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Second Quarter Financial Statement And Dividend Announcement 2018

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
For the Second Quarter ended 30 June 2018

Balance Sheet

Review of Performance

Review for the Quarter ended 30 June 2018 (Q2'18)

Turnover (Q2'18 vs Q2'17)

The Group's revenue for the April-to-June 2018 quarter (“Q2'18”) increased by S$3.3 million or 6.7% to S$52.4 million from S$49.1 million in Q2'17. However in terms of HK$, the Group's revenue increased by HK$33.4 million or 12.2% to HK$307.9 million from HK$274.6 million due mainly to:

  1. Higher revenue from the Precision Components segment, due mainly to increased sales of office automation and consumer products offset by lower sales of TV back panel. Although the transfer of Chinese production from major Japanese OA customers to Southeast Asian countries is still in progress, it is stabilizing, and our major customers are making adjustments to Chinese suppliers, so this quarter's OA sales also showed gradual stability and also received some new orders. In addition, our new Thailand factory which opened in June 2018 began shipment in Q1'18 to a major OA customer in Thailand with help from the Dongguan factory. Sales for TV back panels have declined compared to Q1'18 due to China domestic intense competition. Despite current programmes nearing end-of-life, sales for automotive products were stable due mainly to sales of children's car-seat to a new customer which mass production started this year. Mass production from some newly secured automotive programmes will only start next year.

  2. Higher revenue from the Precision Machining segment on the back of increased sales for heatsinks and car display panels. The demand for TV bezels continues for large, HD TVs. A one-time order in Q2'18 for commercial display product also contributed to the increase in revenue from the Precision Machining segment.

  3. Increased tooling sales in Q2'18 compared to Q2'17 due mainly to sales to 2 new customers and new mold orders from OA customers. Effort has also been put in to clear long-outstanding work-in-progress resulting in higher sales.
Net Profit (Q2'18 vs Q2'17)

The Group net profit was S$5.7 million for Q2'18, an increase of S$5.2 million compared to the S$0.5 million profit in Q2'17 due mainly to:

  1. Mansfield Group (“MSF”) posted a profit of S$5.8 million in Q2'18, S$5.0 million higher than the profit of S$0.8 million in Q2'17 due mainly to:
    1. MSF's gross profit (“GP”) margin increased to 20.2% in Q2'18 from 15.7% in Q2'17 due mainly to :
      1. Higher sales and improved productivity from the Precision Machining segment
      2. Promotion of manufacturing automation and employee incentives to improve productivity in the Precision Component segment.
      3. Offset by
      4. Start-up costs from newly incorporated subsidiaries Mansfield Wei Hai and Mansfield Thailand.
      5. Expenses incurred for new programmes which mass production are anticipated in 2nd half of 2018 and 2019
      6. 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.
      7. Competitive price resulting in lower margin for TV back panel which had higher sales volume in Q1'18 compared to Q1'17.
    2. Reversal of 2017 tax provision amounting to S$2.1 million (RMB9.9 million) following the award of a certificate from a combination of various mainland Chinese government agencies in Guangdong in May 2018 confirming high technology tax concession of 15% for 3 years starting 2017. Tax provision was made at 25% in 2017.
    3. Higher G&A expenses mainly salary and wages from newly set-ups, Mansfield Weihai and Mansfield Thailand. Higher overseas travelling and entertainment expense were mainly due to the opening of the Thailand factory in June 2018.

  2. InnoTek's loss in Q2'18 was S$0.1 million, S$0.2 million lower than the loss of S$0.3 million in Q2'17 due mainly to:
    1. Lower salary and wages due to one fewer staff member and no share option expense in Q2'18 as the share option granted to CEO had been fully vested by Q1'18 and
    2. Lower office rental for the new premise in Q2'18

Review for the 6 months ended 30 June 2018 (1H'18)

Turnover (1H'18 vs 1H'17)

The Group's revenue for the January-to-June 2018 period (“1H'18”) decreased by S$0.2 million or 0.2% to S$100.0 million from S$100.2 million in 1H'17. However in terms of HK$, the Group's revenue increased from HK$554.6 million to HK$590.5 million. This is due to the weakening of the HK$/S$ in 1H'18 at 5.91 compared to 5.54 in 1H'17.

In term of HK$, increased revenue was mainly due to:

  1. Higher revenue from the Precision Components segment, due mainly to increased sales of automotive products, office automation (OA) and consumer products offset by lower demand for TV back panels. OA sales is stabilizing as our major customers are making intensive adjustments to Chinese suppliers. The TV back panels sale has declined due to fierce competition in China. Sales for automotive products were higher due to commencement of mass production for some newly secured automotive programmes.

