(extracted from Annual Report 2023)
DEAR SHAREHOLDERS,
I am pleased to present the annual report for the financial year ended 31 December 2023 (“FY2023”), a year of significant change. This is the first time that I am delivering the annual report, having been appointed as Independent Non-Executive Chairman on 22 June 2023.
As shareholders are aware, on 21 March 2023 Dhu Holdings acquired 35.6 million shares (equivalent to a 28.45% stake in HG Metal Manufacturing Limited (“HG Metal” or the “Company”, and together with its subsidiaries, the “Group”) from vendors Flame Gold International Limited, Ng Joo Yow, Ang Gim Teck and Ang Gim Thian.
Following the acquisition, the Board of Directors was reconstituted, with Ms Xiao Xia being appointed Chief Executive Officer (“CEO”) as well as Executive Director (“ED”) on 27 April 2023. Joining me on the new Board are Independent Non-Executive Directors Ms Daisy Ong Lizhen and Ms Ng Chuey Peng.
Together with the management team, we lost no time in executing the first few corporate actions of what we believe will unfold into a broader transformation of HG Metal in the years to come. I am pleased to report that within a few months, we have already harvested some early fruits in our efforts to achieve corporate recovery.
I summarise here the three main initiatives:
DISPOSAL OF INDIRECT SUBSIDIARY IN MYANMAR
Economic and business uncertainty in Myanmar has escalated due to recent political and security developments in the country. This uncertainty has posed operational challenges as well as risks for foreign companies operating there. The weakening of the Myanmar Kyat has impacted our performance significantly. Our net loss in FY2023 was due substantially to the foreign exchange loss as well as the impairment of trade receivables and interest incurred on an outstanding bank loan taken by the Myanmar subsidiary, First Fortune International Company Limited (“FFI”).
On 31 July 2023, HG Yangon ceased operations in Myanmar and was placed under voluntary liquidation. Subsequent to the financial year end, we entered into a Sale and Purchase Agreement (“SPA”) with Aung Tin Htut on 13 February 2024 to sell our 51.04%-stake in our indirect subsidiary, FFI to Mr Aung Tin Htut, a Myanmar citizen.
Our FY2023 financial performance also reflected an impairment loss provision for FFI which is now classified as a discontinued operations that is held for sale. While we obtained approval from the Singapore Exchange Regulation (“SGX RegCo”) on 30 January 2024 to waive seeking shareholders’ approval prior to the disposal, the transaction is still subject to shareholder approval at the upcoming Annual General Meeting.
This decision, while difficult and painful, will allow HG Metal to prevent future losses in Myanmar. We can also allocate resources to capture opportunities within our core market in Singapore.
Concurrent with the disposal, Aung Tin Htut also sold his interest in HG Metal – approximately 5.33% – to Green Esteel Pte. Ltd. The latter holds a majority stake in our major supplier, Mainboard-listed BRC Asia Limited (“BRC Asia”). This unique alignment presents opportunities for new collaborations and operational synergies, bolstering our market position.
IMPROVING OPERATIONAL EFFICIENCY
We have taken initial steps to improve internal efficiency. These include refreshing the management structure, which has already lowered our administrative expenses to S$7.4 million in FY2023 from S$10.3 million a year earlier. We have also cut down operating expenses by S$0.8 million mainly due to lower depreciation expenses, after we surrendered to our landlord, JTC, a parcel of leased land.
Working closely with the new management we have started reviewing procurement procedures to reduce legacy issues related to high inventory costs. We are confident of lowering these costs and improving our cash conversion cycle from FY2024.
During the year, workflow at our manufacturing facility in Jalan Buroh in Singapore has been optimised to increase capacity and utilisation.
We aim to undertake more workflow improvement initiatives that will help make HG Metal more efficient over the next few years in a systemic and structured manner. In line with this, the Board has also set very clear goals to improve the health and safety of our staff starting in FY2024.
FINANCIAL-RELATED INITIATIVES
As shareholders are aware, interest rates have risen substantially since the end of the pandemic. Hence, one of the first actions taken by the new Board is to reduce bank borrowings. I am pleased to report that despite the ‘the higher for longer’ interest rate environment, our total finance costs have fallen significantly to S$1.0 million in FY2023 from S$1.4 million in FY2022.
To enhance shareholder value, beyond cost-cutting, HG Metal also needs to grow and increase its value proposition. On 19 September 2023, we completed the placement of 25.1 million new shares at S$0.278 each, raising gross proceeds of S$6.97 million. The net proceeds will provide working capital and fund our growth and expansion plans. The placement has enlarged HG Metal’s total number of issued shares to 150,356,441 shares.
