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

1. Dear Puar Hai Kuan, you wrote:

Manufacturing had been touted as an area of growth years ago. Credit must be given to the team for its recent implementation. While management has always said it's a long term strategy and will take time to materialise, I would like some insight into your recent capital investments. As we have seen over the past 2 years, annual revenue from manufacturing is still in early stages, around 3m a year due to some disruptions thrown in. However , the company spent almost $5m to expand its manufacturing facilities, do you think that is a rather aggressive move as manufacturing is less than 3% of your overall turnover at the moment?
Allow us to first elaborate on what type of manufacturing activity we are engaged in. We do what some term as custom-blending or contract manufacturing. What it involves essentially is manufacturing of chemicals based on customers' formulations. Raw materials for the production are either provided by the customers themselves or provided by us. After production is completed, we do the packing, labelling and ship/deliver them to a destination designated by customer. For the services we provide, we charge them a fee. The sales revenue of our manufacturing activity therefore is fee based. In contrast, sales from our distribution activity capture the full value of the goods. Hence it is not meaningful to measure the size of our manufacturing activity by revenue alone.

The total capital expenditure for the expansion consists of the factory building which we bought for S$5.6 million and plant and equipment totalling about S$3.2 million.

The key objectives of this expansion are to (i) increase our production output to meet customers' demand, (ii) improve productivity through better asset utilization, increased process efficiency and automation and (iii) to sharpen our competitive edge.

The investment may seem bold but we view this as an important step towards fortifying our pillars of growth and strengthening our position as an integrated chemicals solution provider.
A Japanese investor recently took a strategic investment in MegaChem. The transacted price of this was a a huge premium to the last traded price before the announcement, and even today the company's shares is much lower than where the transaction took place. While management may not want to comment on the value of such a transaction, there are many instances when a company's share price would have been boosted by such an announcement, rather than staying depressed. I would like to ask if having Chori on board is expected to help the top and bottomline and if there are?
You may refer to our SGX announcement dated 23 October 2012 in which we announced the signing of a Strategic Partnership Agreement between Chori and us. Being a strategic investment for Chori, the business alliance, as laid out in the Agreement, represents a logical step for both parties as we tap on each other's strength and expertise to sharpen our competitive edge in the market. It will enable us to further strengthen our supply sources and product range as well as to deepen our penetration into certain market segments through our complementary strengths in chemicals.
I am pleased that the cash flow in the last year improved sharply over past years. If that is a sign of better things to come that is healthy. I guess maybe due to the higher capex, the company was not able to pay more dividends. I would like to ask if the company has any further upcoming capital expenditures planned for the next 1-2 years.

I would like to thank management for being consistent and honest in their disclosures. I would also like to thank them for doing a great job and improving the company's performances. I have been a long time share holder of the company and would like to remain one for a long time. Please keep up the good work.
At present there are no concrete plans for any major capital expenditure in FY2013 as our focus is on leveraging the strong foundation that has been laid over the last 1-2 years with an aim to elevating our business to a higher level.

Considering all relevant factors such as future capital expenditure and current cash position, we have decided to recommend to shareholders a final dividend of 1 cent per share(subject to approval by shareholders in the coming AGM). Including an interim dividend of 0.3 cents per share, total dividend adds up to 1.3 cents per share for the full year of FY2012 which represents a dividend yield of 5% per annum(based on share price of 26 cents as at end of FY2012) and a dividend payout of 54.7%. This level of dividend is quite consistent with what we have paying over the last few years.

2. Dear Jayster, you wrote:

Europe sales were up, which part of Europe is still strong? Any plans to acquire distressed assets in Europe?

The increase in Europe sales came mainly from UK. We have very minimal exposure to crisis-hit Euro zone countries. There are no plans to acquire distressed assets in Europe. However we may in the future explore any opportunities that may arise out of the Euro crisis.

3. Dear Daniel Koh, you wrote:

Your labour cost is up but your profits are down. Labour cost is half your operating cost. Foreign Labour levy is up and quota is cut, what are you going to do to increase productivity and cut cost?

Our chemical operation does not rely heavily on foreign workers. Hence the increase in foreign worker levy and the adjustment in the foreign labour dependency ratio do not have a major impact on our overall cost. The automation of our production facility which we undertook last year has also, to some extent, further reduced our reliance on foreign workers and will lead to higher productivity.

4. Dear Ken Tay, you wrote:

Your profit is down 35% but yet you didn't cut your dividend. Shouldn't the company be conserving cash and paying down debt from the Tuas property you've just brought?

It would be prudent to pay off the debt, I think interest rate is going to rise soon.

We take a balanced approach in determining the quantum of dividend, taking into consideration among other factors our future capital expenditure, current cash position, gearing, level of retained earnings etc. Having considered all the relevant factors especially the fact that there are at present no concrete plans for much capital expenditure in FY2013, we decided to maintain the dividend level at a level that is fairly consistent with the dividend of the last few years.

5. Dear Ng Ting Ling, you wrote:

Chori now has a Non-Executive Director on your board. What does he brings to the table? Does Chori has plans for a general offer for MegaChem and take the company private? While MegaChem isn't a high growth company, it is a cash cow that pays a steady stream of dividend. Thanks for the dividend this year.

Mr Atsushi Saito was appointed as a non-executive director on our board in November 2012. He brings with him vast experience in the chemical industry, having spent his entire career of 38 years in Chori. During this time, he has held key positions within Chori. His presence in our Board will ensure that the strategy that has been set in the Strategic Partnership Agreement is clearly and consistently executed and that the progress of the business initiatives is constantly monitored.

We are unable to comment on your question of the general offer since we cannot assume the position of our shareholders. Nevertheless, we view Chori as a strategic partner and, through collective efforts, we should be able to build a mutually beneficial relationship between us.

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

This announcement has been prepared by the Company and the contents have been reviewed by the Company's Sponsor, SAC Capital Private Limited, for compliance with the relevant rules of the Singapore Exchange Securities Trading Limited ("Exchange").The Company's Sponsor has not independently verified the contents of this announcement.

This announcement has not been examined or approved by the Exchange and the Exchange assumes no responsibility for the contents of this announcement, including the correctness of any of the statements or opinions made or reports contained in this announcement.

The contact person for the Sponsor is Mr Bernard Lim (tel : (65) 6221 5590) at 79 Anson Road, #15-03 Singapore 079906.