  2. Higher revenue from the Precision Machining segment on the back of increased sales for heatsinks and car display panels. In Q1'18, the current generation of bezels saw higher demand from customers operating in India and Vietnam despite the industry annual upgrade to new model. The demand for TV bezels continues for large, high definition (HD) TVs. A one-time sale order in Q2'18 for commercial display product also contributed to the increase in revenue from the Precision Machining segment.

  3. Increased tooling sales in 1H'18 compared to 1H'17 due mainly to sales to 2 new customers and new mold orders from OA customers. Efforts put into clearing long-outstanding work-in-progress also resulted in higher sales.
Net Profit (1H'18 vs 1H'17)

The Group recorded a profit of S$5.8 million for 1H'18, an increase of S$2.7 million from the profit of S$3.1 million in 1H'17, due mainly to:

  1. Mansfield Group (“MSF”) profit was S$6.6 million in 1H'18, S$3.0 million higher than the profit of S$3.6 million in 1H'17 due mainly to:
    1. MSF's gross profit (“GP”) margin increased to 18.0% in 1H'18 from 17.4% in 1H'17 due mainly to:
      1. Higher sales and improved productivity from the Precision Machining segment
      2. Promotion of manufacturing automation and employee incentives to improve productivity in the Precision Component segment.
      3. Offset by
      4. Start-up costs from newly incorporated subsidiaries Mansfield Wei Hai and Mansfield Thailand
      5. Expenses incurred for new programmes which mass production are anticipated in 2nd half of 2018 and 2019
      6. Higher labour costs incurred by certain entities due to increase in minimum wage and the employment of higher skilled workers to prepare for future mass production with newly installed robotic arms.
      7. Competitive price resulting in lower margin for TV back panel which had higher sales volume in 1H'18 compared to 1H'17.
    2. Reversal of 2017 tax provision amounting to S$2.1 million (RMB9.9 million) following the award of a certificate from a combination of various mainland Chinese government agencies in Guangdong in May 2018 confirming high technology tax concession of 15% for 3 years starting 2017. Tax provision was made at 25% in 2017.
    3. Higher G&A expenses mainly salary and wages from newly set-ups, Mansfield Weihai and Mansfield Thailand. Overseas travelling and business development expenses also increased as the MSF Group increased efforts to secure more sales and new customers.
  2. InnoTek's loss in 1H'18 was S$0.8 million, S$0.3 million greater than the loss of S$0.5 million in 1H'17 due mainly to:
    1. Net investment portfolio loss managed by an investment bank in 1H'18 compared to a gain in 1H'17 as equity and bonds prices were affected by trade war between China and US in 1H'18.
    2. Lower salary and wages due to one fewer staff member and no share option expense in Q2'18 as the share option granted to CEO had been fully vested by Q1'18 and
    3. Lower office rental for the new premise in Q2'18.
Commentary

Although the recent Sino-U.S. trade war has affected the global economy, China reported economic growth of 6.7% in the second quarter of 2018, still above the government's official target of 6.5% for the year. The Group's operations have been affected by challenges such as unstable raw material prices, rising labour costs and tougher competition.

Despite the slowdown in economic growth, the Group has secured new automotive programmes, for which mass production will commence in 2H'18 or FY'19. For the past few years, the Group has been committed to developing its automotive business; in addition to basic interior components, it is producing functional and safety parts to enhance its suite of offerings. The Group expects stable growth in the automotive segment for the foreseeable future.

The Group's TV business saw a downturn this quarter as high-definition (“HD”) TVs under 55 inches increasingly transition to plastic frames. However, there is still consistent demand for TV bezels for large HD TVs and heat sinks.

The demand for TV back panels will decline as China domestic competition intensify. The Group will continue to 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 have shifted production from China to Southeast Asia. At the same time, these customers have introduced tighter requirements for Chinese-based suppliers and now work almost exclusively with selected elite suppliers. The Group believes that its operations in Thailand will enable it to become an integral part of these customers' supply chain. Overall, the Group's OA sales remained steady during the quarter, and benefited from partial orders transferred 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 is developing its subsidiaries in Rayong, Thailand (“Mansfield Thailand”) and Weihai, China (“Mansfield Weihai”). It expects to incur start-up expenses from both plants this year. Mansfield Thailand held its opening ceremony in June 2018, and will officially commence mass production in 2H'18. In the meantime, it has commenced trial production and begun shipment to the Group's major customer with support from the Group's Dongguan plant. Mansfield Weihai has secured factory certification and commenced shipment to a key customer, but expects mass production to start in 2H'18.

Going forward, the Group will continue to implement management measures and step up product development, as well as promote manufacturing automation (on a contract or individual component basis) and employee incentives to improve 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.