General

With governments around the world introducing both fiscal and monetary policies in response to the recession brought about by the meltdown in the global financial markets, many economies had begun to show signs of recovery in the 2nd half of 2009. China economy had remained steady during this period while other Asian economies were expected to recover faster and stronger than the rest of the world.

Our government also introduced many economic measures to help the local businesses. As such, our economy began to recover in the 3rd quarter of 2009 and Gross Domestic Product (‘GDP’) registered double digits growth by the 1st quarter of 2010. This was contributed by an improved market demand and the comparatively lower base last year. In particular, this spectacular growth was mainly driven by the manufacturing, construction and utilities sectors (source: Singapore Department Statistics – Gross Domestic Products by Industry).

However the sectors that Hupsteel and its Subsidiaries (‘Hupsteel’) traditionally served, namely marine and oil & gas, did not show signs of significant recovery during the same period. In addition, just when the world economies were climbing out of the severe recession, sovereign debt crisis of some European countries threatened to derail the recovery process. Worries over solvency of these countries were casting long shadows over the sustainability of the recovery. At the same time, the unrelentingly high unemployment rates and anemic growth of the US economy acted as a dampener to any economic rebound.

Pipes, fittings and structural steel

Prices for pipes, fittings and structural steel continued to adjust downward during the 1st quarter of financial year ended 30 June 2010 (‘FY10’) but had since improved slightly and remained relatively stable during the rest of FY10. The move to price iron ore quarterly would likely lead to rises in the production costs of steel products. The pressure for the increase in production costs however could be mitigated by the weaker oil prices. With mills not curtailing their production capacity, the trend for steel prices, in the near term, would depend largely on market demand.

Our customers from the marine sectors, particularly local renowned shipyards, faced slump in orders for new vessels and rigs while those in the oil & gas sector were hesitant in starting new projects as a result of falling oil prices. With an uncertain outlook on demand from these 2 major segments of customers, Hupsteel did not seek to increase its inventory holding but only replenished popular common sized items. Thus, it had minimized its purchases during the financial year and seized attractive offers when they arose. By the end of FY10, its inventory holding was $69.8M (FY09:$67.1M). It has disposed almost all of its high cost inventories and it now carries mainly inventories at recent market prices.

In addition, Hupsteel having recognized that activities in these 2 key sectors would not recover as quickly as the manufacturing sector, took effort to secure more sales to new and existing customers in other sectors and smaller shipyards. Hupsteel has also benefited from the strong ties it has developed with reputable mills worldwide as a result of its long business history which enables it to secure deals that are beneficial to all its trading partners.

Sandblasting, General Hardwares & Properties

Hupsteel’s sandblasting business remained affected by the low volume of activities from the shipbuilding sector. We would look at reducing the resources deployed in this area and would deliberate on how to rationalize the operation in view of the prevailing market conditions.

The range of rackings brought in by our general hardware business segment continues to be well received by the market. Turnover from the general hardware rose 10% over the previous year.

Occupancy rate for Hupsteel’s owned industrial buildings, offices and shop houses remained healthy during FY10. With the recovery in the general economy, valuations of these properties have improved. This would allow Hupsteel to consider alternative options in managing this portfolio of properties.

Financial Review

Although the general economy registered recovery during the year, demand for steel products did not actually improve and coupled with lower steel prices than a year ago, revenue for FY10 declined 45% to $177.7M from $321.7M. Although selling prices of steel products had declined during the financial year, cost of material also fell correspondingly, resulting in gross profit margin improving to 16.6% (FY09:12.9%).

With all categories of expenses having fallen compared to last financial year due to lower volume and cost cutting measures implemented, Hupsteel managed to report a net profit after tax of $10.3M for FY10 (FY09:$14.1M).

As Hupsteel’s purchases were mainly denominated in US dollar, strengthening of the US dollar at the end of FY10 did not bode well for us. However, the general expectation now is that the US dollar would depreciate against most currencies, in the near term, in order to stimulate the US economy further so as to achieve stable economic growth there. Hence Hupsteel will continue to monitor this currency risk closely and take necessary hedging actions to minimize exchange loss against the US dollar.

Hupsteel will also continue to minimize inventory holding, purchasing only to fulfill secured orders and stock up popular common sized items. In this way, it will be protected against fluctuations in steel prices and avoid over utilizing its cash in inventory purchases. This will allow it to take advantage of attractive offers that might arise from time to time and avoid having to keep stock over a long period of time in view of the uncertainty in market demand.

Corporate

During the financial year, Hupsteel exercised share buyback mandate periodically to purchase 2,803,000 of its own shares from the open market. These shares are now kept as treasury shares.

With competition expected to remain stiff in the midst of limited demand, it is important to make proper inventory holding decisions. Strategic inventory holding constitutes a very critical component of Hupsteel’s business model and we had witnessed how price fluctuations in inventory had affected the profitability and even viability of Hupsteel’s competitors in the last 2 years. Hence Hupsteel will continue to focus much of its attention in managing its inventory. Hupsteel will also continue to keep abreast of any acquisition and merger opportunities that might arise.

Lim Kim Thor
Chief Executive Officer