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 segment operates in a competitive industry, facing challenges from both local and international players. Additionally, the segment is susceptible to supply chain disruptions caused by raw material shortages, transportation difficulties, or other factors that could impact its ability to meet customer demands. Furthermore, finding and retaining skilled professionals can be a challenge for the segment. As such, it is crucial for management to continually evaluate and address these risks to ensure the division’s long-term viability and success. The global volatility of commodity prices, particularly in the palm oil market, has affected the demand for our equipment such as boilers, steam turbines, and other oil room products. As a result, the management team is closely monitoring fluctuations in CPO prices and market demand to formulate appropriate responses to changes in the market. The palm oil industry also faces increased scrutiny due to its negative environmental impact that has resulted to mounting pressures on the industry to adopt sustainable practices. To ensure relevance and business continuity, RE businesses must incorporate eco-friendly technologies as part of its strategy to supply equipment to the industry. The RE segment faces multiple challenges, including exposure to fixed price contracts and fluctuations in the value of the Malaysian Ringgit relative to other currencies, which could impact overall profit margins. Disruptions in project execution and delays in fulfilling contract demands may lead to lower revenue and weaker earnings. However, the management team has taken significant steps to mitigate these risks. For instance, they have aggressively developed an internal pool of talent and equipped the production floor with the latest equipment and technology to enhance overall production efficiency and reduce equipment delivery times. Additionally, various efforts to broaden the customer base and diversify the product range have enabled RE to reduce reliance on specific sectors and customers. Discussion on expectation of future results Governments are promoting the adoption of cleaner energy by implementing policies such as renewable energy targets, tax incentives, and subsidies, which is contributing to the growing market for cleaner energy solutions. Manufacturers of equipment for cleaner energy are benefiting from technological advancements that are increasing the efficiency and reducing the cost of cleaner energy solutions. RE’s biomass boiler and steam turbines have provided the palm oil industry with renewable energy solutions for the past 20-30 years, reducing CO2 emissions. IE’s co-generation solution is also highly energy efficient and cost-saving solution, providing power and secondary energy such as steam energy or chilled water from a single cleaner fuel source, natural gas. The shift towards cleaner energy creates opportunities for innovation and collaboration among manufacturers, energy companies, utilities, and other stakeholders. This collaboration in developing new solutions and business models that can help accelerate the transition to a low-carbon economy. The outlook for the segment remains positive, as the growing demand for clean energy solutions and the technological advancements driving their adoption are expected to continue in the future. INDUSTRIAL TRADING & SERVICES (‘ITS’) Discussion of strategies, operational capabilities to achieve the desired business objectives and results In 2022. ITS continues to exercise caution in controlling its trading volume and credit exposures due to the adverse economic conditions affecting the building materials industry in Malaysia. During the year, ITS focused on protecting gross margins and collection of receivables. Additionally, ITS also made good progress in optimizing its inventories and working capital requirements. As part of its rationalization of its non-core assets, in 2022, ITS divested its remaining shareholding in Spirolite to Lesso China Group for a purchase consideration of RM30.8 million. This marks ITS full exit from the HDPE pipe manufacturing business. During the year, ITS equipment distribution business profit margin was also impacted by higher importation cost resulting from the strengthening of USD and the weakening of MYR against major currencies. In counteracting these challenges, the ITS equipment distribution business prioritized in growing its after-sales service and used easily available spare parts as part of its strategy to defend its margins. MANAGEMENT DISCUSSION AND ANALYSIS Wah Seong Corporation Berhad Annual Report 2022 42
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