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Third Quarter Financial Statement And Dividend Announcement 2017

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
For the Third Quarter ended 30 September 2017

Balance Sheet

Review of Performance

Review for the Quarter ended 30 September 2017 (Q3'17)

Turnover

The Group's revenue for the July-to-September 2017 quarter (“Q3'17”) increased by S$0.7 million or 1.3% to S$56.5 million from S$55.8 million in Q3'16.

This was mainly due to:

  1. Revenue increase from the Precision Machining (previously named Precision subassembly) due mainly to the higher sales from heat sink and TV Bezel programmes in Q3'17 as compared to Q3'16.

    This was offset by:

  2. Revenue decline from the Precision Components segment, due to lower demand for office automation and consumer products. Certain major Japanese customers have also migrated new production programmes from China to plants in South-east Asia. Sales of automotive products were also slightly lower as current programmes are nearing end-of-life while mass production from some newly secured programmes scheduled to start next year. This was offset by an increase in TV sales in Q3'17 compared to Q3'16.

  3. Tooling sales decreased in Q3'17 compared to Q3'16. There were some delays in deliveries of tooling sales in Q4'17.
Net Profit

InnoTek Group recorded a profit of S$4.0 million in Q3'17, S$1.0 million lower than Q3'16. The S$1.0 million decline was due mainly to:

  1. Mansfield Group (“MSF”) recorded a profit of S$4.1 million, S$0.9 million lower than Q3'16 due mainly to:
    1. Higher tax expense of S$1.6 million mainly from profit-making Magix which has fully utilised the losses carried forward from previous years.
    2. Exchange loss of S$0.4 million compared to exchange gain of S$0.1 million in Q3'16.
    3. Despite slightly higher revenue, MSF's gross profit (“GP”) margin fell to 21.6% in Q3'17 from 21.9% in Q3'16 mainly due to higher mix of TV sales, segments which has a lower GP margin.
      This was offset by:
    4. Lower G&A expense. This was mainly due to lower retrenchment cost of S$0.2 million as well as repair and maintenance expenses.

  2. InnoTek's loss of S$0.1 million in Q3'17 as compared to a breakeven in Q3'16 was due to the unrealised exchange losses from HK$ denominated interest receivable from the Mansfield Manufacturing as the HK$ weakened against the S$ in Q3'17.

Review for 9 months ended 30 September 2017 (9M'17)

Turnover

The Group's revenue for the January-to-September 2017 period (“9M'17”) decreased by S$2.8 million or 1.7% to S$156.6 million from S$159.4 million in 9M'16.

The lower revenue was mainly due to:

  1. Revenue decline from the Precision Components segment, due to lower demand for office automation and consumer products. Certain major Japanese customers have also allocated new production programmes to plants outside of China. In addition, sales for automotive products were lower as current programmes are nearing end-of-life while mass production from some newly secured automotive programmes have not started mass production.

    This was offset by:

  2. Revenue increase from the Precision Machining (previously named as Precision subassembly) due mainly to the higher sales from TV Bezel programmes and heat sinks in 9M'17 as compared to 9M'16.

  3. Tooling sales increased slightly in 9M'17 compared to 9M'16. The major increase comes from sales to the JV company, Anhui KM Technology Co. Ltd which Mansfield holds 49% stake
Net Profit

InnoTek Group recorded a profit of S$7.1 million in 9M'17, higher by S$0.3 million compared to the profit of S$6.8 million in 9M'16 due mainly to:

  1. Mansfield Group profit for 9M'17 decreased to S$7.7 million, S$0.3 million lower compared to a profit of S$8.0 million in 9M'16 due mainly to:
    1. Despite lower revenue, MSF's gross profit margin increased to 18.9% in 9M'17 from 18.0% in 9M'16. This is mainly due to:
      1. Lower direct /indirect headcount
      2. Lower depreciation due to disposal of old PPE in 2016 and lesser addition of new PPE
    2. Lower administrative expenses attributable to business tax and statutory charges, motor vehicles expense, repair and maintenance, rental expense as well as lower administrative headcount. This was partially offset by higher bonus provision.
    3. This was offset by:

    4. Higher tax expense of S$2.6 million mainly from profit making Magix Dongguan as it has fully utilised the carried forward losses from previous years.

  2. InnoTek's loss in 9M'17 was S$0.6 million, S$0.6 million lower compared to a loss of S$1.2 million in 9M'16 due mainly to:
    1. Net gain of S$0.4 million compared to net loss of S$0.1 million in 9M'16 from the investment securities portfolio managed by an investment bank.
Commentary

Despite competition and margin pressures in the TV segment, the Group registered improved revenue in Q3'17 compared to a year ago mainly from the sale of TV bezels and heat sinks. The Group recorded increased orders for heat sinks, which can be used in both TVs as well as computers. The TV segment accounted for 41% of the Group's revenue in the quarter under review, overtaking the Office Automation (“OA”) division as the main revenue contributor. The TV segment has been able to secure new clients and orders for new products including heat sinks due to improvements in quality and adoption of new technological innovations such as automation. This increase in revenue, driven by growing consumer demand for high-definition TV panels requiring thinner and strong bezels is coming at a time when the OA sector is witnessing a transition with some major Japanese customers relocating operations from China to Southeast Asia.

The Group has also set up a new subsidiary in Weihai China, Mansfield Technology (Weihai) Co. Ltd. (“Mansfield Weihai”), to support Hewlett Packard's operations in China, following the electronics giant's US$1.05 billion acquisition of Samsung's printer business. Mansfield Weihai's activities consist of research and development, design and manufacture of precision metal stamping, tooling, non-metal and assembly products and services. Revenue contribution from Mansfield Weihai is expected to be in 2018.

The OA sector remains challenging for the Group amid increased competition and cost pressures, as several key customers relocate their business and production activities to lower-cost Southeast Asian countries. To mitigate this decline, the Group incorporated Mansfield (Thailand) Co. Ltd. (“Mansfield Thailand”) in April 2017. It has since increased its registered share capital to 50 million Baht and paid-up 47.3 million Baht to satisfy partial payment for land purchased in the Amata City (Rayong) Industrial Estate in Thailand, as well as for plant construction and general working capital.

The construction of the Thailand plant is scheduled for completion in the first half of FY2018, with production and revenue contributions expected to commence in the second half of FY2018. Until then, operational activities in Thailand will be supported from Dongguan. Revenue contribution from Mansfield Thailand is expected to gather momentum from FY2019.

According to the China Association of Automobile Manufacturers, automobile production and sales each exceeded 20 million units for the nine months ended 30 September 2017 (“9M'17”), up almost 5% year-on-year. The Group recorded lower sales in its Automotive segment. Current programmes are approaching end-of-life, while newer ones have yet to commence mass production. However the Group remains optimistic about its prospects in this sector. The Group will continue pursuing more Automotive programmes and orders for both car seat moulds and stamping. It also plans to ramp up involvement in the car seat business with an extension into the children's car seat segment as a new revenue stream.

The Group remains cautiously optimistic about its outlook for the rest of FY2017. Increase in raw material may also be a concern and it will continue to focus on streamlining cost efficiencies and new customer acquisitions and product innovations to mitigate challenges in the operating environment, while seeking to launch new OA manufacturing operations in Thailand.