Information Request

Online Q&A

Dear Investors,

Thank you very much for the questions and the opportunities to clarify them. We hope you have a better understanding of our business through this online exchange.

Your questions will be reposted in blue italics.

Regards,
The Management Team
MegaChem Limited

Dear Roy Phua, you wrote:

Firstly, what kind of response and results are you seeing in your contract manufacturing business?

We entered the contract manufacturing business with a long term view of adding value to our customers and also to create a long term sustainable competitive advantage over our competitors. The results are not expected to be immediate. However, the response from customers so far has been encouraging so while the contribution to the Group's revenue may not be significant currently, we believe the prospects for contract manufacturing look quite promising.

2nd: Will you benefit directly from the growth of the biomedical industry in Singapore?

Yes, the growth of the biomedical industry will benefit us. More specifically, we are already supplying chemicals to the pharmaceutical industry, which in Singapore, is seeing an increase in foreign investment. This development will boost the industry's growth and benefit us.

3rd: What is your aim for the company in 2-3 years in terms of creating a niche for yourself?

Our strategy is very customer-driven with the focus on providing total solution to meet customers' needs. Total solutions encompass, among others things, high product quality as well as 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. The 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.

4th: You mentioned the outsourcing trend in chemicals. Which two industries in terms of products do you see yourself benefiting most as a result of this trend?

There are opportunities in a wide range of industries. However, we intend to focus initially on the water treatment, cleaning and oilfield industries.

5th: Lastly, what kind of competition do you presently face in contract manufacturing?
Keep up the good work

There are not many chemical contract manufacturers in Singapore. Coupled with growing demand for such services, we believe the market is big enough for us to achieve a sizeable market share. Given the large customer base of our distribution business to tap on, our penetration into this business, in our view, should not be too difficult.

Regards,
The Management Team
MegaChem Limited

Dear Kenny Goh, you wrote:

Looking at the share price of today, will the Management or Directors to considering of shares buy back scheme for the next few months?

It has been only 10 months since we were listed in October last year. It is too early at this point of time to talk about share buy-backs. In any case, we believe there are opportunities for us to grow our business. Therefore, we intend to use our cash to grow the business rather than to buy back our shares.

Regards,
The Management Team
MegaChem Limited

Dear Pong888, you wrote:

Question to management...
1.The management seems to be quite pro-IR with the video presentation on the internet. Hope to see more following in your company after your distant similar company Meghmani is doing fairly well after a poor debut in SGX. Are there any similar companies doing specialist chemicals like Megachem in the region or in the world that is listed?

There are a number of major specialty chemicals distributors in the States and in 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 in bulk commodity, if any, forms part of a bundle of products that we offer to customers and not as a core product.
The industry is highly fragmented such that each specialty chemical distributor may have its own strength in certain products or markets. While we supply to countries globally, our strength so far has been in Asia where the growth rates are relatively high.

2. I quote from your results announcement: Share of results of associated company increased by S$0.2 million or 40.9% to S$0.6 million (30 June 2003 : S$0.4 million). Driving its performance was the rapid growth in the automotive industry and its strength in metal finishing, coating and polymer products.
May I know what associated company are these (how many companies contributed to this?) Is this in Singapore and what is Megachem's investment in this company (and when?)

We have only 1 associated company named Megachem (Thailand) Ltd. We invested Baht980,000 in 1992. Currently this represents approximately 48.3% of Megachem (Thailand) Ltd's paid-up capital.

Sorry... some more qns.
3. Your GP is consistent at 21-22% over the past 2 financial year. Is this a drop/gain from the previous years? Would management expect the GP moving forward to be similar at 21% + - in the years ahead? If its expected to be slightly higher or lower, pls elaborate why?

There has been little fluctuation in our gross profit margin in the past. Movements in currency and oil prices have some impact on our margin but this has been manageable. In fact our GP margin has stayed above 20% since FY2000 and is likely to remain so in coming years.

4. Also, can you explain what are the barriers to entry into your kind of business? Would a few chemists with some money in the bank do the same as you and challenge your business? Who would you rank as your competitors in the business?

There are many barriers to entry for our business with the two main ones being stringent customers' evaluations and heavy capital investment. Customers generally have a stringent evaluation process in place before a potential supplier is approved. So the gestation period can be fairly long. In today's market place companies do not just sell a product. Instead they sell a solution. This involves investments in technical competencies, extensive marketing network, efficient logistics support in addition to quality products and services.

Note: The above comments should not be construed as advice for potential investors who are considering setting up a chemical business.

Dear Terrortubby, you wrote:

Pong888, the investment in the associated companies is found in their balance sheet and its just S$1.3 million. Pretty good investment! Yes, management, pls shed some light on that. I do not quite follow this counter. Maybe the management can help by sharing with us what are the growth plans of Megachem?

Thank you sir.

The investment of $1.3 million in the associated company includes our share in its paid up capital and retained earnings.
Our growth strategies are as follows:

Increasing product range
Intensify efforts to develop export markets
Develop contract manufacturing business to ride the outsourcing trend
· Explore strategic collaboration/acquisitions

Dear Sirjit, you wrote:

Hi, Thanks for the opportunity of this online Q&A with the management!

1. The group's gross profit margin is quite respectable at above 20%, what are the plans undertaken by the management to continue this favourable situation?
We are focused on high value specialty chemicals which are more demand inelastic as well as less sensitive to oil price fluctuations when compared to bulk/commodity chemicals. This has enabled us to maintain our gross profit margin at a fairly stable and respectable level. This strategy will not change.

2. UK reported strong revenues, can the management shed more light on this?
Stronger domestic sales coupled with higher exports to Australia, Pakistan, Sri Lanka, Middle-east and Venezuela contributed to the higher sales in our UK subsidiary.

3. Also, what are the reasons for the Philippines market decline in sales?
The decline in sales in our Philippines subsidiary was caused primarily by lower demand from certain key customers.

4. What are the costs to develop more product range?

Developing more product range will obviously entail strengthening our relationships with suppliers. Suppliers need to have confidence in our ability to move their products. In order to do this, it is necessary to have a wide customer base and extensive marketing network as well as high level of technical competency. We have been able to do this quite successfully over the years, which explains why we have a wide range of products and strong relationships with many reputable suppliers.

5. Singapore still remains a very big sales revenue for the company, what are the plans to expand its sales diversity?

Over the years, we have built our network beyond Singapore. Some of these such as our subsidiaries in China are relatively new and need more time to nurture. More recently our Vietnam representative office was set up. We will continue expanding our overseas businesses and expect to see bigger contributions from this effort to the total Group's revenue.
Regards,
The Management Team
MegaChem Limited

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