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First Quarter Financial Statement And Dividend Announcement 2018

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
For the First Quarter ended 31 March 2018

Balance Sheet

Review of Performance

Review for the Quarter ended 31 March 2018 (Q1'18)

Turnover

The Group's revenue for the January-to-March 2018 quarter (“Q1'18”) decreased S$3.5 million or 6.8% to S$47.6 million from S$51.1 million in Q1'17. However in term of sales in HK$, the Group revenue increased from HK$279.9 million to HK$282.6 million. This is due to the weakening of the HK$/S$ in Q1'18 at 5.936 compared to 5.477 in Q1'17.

In term of HK$, the slightly higher revenue was mainly due to:

  1. Revenue increase from the Precision Components segment, due to higher sales of TV back panel but offset by lower demand for office automation and consumer products. Certain major Japanese customers have also accelerated their new production programmes to plants outside of China. Sales for automotive products were higher despite current programmes nearing end-of-life as production was bought forward due to the Chinese New Year holidays in February. Mass production from some newly secured automotive programmes will only start next year.
  2. Revenue decrease slightly from the Precision Machining segment due mainly to the reduced sales to certain TV customers but compensated by higher bezel sales, heatsinks and car display panel. The current bezel products saw higher demand coming from customer operating in India and Vietnam despite the earlier yearly upgrade to new model.

  3. Tooling sales in Q1'18 was stable and about the same level compared to Q1'17.
Net Profit

InnoTek Group was profitable in Q1'18 with a profit of S$0.1 million, a decrease of S$2.4 million compared to the profit of S$2.5 million in Q1'17 was due mainly to:

  1. Mansfield Group (“MSF”) profit was S$0.8 million in Q1'18, S$2.0 million lower than the profit of S$2.8 million in Q1'17 due mainly to
    1. MSF's gross profit (“GP”) margin decreased to 15.6% in Q1'18 from 19.0% in Q1'17 due mainly to :
      1. Increase in cost of direct and indirect materials.
      2. Start-up costs from newly incorporated subsidiaries Mansfield Wei Hai and Mansfield Thailand
      3. Expenses incurred for new programmes which mass production are anticipated in 2nd half of 2018 or 2019
      4. Certain entities incurred higher labour cost due to increase in minimum wage and employment of higher skill workers to get ready for mass production in future quarters with newly installed robotic arms .
      5. Competitive price resulting in lower margin for TV back panel which had higher sales volume in Q1'18 compared to Q1'17.
    2. A write-back of S$0.3 million doubtful debt provided for in December 2015 but collected back in Q1'17. There was no repeat in Q1'18.
    3. Higher G&A expenses mainly from newly set-ups, Mansfield Weihai and Mansfield Thailand. Overseas travelling and business development expense had also increased as the MSF Group increased efforts to secure more sales and new customers.
  2. InnoTek's loss in Q1'18 was S$0.6 million, S$0.4 million higher than the loss of S$0.2 million in Q1'17 due mainly to:
    1. Net investment portfolio loss managed by an investment bank in Q1'18 compared to a gain in Q1'17 (refer to 1(a)(i) (c) ) as equity and bonds prices were affected by trade war between China and US in Q1'18.
    2. Higher share option expense for share options granted to CEO on 9 March 2017.
Commentary

Although international trade has been affected by global economic and political developments, China is enjoying economic stability on the domestic front. Products and industries that serve the demands of daily life such as the automotive sector are expected to maintain moderate growth.

The Group's operations have been affected by unstable raw material prices, rising labour costs and tougher competition.

The Group's TV segment maintained stable order volume this quarter. This was largely attributable to strong sales in overseas markets, as well as high demand for existing products such as TV bezels and heat sinks. The Group believes that there is demand for large, high-definition (HD) TVs in domestic and overseas markets. It will introduce measures such as automation to improve manufacturing efficiency and boost the quality of new products, which will need to be of even better quality going forward in order to support higher-resolution content.

Several of the Group's Japanese customers in the Office Automation (“OA”) business are shifting production from China to Southeast Asia, a transition which is expected to conclude in the next two years. At the same time, these customers have introduced tighter requirements for Chinese suppliers and now work almost exclusively with selected elite suppliers. Nevertheless, the Group's OA sales held steady due to stable orders and partial transfer orders from other suppliers. The Group will continue to grow its OA market share by transforming from a single-component supplier to an assembly supplier.

The Group's subsidiaries in Thailand and Weihai, China – Mansfield (Thailand) Co., Ltd. (“Mansfield Thailand”) and Mansfield Technology (Weihai) Co., Ltd. (“Mansfield Weihai”) – are still in development. As such, their performance is not yet reflected in this quarter's results. Mansfield Thailand's plant is on track for its scheduled completion in mid-May 2018 and is slated to begin production in 2H'18. Mansfield Weihai recently secured factory certification to support our customer printer-related activities in China and will commence production in 2H'18.

The Group is confident of its prospects in the automotive business. Although the switch between new and old programmes will impact its performance in the short term, it is actively engaging with existing customers to acquire new orders. The Group is targeting strategic cooperation with global Tier 1 suppliers, and has made some headway on this in Q1'18. In addition to basic interior parts, it will continue to produce functional and safety parts to enhance its suite of offerings.

The Group remains cautious about its outlook for FY2018. It will implement process reforms and product innovation this year as well as promote manufacturing automation and employee incentives (on a contract or individual component basis) to improve its productivity and competitiveness. At the same time, it will seek to strengthen relationships with existing clients and pursue customer acquisitions in order to develop its capabilities in a sustainable manner.