Steel Division

The global economic downturn had adversely impacted our Steel Division. Consumption of flat products slowed down in line with the lower pace of development of the local infrastructural projects and poor international demand. The Division’s sales and profitability for the year under review were negatively impacted by two main factors: i. The planned shutdown for upgrading of the rolling mill at the end of August 2008. The project took longer than expected and also experienced a lot of teething problems after start-up. This resulted in delays in fulfilling customers’ orders and with the deteriorating market conditions, some customers cancelled the balance of their undelivered orders. ii. As the full impact of the financial crisis unfolded, market demand went into a prolonged slump commencing from September 2008 and only started to recover in June 2009. At one point, demand was only about 20% of the early 2008 levels. In line with the decline in international prices, domestic HRC prices had to be adjusted downwards from RM3,800 per metric ton in Q4 2008 to about RM2,100 per metric ton in Q2 2009. Export demand shrank in tandem and prices went below our breakeven levels making exports unfeasible except for certain very selective markets. Consequently, the Division’s revenue declined to RM3.0 billion compared to RM5.2 billion the previous year. The Division incurred a net loss of RM987.5 million compared to a net profit of RM106.3 million the year before. The mild recovery in domestic and international demand seen in June 2009 has strengthened and demand is currently standing at about 85% of 2008 levels. Real demand is beginning to pick up, with the rise in demand being sufficient to encourage producers to raise prices and possibly to recoup some of the losses when prices were even lower earlier in the year. Price increases also reflect short-term supply-side tightness given extensive production cuts in recent months, while the overhang of unsold stocks has been whittled down, especially in China, as shipments to end-users have begun to outpace local purchases. Steel prices have shown mild recovery and international prices are currently around mid US$500 level. Domestic HRC prices have also been raised to about RM2,300 per metric ton. Domestically, the scenario for the steel industry has been altered significantly by the Government’s announcement of the new iron and steel policy on June 17, 2009. Whilst reducing import duties on flat products from 50% to 25%, the new iron and steel policy no longer grants import duty exemption for flat products that can be supplied by local manufacturers. Previously, there were 7 sectors that could obtain import duty exemption for HRC even if the grades could be produced locally, namely, automotive, electrical and electronic, shipbuilding, oil and gas, furniture, import for reexport, and companies in Free Trade Zones and Licensed Manufacturing Warehouses. Except for the last two categories, all other sectors will now have to pay 25% import duty if they import HRC that can be produced by Megasteel. The new iron and steel policy augurs well for Megasteel as grades that can be supplied by Megasteel effectively have 25% import duty protection. The positive impact of this was immediately felt by the strong upsurge in orders accompanied by better pricing. We also expect to feel the full benefits of the stimulus packages announced by the Government towards the end of 2009. There should also be the added boost of long delayed projects under the 9th Malaysia Plan being implemented. The Direct Reduced Iron ("DRI") project under Lion DRI Sdn Bhd is operating smoothly and will assist in improving the quality and broadening the range of specifications that can be produced by Megasteel thus enabling it to take full advantage of the new iron and steel policy. Given the above scenario, we are cautiously optimistic that the coming financial year will see Megasteel achieving a satisfactory level of profitability.

Manufacturing Division – Steel Furniture

The Steel Furniture Division reported satisfactory levels of revenue and profitability for the financial year under review despite the current economic downturn. The better performance was mainly attributable to the better operating environment in the domestic market, particularly for projects involving security products of audit rail digital lock with timelock function catering to fast food chain stores throughout Malaysia, and also some government projects. The better performance in the export market was attributable to the Division’s ability to capitalise on the opportunities arising from the weakening of the Ringgit as our exports are mainly denominated in US Dollars. The Middle East region remained our main export market where we have established our reputation and proven our reliability in terms of product quality and timely delivery. Local revenue registered an increase of 23% as compared to a year ago. The higher turnover was mainly attributable to higher selling price arising from the increase in cost of cold rolled steel, which is the main raw material cost. Tighter cost reduction control, such as changing from 2 shifts to 1 shift and yet maintaining the average production volume has enabled the Division to register a profit before taxation of RM1.5 million. The steel office furniture market remains stagnant and highly competitive. To enable the Division to remain competitive, we will continue to focus on participating actively in project tenders, cost reduction control and improving productivity, introducing innovative features and adding more aesthetics to enhance our products’ functionality and looks.

Motor Division

As expected, contribution from the Motor Division was negligible, in line with the steps taken to rationalise the motor operations. Revenue for the year was lower at RM5.2 million and was derived mainly from the sale of the trucks from China.

Property Development Division

With the onset of the economic downturn, the property market began to dampen since late 2008. Many developers experienced stagnation in sales with many launches deferred due to the weak demand situation. For the year, Bandar Mahkota Cheras too was affected by this weakening demand and to cushion the situation, we were focused on identifying the marketable "bread-and butter" products with the objective to clear all completed stocks and to have a ready cash flow. Effective and "difficult-to-resist" promotions in the form of Zero Cost Plan and Easy Payment Schemes were packaged to meet the needs of purchasers to allay their fears of excessive financial obligations and concerns in using their own cash for the deposits and/or the servicing of the bank interest. The introduction of these promotions saw RM21.8 million worth of completed stocks consisting primarily of terrace houses, shop offices and apartments successfully sold towards the last quarter of the year.