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Chairman's Message

Extracted from Annual Report 2016

Chairman

Dear Shareholders,

On behalf of the Board of Directors, it is my pleasure to present to you Megachem Limited's ("Megachem" or the "Group") annual report for the financial year ended 31 December 2016 ("FY2016").

Managing softer macroeconomic conditions with operational efficiencies

Against a backdrop of softer global macroeconomic conditions at the end of the last financial year, we cautioned that it would likely lead to a less than upbeat playing field in 2016. That turned out, to a large extent, the way we had anticipated. The demand for specialty chemical, given its wide application and usage in a diverse range of industries, is closely correlated to economic activities. Hence, Megachem, as a specialty chemicals player, has been impacted by weaker demand from our customers and this has weighed on our FY2016 financial performance.

Having gone through multiple market cycles, we are well aware of the importance in margin optimisation so as to mitigate adverse effects when macroeconomic conditions lead to a falter in demand. We were fortunate that our focus on this aspect has helped to mitigate some of this impact, leading to an improvement in gross profit margins.

Weaker market climate impacts financial performance

Our lower topline of S$99.8 million in FY2016 represented a 9.8% decline from S$110.6 million in the previous corresponding financial year ("FY2015"). This was primarily due to the weaker performance of our ASEAN, North Asia and America operations, although revenue improvements of our Australia and South Asia markets helped to partially offset some of the sluggishness.

At 96.5% of total sales, our distribution business segment continued to account for the largest part of our topline. Revenue for the distribution business segment dipped 10.1% to S$96.3 million as compared to the manufacturing business segment's 0.5% growth to S$3.5 million in FY2016.

The Group's overall revenue contraction was counterbalanced by a 2.4 percentage-point expansion in gross profit margin to 25.3%, leading to only a marginal 0.4% decline in gross profit to S$25.3 million during the financial year.

However, a 3.6% climb in total operating expenses to S$22.4 million coupled with a lower share of profit of associated companies and higher income tax expenses led Megachem to record a 32.1% decline in net profit after tax to S$2.2 million in FY2016. The increase in expenses was mainly due to impairment of trade receivables from Venezuela of S$0.9 million following currency controls imposed by its government. Without this impairment, our net profit before tax would have been marginally higher. EBITDA correspondingly dipped 12.6% to S$5.6 million while earnings per share contracted to 1.53 cents in FY2016, down from 2.22 cents in FY2015.

We firmly believe that a strong balance sheet is essential as a bulwark against unexpected headwinds. Backed by the resilience of our positive cash flow generation, the balance sheet as at 31 December 2016 was bolstered by a S$0.5 million increase in cash and bank balances to S$11.6 million, while total borrowings decreased S$2.9 million to S$15.3 million.

Our gearing ratio also improved to 0.36 time as at 31 December 2016, from 0.43 time as at 31 December 2015. Net asset value per share was lower at 31.50 cents as at 31 December 2016, down from 31.65 cents as at 31 December 2015.

Long-term growth prospects in Asia amidst muted global outlook

We anticipate the business outlook for 2017 to be muted, given the uncertainties surrounding the global economy. Trade protectionist initiatives and political uncertainties, potential economic shocks arising from Brexit and threats of China's economic slowdown could lead to a weakened global economy. Volatility in energy prices and currency risks are also areas that could lead to causes for concern.

The nature of the specialty chemicals industry and Megachem's extensive global operations would mean that our operational and financial performance is susceptible to macroeconomic fluctuations. Often, these factors are not directly within our sphere of influence. While it is challenging to firmly predict how the 2017 financial year will pan out, we intend to concentrate our energies in areas that are within our control. These include the prudent management of our finances, extraction of cost efficiencies by building-up our operational excellence – strategies we have consistently pursued in the past that will continue going forward. By doing so, it serves to provide a buffer against a negative impact that may arise from macroeconomic uncertainties.

In tandem with the strategies mentioned, we also intend to deploy further resources to forge new growth pillars to expand our geographical reach, product and service offerings and business partnerships.

Geographically, while our Asia geographical segment bore the brunt of a revenue slowdown in FY2016, it remains a strategically important market for us. Asia is one of the largest markets for specialty chemicals and we anticipate the long-term growth prospects to be buoyant. Over the years, we have established a strong track record in the industry. We intend to continue leveraging on our network of long-standing relationships to strengthen our position and further penetrate the market.

Successful listing of associated company in Thailand

One of the key steps taken to expand our presence in Asia was the listing of our associated company Megachem (Thailand) Public Company Limited ("MGT") – in Thailand on the Stock Exchange of Thailand – Market for Alternative Investment ("SETMAI") on 23 February 2017.

MGT issued an aggregate of 100,000,000 new Shares ("New Shares") for subscription, at an Offer Price of 1.89 Thai Baht per New Share. We are pleased to note its strong debut, with shares of MGT opening at 2.74 Thai Baht, representing a premium of 45.0% above the Offer Price and closing at 2.42 Thai Baht, 28.0% above the Offer Price.

MGT's successful listing marks a key milestone for us. By tapping on the capital markets, it has enabled our associated company to raise funds for the expansion of its operations in Thailand, a growth market given that it is one of Southeast Asia's key manufacturing bases that typically require significant volumes of specialty chemicals.

Thailand holds promising prospects for Megachem's business and over the mid-to-long-term, could serve as a springboard for us to further extend our presence in Southeast Asia and beyond.

Upholding high corporate governance standards

Adhering to high corporate governance standards has always been a key pillar of Megachem's values. 2016 was no exception to maintaining these efforts. At the Singapore Corporate Awards ("SCA") 2016, we were honoured to have been awarded the Best Investor Relations Award (Gold) and Best Annual Report Award (Silver) in the "less than $300 million market capitalisation" category.

These prestigious accolades attest to our efforts in achieving corporate governance excellence and mark the eighth year in the 11 years that we have won at least an award since the inception of the SCA in 2006. We look forward to upholding our commitment to engage and communicate with stakeholders in a transparent and timely manner.

Rewarding our loyal shareholders

We deeply appreciate the strong support investors have accorded us as we navigated the peaks and troughs of industry cycles over the years. To reward our loyal shareholders for their unwavering confidence in us, the Board has recommended a final dividend of 0.7 cent per share. Together with the interim dividend of 0.5 cent per share, the collective dividends of 1.2 cents per share represents a 78.4% payout ratio of Megachem's FY2016 net profit attributable to shareholders of the Company.

Words Of Appreciation

I would like to extend my heartfelt appreciation to our management team, staff, bankers and business associates for their dedication and diligence over the past year. To my fellow directors, I would like to express my gratitude to them for their counsel in strategically positioning Megachem for its long-term success. I would also like to take this opportunity to thank all our loyal shareholders.

I look forward to the continual close collaboration with our stakeholders and I am confident that with our time-tested formula of persistent hard work that has led to Megachem's strong industry track record, it will continue to yield us success.

Yours Sincerely,

Sidney Chew

Executive Chairman & Managing Director
Megachem Limited