Koon Holdings Ltd

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Chairman's Statement

Extracted from Annual Report 2011

Dear Shareholders,

On behalf of the Board, we are pleased to present to you Koon Holdings Limited's ("Koon", "崐控股有限公司" or the "Group") annual report for the financial year ended 31 December 2011 ("FY2011").

The past year has been a busy but fruitful one for us as we continued our business diversification strategy with a strategic focus on precast and property development.

One of the key performers for last year was our Precast Concrete Work division ("Precast division"). Recognising the synergy and potential of the precast market, we established this new division via the acquisition of Econ Precast Pte. Ltd. ("Econ") and Contech Precast Pte. Ltd. ("Contech").

Laying the growth strategy for this division, we implemented new directions, streamlined and integrated operations and most importantly, provided them with the necessary resources to operate and to grow. Within one year, the order book for our Precast division tripled from S$31 million in February 2011 to S$94 million in 2012, with majority to be recognised in the next two years.

To further diversify our business model, we did not stop at precast. As you may already know, 2011 also marked our foray into property development. We acquired a majority stake in Singapore's premier real estate agency, Global Property Strategic Alliance Pte. Ltd. ("GPS Alliance"). Within months, this division quickly expanded into property development , proper t y valuation and advisory services as well as home furnishing to provide integrated solutions to our customers - developers and property owners.

Beyond Singapore, another encouraging development came from our investment in an Australia energy infrastructure company, Tesla Holdings Pty Ltd ("Tesla"). In August 2011, Tesla successfully completed and commissioned its first power plant in Perth with three additional plants expected to be completed in the second half of 2012. Subsequently, in March 2012, we raised our equity stake in Tesla to 71.2%.

We believe our diversified business model will continue to set the pace for future growth. At the same time, we remain focused on creating synergies between our complementary business units. While challenges in global economies remain unabated, we are confident that our diversified range of business activities will position us well to weather economic volatility ahead.

Infrastructure Construction and Civil Engineering

Our proven track record and established position as one of the infrastructure construction specialists in Singapore has provided us with a foundation to collaborate with our partners to broaden our presence in this niche market.

Following the successful completion of several projects, such as the Serangoon Reservoir, Construction Industries Park at Seletar and Gardens by the Bay at Marina South, we continue to actively tender for new government infrastructure projects and we secured contracts related to the widening of Tampines Expressway (TPE) and the development of Tampines Logistics Park in 2011.

Combined with the resources of our plant and equipment rental division, we have more flexibility in managing our marine and land-based construction machinery and equipment to ensure efficient usage and the timely completion of our projects.

As at 24 February 2012, our order book for Infrastructure Construction and Civil Engineering ("Construction division") stands at S$113 million.

The order book excludes the Sao Bien Port project announced in February 2010. The project encountered delay in getting certain approvals and negotiation is still in progress. However, for financial prudency, we have provided for impairment loss of S$1.6 million in FY2011. Further updates in relation to this project will be announced as and when appropriate.

Plant and Equipment Rental

Complementary to our infrastructure construction business, this division focuses on the rental of these plant and equipment to external clients as well as the deployment for internal usage.

While adequately supporting the Group's construction requirements, this division has enabled us to centralise our procurement of plant and construction equipment to generate cost efficiencies.

Precast Concrete Work

With the acquisition of Econ and Contech in 2010, we now own 2 out of 10 precast manufacturers in Singapore that hold the highest license (L6) from the Building and Construction Authority of Singapore ("BCA"). With these BCA licenses, both Econ and Contech are able to tender for the supply of precast concrete components with unlimited value for both public and private sector projects in Singapore.

During the period under review, we focused on enhancing operational efficiency as well as the manufacturing capabilities of our Precast division. Furthermore, in line with increased demand for public housing development, we expanded our production capacity and widened our product offerings to undertake larger precast projects.

Determined to grow our precast business, we are also cross-selling our precast products to relevant customers from other divisions as well.

As at 24 February 2012, the order book of our Precast division stood at S$94 million, with majority of order book to be recognised within the next 2 years. Our position as one of Singapore's largest precast players played a significant role in promoting the adoption of precast concrete technology in the building industry.

Property

While this new division has grown quickly with the acquisition of Singapore's premier real estate agency, GPS Alliance, a great deal of consideration and prudency were deliberated by the Board before the acquisition in July 2011.

Within the same year, we set up new subsidiaries under this division and expanded into property valuation and advisory services as well as home furnishing. We also took a 15% stake in an Executive Condominium housing development project located in Pasir Ris where GPS Alliance will be responsible for the marketing strategy and sales of this residential development. This is a significant step forward as we pursue our long-term objective to be an innovative builder and developer.

