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 Desmond, you wrote:
Hi,
Congrats to another outstanding performance for FY2007. According to SGX's new earning reporting ruling, company with market cap exceed $75M to report quarterly earnings. Would Asia Enterprises be reporting its Q1 result this May?
Thank you for your words of encouragement. Yes, the Group will commence quarterly reporting from FY2008 onwards. We shall be announcing our first quarter results for the three months ending 31 March 2008 in May.
Dear Old Man 53, you wrote:
Dear Management,
1. Please explain why is there a sudden provision in "Allowance for impairment in trade receivable" of $1.577million in FY07, whereas in FY06 there was no such provision? Could these be written back in FY08 with your collection efforts?
2. Please explain why is there a huge jump of 127% in "Financial Expenses" in FY07 to $1.99million as compare to only $875,000 in FY06?
3. Please explain why is there huge increase of inventories to $66million from $41million?
4. Would Labroy & Pan U Marine still remain as Asia Enterprises customers in FY08, after they are being acquired by Dubai DryDocks? If not, how would these affect your sales in FY08?
1. The provision for doubtful debts in FY2007 was made for a single customer. Although the amount of trade receivables related to this customer is outstanding for less than a year, we have adopted a prudent approach by making a full provision in FY2007.
We have always maintained prudent credit management as demonstrated by the minimal bad-debt write-offs in past years. Despite higher business volumes in FY2007, our trade and other receivables only increased marginally by 6.8% to $37.9 million at the end of the year with nearly 60% outstanding for less than 60 days.
2. The higher Financial Expense was due mainly to the provision for doubtful debts of $1.577 million that was made in FY2007. On the other hand, interest paid on borrowings was reduced by 36% to around $367,000 during the year.
3. The increase in our inventories – which is measured on a weighted average cost basis – is attributable to higher average steel prices in FY2007, compared to FY2006, as well as the build up of more inventories towards the year-end to capitalize on the positive business environment. Our aim is to have an appropriate level of inventory as well as the necessary range of products to fulfill customers' requirements for Just-in-Time delivery and maintain our status as a Regional Steel Distribution Center.
4. These companies which have been acquired by Dubai Drydocks are still our customers presently. To-date, we have built a large base of customers in the marine sector and none of our customers individually accounts for more than 10% of the Group's sales. Besides regional exposure, we also serve a variety of other industries such as construction, engineering/fabrication, and manufacturing. Going forward, we believe the continued growth of the Asian economies presents opportunities for us to generate sales from existing and new customers in the region.
Dear Marcus Chen, you wrote:
Dear sir/madam,
I would like to hear the management views on the future AEH business growth plan on the backdrop of:
1) Higher steel quantities produced by China and India and if this would pose significant challenges to AEH's current & potential market.
2) Dependency on Keppel Corp's business (as I understand AEH steel is specialised in the Offshore & Marine industry). And if there are plans to search out more customers.
3) Basic infrastructure growth in Singapore (eg. roads, MRT lines, construction of residential, offices, and IRs, etc.) and if AEH has a share in this growth.
4) New businesses (as part of business diversification plan) growth in the pipeline, with the end-result of fundamentally warranting a higher fair PE ratio from the analysts/institutional investors.
Have a prosperous and happy Lunar New Year.
1. Steel production in China and India has indeed risen, with China continuing to dominate the world's production output. However, the rate of growth in China's steel output was reported to be slower in 2007 compared to 2006 due to the government's efforts in consolidating the industry and reducing excess capacity. In addition, the Chinese government has imposed export tariff policies in recent years to slow down steel export growth.
On the demand side, internal consumption of steel has also been on an uptrend in China and India, thanks to the growing economies of these countries. In fact, China topped the list of countries and regions worldwide in steel consumption, based on estimates by MEPS which showed that China consumed around 33% of global finished steel in 2007.
The situation today is unlike what we have witnessed in 2005, when the sudden surge in output from China caused global steel prices to plunge due to excess inventory.
With demand for steel from various regions worldwide staying robust, and higher costs of steel production to be sustained because of rising raw material prices, current visibility indicates that steel prices are generally expected to remain firm throughout the first half of 2008.
While our markets are pre-dominantly Singapore, Indonesia and Malaysia, we are also progressively increasing our market penetration in other developing growth markets in the Asia Pacific region. Many of the end-users in these neighbouring markets look to Singapore for their steel requirements given its status as a transshipment hub. Our established reputation and ability to provide 'one-stop' solutions place us in a good competitive position to capitalise on the presently brisk steel demand in this region.
2. Over the years, we have built a diverse pool of more than 600 active customers in the Asia Pacific region. This means that we are not overly dependent on any single customer. Presently, none of our customers account for more than 10% of Group revenue on an individual basis. We are constantly looking to expand our market share and seeking new customers in existing and new markets within the Asia Pacific region.
3. The growth in infrastructural developments in Singapore is expected to present more business opportunities for the Group. In FY2007, we benefited from higher sales to the construction sector. While we should benefit from demand from Singapore's construction industry, the shipbuilding and marine-related sector will remain as the Group's primary focus going forward.
4. Besides organic growth, we are actively exploring the potential of suitable and synergistic acquisitions or alliances that will enable us to enhance our existing business and/or broaden our geographical reach. To this end, we would consider companies involved in the upstream or downstream activities within the steel industry.
