue.
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Oh, explain that. Well...
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When you just sell a commoditized part, the customer can easily buy that exact
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same part from a cheaper foreign competitor the next time it breaks.
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Right. Whoever's cheapest. Exactly.
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But when you are the architect, the installer, and the mechanic of their entire
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track frame system, they rely deeply on your proprietary knowledge.
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The switching costs for the client become incredibly high. It transforms lumpy,
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unpredictable, one-off product sales into smoother, highly predictable,
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recurring service revenue. But they are still ultimately tied to global mining
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and construction cycles.
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The company itself states in the report that they maintained a pautious outlook
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due to a volatile geopolitical climate.
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If global construction slows down significantly, if fewer holes are being dug
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in Australia due to falling commodity prices, won't even their shiny new service
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model take a massive hit?
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I mean, if the mining machines aren't running, the mechanics don't get called out for service.
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You're not wrong. The service model provides a stronger buffer,
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yes, but it absolutely does not provide immunity from a severe economic cool down.
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A stalled mining operation doesn't pay for preventative maintenance on machines sitting idle.
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The company's future, as they state directly in their own outlook,
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depends entirely on exploring new markets to diversify revenue streams.
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They have proven they can successfully implement this service-heavy model in
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Australia to the tune of $14 million. Yeah.
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They have to prove they can replicate that exact same success in other geographic
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regions to truly insulate themselves from localized economic shocks.
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And rolling out a service business requires capital, which loops right back
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to why they are aggressively collecting debts and hoarding their cash instead
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of paying dividends. It all connects.
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Okay, we have covered a massive amount of ground today. Let's pull it all together
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and summarize the key takeaways from these financial statements for the listener.
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Holy On Corporation is a truly fascinating case study of an investor's mixed bag.
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It really is. It is a company navigating extreme cross-currents.
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On one hand, you have shrinking global sales driven by macroeconomic factors
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totally outside their control.
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Right. On the other hand, you have highly disciplined management,
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executing aggressive cost-cutting, intentionally moving higher margin inventory,
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and displaying incredible efficiency in collecting cash and clearing out old bad debts.
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They survived a 12.4% revenue drop by getting leaner and meaner and actually
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grew their profit before tax.
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Yet that heavy legal baggage in Malaysia is forcing them to play extreme defense
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with their balance sheet.
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They are hoarding all that hard-won cash, meaning investors looking for yield
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shouldn't hold their breath for a dividend anytime soon.
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Ultimately, it seems their entire growth narrative rests on this promising but
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highly capital-intensive transition to a service model in Australia.
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They are a company at a major crossroads, navigating a very difficult industry
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storm with a tight, deliberate grip on the ship's wheel.
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Which leaves you, the investor, with a final, provocative thought to mull over
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after the steep dive is done.
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Think deeply about that Australian pivot. If the physical parts distribution
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business continues to face relentless global headwinds,
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unpredictable cyclical downturns, and cheaper foreign competition,
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could a heavy manufacturing company like Ho Leong eventually shed its manufacturing roots entirely?
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Oh, wow. Could we see them evolve over the next decade strictly into a highly
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specialized consulting, engineering, and service firm for the mining industry?
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And if they do manage to pull that off, how do you even begin to value a company
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that is right in the middle of such a profound identity crisis?
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Something to think about as you review your portfolios.
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This content is intended to serve strictly and only as an informational,
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independent, objective summary of recent events and should in no way be interpreted,
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construed or relied upon by any party as inside information or financial advice.