Investment

To channel our excess capital resources for better use, we invest in businesses that are able to generate recurring income while providing us the potential to create synergies among our existing business activities. To date, Koon holds approximately 71.2% equity stake in Tesla.

In line with our business plan, Tesla commissioned its first 9.9MW diesel power plant in Western Australia in the second half of 2011. As such, Tesla started generating recurring revenue based on a two-tier revenue matrix (standby fee and actual usage fee).

To address the growing energy needs in Western Australia, Tesla has also secured various sites in Western Australia for the construction of three additional 9.9MW diesel power plants which will be completed in the second half of 2012.

Financial Review

Overview

While the Group recorded a 10.9% revenue growth to S$88.1 million, net profit attributable to shareholders was down from S$13.0 million a year ago to S$7.6 million in FY2011. Our expansion in Precast activities and foray into the real estate market incurred additional expenses during the development phase which translated to lower bottom-line performance. However, this is an essential investment in the future of our Group, and we shall maintain our tight cost control as we pushed forward with our business strategies.

Operating Performance

During the period under review, the Group's revenue increased 10.9% from S$79.4 million to S$88.1 million. The increase in revenue was mainly attributed to the higher revenue from the Precast division and maiden revenue contribution from the Property division and was partially offset by the decline in revenue from the Construction division.

In FY2011, revenue from the Construction division decreased to S$47.6 million from S$66.1 million a year ago, which was mainly due to:

  1. Project Completion Timeline
    Substantial completion of major projects such as Serangoon Reservoir, Gardens by the Bay at Marina South, Jurong Island projects, PUB Wetlands contributed significantly to the Group's revenue in FY2010 and as a result, there was lower revenue recognition in FY2011 from these projects. The decrease was partially offset by new projects such as Infrastructure works at Changi East, coastal protection work at Pulau Tekong, a private civil engineering project at Tuas and JTC Tampines Logistics Park project.

  2. Timing of Revenue Recognition
    The Group only recognizes revenue when a construction project is 20% or more complete.

    While the Construction division remained as the largest revenue contributor of the Group, the Precast division that we acquired in 2010 recorded a significant revenue increase, from S$8.9 million in FY2010 to S$31.5 million in FY2011, mainly attributed to consolidation of full year revenue for 2011 as well as the increase in new contracts secured.

    Our Plant and equipment rental division continued to support the Construction division and generate stable income to the Group.

    The Property division that was acquired in July 2011 contributed maiden revenue of S$7.6 million in FY2011.

    Gross profit decreased by 48.9% to S$8.2 million mainly due to lower profit contribution from the Construction division and an impairment loss of S$1.6 million for the delayed Vietnam Sao Bien project which was partially mitigated by the contribution from the Precast division.

    Other income increased from S$7.2 million in FY2010 to S$14.0 million in FY2011 mainly due to the gain on disposal of leasehold property of S$5.6 million and dividend income received from Koon Zinkcon Pte Ltd ("Koon Zinkcon") of S$6.5 million. Koon Zinkcon is the Group's 50% joint venture with Boskalis International (S) Pte Ltd, a major international dredging and offshore engineering firm.

    In line with the Group's ongoing expansion plans, recent acquisition and new business setups, administrative expenses and distribution expenses increased by 39.0% and 331.4% to S$13.1 million and S$1.2 million respectively.

    Share of loss from associate of S$0.96 million arose from the ownership of Tesla.

    As a result, net profit attributable to shareholders reduced 41.6% to S$7.6 million. This profit was largely due to gain from disposal of leasehold property and dividend income from Koon Zinkcon.

Operationally, FY2011 has been a transformative year for Koon. In the second half of 2011, we acquired GPS, an investment holding company that owns the premier real estate agency, Global Property Strategic Alliance Pte. Ltd. Within half a year since the acquisition, GPS has made significant progress in expanding its business network and business activities to new areas such as property valuation and advisory services, property development as well as home furnishing.

Our focus and resources channelled to the Precast division has opened-up new opportunities to cross-market products and services to our clients and more importantly, this has enabled us to offer greater value propositions as we widen our product and service offerings to our clients.

These milestones demonstrated our commitment to diversifying our revenue base and enhancing our business model. In the past two financial years, the Group has taken calibrated steps towards our primary corporate objective: building sustainable businesses that generate long-term growth and value to our stakeholders.

