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Operation Review

Steel Division

This division is involved in the manufacturing of stainless steel welded pipes and butt-weld fittings, carbon steel welded pipes and hollow sections, provision of shearing and slitting services as well as trading of stainless steel plates. The revenue contributed by the steel division is approximately 84% of the total Group revenue in FY2008. The steel division achieved revenue of RM380.40 million, a decrease of 6% from the previous financial year's revenue of RM403.23 million. The profitability of the division is reduced from a profit before taxation of RM26.90 million in FY2007 to RM1.31 million in FY2008.

Stainless Steel Division - Manufacturing

With the sharp decline in global stainless steel prices, the performance of the stainless steel division during the financial year under review has been adversely affected. The division recorded revenue of RM234.42 million in FY2008, a decrease of 4% from RM244.10 million in FY2007. It achieved a much lower profit before taxation of RM0.16 million compared to RM17.23 million in FY2007.

In the domestic market, the division experienced slower demand from various industrial segments during the first half of FY2008 as most of the end users and stockists withheld their orders in anticipation of lower prices in a declining market. Surging crude oil price in the first half of 2008 had exerted inflationary pressure on almost all industries. The division's operational costs had increased with the increase in electricity tariff and transportation costs.

To cushion the weaker overall demand, the division shifted its focus to the treated water sector, in particular the usage of stainless steel pipes for water meter stand, communication and service pipeline sections throughout Malaysia. In addition to stockists, we also fostered closer relationship with fabricators who manufacture pressure vessels and related products for worldwide oleochemical and biodiesel players.

Since the first quarter 2008, the implementation of various prominent domestic infrastructure and construction projects have slowed down. We believe this is temporary and the development in oil and gas, palm oil, oleochemical and water sectors in Malaysia should augur well for our products in the long run.

Export sales have been encouraging, and saw increased contribution to 70% of total sales. The division continued to maintain its leading position in traditional international markets such as the United Kingdom, Canada, South Africa, USA and Australia. The diversified earning base will enable us to cushion reduced demand from any single economy.

The recovery in stainless steel coil prices since end 2007 had increased the demand for our core products, which saw stainless steel grade 304 and 316L average price appreciated 18% and 10% respectively from Dec 2007 to April 2008. We took the opportunity to strengthen our marketing network in the fast growing ASEAN region, such as Singapore, Indonesia, Thailand and Vietnam in order to broaden our earning base.

The recent volatility in the commodity derivative market has distorted actual supply and demand forces in the underlying metal market. Prices of major base metal like nickel, steel, copper, platinum and zinc have slid by 35% to 45% due to broad sell-off worldwide.

As a result, stainless steel prices for Grade 304 and Grade 316L declined further from average of USD3,500 per tonne and USD6,080 per tonne respectively in July 2008 to reach their respective recent lows of average USD2,950 per tonne and USD5,350 per tonne in October 2008. We anticipate a gradual recovery of stainless steel prices in the first quarter of 2009 as underlying demand remains strong.

We will embark on expansion programmes to achieve greater economies of scales and remain competitive. In our effort to improve quality and product certification, we have obtained Product Registration Approval Certificate from Suruhanjaya Perkhidmatan Air Negara (SPAN) in 2008. This achievement will enhance our visibility and positioning in the water services industry in Malaysia.

Carbon Steel - Manufacturing

In tandem with rapid appreciation of carbon steel prices worldwide across all range of steel products in the first half of 2008, the carbon steel division achieved a good performance in FY2008. The division registered revenue of RM75.90 million in FY2008, an increase of 32% compared to RM57.36 million in FY2007. The division's profit before taxation improved by more than 520% to RM8.91 million as compared to a profit before taxation of RM1.43 million in FY2007.

The demand for carbon steel pipes and hollow sections was relatively soft in the first half FY2008 as the influx of imported hot rolled pipes from neighbouring countries had disturbed demand-and-supply situation. The strong demand since December 2007 which hit record highs towards end June 2008 led to great improvements in our end products' selling prices and sale volume in the second half of FY2008. We capitalised on this upward trend by increasing our production output and sales volume. Our timely procurement of raw material at right prices and sufficient stock level enabled us to capitalize on the rising demand which contributed significantly to our profitability.

The strong demand came from domestic building and construction, automotive, engineering and furniture industries where users quickly took position before material cost accelerated further. The surge in demand from stockists and increase in iron ore prices worldwide, which is a basic feedstock for carbon steel, further tightened the supply of steel globally in the first half of 2008.

The carbon steel prices started to trend downward from July 2008.

Going forward, we expect carbon steel raw material prices to enter into a volatile phase as most of the industry players were over-stocking with high raw material inventory. The de-stocking exercise is estimated to take approximately 5 to 6 months to digest overhang positions and excessive volume built up by industry players since early 2008.

