Information Request

Online Q&A

MegaChem Limited

Management Online Q&A With Investors

Dear Investors,

Thank you very much for your questions and the opportunities to respond to them.

We hope you have a better understanding of our business through this online exchange.

Your questions are reposted in blue followed by our replies in black .

Rgds,
The Management Team
MegaChem Limited

Dear Ms Geraldine Quek, you wrote:

Hi management, i was going your unaudited financial statement and have some queries on your figures.
1.Why is the allowance set aside for doubtful debts & bad debts in fy04 so much higher than fy03? care to shed some light on this issue?

We have an allowance of $148,000 for bad debt. We wrote off actual bad debts of $126,000 in FY2004, of which we managed to recover $94,000 from credit insurance claim. As a percentage of trade debtors, this is 1.2%. We view the current level of provision as prudent.

2.Why is the loss from foreign exchange such a substantial amount compared to 2003? What kind of currencies investments am I seeing here?

The FX losses were mainly unrealized losses. In the last 3 years, we had FX gains.

The Group tries to achieve a natural hedge in its FX exposures by buying and selling products in the same currency as far as possible. As this is not always possible, we will hedge any outstanding exposure using forward foreign exchange contracts.

3.Any plans to increase sales revenue from other regions other than Singapore? How confident is the Management?

We have been continuously expanding our presence in overseas markets over the last few years and will continue with this strategy of geographical expansion. In FY2004, the sales contribution of our overseas operations increased from 46.4% to 51.3% of total Group revenue. Recent efforts to build our business outside Singapore include the setting up of subsidiaries in the UK and Shanghai in 2001, and representative offices in Vietnam in 2004 and Beijing in January 2005. We believe their contribution to Group sales should increase in coming years.

4.How does the Management differentiate MegaChem from its competitors?

We have a very customer-driven strategy that focuses on providing total solutions to meet our customers' needs. Total solutions encompass, among others things, high product quality as well as a high customer service level through excellent sales, technical and logistics support. In addition we have invested substantially in IT to reduce response time in terms of product delivery and product information flow. Our contract manufacturing business will make our role of being a total solutions provider even more complete. With this strategy, we believe we have to a large extent differentiated ourselves from our competitors to place us in a strong position in the coming years.

Dear Judy, you wrote:

Thanks for the initative to give investors a better chance to understand the company!
1. The net profit of the company is a healthy 10% compared to last year, will we be looking at this level of growth rate going forward?

While the global economy is widely expected to moderate in 2005, the EDB has issued a report that predicts strong growth for the chemical industry in Singapore this year. This should benefit MegaChem because a large part of our sales are generated from Singapore. Our growth strategy which entails increasing geographic network, enhancing our products offerings, widening our industry coverage, building our manufacturing capabilities and seeking strategic alliances, should also drive continued growth in coming years.

2. UK posted a increase in the top line contribution, are there any plans to target the european market?

Our UK operation is already selling to the European market, which is a major market for chemicals. We intend to continue building on the success we enjoyed in this market in FY2004.

3. The short-term borrowings of the company is currently at around $10m, when are they due and what are the usage of this fund?

These are largely short-term borrowings, consisting of bills payables which are used to fund our working capital requirement. The tenures of these bills payables are generally between 4 to 5 months.

4. Any plans to further diversify the sales revenue base? Thanks You.

Our overall business strategy is integration within our core business. Our venture into manufacturing is just one example of our continuing efforts to provide integrated solutions to our customers.

However, we intend to remain diversified in terms of the markets we serve, the diverse industries we sell to, as well as the broad range of products we offer. This strategy has given us a certain level of stability in our revenue.

Dear Richard, you wrote:

Hi, You have plans to establish ops in vietnam. When will we expect more news on this progress? can highlight your growth driver for next 2 years?

There is an increase in the allowance for doubtful debt. Is it realised or unrealised?

Foreign exchange losses is abt 4% of your operating profit. Does the company do hedging of funds?

tks!
richard

1. Vietnam
We established a representative office in Vietnam in the second half of last year to increase our presence to better serve our customers and also to tap on the growing market.

2. Growth Drivers
Going forward, our strategy will be built on 5 main pillars of growth :

i. Increasing our Geographic Coverage
The Group will continue to pursue a strategy of building and strengthening our relationships with our global customer base. This entails having a network that is able to service our large base of MNC customers around the world. In line with this strategy, we set up our Vietnam representative office recently as well as a branch office in Beijing to deepen our penetration into the China market. We will also explore ways to establish a presence in major markets such as India.