Strong Balance Sheet

While we continued to expand into new business areas, our balance sheet remained healthy with total asset growing 23.8% from S$98.7 million to S$122.2 million in FY2011. Net tangible asset per share increased 7.2% from 30.36 Singapore cents to 32.56 Singapore cents. As at end of December 2011, Cash and cash equivalents stood strong at S$19.6 million.

During FY2011, trade receivables increased mainly due to increase in Precast sales and the addition of commission income from the newly acquired property division during the financial year.

Inventories increased by S$5.8 million due to higher raw materials and finished goods from the Precast division.

Property, plant and equipment increased by 16.5% to S$25.7 million in FY2011 due mainly to additions of an additional office building, purchase of moulds by the Precast division and the acquisition of motor vehicles, bulldozers and steel sheet piles in the Plant and equipment rental division.

Due to the increase in production activities for the Precast Concrete Work division for FY2011 and the addition of Property division, trade payables increased to S$41.3 million.

Cash Flow Highlights

The cash and cash equivalents of the Group decreased mainly due to net cash outlay for purchase of fixed assets, the payment of dividends of S$2.4 million, subscription of preference shares in Tesla of S$4.7 million, and the Group's share of shareholder loan of approximately S$6.2 million to its joint enture HUGE Development Pte. Ltd. for the Pasir Ris executive condominium development project. This was partially offset by proceeds from the sale of leasehold property of S$7.5 million.

Outlook and Prospects

Looking ahead, Singapore's continued economic development, progressive infrastructure improvement and public housing demand underscores the resiliency of our businesses. In January 2012, BCA projected total demand for construction works from both public and private sectors would reach S$21-S$27 billion in 2012. On the public housing front, the Housing and Development Board ("HDB") will launch up to 25,000 new flat units in 2012.

Besides the demand from public housing, precast products are gaining wider adoption especially from the private sector as they simplify onsite construction process, provide better quality control and higher cost efficiencies. On top of these advantages, adopt ion of precast products in construction works also help developers to meet the constructability target set by BCA.

On the property market, the Singapore Government has announced new measures to promote a sustainable residential property market where prices move in line with economic fundamentals. While these measures may affect property purchases, Singapore's growing population, economic growth and popularity will continue to be positive drivers for the domestic property market in the long run.

Our Strategies Ahead

Strengthening Our Human Capital

For the forthcoming year, we will continue to build on our core competencies and capabilities to sharpen our competitive edges. Recognising that people are the DNA of the Group, we will continue to nurture our employees' talents and capabilities through comprehensive trainings and development courses.

Upholding health, safety and environment best practices - a core value of the Group - remains a key priority to ensure a safe and healthy workplace for our employees, contractors and stakeholders.

With continuous improvement on our internal resources management, we are committed to maintain our ability to execute our projects on time and deliver what we promise.

Positioned for Growth

Wi th both Econ and Contech's accumulated expertise and experience in the precast market, as well as Koon's established presence in the construction industry, we are well positioned to offer wide-ranging integrated services to a wider pool of customers, offering operational and project management efficiencies.

Koon will continue to adopt financial and operational prudence to best manage the effects of the changing economic landscape on our businesses. Concurrently, to enhance our long-term competitiveness, we will continue to focus on upgrading our core competencies, capabilities and productivity.

While there are lingering global economic uncertainties, the Group is confident that with vigilance and resilience, it will forge a steady path to sustainable growth.

Rewards to Shareholders

To reward our shareholders, we are pleased to propose a final tax-exempt cash dividend of 0.5 Singapore cent per ordinary share for FY2011, in addition to the interim dividend of 0.5 Singapore cent per ordinary share paid.

The proposed final dividend, if approved at the forthcoming Annual General Meeting to be held in April 2012, will be paid in May 2012.

Acknowledgement and Appreciation

On behalf of the Board, we would like to welcome Mr Ko Chuan Aun, our newly appointed Independent Director. With the Board's collective experience, knowledge and networks, we look forward to their observations and advice to lead us towards achieving our vision "To be an Innovative Builder and Developer Creating Value for All Stakeholders".

We would like to take this opportunity to express our appreciation to our shareholders, customers, financiers, business associates and suppliers who have been unwavering in their support to Koon.

We would also l ike to thank the management and staff of Koon for their hard work and my fellow members of the Board of Directors for their guidance and support. Together, we will chart new growth and bring long-term sustainable value to all our stakeholders.


Yao Chee Liew
Non-Executive Chairman and Independent Director


Tan Thiam Hee
Managing Director and Chief Executive Officer

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