Extracted from Annual Report 2010
On behalf of the Board of Directors, I am pleased to present the Annual Report of SM Summit Holdings Limited ("the Group") for the financial year ended 31 December 2010.
FY2010 was a challenging year for the Group despite the overall global economic recovery. The entertainment industry continued to be negatively impacted by the adverse retail environment for DVDs and Compact Discs as the industry faced increasing competition and changes in consumption patterns. Demand for optical disc products fell as our customers became more conservative in managing their orders and inventory at the retail stores when releasing their titles. As such, our revenue fell by 11% from S$42.9 million in FY2009 to S$38.3 million in FY2010.
However, I am pleased to announce that the Group has dug deep and our cost management efforts have yielded positive results. One of the actions we carried out was a re-structuring exercise wherein we relocated our machinery from Singapore and Australia to Indonesia. These efforts have helped to reduce our labour and factory overheads and through such cost containment measures, we were able to improve our gross profit by 7% from S$8.7 million in 2009 to S$9.3 million in 2010 in spite of the drop in revenue.
Other income fell by approximately S$1.3 million primarily due to lower exchange gains for the year. On the other hand, depreciation was reduced by S$0.8 million as some assets were already fully depreciated. In line with the lower sales volume, distribution costs also fell by S$1.1 million compared to FY2009 as selling expenses such as freight and marketing salaries were reduced. With an income tax credit of about S$90,000, the Group successfully swung from S$0.4 million net loss in FY2009 to net profit of S$0.6 million in FY2010.
Consolidating Capabilities, Optimising Efficiency
With global economic growth seen slowing down and inflationary pressures building up, the macro environment going forward continues to be uncertain. We foresee that demand for optical disc manufacturing will likely remain weak and given the uptrend in the price of polycarbonate, a key raw material for our products, the Group's priority for the coming year will still be cost management through consolidation of capabilities and effective utilization of resources to match demand, so as to achieve optimum efficiency.
In fact, we will continue to focus on our Indonesian production base as our current capacity and size is still small. By growing this segment, we expect to gain a bigger market share while keeping costs down at the same time. In addition, we will also be exploring new technologies and cultivating new revenue streams by working with strategic partners in the areas of BluRay Disc and EcoDisc manufacturing.
New Business Opportunity
As the outlook for the optical disc industry remains challenging, we saw the need to explore alternative business opportunities to generate new stable streams of revenue and profits for the Group.
In line with the Group's diversification plans, we entered into term sheets to acquire 100% interest in Centurion Dormitory (Westlite) Pte Ltd ("Westlite"), 45% interest in Lian Beng Centurion (Mandai) Pte Ltd ("JVCo") and 75% interest in JYC-NCL Pte Ltd ("JYC-NCL"), collectively referred to as the "Proposed Transactions" on 13 January 2011. Both Westlite and JYC-NCL have existing profitable businesses in the ownership, management and operation of workers dormitories and temporary workers' accommodation. On a combined basis, the dormitories managed by Westlite and JYC-NCL can house more than 14,000 workers. JVCo, on the other hand, is a company which has a piece of land in Mandai which, subject to the necessary approvals, can be developed for the operation of workers' dormitories with a capacity of at least 4,000 beds.
This will allow the Group to diversify itself from its current business where the operating environment for optical disc manufacturing remains difficult. The acquisition of existing profitable businesses with healthy operating cashflows will also strengthen the Group's fundamentals. While ambitious in nature, the Proposed Transactions will help the Group make a meaningful foray into this new sector with foreseeable growth potential.
At the time of writing this message, we are still in the process of carrying out our due diligence on Westlite, JVCo and JYC-NCL and are in discussions and enquiring with the respective vendors on certain matters arising from the due diligence that are crucial to the Proposed Transactions. We are also in discussions and negotiations with the respective vendors of Westlite, JVCo and JYCNCL on the terms of the definitive sale and purchase agreements to be entered into in relation to the Proposed Transactions.
The Proposed Transactions will require, amongst others, the approval of shareholders at an Extraordinary General Meeting to be convened. We will make further announcement of any material developments on the Proposed Transactions at the appropriate time. As these transactions are complex, I must inform shareholders that there is no certainty or assurance that the Definitive Agreements will be entered into or that Proposed Transactions will be proceeded with.
To reward our shareholders for their support during these challenging times, the Board of Directors has recommended a first and final dividend of 0.5 cent per ordinary share for FY2010.
Appreciation And Acknowledgements
Finally, on behalf of the Board of Directors, I would like to express my gratitude to the management team and for their hard work during these trying times. I would also like to take this opportunity to thank all shareholders, business associates, partners and customers for their staunch support over the years. Lastly, I would also like to thank the Board members for the guidance that they have given to the Group as we move on to a new chapter.
Lee Kerk ChongChairman
25 March 2011