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Extracted from Annual Report 2016

I am honoured to present you the annual report for InnoTek Limited ("InnoTek" or the "Group") for the financial year ended 31 December 2016 ("FY2016"). This report represents the scorecard in the first full financial year since my dual appointment on 2 November 2015 as the Executive Director of InnoTek and as Chief Executive Officer of Mansfield Manufacturing Company Limited ("Mansfield"), the Group's main operating subsidiary.

Shareholders would be familiar with our performance in recent years and the challenges faced by the manufacturing sector in China as a whole and by our Company in particular.

Following my appointment, I quickly assembled a team of experienced managers. Together we reviewed the existing problems faced within the Company as well as our relationships with existing Mr. Lou Yiliang Chief Executive Officer and potential customers. Our key priorities were to stem losses, improve cash flow and strengthen our value proposition with existing and new customers.

Under my leadership, we returned to the basics. We implemented strategies to focus on product innovation, staff training and how to improve operating cost efficiencies, automation and customer engagement. The task has been very challenging and we faced many difficulties. But our management team persisted and, over time, the entire InnoTek team responded to the changes. We have also strengthened relationships with existing customers and secured new customers.

I am thankful for the support of so many people as I share with you this turnaround story of InnoTek.

FINANCIAL PERFORMANCE

Revenue for FY'16 decreased 7.9% to S$214.7 million from S$233.1 million in FY'15. The decline was due mainly to lower contribution from the Precision Components and Tooling segment, as some Japanese customers relocated production from China to lower-cost centres in South East Asia. This was offset by higher revenue from the Precision Machining segment as new products for two major Taiwanese customers commenced mass production.

Reflecting the many operational improvements that have been implemented by the new management team, the Group's gross profit margin improved sharply to 19.1% in FY'16 from 6.5% in FY'15 despite lower revenue.

Net profit after tax increased significantly to S$11.6 million in FY'16 from a net loss after tax of S$16.3 million in FY'15, representing a positive swing of S$27.9 million in earnings.

InnoTek's net cash position as at 31 December 2016 improved to S$30 million (up from S$25.2 million a year earlier) after the repayment of S$5.3 million of invoice financing.

Earnings per share for FY'16 reversed to a positive of 5.17 Singapore cents compared to a loss per share of 7.28 Singapore cents in FY'15. Net asset backing per share as at 31 December 2016 was 55.8 Singapore cents, compared to 51.9 Singapore cents a year ago.

BUSINESS REVIEW

The operating environment for all three of InnoTek's business segments – automotive, office automation and TV – remains challenging and highly competitive, leading to price cuts across the board. Our income from interest rates has also fallen sharply in the tough economic climate.

Most of our competitors today are private enterprises, helmed by dynamic and flexible first-generation entrepreneurs. The Group, having gone through a few rounds of management transition and high staff turnover in the past few years, found itself lacking a core operational team to hold the fort. InnoTek's previous three main competitive advantages – Technology, Capital and Scale – had ceased to exist.

The lack of stability in the previous teams had led to a drop in the quality of deliverables to our customers. Consequently, a few of our customers stopped granting new programmes to InnoTek. As such, much of the team's restructuring efforts in FY2016 involved engaging existing and potential customers to rebuild relationships and restore trust.

To put things into perspective, among the three business segments, automotive programmes tend to have the longest product life cycle, clocking in at around five years. Office automation cycles are around three years, whilst the TV market has the shortest product life cycles of less than a year.

In the year ahead, apart from the TV segment which should stay relatively stable, we will need to prepare ourselves for an increasingly challenging operating climate. Office automation, which declined 18% in 2016 following the relocation of some Japanese brands' production to lower-cost countries in Southeast Asia, is likely to decline by a further 15% in 2017. Our decision to invest in Thailand is part of our efforts to make up for the loss in orders, following a major office automation customer's decision to transfer new products to Thailand.

Overall, 2016 was a challenging yet fruitful year for InnoTek. While we executed a successful turnaround and recorded a profit for the year, there is much to be done to improve the Company's fundamentals before we can truly embark on further development. It will take time and effort to increase our output value and improve our production efficiency. We still have a long way to go.

That said, I would like to thank the Board of Directors for their faith in me, and I am confident that with the hard work of everyone in the Group and the support of all shareholders, we can bring InnoTek to greater heights in the coming years.

Lou Yiliang
Lou Yiliang
Chief Executive Director