Management Online Q&A With Investors
Dear Investors,
Thank you very much for the questions and the opportunity for us to respond. We hope you have a better understanding of our business through this online exchange. Your questions will be reposted in blue followed by our replies in black.
Kind regards,
The Management Team
Asia Enterprises Holding Limited
Dear Old Man, you wrote:
Hi Management,
Congrats on the excellent Q2 & H1FY07 results. In the latest annual report, the company mentioned something about supplying steel plates/products, or services to FPSO & rig-building sectors. Kindly update us the progress on these niche areas. Thanks in advance!
During 1H FY2007, the Group's sales to the marine-related industries continued to grow 37% year-on-year to S$54.0 million. As part of our growth strategy, we have continued to strengthen our product offering with higher-value added steel products for specialized industrial applications such as construction of oil rigs and other structures. Besides benefiting from rising steel prices, the improvement in our gross profit margin in 1H FY2007 is also a reflection of a shift in our product mix towards such higher-value added products.
We believe that our strategy to continually evaluate and expand our product offerings strengthens our position as a one-stop supplier and creates higher customer value-add.
Dear Bobby Jayaraman, you wrote:
My question is around your gross margins:
1. My understanding so far is that given the 4-5 months lag between purchase of inventory and sale, following scenarios may arise:
a. Worst case: steel prices high in first few months of year leading to high inventory cost and then steel price drops (similar to 2005) leading to weak margins.
b. Base case: consistent steel price throughout year hence consistent margins
c. Best case: opposite of worst case (probably happened in 1HY 07?) leading to high margins (20% like in 2004?)
Could you please comment on the potential margins for scenarios a, b, c and your view as to most likely scenario in 2nd half 07, 2008 and 2009, also if customers push back on high steel prices can they order directly from mills?
An in-depth answer would be highly appreciated as the demand side is quite clear, bit more cloudy is sustainibility of margins atleast similar to 2007 given highly volatile steel prices.
Much thanks!
The steel market has become increasingly volatile in recent years. This has resulted in limited visibility for steel prices beyond FY2007. However, the Group has experienced various situations throughout our 34-year history and like many other industry players, our historical gross profit margins have been subjected to fluctuations according to varying market conditions.
Within the last 2 years, the steel industry has experienced wild swings in international steel prices. In 2H FY2005, steel prices corrected sharply. International steel prices rebounded in 1H FY2006, and remained relatively stable throughout 2H FY2006 before strengthening further in 1H FY2007. The profit margin trends of Asia Enterprises over the same periods are shown in the latest presentation slides on our website. We believe this time frame generally captures the scenarios that you have mentioned.
Besides steel prices, there are other key variables that can affect gross profit margins, such as the distributor's inventory purchasing and management strategy (such as timing of purchase, product volume and type), level and cost of inventory, and the mix of products. At Asia Enterprises, we base our procurement decisions on regular assessments of the steel market and customer demand among other factors.
We believe it is notable that the Group has remained profitable since inception, even during highly challenging periods, including major economic crises and fluctuations in the steel cycle. This can be attributed to the Group's extensive experience and knowledge of the steel industry, disciplined and prudent financial management which are fundamental to the management of such industry risks.
Given the current market conditions, we do not foresee a major correction of steel prices in the second half of 2007.
Steel mills typically have specific product lines, require minimum bulk order quantity and have long production lead times. Industrial end-users on the other hand, require a wide variety of steel products in smaller quantities typically within a short delivery period. Hence, they generally do not procure steel products directly from steel mills.
As a one-stop steel distributor, Asia Enterprises acts as a vital intermediary to bridge this gap between demand and supply, by providing our customers with a wide range of products, readily available inventory, flexible order sizes, and just-in-time delivery. We believe our reputation and reliability, as well as a strong emphasis on quality service are the key attributes driving the high level of repeat business that the Group enjoys today.
Dear Eric Lim, you wrote:
Congratulation to the management for the set of sterling results.
Although the management is working hard to generate healthy returns for the shareholders, most people in the investing community are still not so familiar about the company. I hope that the management might consider the following alternatives to increase the public profile of the company:
It is not necessary for the company to do quarterly earnings announcement due to its market cap, you might want to make quarterly announcement of profit guidance and business updates.
In compliance with the listing rules, the Group will commence quarterly reporting from FY2008 onwards. Thank you for your suggestions which we will take into consideration. Meanwhile, we will ensure timely disclosures to our shareholders if there is any substantial information or significant corporate developments.Are there any plans for the company to expand beyond Singapore market such as potential business opportunity in Malaysia(IDR project) and Vietnam (strategic alliance with construction companies)etc.
Singapore, Malaysia and Indonesia are the Group's core markets, contributing 48%, 10% and 39% respectively to our revenue in 1HFY2007.
Apart from our core markets, we are working to increase our market penetration in other territories within the Asia Pacific region that offer promising growth opportunities for the Group. While other geographical markets contributed only around 3% to Group revenue in 1H FY2007, we are seeing encouraging progress in our sales to a number of these markets.
Dear Rachel Wong, you wrote:
Will your company propose to give bonus to shareholders since the company is doing very well?
The management believes in sharing the Group's performance with our shareholders to reward them for their continued support and confidence.
We will review the Group's operating results, financial position, working capital and business expansion needs when proposing the dividend payout for FY2007.
Dear Ang Leong Seng, you wrote:
Since profit surges 78% to 10.9m in 1HF2007, why didn't the company distribute internal dividend?
At present, the Group does not have a formal policy to distribute interim dividends. While the Group's performance at half-time was relatively good, the steel industry remains fairly volatile with short visibility. We believe maintaining a sound cash position ensures that the Group is able to withstand any unforeseen downturn in the industry more successfully, and achieve its aim to be profitable even in face of difficult conditions. At the same time, having stronger working capital ensures that we are better positioned to capitalise on business opportunities that may arise.
Dear Investors,
Thank you for all your questions and the interest in Asia Enterprises Holding Limited. We have come to the end of this Q&A session.
We have enjoyed and learnt much from your questions and we hope that you have a better insight of our Company and know more about our operations.
Kind regards,
The Management Team
Asia Enterprises Holding Limited