Wah Seong Corporation Berhad Annual Report 2017

FROM THE BOARD OF DIRECTORS AND KEY SENIOR MANAGEMENT WAH SEONG CORPORATION BERHAD ANNUAL REPORT 2017 22 MANAGEMENT DISCUSSION AND ANALYSIS RE was successful in penetrating new markets in the sale of decanter units under the name of PMT-Saito to customers in Malaysia and Indonesia. This is a positive development for the new product line which is anticipated to be the preferred palm oil sludge water separation device for the new built palm oil mills due to its cost- effectiveness and environmental friendly feature. RE will market this new product line aggressively in the coming years. With continued focus on increasing market share beyond the traditional market of Malaysia and Indonesia, RE has also expanded its reach to new overseas market and delivered its products and services to Equador, Mexico, Peru, Nigeria and Bangladesh. Discussion on Key Financial and Operational Indicators for the segment For the year under review, the RE segment recorded revenue of RM280.3 million and segment profit of RM29.5 million, both of which were lower than the previous year’s performance. This was mainly due to lower demand for process equipment for the oil & gas industry and palm oil processing equipment as well as margin compression in this product. As of 31 st December 2017, the RE segment has a combined order book of RM249.7 million which is 50% higher than that as at end 2016. Its orders are made up of smaller projects, of which 81% relates to the palm oil industry and 19% from other industries including power generation industry. Discussion of anticipated or known risks that may have a material effect on, among others, the sustainability of the group’s results or operations, financial condition or liquidity The RE Division’s business is highly dependent on the palm oil and agro industry sector. A change in global economic, political and social factors largely remains beyond the RE Division’s control. The recent announcement made by the European Union Parliament voting to ban the use of palm oil in biofuel from 2021 to prevent deforestation and in meeting Europe’s ambitious climate goals may impact the players in the palm oil industry and indirectly affects some of the customers of RE Division whose exports market is predominantly in Europe. To mitigate this operational risk on replenishment of new orders and margin compression, the management team conducts frequent strategic business review meetings to respond quickly to the changes impacting the business environment. Furthermore the market dynamics will dictate market players to take proactive measures to actively divert supply to meet the demand in other regions, such as China and India where there is higher growth in demographics. Discussion on expectations of future results The outlook of the Palm Oil industry continues to remain challenging in year 2018 due to the stiff market competition and dwindling demand of traditional export market with an increasing anti-palm oil campaigns propagated by the West. In 2018, there will also be an increased pressure by the industry players to address its labor shortages and rising operational cost issues and an immediate solution to these issues are potential upgrades of current palm oil mills which will require more modern and energy efficient process equipment. The RE segment is positive that more co-generation system will also be adopted by the industry players in view of the rising tariff of piped natural gas in Peninsula Malaysia. This positive development will increase the demand for the products and services offered by the segment in the immediate future, not only in Malaysia but also in Indonesia. INDUSTRIAL TRADING & SERVICES (“ITS”) Discussion of strategies, operational capabilities to achieve the desired business objectives and results In year 2016, ITS made a conscious decision to diversify from its traditional business dependent on commodity based products to a new line of business involved in the distribution, rental and services of power generation and construction equipment. WDG Resources Sdn. Bhd. (“WDG”) is an authorised distributor of Mitsubishi Heavy Industries range of diesel engines. On 1 st June 2017, WDG also successfully secured the sole distributorship of Doosan Infracore range of construction equipment such as excavators, wheel loaders and articulated dump trucks. This strategy yielded positive results in which the segment was able to secure a number of major projects to supply generator sets for Southkey Mid Valley Megamall in Johor Bahru, TRX Prudential in Kuala Lumpur and Gardenia Bakery Phase 2 in Selangor. The new distributorship with Doosan also resulted in theGroup securing contracts to supply construction equipment to Sime Darby’s Bandar University Pagoh Project and the Northern Free Trade Zone in Bukit Kayu Hitam, Kedah. For its building materials distribution business, the ITS Division secured contracts to supply construction materials for Impression City in Melaka; I-Santorini, Tanjong Tokong in Penang; 20 th Century Fox Theme Park in Genting Highlands and Hospital Baru, Bachok in Kelantan. The Division’s HDPE products were also extensively used in Malaysia’s various large scale infrastructure projects such as Kwasa Damansara in Sungai Buloh; Syabas Pipe Replacement Project in Selangor; MRT 2 and LRT 3 in Greater Klang Valley.