Annual Report 2018 DKSH Holdings (Malaysia) Berhad Think Asia. Think DKSH. Making business partners grow As the No. 1 Market Expansion Services provider in Malaysia, we help companies to grow their business in new and existing markets. > DKSH Holdings (Malaysia) Berhad: Annual Report 2018 Contents 2 Corporate information 63 Directors’ report 4 Management discussion and analysis 68 Statement by Directors 7 DKSH at a glance 68 Statutory declaration 7 Financial highlights 69 Independent auditors’ report 8 Corporate profile 74 Statements of comprehensive income 14 Directors’ profiles 75 Statements of financial position 21 Key Senior Management’s profiles 77 Statements of changes in equity 26 Corporate structure 79 Statements of cash flows 28 Corporate governance overview statement 82 Notes to the financial statements 39 Sustainability statement 142 Analysis of shareholdings 53 Statement on risk management and 145 Notice of Annual General Meeting internal control Proxy Form 56 Audit Committee report 59 Additional compliance information 62 Statement of Directors’ responsibility 1 > DKSH Holdings (Malaysia) Berhad: Annual Report 2018 Corporate information Board of Directors Stephen John Ferraby Non-Independent Non-Executive Chairman Lee Chong Kwee Senior Independent Non-Executive Director Datuk Haji Abdul Aziz bin Ismail Independent Non-Executive Director Chan Thian Kiat Independent Non-Executive Director Jason Michael Nicholas McLaren Non-Independent Executive Director/Group Finance Director Lian Teng Hai Non-Independent Non-Executive Director Audit Committee Lee Chong Kwee Chairman of the Audit Committee Datuk Haji Abdul Aziz bin Ismail Member Chan Thian Kiat Member Nominating Committee Lee Chong Kwee Chairman of the Nominating Committee Stephen John Ferraby Member Datuk Haji Abdul Aziz bin Ismail Member Registered office Address: B-11-01, The Ascent, Paradigm, Phone +60 3 7882 8888 No. 1, Jalan SS7/26A, Kelana Jaya, Fax +60 3 7882 8899 47301 Petaling Jaya, Selangor Darul Ehsan Auditors Ernst & Young, Chartered Accountants Phone +60 3 7495 8000 Address: Level 23A, Menara Milenium, Jalan Damanlela, Fax +60 3 2095 9076 / 2095 9078 Pusat Bandar Damansara, 50490 Kuala Lumpur Share registrar Tricor Investor & Issuing House Services Sdn. Bhd. Phone +60 3 2783 9299 Address: Unit 32-01, Level 32, Tower A, Fax +60 3 2783 9222 Vertical Business Suite, Avenue 3, Bangsar South, No. 8, Jalan Kerinchi, 59200 Kuala Lumpur Stock Exchange listing Listed on Bursa Malaysia Securities Berhad Stock name: DKSH (Main Market) since December 13, 1994 Stock code: 5908 Company Secretaries Lwee Wen Ling, MAICSA 7058065 Andre’ Chai P’o-Lieng, MAICSA 7062103 Principal bankers Deutsche Bank (Malaysia) Berhad HSBC Bank Malaysia Berhad Malayan Banking Berhad Public Bank Berhad MUFG Bank (Malaysia) Berhad Sumitomo Mitsui Banking Corporation Malaysia Berhad 2 Management discussion and analysis The management review of DKSH Holdings (Malaysia) Berhad and its subsidiaries (“the Group” or “DKSH”) outlines an in-depth analysis of the financial year 2018 and provides an outlook into DKSH’s further growth. > DKSH Holdings (Malaysia) Berhad: Annual Report 2018 Management discussion and analysis Marketing and Distribution segment For the Marketing and Distribution segment, the Group provides the full range of services along the value chain. The service portfolio ranges from marketing and sales, to distribution and logistics, invoicing and credit control, handling of inventory and trade returns and other value-added services. This segment comprises the Fast Moving Consumer Goods (“FMCG”) business and on a smaller scale, the Performance Materials business. The Marketing and Distribution segment recorded a growth in revenue of 7.6%, increasing from RM 2.6 billion to RM 2.8 billion. This growth was largely Jason Michael Nicholas McLaren contributed by new clients and organic Non-Independent Executive Director/Group Finance Director growth on existing clients, which in turn increases market share both for the Group and for our clients. Difficult market Revenue growth in challenging The Group successfully and seamlessly conditions were experienced during the conditions switched from Goods and Services Tax year, and as such there was an increase Despite challenging market conditions (“GST”) to the Sales and Service Tax in operating costs due to additional due to the