Dear Kelvin, you wrote:
Hi Mgmt
While I appreciate mgmt for holding this Q&A, I am disappointed with 2H results. This is especially when demand for steel is strong with prices going up and AEH holds more than 4 months of stocks! My Qs:
1. I noted that 2H turnover is only marginal higher and gross margin is lower compared to 1H. What is the reason for this poor performance? A detail analysis as per your results announcement format for 2H 07 vs 2H 06 will be very, very useful.
2. In addition, there is a provision for bad debts. The bad debts is due to which customer/ customers in which country? Is this one-off or there are potential more bad debts?
3. Does resignation of 2 high level sales staff have any impact on sales and collection? Have replacement staffs been found for this 2 position? Is the company facing high staff turnover, esp for sales staff? What is the staff turnover rate for FY2007?
4. Will the company be providing quarterly performance updates?
5. What are the assets that are classified as held for sale?
1. While demand for steel in 2HFY07 remained relatively buoyant in the markets we serve, we believe this demand was matched by a similar level of steel inventory available in the marketplace. Given this backdrop, competition was keener and the focus of our sales strategy was to maintain the profitability of our sales. Despite the more competitive climate in 2HFY07, our revenue during this period was still higher than in 1HFY07.
However, the replacement cost for inventory has also increased in line with rising steel prices. This has resulted in a slightly lower gross profit margin in 2HFY07 when compared to 1HFY07.
2. The provision for doubtful debts in FY2007 was made for a single customer. Although the amount of trade receivables related to this customer is outstanding for less than a year, we have adopted a prudent approach by making a full provision in FY2007.
Going forward, we will continue to maintain prudent management of our credit policies, which is a practice that has enabled the Group to maintain minimal bad debt write-offs in the past years.
3. The resignations of two of our sales personnel were due solely to family commitment and health reason respectively. We do not expect these events to affect our business as the Group's growth and long-standing relationships with customers are built on Asia Enterprises' credible market reputation. As part of our plan to increase our market presence in the region, we are constantly on the look-out for potential and suitable candidates to expand our staff strength.
Our employee retention rates have been generally good. Around 50% of our staff have been with the Group for more than 10 years, with half of them having stayed with us for over 20 years.
4. In compliance with the listing rules, the Group will commence quarterly reporting from FY2008 onwards. We expect to announce our first quarterly results for the three months ending 31 March 2008 in May.
5. The 'Asset Held for Sale' is in relation to a piece of industrial land in Jiangsu, China, that is owned by the Group. Previously classified under 'Property, Plant and Equipment', the piece of land is now reclassified to 'Asset Held for Sale' as China's latest regulatory policy stipulates that land not utilised for over two years will have to be disposed.
Dear Lau Wang Yip, you wrote:
I understand from your announcements during the past 3 months that 2 of your Senior Sales Managers have left the company. Is this the reason why the co. earns less in the 2nd half ( 3.18ct.) than in the 1st half(3.96ct.)?
The lower Net Profit Attributable to Equity holders in 2HFY07, as compared to 1HFY07, is due mainly to a provision for doubtful debts of approximately $1.6 million. In addition, the replacement cost for inventory has also increased in line with rising steel prices. This has resulted in a slightly lower gross profit margin in 2HFY07 when compared to 1HFY07. Nonetheless, we were able to achieve a strong 28% year-on-year growth in our full-year net profit to reach a record of $19.6 million.
The resignations of two of our sales personnel were due solely to family commitment and health reason respectively. We do not expect these events to affect our business as the Group's growth and long-standing relationships with customers are built on Asia Enterprises' credible market reputation. As part of our plan to increase our market presence in the region, we are constantly on the look-out for potential and suitable candidates to expand our staff strength.
Dear Eugene, you wrote:
I noted that while Asia Enterprises achieved 76% Y-O-Y increase in net profit for 1H2007, the 5% Y-O-Y decline in net profit for 2H2007 is not encouraging. Can you provide more details to explain the decline in performance for 2H2007?
Also, going into 2008, do you forecast a decrease in steel prices leading to a decline in net profit? If steel prices were to decline into 2008, will demand for your steel products generate sufficient volume to mitigate the drop in net profit?
Thanks!
The lower net profit year-on-year in 2HFY07 is mainly attributed to a provision for doubtful debts of approximately $1.6 million. In addition, the replacement cost for inventory has also increased in line with rising steel prices. This has resulted in a slightly lower gross profit margin in 2HFY07 when compared to 1HFY07. Nonetheless, we were able to achieve a strong 28% year-on-year growth in our full-year net profit to reach a record of $19.6 million.
Buoyed by robust demand from various regions worldwide and rising costs of production, particularly raw materials such as iron ore, coking coal and scrap, steel prices are generally expected to remain firm throughout the first half of 2008.
We believe that our management expertise, experience and strong financial position are key in mitigating the risks arising from fluctuations in steel prices. With zero net gearing, we are not under significant pressure to liquidate our stocks during unfavourable periods. To cite an example, when global steel prices corrected steeply in 2005, the Group managed to sustain its net profit for the year, and pay out 40% of our net profits as dividends to shareholders.
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