Against this backdrop, we adopt a dynamic approach in our business strategies through continuous improvement in our inventory control system, timely procurement of raw materials and identification of new markets with higher profit margins.

Although implementation of key infrastructure and industrialrelated projects have slowed down amid an uncertain near term economic outlook, we believe underlying demand for our carbon steel products should recover sooner than expected as the products in the market required to be replenished for implementation of various development plans.

Stainless Steel Service Centre - Trading & Services

The Group's steel service centre experienced a dip in both its revenue and profitability in FY2008. It reported revenue of RM70.07 million in FY2008 compared to RM101.77 million in FY2007, a decrease of 31%, and suffered a loss before taxation of RM7.76 million as compared to profit before taxation of RM8.24 million in FY2007.

Oil and gas, water, bio-diesel and oleochemical industries will continue to drive the demand. The centre's strong position in niche markets in providing wider stainless steel plates up to 2m width and thicker plates ranging from 9mm to 12mm will help improve financial performance in the coming financial year.

Bedding Division - Malaysia

In FY2008, the bedding division's revenue remained at RM35.41 million as compared to RM35.35 million in FY2007. Profit before taxation of RM2.62 million was 94% higher than RM1.35 million achieved in FY2007.

The impressive growth was made possible via implementation of effective marketing strategies and shifting of business orientation to strengthen our marketing channels other than our conventional Dealer Market segment. Dealer Market segment remains a dominant and major revenue contributor to us. It contributed approximately 45% of total revenue for past two financial years. A series of pragmatic sales and marketing strategies were launched during the financial year under review which included intensive joint promotion initiatives with leading international distribution chain Amway, introduction of specific house brand products at major hypermarkets to reach out to consumers and uplifting the performance of Project Market segment.

Our Project Market segment registered stronger revenue contribution than last financial year. We managed to increase our market share in a very competitive market and strengthen our position as a key player. However, the recent increase in raw material cost might erode our profit margin and our Project Market segment's performance might be affected in view of the uncertain economic development.

Our tie-up with Amway led to more than 45% growth in revenue in the last financial year. We received overwhelming responses from Amway's customers through attractive promotional activities. With rising Amway MLM distributor membership, on-going promotional activities and newly introduced products, Amway venture is likely to become one of our significant revenue contributors in the future.

We have expanded our distribution network aggressively in the mid-premium segment in Sabah & Sarawak. We carried out warehouse sales throughout the year to increase revenues especially during low seasons.

The hypermarket businesses under our Mass Merchants segment recorded significant reduction in revenue in FY2008. This segment's profitability had been affected by keen market competition amongst hypermarkets, escalating raw material cost and resistant from hypermarket operators to allow upward price adjustments. Nevertheless, we believe this segment's future outlook remains favourable with rising number of hypermarkets to be opened up in the near future.

Our Fibre segment under Eurocoir suffered losses due to fierce competition in polyester fibre business and small market size. The losses over the years have eroded the bedding division's profitability. We have taken a decisive step to close down the Fibre segment in January 2008 to curb further losses.

In view of the tougher market environment, we plan to introduce more new products and intensify our marketing efforts in the coming financial year. We look forward to widen our market in the South East Asia region.

China Division

The China Division comprises manufacturing of bedding products and furniture, steel wire and supply of electricity power and steam. All business segments under this division are undertaken by way of joint ventures which are either subsidiaries or associates of the Group. The profitability has reduced substantially due to high raw materials cost, imposition of export duty and tighter regulatory framework in domestic market.

The bedding segment in China continues to operate under a very competitive market environment. We have over the years introduced more innovative products, identified new niche markets, built up product branding and introduced product replacement approach to defend our market share. We have established a separate Centralised Marketing Unit (CMU) in March 2008 to assist formulating an overall marketing framework for all joint venture bedding companies and specific marketing strategy tailored to individual joint venture company. CMU will coordinate strategic marketing plan and work schedule of all joint venture companies. We aim to achieve better production and operation cost reduction, expedite market expansion and improve bedding venture profitability in the long run.

The manufacturing of steel wire segment registered higher revenue in FY2008 and achieved a lower profitability mainly due to rising of raw material cost and imposition of 5% export duty.

Our power plants' business suffered from high coal price and transportation cost. The increase in the selling price of power plant steam partly cushioned the escalating costs. Further expansion of our steam customer network and execution of efficient production management will improve steam generation business performance. We have optimised the usage of coal mud to reduce the operation cost of our power plant.

We expect more challenges to our businesses due to anticipated slowdown in China's economy. We believe our years of experience and established network in China will help us rise above these challenges.


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