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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 will be reposted in blue italics.


Rgds,
The Management Team 
MegaChem Limited

Dear CB Wong, you wrote:

Would appreciate you could enlighten us on the followings:-

1.It is the good effort of management to focus on the 5 main pillars of growth, but despite having made progress by the growing the company's presence in China and building manufacturing capabilities for past three years, the bottomline in these areas have not turn positive. Could you explain the cause and what measures are taken to improve the results?

In any new business initiative, it takes time to build up credibility and acceptance. Since inception, our sales revenue for China has grown at a CAGR of 76% and revenue in manufacturing grew at a CAGR of 169%.

We have narrowed our losses in these two businesses and we aim to achieve breakeven for our manufacturing division in FY2006.

2.Share of profit of associated company has declined by about 46% from FY 2003. Please explain the reason behind this continued decline?

Our share of our associated company’s profit, after having increased in 2004, declined by 33.5% despite higher sales. This was due to lower margin and higher expenses attributed to increased competition and higher headcount respectively.

3.Since FY 2002 there has a consistent yearly & write-off of inventory; ranging from 3.2% to 3.6% of the Inventories for each respective financial year. Please explain the reason behind the write-off and how this could be minimize in the coming financial year?

There is an accounting consideration in the way we write-off our stocks. The approach we take in our stock write-off is considered prudent from an accounting perspective. In reality, we were able to sell a large part of these stocks that were written off previously. In that sense, they are not really ‘obsolete’. Specialty chemicals in general have a fairly long shelf life.

We are constantly looking to maintain our inventory at an optimal level which is not an easy task given customers’ requirements for shorter delivery time, one-stop supply etc.

4. What is the Outlook for the chemical industry especially on specialty chemical?

The fall in our sales in FY2005 can be largely attributed to the uncertainty created by the surge in oil prices. As a result our customers became cautious in their purchasing and production planning.

For FY2006, we believe that as long as consumer spending and the global economy remain healthy, our customers will need to increase their raw material purchasing and production. This in turn will have a positive impact on our sales.

5.Would appreciate it if you could include the financial figures for the second half year in comparison to that of the previous year in your announcement for the financial year-end result. This will ease the task of investor's comparative analysis.

The sales and net profit after tax for the first and second half of the year can be found in Section 15 of the announcement. However we would consider your suggestion to expand this further in future announcements.

Dear Mark, you wrote:

MegaChem had opened a liaison office in India, any development since then? Any plans to build factories there to take advantage of the lower cost environment?

The liaison office in India was started just recently in December 2005. We have started our marketing activities to penetrate the market and we have no plans to build factories in India at the present moment.

Dear Jayster, you wrote:

You have a new product called Megafuel. Where can i get it? Is it available off the shelf? Petrol is so expensive nowadays, are you selling it to petrol companies in singapore like spc & shell so i can save on petrol? Thanks.

Our strategy with regard to Megafuel is to launch it in China first due to its huge market size and growing governmental efforts to reduce pollution. It is also being introduced in Malaysia and Indonesia where the market size is quite substantial. In terms of marketing channels, we are currently using distributors in these countries that have established network to help push our products. Once we have achieved certain level of success in these markets and with a certain track record we will be in a better position to launch it here in Singapore.

Dear Tan Chew Ming, you wrote:

China has been a growing market for Megachem. How does your company grow there in spite of the fierce competition? Do Megachem have any competitive advantages over its competitors in China?

We are a reputable market player with a strong distribution network, serving global customers. Our initial expansion into China was to support our global customers who have a presence in China.

In addition, our products are certified with international quality standards and we have very close relationships with our suppliers and customers.

We remain focused on targeting the MNC customers where buying decision is based not purely on price but also on quality. This segment of the market is less competitive as compared to the lower end of the market. So far we are able to remain competitive because these MNC customers recognise our competitive strengths that serve their needs.

Arising from our recent review of our marketing strategy, we have decided to further develop our China operations. In addition to selling our products into the China market, we are looking to export products from China to other markets. The objective is to leverage on our established distribution network and expand our Chinese product range, which are increasingly gaining acceptance outside China.

You may read more about our vision and strategy in our Annual Report due for release in April.

Dear Kelvin, you wrote:

Profit is down for your company because of the rising prices of oil. Do the company absorb the cost or pass it on to the customer? What's the customer reaction?

In general, the escalating oil price has both direct and indirect impact on the chemical industry at large.

  1. When oil prices rise, costs for the raw materials used to make chemicals also increase.
  2. Rising oil prices also dampens demand and the overall economy as manufacturers and consumers curtail their purchases.
  3. Higher raw material costs affect companies that make basic chemicals or commonly known as the commodity chemicals most as the content of oil in such upstream products are high.
Not immune but slightly less susceptible to the pressures faced by commodity chemical companies, are companies that make specialty chemicals, which are more focused on targeted applications and markets. These are more downstream products whose oil content is smaller and their usage in finished products is also smaller.

As we are mainly in the specialty chemical business, the direct impact of higher rising oil prices on us is less as compared to a commodity chemical company. This is evident in the fairly stable gross profit margin that we were able to maintain over the years.

The indirect impact is however greater as our customers become cautious in their purchasing and production, resulting in lower sales for the Group.

Dear Investors,

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

We have enjoyed and learnt much from your questions and we hope that you have a better insight of our Company and know more about our operations.


Regards,
The Management Team
MegaChem Limited