MegaChem Limited

Management Online Q&A With Investors

Dear Investors & Stakeholders

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.

Best Regards,
The Management Team
MegaChem Limited

1. Dear Simon Lim, you wrote:

Your finance cost have increased by 40.8% to S$0.75 Million in FY2018. What are you planning to do to mitigate the effects of rising interest rate?

As a distributor, our customers expect us to keep sufficient inventory to meet their requirements. Failure to do so can lead to loss of business. Hence, it is in the nature of our business that inventory level and our working capital requirements increase in tandem with sales. Consequently, bank borrowings will also increase to fund the working capital requirements, leading to higher finance cost. Nevertheless, we have been trying to keep the working capital cycle short to reduce bank borrowings and finance cost. However, our gearing level remains at a comfortable level even though borrowing has increased.

2. Dear Hai Kuan, you wrote:

It was mentioned in your latest results release that economic and industry indicators are pointing to slower growth in 2019. After a commendable 2018 with good sales and growth, it would be a pity for momentum not to be maintained.

Could you elaborate on the sales visibility with regards to overall sales for 2019 and also how the respective regions like North Asia, Europe, ASEAN could fare with respect to last year's performance and also as a percentage of the company's sales eg. Is Asia sales going to make up more of overall sales etc?

While we are confident of our long term prospects, our business is inextricably linked to the global economy. Any adverse changes in the external environment will have impact on our business. Having said that, our diversified customer and product portfolio to a certain extent mitigates such risk as can be seen from the consistently profitable track record since inception.

Asia stands at the core of our strategy even as we try to grow our business on a global scale given the brighter growth in Asia compared to other region. Out of the 12 countries in which we are present in, 9 are in Asia, including the big markets in China, India and ASEAN as a whole.

3. Dear Lester Yeo, you wrote:

What currency are you using to trade in your new business in Myanmar? The Myanmar Kyat keeps dropping just like the Venezuela Bolívar. The currency and political risk in Myanmar is high. Is the risk worth the rewards?

As you have rightly pointed out, there is currency risk in the Myanmar Kyat. We have seen in other countries where the local currency will tend to depreciate at the early stage of development. Myanmar is perhaps at this stage. We are therefore treading carefully and do not foresee ourselves staking a large part of our business in Myanmar. At a later stage when economy becomes more export oriented, the Myanmar Kyat may stabilise. Our business objective and strategy is to gain a foothold in Myanmar market and to garner experience and insights so that when the market develops, we are ready to take full advantage of it.

4. Dear Samuel Chee, you wrote:

Have you considered selling your factory in Tuas to an industrial REIT and leaseback to unlock cash to repay your debt? It cost you S$5.6 million in 2011. How much is the factory book value now?

Over the years, we have faced increasing warehousing costs and to manage this, we have weighed the cost and benefits of owning the factory before deciding on the warehouse ownership. We are not too familiar with REITS but we gather that our bank borrowing cost is probably lower than the leasing rates we get from REITS. In any case, the loan we took from the bank to finance this will be fully repaid in 2020. The book value is lower than the purchase cost and in the last valuation done in 2017, it was valued at S$7.0 million. The other property at 132 Pioneer Road is unencumbered.

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.

Best Regards,
The Management Team
MegaChem Limited