We are pleased to present to you the annual report of HG Metal Manufacturing Limited ("HG Metal") for the year ended 31 December 2017 ("FY2017").
GROUP'S FINANCIAL PERFORMANCE
In FY2017, we continued to make good progress with respect to our strategic priorities and in building a simpler, more customer-oriented company. Although we had expected a challenging FY2017 due to the continued weakness in demand amid the challenging business environment, we met those challenges head on and managed to come through it well.
Our multi-year focus on cost efficiency, business sustainability and growing revenue organically are progressing on track. Such performance is not only a testament of our longstanding reputation as one of the largest steel distributors and the appeal of our customised solutions to our regional customers.
We are pleased to report to shareholders that the Group's total revenue for FY2017 has grown from S$108.5 million in FY2016 to S$162.6 million. This increase in revenue was a combination of rise in international steel prices that occurred in FY2017, which resulted in a 34% increase in average selling price and also a 12% increase in sales volume.
Due to higher revenue recorded during the year, as well as slight improvement in gross profit margin in FY2017, the Group reported an increase of S$3.7 million in gross profit to S$9.7 million in FY2017 from S$6.0 million in FY2016.
However, in spite of this increase, the Group posted a net loss after tax of S$12.0 million in FY2017 as compared to a net profit after tax of S$0.9 million in FY2016, mainly due to the impairment loss from disposal of our associated company, BRC Asia Limited ("BRC"). The Company has reviewed its investment strategy in BRC and considers it an opportune time to realise its investment in BRC and apply the proceeds to other business and investment opportunities which are more likely to enhance shareholder value.
As at 31 December 2017, there were no outstanding bank borrowings and the Group's total bank balances and fixed deposits remained healthy at S$48.3 million as at 31 December 2017, compared to S$37.7 million as at 31 December 2016.
STRATEGIC DISPOSALS AND CAPITAL REDUCTION
Turning to broader issues, FY2017 was marked by several corporate developments that were targeted to re-position the Group for sustainable growth in the future. On 9 September 2017 the Group announced that it had entered into a conditional agreement with a purchaser, Esteel Enterprise Pte. Ltd. to dispose off all 42,145,518 ordinary shares ("BRC Shares") held by the Company in the issued and paid-up share capital of BRC at the consideration of S$0.925 per BRC Share.
The purchase consideration was arrived at on a willing-buyer and willing-seller basis, after taking into account the historical financial performance of BRC and its subsidiaries, its business prospects, prevailing market share prices and the terms of offer.
In conjunction with the disposal of the BRC Shares, the Company undertook a capital reduction exercise in 2017 to reduce its issued and paid-up share capital from S$152.1 million to S$70.5 million. The capital reduction served to write-off the Company's accumulated losses to the amount of S$68.2 million and to facilitate a cash distribution of $13.4 million to shareholders on the basis of $0.105 for each ordinary share held by shareholders in the capital of the Company. On behalf of the Board, we would like to thank our valued shareholders for casting their vote of support to approve the strategic divestment and the proposed capital reduction and proposed cash distribution in the Extraordinary General Meeting held on 25 October 2017.
Meanwhile, on 4 October 2017, the Company announced that its associated company, POS-SEA Pte Ltd had initiated a capital reduction exercise to cancel 490,000 shares held by the Company and to return the US$490,000 share capital invested by the Company. Following the completion of the capital reduction in November 2017, POS-SEA Pte Ltd ceased to be an associated company of the Group.
OUR MARKETS AND CAPABILITIES
HG Metal is an established Company. Not only are we part of many local communities, we have also established a strong global network of suppliers and clients. Our extensive network of suppliers includes China, Japan, Korea, Turkey, Russia, Ukraine and other Eastern European countries. We also have a large and diversified customer base of more than 1,500 clients from around the world, with our key markets being Singapore, Myanmar, Malaysia and Indonesia.
As with previous years, we have made significant progress in improving our organisation by building partnerships and networks across the globe for synergistic business opportunities to bolster growth. On the other hand, the simplification of operations automation and cost reduction have created benefits and enhance our customers' experience with HG Metal.
Today, HG Metal has one of the largest steel warehouse and processing facilities in Singapore. With these assets and capabilities, we believe we are better placed to differentiate ourselves from our competitors.
We expect growth available in our addressable markets will continue to be a challenge amidst the progressive recovering of the global and Singapore economies in 2018.
In 2017, we saw Singapore's GDP expanded by 3.6%, which was mainly fuelled by the manufacturing segment. This is in spite the fact that the construction sector reported a negative growth of 8.4% in 2017. Singapore's growth however is expected to decelerate in 2018 over the concerns that the trade-driven lift from electronics manufacturing might fizzle out. The potential weakness in the recovery of the construction, marine and offshore industries will continue to pose challenges to our steel business.
In the light of the afore-mentioned, the Group expects the operating environment for the steel industry to remain challenging given the prevailing sectoral weakness. The volatility in US Dollar and international steel prices, and intensifying local competition will continue to pose challenges to the businesses of the Group. Notwithstanding the challenges faced, the Group will remain focused in growing its core businesses and will position itself to take advantage of the recovery in demand whenever such opportunities arise.
Back by a strong balance sheet, the Group will continue to seek growth opportunities, locally and abroad in the new financial year. This includes focusing on markets and services where we have a competitive advantage, allocating capital where we see the ability to generate attractive risk-adjusted returns and investing where we see an opportunity to expand our market share.
The past few years have been a really tough period for the Group, and bottom line results can obscure the real underlying progress that is being made. We would therefore like to thank the Board, the management team and all our staff for the enormous efforts they are making to secure our recovery. We firmly believe that the current HG Metal has the right plan in place to deliver sustainable success, and a strategy which can adapt to any changes in the market. We, together with our management team view this as a core part of our ambition for 2018. Finally, we would also like to thank all our customers, business associates and shareholders for their staunch support. We look forward to journeying with you as we continue to deliver innovation, growth and value to shareholders.
MR TEO YI-DAR (ZHANG YIDA)
MR FOO SEY LIANG