Information Request

Online Q&A

MegaChem Limited

Management Online Q&A With Investors

Dear Investors,

Thank you very much for the questions and the opportunity for us to respond. We hope you have a better understanding of our business through this online exchange.

Your questions will be reposted in blue italics followed by our replies in black.

Rgds,
The Management Team
MegaChem Limited

Dear Sam Lee, you wrote:

Nylex Malaysia recently bought a 29.9% stake in your company. What synergies are you tapping from this new shareholder? Are they a passive shareholder?

Nylex is a new major shareholder and we are exploring ways we can tap on each others’ strengths to expand our presence in our respective markets.

Dear Max Phua, you wrote:

1. Since more than 2 years ago, the company outlined its vision of having 5 pillars of growth. Since then, management has been consistent in conveying this message but the results have shown otherwise. Total turnover has hardly increased in the last 4 years, and profit has also come off sharply. Where is the turnover increase as you are starting from a small base?

We have spent the last 2 years repositioning ourselves for the next phase of growth. This involves transforming ourselves from a regional player to a global player by expanding into emerging, high growth markets such as China, India and Vietnam. Our sales revenue for China has grown at a CAGR of 63% over the last 5 years. Our markets outside ASEAN countries now contributes 29% to the group’s revenue as against 22% in 2003 and will continue to grow strongly in the next few years. We are also transforming ourselves from a distributor to an integrated solution provider by adding manufacturing to our business model. Since we embarked on manufacturing in 2002, its revenue has been growing at a CAGR of 143%. It now contributes about 6% to the Group’s net profit before tax. Revenue contribution from our manufacturing segment will however continue to be small as our manufacturing consists largely of custom blending/contract manufacturing which is fee-based and therefore does not contribute significantly to the sales turnover.

2. Will a scenario of sustained high oil prices (say, 55usd )over the next 3-5 years affect the company's performance and growth, and if so what would be the impact on volume and profitability?

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

When oil prices rise, costs for the raw materials used to make chemicals also increase
Rising oil prices dampens demand and the overall economy, as manufacturers and consumers curtail their purchases
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.

Companies that make specialty chemicals are not immune but slightly less susceptible to the pressures faced by commodity chemical companies as they 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 even though there is a marginal drop in FY2006. The indirect impact is however greater as our customers become cautious in their purchasing and production.

For FY2007, we believe that as long as consumer spending and the global economy remains healthy, our customers will need to increase their raw material purchasing and production. This in turn will have a positive impact on our sales.

3. The global economy has been very strong in the last 2 years. Despite this, the company has not been able to capitalise on this growth it seems. If the global economy slows, how badly affected would the company be?

MegaChem has been profitable since inception and has overcomed several economic downturns. We have therefore shown in the past that our business is very resilient. More importantly, we believe that the specialty chemicals industry has tremendous potential for growth. According to a chemicals research report, the global specialty chemicals market is expected to see good growth, with demand driven by China, India and Middle-east. Given our presence in these markets, we are well-positioned to capitalize on these growth opportunities.

Despite my questions above, I would like to thank the company and its staff for the work they have put in over the last year.

Dear Nevin Blumer, you wrote:

I have been sitting on MegaChem stock for more than 3 years and am running out of patience with it. The company management is just not facing reality. You are losing market share in Singapore, experiencing declining gross margin just to retain your market. I see no plan for action except and more excuses and wishful thinking that oil will come down and that the China market will rescue it. When will this company see a change in management?

Sincerely, Nevin Blumer

We intend to grow by implementing our five pillars of growth; increasing geographic coverage, enhancing product offerings, widening industry coverage, expanding manufacturing capabilities and seeking suitable strategic alliances.

Over the last 2 years, we have pursued a strategy of building and strengthening our relationship with global customers. In 2006, we established a representative office in India to capitalize on its growing economy. We are now present in China, Vietnam and India, 3 of the fastest growing global economies. We intend to continue this strategy by establishing a presence in the Middle-East in 2007. We also intend to intensify efforts to build our export markets in South Asia, Australia, Eastern Europe and South America.

We have secured more distribution rights from suppliers and will continue to enhance our product offerings by constantly seeking new agency products. We have also developed and tested new products which have received positive initial response from customers.

We believe the efforts we put in developing the five pillars of growth will propel us to higher level of growth in the coming years.

Meanwhile we have rewarded our shareholders with good dividend yield over the years.

Dear Michael Sim, you wrote:

Hi Mgmt,

Congrats on a decent set of results. I've a couple of questions:

1) At the end of your most recent announcement re financials, you mentioned that there were 4 main risk factors in your biz, mainly, interest rates, oil prices, currency and economic growth. While I understand the issue of economic growth, I'd like to know what are your risk mitigating strategies/plans to address interest rates, oil prices and currency fluctuations. I do note that you've incurred a forex loss of 132K, which was not evident last year.

One of the measures we are taking to mitigate the risk of rising oil prices is to enter into some kind of tripartite pricing and inventory arrangement with our suppliers and customers. This works as a form of hedge for our customers as it ensures certainty of supply at prices that they are comfortable with. In general we are able to pass part of the cost increase to our customers after a period of time.

For currency risk, we actively hedge our exposure. For the current period, we actually had realised foreign exchange gain. However, there were also unrealised foreign exchange losses arising mainly from translation of foreign currency denominated items in our balance sheet. We had explored ways to hedge our interest rates with our banks but the hedging cost was too high. We had instead kept our borrowings at a low level to contain the increase in interest expense.

2) In your last Chairman's message, you mentioned that you'll be implementing a whistle-blower initiative in FY06. Has this been implemented?

We have communicated the broad framework of our whistle-blowing program to our staffs while pending clarifications on certain issues. We hope to fully implement the program by end of this year.

3) Since the launch of Megafuel in Sep 2005, I'd appreciate if you're able to share your results in this area for FY06.

Our strategy with regards to Megafuel is to launch it in China first, due to its huge market size and the government’s growing efforts to reduce pollution. We have achieved a certain level of success in some provinces in China but have yet to make headway in other provinces due to long and stringent pre-qualification process. Megafuel is also sold in Malaysia and Indonesia currently. As for Singapore, we have just obtained certification from PSB/TUV on the product and are now studying the appropriate marketing channels. With this certification, we are ready to push this product more aggressively. Our primary target customer segment includes transporters and ferry operators where sales are usually in larger quantities. In terms of marketing channels, we are also using well-established distributors in some countries to help push our products.

Dear Investors,

Thank you for all your questions and interest in MegaChem Limited. We have come to the end of this Q&A session and hope that you have a better insight of our company and our operations.

Regards,
The Management Team
MegaChem Limited