On top of our network, we intend to intensify our efforts to build on our export business to markets such as South Asia, Middle-East, Australia and South America.

ii. Enhance our Product Offerings
The Group will enhance our product offerings by constantly seeking new agency products that will increase value to our customers in terms of quality and providing solutions.

iii. Widen our Industry Coverage
We will maintain our product diversity and at the same time increase our focus in growth industries such as water treatment, food and pharmaceuticals.

iv. Build our Manufacturing Capabilities
To ride on the outsourcing trend, we set up our manufacturing arm . FY2004 was its second full year of operation and we are encouraged by the positive response to our contract manufacturing services. We are in the process of securing additional outsourcing contracts in this line of business.

v. Seek Strategic Alliances
To accelerate growth, the Group will continue to seek strategic alliances and acquisitions in related businesses that are able to provide a strategic fit.

3. Bad Debts
Allowance for bad debt was $148,000. Actual bad debt written off was $126,000 of which we managed to recover $94,000 from credit insurance claim.

4. Foreign Exchange
The FX losses in FY2004 are mainly unrealized losses. In the last 3 years we had FX gain.

Dear Jacky, you wrote:

Saw this report by netresearch on your growth potential with proprietary products and waste management.

Can kindly elaborate please?

1. Proprietary Products
Our manufacturing business, which was started only about 2 years ago, has 2 main activities ie contracting manufacturing and manufacturing of proprietary products. The contract manufacturing activity produces products based on customers' formulations whereas the proprietary products are developed using our own formulation.

The response to our contract manufacturing business has been encouraging. As for our proprietary products, the sales contribution to the Group is still small. We are still at an early stage in this business. While we have completed our market evaluation for some of the products we have developed, qualification periods are typically fairly lengthy. In the meantime, we intend to continue developing a wider range of products.

2. Strategic Alliances and Acquisition
One of the Group's five pillars of growth is to seek strategic alliances and acquisitions. In this regard, we will be actively looking for businesses that will provide a strategic fit to MegaChem such as chemical-related businesses, including chemical waste management.

Dear Liz, you wrote:

How do you view the sustainability of your biz? Who are your competitors?

Can they replace your current relationship with your customer base of speciality chemicals easily with better pricing or speed? If there is a threat, what are the measures you have in place to contain this?

Sustainability of Business
We have been profitable since our inception in 1987, despite periods of adversity caused by the external environment such as during the Asian Financial Crisis in 1997 and the SARS crisis in 2003. This should highlight the resilience and robustness of our business model.

Competition
There are a number of major specialty chemicals distributors in the US and Europe. As these companies are also involved in bulk/commodity chemicals, their sales revenues are fairly huge. In comparison, we focus primarily on specialty chemicals. Sales of bulk commodity chemicals, if any, form part of a bundle of products that we offer to customers and are not viewed as core products of the company.

The industry is highly fragmented such that each specialty chemical distributor may have its own strength in certain products or markets. Our edge lies in being able to provide a wide range of over 800 types and grades of specialty chemicals to our established base of more than 1,200 customers from diverse industries. We also have a local presence in all geographical regions through our network of operations, with a strong focus on Asia where growth rates are relatively high.

Barriers to entry
There are many barriers to entry for our business with the main ones being stringent customers' evaluations, capital investment and product range.

Customers generally require products from potential suppliers to undergo a stringent evaluation process before granting approval. This means the gestation period can be fairly lengthy.

In today's market place, companies do not just sell products. They sell solutions which involves investments to upgrade technical competencies, build an extensive marketing network, efficient logistics support in addition to providing quality products and services.

To ensure a high quality product range, companies also have to develop strong relationships with manufacturers/suppliers, who need to have confidence in our ability to move their products. To win their confidence, companies must have a wide customer base and extensive marketing network as well as high levels of technical competency. We have been able to do this successfully over the years, which explains why we have a wide range of products and strong relationships with many reputable suppliers.

Dear Investors,

Thank you for all your questions and your interest in MegaChem Limited. We have come to the end of this Q&A session.

We have enjoyed the session and have learnt much from your questions. We hope that through this Q&A, you have gained better insights to our Company and our operations.

Rgds,
The Management Team
MegaChem Limited