OPERATING AND FINANCIAL REVIEW

The Singapore economy surged ahead with a robust recovery following the dose of economic stimulus package meted out by the government in January 2009. The economies in neighbouring countries also recovered. For us at Sin Ghee Huat Group of Companies, it was progressive improvement from quarter to quarter during the year ended 30 June 2011 (FY2011). The results were encouraging. We achieved a higher revenue and higher profit for the year.

Group revenue totalling $52.7 million was 9% higher compared with $48.4 million posted in FY2010. Net profit was $5.3 million, up from $3.7 million recorded in FY2010.

NEW SUBSIDIARIES

SG Metals (Suzhou) Ltd, incorporated in Suzhou, PRC on 6 July 2010 as a wholly-owned subsidiary, commenced business activities in the first quarter of the year. As we go through the learning curve operating in a foreign jurisdiction at this initial stage of our first overseas venture, we would take one step at a time cautiously, spacing out our investments in the subsidiary in small quantum progressively as the needs arise.

Our Singapore subsidiary, SG Metals Pte Ltd, also commenced business operations towards the later part of FY2011. Through this subsidiary, the Group would increase the range of products to meet the needs of our customers.

DEMAND FOR STAINLESS STEEL PRODUCTS

Demand for stainless steel products was generally on the rise, noticeably in the second half of FY2011. Total sales volume rose 13% compared with FY2010. The overall average selling price, which decreased in FY2010, continued to decline during FY2011, albeit proportionately less year-on- year. The average cost price also declined. This contributed to improved gross profit as well as profit margins.

The price of nickel, which generally has a direct influence on the price of stainless steel products, fluctuated quite significantly as in the previous years. From approximately US$19,400 per tonne at the end of June 2010, it rose to about US$23,400 and US$24,900 at the end of September 2010 and December 2010 respectively. It climbed further to S$26,100 towards the end of March 2011 before sliding to US$23,100 per tonne at the end of June 2011. Whilst movements in nickel price in principle signal the direction of the prices of stainless steel products, their significance could from time to time be blurred by speculation in the commodity.

MEPS Steel News dated 31 May 2011 said, “… Nickel value have been on a downward trend since March and, like most commodities, dropped sharply at the beginning of May. This was due to speculation on the commodity and had little to do with the fundamentals of either nickel or stainless steel.”

BUSINESS AND GEOGRAPHICAL SEGMENTS

The bulk of the revenue increases in FY2011 came from the “trading and others” sector and the “machining and processing” sector. Revenue in the “trading and others” sector grew 26% to $23.9 million from FY2010’s $19.0 million. The machining and processing sector generated $12.1 million, up from the preceding year’s $9.8 million, representing an increase of 23%. This sector encompasses the process industries, such as food processing, pulp and paper, as well as machine fabrication industry. Revenue from the "marine and shipbuilding" sector and the other sectors declined.

The Group has essentially one business or operating segment, which is the trading and sales of stainless steel products. The business segment as presented provides additional information in terms of the industries in which our customers generally operate. Customers categorised in the “trading and others’ sector may re-sell the products, which they purchased from us, to end-users in any industry.

The local market in Singapore constituted 72% (FY2010: 71%) of the Group’s total revenue. Revenue generated from the ASEAN countries, principally Malaysia and Indonesia, was 24% (FY2010: 21%). Many of our customers are long- time customers. Their continued support and patronage has enabled us to maintain a stable mix of customer base in these traditional markets.

OTHER OPERATING INCOME

Other operating income was $210,000 compared with $336,000 for FY2010. A breakdown is given below:

Sundry income in FY2010 comprised mainly grants received under the jobs credit scheme, which ceased in the early part of FY2011.

OTHER OPERATING EXPENSES

Other operating expenses for FY2011 mainly comprised foreign exchange loss of $160,000 and allowance for doubtful debts of $19,000. Other operating expenses for FY2010 comprised foreign exchange loss of $6,000.

RECLASSIFICATION OF ACCOUNTS

Allowances for inventory write-down and damaged/ obsolete inventories as well as any reversals thereof, which were previously included in “other operating income” or “other operating expenses”, have been reclassified as cost of sales. Any movements of such allowances or reversals in a period would henceforth be reflected in the cost of sales and gross profit on a net basis.

DISTRIBUTION AND ADMINISTRATIVE EXPENSES

Distribution costs in FY2011 were higher at $4.0 million (FY2010: $3.2 million) generally in line with higher sales. Increased manpower costs were also incurred to support sales and marketing efforts. Administrative expenses were marginally higher (3%) than in FY2010. Part of the distribution costs and administrative expenses were attributed to the new operations in Suzhou, PRC, which commenced business activities during the year.

FINANCE COSTS

The Group did not incur any finance costs during FY2011. Finance costs for FY2010 was only $4,000, which related to the first quarter of the preceding year.

PROFIT BEFORE AND AFTER INCOME TAX

Profit before income tax increased to $6.3 million (FY2010: $4.5 million). Net profit increased to $5.3 million from $3.7 million of FY2010. The increase in profit before and after income tax was largely attributed to higher sales revenue and higher gross profit.

CASH FLOWS AND FINANCIAL POSITION

Cash generated from operations in FY2011 was $2.7 million compared with $9.7 million in FY2010. The disparity was mainly attributed to working capital changes relative to the level of business activities in the respective years.

Demand for stainless steel products were still low in FY2010 following the 2008 global economic crisis. This was reflected in the decrease in revenue from $54.4 million in FY2009 to $48.4 million in FY2010 as shown below:

As inventories were drawn down in the course of sales and less replenishment made, their closing balances were reduced from $34.6 million as of 30 June 2009 to $28.3 million as of 30 June 2010. As market conditions improved subsequently with revenue attaining $52.7 million in FY2011, inventory replenishment increased, resulting in the increase in inventory levels.

Trade receivables increased from $13.1 million as of 30 June 2010 to $15.1 million as of 30 June 2011. The increase was mainly because sales revenue in the second half of FY2011 (especially the fourth quarter) was relatively higher than that posted in the corresponding period of FY2010.

Revenue in the fourth quarter of FY2011 was higher at $15.0 million compared with $13.6 million in the fourth quarter of FY2010 as shown below:

These collectively resulted in a more significant variance in terms of changes in working capital and cash flows from operations.

The Group invested a total of $1.4 million (FY2010: $770,000) in capital expenditure during the year. This encompassed the facility set-up at Suzhou, completion of warehouse extension at 32 Gul Crescent Singapore as well as replacements of certain plant, machinery and equipment.

We maintained a healthy balance sheet, with cash and cash equivalents standing at $36.4 million as at 30 June 2011 (30 June 2010: $39.8 million).