General

During the financial year ended 30 June 2007 (“FY2007”), HUPSteel (or “the Group”) reaped benefits across all product categories as Singapore’s economic growth continued to gain momentum. In line with these broader macroeconomic trends, HUPSteel continued to experience strong demand for its steel products from our traditionally firm Oil and Gas and Marine sectors. Our customers from these sectors have reported healthy order books and many have been working at their near capacity levels directly benefiting us. In addition, the Group also saw increased demand coming from the recovery in Singapore’s Construction sector.

Concurrently, in FY2007, HUPSteel sold more to our customers in the Oil, Gas and Marine sectors.

Pipes, fittings and structural steel

It is against this backdrop of vibrant Oil, Gas and Marine sectors that the Group’s sales for pipes, fittings and structural steel for FY2007 reached a record high of $284.2M since its listing on the Stock Exchange of Singapore.

The ever increasing consumption of oil worldwide kept oil prices at high levels leading to a constant search for new oil reserves and alternative fuel sources. This has translated into increased exploration activities and related down-stream projects which, in turn, generated demand for more pipe and fitting products. To support the thriving exploration and related activities, new rigs and supporting marine vessels were needed. These spurred demand for shipbuilding and rigbuilding in the Marine sector following in tandem with the Oil and Gas sector. Steel plates which are one of the main building materials for marine vessels and rigs were in great demand as shipyards carried out building activities at an accelerated pace to fulfill the overwhelming orders received.

At the beginning of the calendar year 2007, there were signs of recovery in the Singapore’s Construction sector, with large infrastructure projects like the Integrated Resorts, MRT lines and Business & Financial Centre at Marina, all expected to start work soon. The sector was further boosted by the large number of en-bloc projects concluded in the first half of the calendar year which augurs well for the future of the Construction industry.

Sales volume for FY2007 grew almost two-fold over that for the financial year ended 30 June 2006 (“FY2006”). Almost 65% of our sales were made locally as Singapore, being one of the world’s preferred oil refining as well as shipbuilding centers showed a huge appetite for steel products. The remaining sales were made to other countries in the Asia-Pacific region.

Our steel supplies come from steel mills in both Europe and Asia thus reducing our exposure to country-specific conditions that can affect supply prices. After interacting with many of these suppliers over the past many years, we have close relationships with these mills and our in-depth knowledge of the products manufactured by the various mills ensures that our customers are always supplied with products that meet their needs. During FY2007, supply for pipes, fittings and structural steel products remained tight due to the strong global economy. Our strong ties with the mills have enabled HUPSteel to secure enough supplies to meet the demand of our customers.

It was in view of the tightening supply situation that the Group built up its inventory holdings to $79.9M which is approximately 80% more than the previous year’s level (FY2006: $44.4M). This was intentional as we anticipated continued strong demand from our large base of customers spread across the Asia-Pacific region.

Gross profit margin for the Group for FY2007 improved slightly to 21.1% from 20.1% achieved for FY2006. This could be attributed to better prices fetched for structural steel products as compared to the previous year. This margin is a function of the sales mix of pipes, fittings and structural steel products that make up the total sales of the Group.

Sandblasting, General Hardwares & Properties

Riding on the buoyant shipbuilding sector, the Group’s sandblasting service offered through one of its subsidiaries; Sinip Steel Industries Pte Ltd also continued to enjoy booming activity throughout FY2007. The sandblasting work is primarily bundled as a value-added service to our shipbuilding customers. Revenue from the general hardware business remained stable and profitable throughout FY2007.

With the property sector showing signs of recovery in the early part of 2007, rental rates have similarly improved in line with market sentiment. The Group’s properties had achieved comparatively higher occupancy and better rental rates for FY2007 than the previous year. The management will be reviewing its properties portfolio and consider any viable options to redeploy these assets in the new financial year.

This business segment of the Group constitutes less than 5% of its annual turnover.

Profit and Loss

The Group reported a record revenue of $284.2M for FY2007, an increase of 53% over the revenue of $186.2M for FY2006.

Other operating income for FY2007 rose 102% to $3.1M from $1.5M. The increase was partially attributed to a special dividend of $0.9M received as a result of an early redemption of a bond held by the Group. The Group also sold some of its quoted equities that generated a gain on disposal amounting to $0.8M during FY2007.

