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(extracted from Annual Report 2021)

DEAR SHAREHOLDERS,

On behalf of the Board, I am pleased to present the Annual Report of HG Metal Manufacturing Limited (the “Company” and together with its subsidiaries, the “Group”) for the financial year ended 31 December 2021 (“FY2021”).

FY2021 BUSINESS REVIEW

According to the Ministry of Trade and Industry(1), Singapore’s economy grew 6.1% in the fourth quarter of 2021, bringing the full-year growth to 7.6%. This 2021 GDP figure marks a rebound from 2020’s record 4.1% contraction, which had been Singapore’s worst recession since independence(2)(3).

Singapore’s construction industry was heavily impacted by the COVID-9 pandemic, contracting 38.4% in 2020 as public health considerations necessitated strict border controls which restricted the inflow of migrant workers to the construction sector, resulting in labour shortages, increased labour costs and projects delays.

The construction sector had seen steady recovery and grew by 20.1% year-on-year in 2021, driven by Singapore adopting the endemic approach and allowing foreign workers to enter the country, and rising construction demand from both the public and private sector.

In FY2021, the COVID-19 pandemic continued to pose challenges to our business operations. Ongoing safe management measures and restrictions on border movement impacted manpower supply, disrupted international shipping and intensified material price fluctuation, resulting in an increase of our operational costs.

To ease our manpower crunch issue, we worked at retaining staff to reduce our staff turnover, while we outsourced some business functions to sub-contractors at competitive rates. Meanwhile, as disruption of international shipment led to a longer delivery time, the Group formed a centralised supply chain management team to focus on ensuring timely delivery of goods to our customers. The team developed strategic plans that spanned the whole logistics process from sourcing of raw materials to production and distribution of goods, so as to reduce cost and alleviate supply shortage.

In view of the uncertain economic situation, we closely monitored our currency exchange risk exposure, while implementing stringent credit risk control through tightening credit extension to customers and calibrating shorter payment terms for ongoing supplies. The Group made efforts to ensure better utilisation of internal resources, as we reduce reliance on outsourced logistic services.

Besides this, the military coup in Myanmar had also caused unforeseen business disruption and increased our risk exposure. This was further aggravated by the COVID-19 pandemic, which led to lockdowns that further dampened economic activities in Myanmar. Noting the oncoming headwinds, the Group directed its efforts to gain growth opportunities locally, riding on the wave of construction recovery in Singapore as it rebounded from the pandemic low. We worked towards strengthening our foothold in the market through a multi-pronged growth strategy. We continued to focus on bridging the gap between upstream steel producers and end-users, adding value by providing end-to-end customised solutions for the reinforcement and construction industries to our customers. We streamlined our business model by moving towards direct sales to end-users, strengthening our customer relationships and engaging end-users of steel directly, especially customers that require large customised orders for specific projects.

Notwithstanding these challenging environment and business disruptions, I am pleased to inform shareholders that the Group has remained resilient and managed to deliver a credible set of results with our strong fundamentals.

Meanwhile, in line with the global move towards sustainability development, we partnered LYS Energy Group to build and operate a rooftop grid-tiered solar photovoltaic (PV) system at our premises as part of our efforts to reduce carbon footprint and reap cost-savings benefits. The solar system has been operational since Q3 FY2021.

FY2021 FINANCIAL PERFORMANCE

The Group’s HG Construction Steel business segment reported 53% increase in sales volume in FY2021 against FY2020 upon resumption of project sales deliveries that were affected by the COVID-19 pandemic in FY2020. Concurrently, our HG Distribution segment also achieved better performance due to significant improvement in gross profit margin.

The Group reported a 55% gain in revenue in FY2021. Total revenue was S$142.3 million in FY2021 as compared to S$91.7 million in FY2020. This was in tandem with significant surge in international steel prices and recovery of construction activities in Singapore during the year, which bolstered the Group’s business activities.

