Hiap Hoe's Earnings Surge: A Cautionary Tale of One-Off Gains and Sustainability Risks

The recent earnings report from Hiap Hoe Limited (SGX:5JK) has sparked both optimism and skepticism among investors. For the first half of 2025, the company reported a net income of S$5.38 million, a staggering 452% increase compared to the same period in 2024. While this growth is impressive on the surface, a closer look reveals a critical nuance: a significant portion of this profit surge stems from one-off gains totaling S$21 million over the past twelve months. This raises a pivotal question: How reliable are these earnings, and what does this mean for Hiap Hoe's long-term sustainability?

The Role of One-Off Gains in Earnings Volatility

One-off gains, by definition, are non-recurring and often tied to specific events such as asset sales, litigation settlements, or tax adjustments. In Hiap Hoe's case, these gains contributed disproportionately to its statutory profit, masking the performance of its core operations. While the company's Q2 2025 report does not explicitly list non-recurring items, the cumulative impact of these gains over the past year suggests that the reported earnings may not reflect the business's underlying strength.

For context, consider the broader market's reaction. Despite the sharp rise in net income, Hiap Hoe's stock price has remained relatively stagnant. This disconnect hints at investor caution—market participants may be factoring in the likelihood that such gains are unlikely to recur, thereby tempering expectations for future growth.

Assessing Earnings Quality Beyond the Headlines

Earnings quality is a measure of how well a company's reported profits align with its operational realities. When a significant portion of earnings comes from one-time events, the quality metric weakens. For Hiap Hoe, the 19% year-over-year increase in EPS appears robust, but this growth is partially inflated by non-operational gains. Investors must ask: What would the company's earnings look like without these one-off items?

A useful comparison can be drawn with HP Inc., which recently excluded $272 million in non-recurring charges from its Q2 2025 earnings to present a clearer picture of core performance. While HP's adjustments were negative (costs), Hiap Hoe's are positive (gains), both scenarios highlight the importance of distinguishing between transient and sustainable earnings.

Sustainability Risks and Strategic Implications

The reliance on one-off gains introduces material risks for Hiap Hoe. First, it creates a high bar for future performance. If the company cannot replicate these gains, investors may face a sharp correction in earnings expectations. Second, it obscures the true health of the business. For instance, Hiap Hoe's operating margins and return on investment metrics—key indicators of operational efficiency—may appear stronger than they are when inflated by non-recurring items.

Moreover, the construction materials industry is inherently cyclical, with demand tied to macroeconomic conditions. If Hiap Hoe's core operations are not generating consistent profits, the company may struggle to weather downturns or competitive pressures. This is particularly relevant in Southeast Asia, where infrastructure spending is slowing in some markets.

Investment Advice: Look Beyond the Numbers

For investors, the lesson is clear: Do not be seduced by headline earnings without dissecting their composition. Here's how to approach Hiap Hoe's stock:

1. Analyze Core Metrics: Scrutinize operating cash flow, free cash flow, and EBITDA margins to gauge the company's ability to generate profits from its primary business.
2. Monitor Balance Sheet Health: High debt levels or weak liquidity could amplify risks if earnings decline.
3. Compare with Peers: Benchmark Hiap Hoe's performance against competitors that rely on sustainable earnings models.
4. Factor in Macroeconomic Trends: Assess how regional construction demand and raw material costs might impact future profitability.

While Hiap Hoe's earnings report is undeniably positive, the presence of one-off gains necessitates a cautious outlook. Investors should prioritize companies with consistent, recurring earnings and strong operational fundamentals. For Hiap Hoe, the path to sustainable growth lies in demonstrating that its core business can deliver robust performance without relying on transient windfalls. Until then, the stock may remain a high-risk proposition for those seeking long-term value.

In conclusion, the interplay between one-off gains and earnings sustainability is a critical factor in evaluating Hiap Hoe's investment potential. By focusing on the underlying business dynamics rather than short-term accounting artifacts, investors can make more informed decisions in a market where appearances can be deceiving.