FINANCIAL PERFORMANCE
Having outlined the above three main initiatives taken thus far in FY2023, allow me now to discuss the financial performance of the Group.
The post-pandemic global economy has been buffeted by macroeconomic challenges such as higher interest rates, inflationary pressures, and supply chain disruptions. The operating environment has been further challenged more recently by rising geopolitical tensions arising from U.S.- China trade tensions, the Russia-Ukraine conflict and the situation in Gaza.
Against this backdrop, the Group’s sales volume increased 23% year-on-year, buoyed by strong demand in the Singapore construction sector amid accelerated construction activity in public and private sectors.
However, a situation of higher costs of materials, arising from legacy operational issues outlined above, and lower selling prices impacted us in three ways for our continuing operations: i) revenue for FY2023 declined 2% to S$149.8 million compared to S$152.6 million in FY2022 (also contributed by a change in sales mix); ii) gross profit for FY2023 fell 38% to S$12.8 million from S$20.5 million in FY2022; iii) FY2023 gross profit margin declined to 8.5% compared to 13.4% in FY2022.
We incurred net loss after tax of S$2.2 million from our discontinued operation in Myanmar; this includes a S$0.7 million one-time impairment loss in relation to the discontinued operation that is held for sale.
The net loss after tax from discontinued operations offset a S$0.5 million net profit after tax from continuing operations in FY2023, compared to FY2022’s S$4.9 million. Overall net loss after tax for FY2023 stood at S$1.8 million (FY2022: S$5.8 million net loss). Excluding the impairment, net loss would have been even lower.
OUTLOOK AND FORWARD STRATEGY
The initiatives I outlined above reflect our decision to terminate operations in Myanmar, improve internal efficiencies and channel more resources to Singapore, our main market.
The Ministry of Trade and Industry (“MTI”) reported that the Singapore economy grew by 1.1% in 2023, compared to 3.6% in 2022. Growth for 2024 is forecast to range between 1% to 3%, as advanced economies are expected to see sluggish growth in the first half of the year before recovering gradually.
Meanwhile, the Building and Construction Authority (“BCA”) expects medium-term demand in Singapore to steadily improve from 2024. The preliminary construction demand for 2023 reached S$33.8 billion, which exceeded the initial estimates of S$27 billion to S$32 billion a year ago. Total construction demand is now forecast to range between S$32 billion and S$38 billion for FY2024. This sector is expected to remain stable from 2025 to 2028.
Our strategic transformation will, to no small extent, revolve around opportunities related to the application of steel products for the built environment in Singapore. The national impulse to emerge as a preferred global city will mean higher standards of infrastructure and buildings. There will also be a constant emphasis on improving efficiency, sustainability, health and safety for the construction sector, which will have implications for suppliers of building materials including steel.
For HG Metal, this landscape offers both challenges and opportunities. Beyond fluctuating steel prices, we need to embark on a broader transformation to re-position the Group. We need to build a leaner, more agile HG Metal that can remain relevant as a leader in the steel market in Singapore and beyond.
We will outline these strategies in greater detail in due course. Barring unforeseen circumstances and further significant impairments, we are cautiously optimistic operations and prospects in FY2024 will improve compared to FY2023.
IN APPRECIATION
On behalf of the Group, I would like to express my gratitude to our customers and business partners for their support throughout the year, and to HG Metal staff for their commitment and dedication; without your contributions, HG Metal would not be where we are today.
I would also like to extend my appreciation to the directors and management who have resigned. They are Independent Non-Executive Chairman Mr Kesavan Nair, Non-Executive Director Mr Foo Sey Liang, Independent Non-Executive Director Mr Ng Weng Sui Harry, Independent Non-Executive Director Ms Ng Kate Jain, Chief Executive Officer Mr Shin Taeyang, Mr Royston John, Head of Business of HG Metal Manufacturing Limited, and Mr Ang Thiam Kwee, Dan, Head of Business of our wholly-owned subsidiary Oriental Metals Pte Ltd. The Board thanks them for their past contributions and wishes them all the best in their future endeavours.
I also welcome my fellow Board members who have been kept busy since their appointment last June. They have worked hard with the management and will need to provide counsel and direction as we embark on future transformation.
Most importantly, thank you, our shareholders, for your support. We are on an exciting path to a stronger HG Metal, and we remain committed to delivering greater value in the years ahead.
Mr Ong Hwee Li
Independent Non-Executive Chairman