The Group’s gross profit margin for the year rose to 20.5% as against 12.1% in FY2020 due to increase in sales volume, lower average cost of material on hand and higher revenue, in tandem with significant increase in average selling prices. This has contributed to substantial improvement in the Group’s gross profit to S$29.2 million in FY2021 as compared to S$11.1 million in FY2020.

In FY2021, we continued to implement cost control measures on our distribution, and operating expenses. Most of these expenses were kept consistent with the previous year, except for administrative expenses which rose 29% due to an increase in staff compensation and headcounts for growing local sales. Higher staff expenses were partially offset by savings in selling and distribution expenses through optimization of our internal resources.

Due to reasons aforementioned, the Group posted a net profit after tax of S$11.2 million in FY2021, which is a significant improvement compared to the net profit of S$1.3 million recorded in FY2020.

There was an increase in working capital requirements during the year because of higher steel prices. Despite this, the Group continued to strengthen its working capital management and maintain a healthy cash flow position with adequate liquidity. The Group’s cash and cash equivalent surged from S$19.5 million as at 31 December 2020 to S$27.9 million as at 31 December 2021 mainly due to positive operating activities cash flow. Meanwhile, the net cash flow from financing activities, mainly from bank borrowings was substantially offset by cash flow used in investing activities related mainly to purchase of property, plant and equipment.

As of 31 December 2021 the Group’s shareholders’ funds was S$110.7 million and net asset value per share was valued at 88 Singapore cents. The Group continues to maintain a strong balance sheet, which will enable us to pursue expansion plans and undertake new projects as and when the opportunities arise.

PROPOSED DIVIDEND

In appreciation of our shareholders for their trust and unwavering support, the Board of Director is proposing a final one-tier dividend of S$0.04 per ordinary share for FY2021, subject to shareholders’ approval at our upcoming Annual General Meeting.

BUSINESS OUTLOOK

According to the Building and Construction Authority of Singapore(4), total construction contracts that will be awarded in 2022 is projected to be around the pre-COVID-19 level at between S$27.0 billion and S$32.0 billion. This augurs that construction demand is expected to grow in 2022 with the public sector expected to account for about 60% of the total demand, while private sector demand is estimated to stand between S$11.0 billion and S$13.0 billion. Additionally, backlog of works affected by the pandemic since 2020 will also boost the anticipated growth in 2022.

As we enter the third year of the COVID-19 crisis, economic developments have been both encouraging and troubling, clouded by many risks and considerable uncertainties. The global outlook is clouded by various downside risks, including renewed COVID-19 outbreaks due to Omicron or new virus variants, diminished fiscal support, and lingering supply bottlenecks. The situation would be further aggravated by global rising inflation and higher energy prices that is now further impacted by the recent Russia’s special military operation in Ukraine that spread chaos throughout energy markets.

Additionally, the Group foresees that rising steel prices and supply chain disruptions, together with manpower shortage will elevate average inventory holding cost in the near future which will necessitate the Group to plan its stock replenishment cautiously and on a timely manner.

Despite the impending challenges, the Group endeavours to continue expanding its operational capacity and scale up marketing efforts to seize any opportunities that may arise in the light of positive outlook for the local construction demand in 2022. In line with our prudent management approach, we will focus on optimising our resource allocation and working capital to bring cost-savings benefits to our business operations.

The Group will continue to focus its strategies and priorities on further strengthening its market positioning. The Group believes that being dynamic and ever-adapting are necessary in these volatile times. As such, the Group will continue to exercise caution for any changes or development in both the domestic and international markets to manage its risk exposure and to overcome any hurdles it may face while simultaneously working towards increasing value creation to its stakeholders.

ACKNOWLEDGEMENT AND APPRECIATION

I would like to thank our management and staff for their hard work and perseverance during the year. We are grateful to our customers, business associates, suppliers and shareholders for their continued invaluable support, confidence and trust on the Company. Together, we look forward to scale new heights and achieve greater success for our shareholders and stakeholders.

Finally, I would like to thank my fellow Board members, for their stewardship and contributions to the Group. On behalf of the Board, we take this opportunity to thank Mr Teo Yi-Dar for his past services as Director and Independent Non-Executive Chairman of the Company.