Operating expenses for FY2007 included staff costs of $11.6M (FY2006: $9.0M), depreciation of $1.4M (FY2006: $1.3M), other operating expenses of $10.8M (FY2006: $7.9M) and finance cost of $1.9M (FY2006: $1.0M). All these expenses were comparatively higher, primarily due to the higher sales turnover experienced during FY2007. The Group also employed more staff during the year and its total workforce stood at 175 at the end of FY2007. Finance cost rose significantly due to interest costs arising from more trust receipts utilised for the purchase of inventories to generate higher sales and to increase inventories holding.

With the higher revenue reported and a reduction in corporate tax rate to 18%, the Group turned in yet another record year of net profit after tax of $31.2M which was 98% higher than the net profit after tax of $15.7 for FY2006.

Balance Sheet

In line with higher sales and continued strong demand expected from its customers, the Group’s trade receivables (including other receivables) and inventories rose to $80.5M (FY2006: $53.4M) and $79.9M (FY2006: $44.4M) respectively. Correspondingly, trade and other payables and borrowings also increased to $30.6M (FY2006: 10.2M) and $43.2M (FY2006: $17.7M) respectively.

Despite of the higher working capital requirement, the Group was able to maintain a healthy current ratio of 2.2 (FY2006: 3.45) and managed a positive cash flow for FY2007.

During the year, the Group begun the construction of a warehouse extension at its flagship premise located at 116, Neythal Road. The extension was completed in March 2007 and added another 5,000 square metres of covered warehouse space to store our inventories including the high value products.

The record net profit after tax for FY2007 had enabled us to report higher return on equity of 21.5% compared with 12.5% achieved for FY2006. At the same time, return on assets also rose to 13.8% (FY2006: 9.9%) with the higher net profit after tax of $31.2M achieved for FY2007.

Corporate

Throughout FY2007, the Group continuously reviewed opportunities referred by business associates for possible merger and acquisition. They were evaluated, among other criteria, on the business risk involved, size of investment needed and whether it would complement the Group’s activities thereby creating synergy for its business.

The Group undertook and completed a 1 for 4 rights issue of shares exercise during FY2007. This rights issue of shares exercise which was bundled with an option for shareholders to elect to use their bonus dividends to subscribe for their entitled rights shares was fully taken. With this exercise, the Group was able to return part of the S44A tax credit to shareholders. At the end of the exercise, a total of 90,482,698 new shares were allotted and listed on the Official List of the Singapore Exchange Securities Trading Limited on 7 December 2006. As a result, our share capital increased to $68.1M from $59.3M by capitalising $9.0M from retained earnings.

The Group also took unprecedented steps to announce and paid its first ever interim dividend of 1 cent per share and 2nd interim dividend of 0.5 cent per share to celebrate its record results. We had also declared a final dividend of 0.5 cent and a special dividend of 1 cent per share during the announcement of the Group’s full year results.

We were happy to be selected as one of the fastest growing 50 companies in Singapore. This award recognised companies that had achieved the highest compounded annual growth rate in turnover of at least 10% every year for the last three years and must be profitable for all of those years.

On 11 July 2007, the Group undertook a share placement of 49,500,000 new shares to 3 interested institutional funds, namely Lehman Brothers Commercial Corporation Asia Limited, Lion Capital Management Limited and UOB Asset Management Limited at a price of $0.555 per share for a total consideration of $27.4M. These proceeds would be used mainly for working capital, any new business opportunities and retire borrowings. More importantly, the placement also served to enhance the shareholders profile of the Group and improve market liquidity of its shares. These shares were subsequently allotted and listed on the Official List of the Singapore Exchange Securities Trading Limited on 24 August 2007. With this placement, the number of shares in issued increased from 452,396,488 to 501,896,488.

On 10 September 2007, the Group announced a bonus dividend of 3.049 cents less tax at 18% (2.5 cents net) and proposed a renounceable non-underwritten rights issue of shares in the ratio of 1 right share for every 4 existing shares held by the shareholders with a subscription price of $0.10 per rights share. Shareholders will be given an option to elect to use the bonus dividend declared to fully subscribe for their rights without further cash outlay. This exercise is the same as the one completed in 2006 and it aims to utilize most of the Section 44A tax credit balance before it expires by 31 December 2007 so that shareholders may benefit from the tax refund if their personal income tax rate is lower than the corporate tax rate.

Lim Kim Thor
Chief Executive Officer