unfavorable macro (“SST”) on September 1, 2018 with warehousing space and associated costs, environment, the Group’s net sales grew no business disruption. However, a tax and one-off expenses on a provision from RM 5.5 billion to RM 6.0 billion holiday after the abolishment of GST for doubtful debt and commencement in 2018, up 9.1% year-on-year. There prior to the implementation of SST and of growth and efficiency improvement was strong improvement in net sales the resulting uncertainty in consumer project. As a result, expense increases across all segments, with Healthcare, demand significantly impacted the were greater than the contribution of Telecommunications and Famous Amos Marketing and Distribution segment, as it increasing net sales and the operating businesses performing well. Growth is most susceptible to shifts in consumer result was down by 52.8%, from RM 45.7 continues to be driven by organic sentiment. million to RM 21.6 million. growth with existing clients, winning of new clients and strategic new business There were no significant adjustments This segment also contains the Group’s development. or fundamental shifts in the Group’s Performance Materials business that business focus during 2018. The results continued to perform well in 2018. Profit after tax is down by 14.4% from generally reflected the underlying RM 52.1 million to RM 44.6 million despite performance of the business given the With market conditions continuing to better sales due to change in margin mix, external economic environment, with be challenging and volatile, we are one-off expenses and slight increase in some impact from one-off expenses. cautiously optimistic on the outlook of cost base to support future growth. this segment, particularly as the consumer 4 > DKSH Holdings (Malaysia) Berhad: Annual Report 2018 Management discussion and analysis (continued) sentiment of the country is expected to this segment include the Healthcare Segment “Others” improve as political conditions stabilize. business and supply chain focused parts This segment consists most notably of The segment’s client portfolio remains of the Consumer Goods business. the Famous Amos chocolate chip cookie well-diversified both in terms of product retail chain, as well as unallocated central segment and balance of Malaysian, Asian Net sales for this segment increased by overheads including rental. and non-Asian products. 10.5% from RM 2.8 billion to RM 3.1 billion due to strong growth in both The Famous Amos business continued its The acquisition of Auric Pacific (M) Sdn the Healthcare and Telecommunications success in 2018 as the strategic focus on Bhd (“Auric Malaysia”) will contribute businesses. Healthcare continued to outlet profitability, geographic coverage, to growth as Auric Malaysia is benefit from rising healthcare spending and product portfolio delivered sales complementary to the existing business in Malaysia and the product portfolio growth of 9.9%, while total outlets of the DKSH Group with strengths in the was further optimized to meet the latest increased from 81 to 91 in Malaysia and food service and chilled and frozen foods market developments. Additionally, robust one new outlet in Brunei Darussalam. segments, as well as highly profitable growth was experienced in existing clients The strong sales growth, coupled with house brands, predominantly market while there was also a healthy contribution rigorous cost control led to an improved, leading butter brand SCS and market share from new business development, both strongly positive profit result. dominant melange product Buttercup. in terms of winning new clients and The complementary but similar nature of expanding portfolios with existing clients. The outlook for this segment is optimistic. businesses allows for DKSH Malaysia to This segment showed a strong operating The Group is confident that the current leverage on channel growth for existing result increase due to improved clients business strategy that resulted in strong clients in both businesses while realizing mix, stable costs and one-off effects of results in 2018 will continue to be cost savings through scale and efficiencies provision and debt recovery. Coupled with effective in 2019, but results will as in operations. the strong revenue growth, the operating always be sensitive to any downshift in result rose by 48.5%, from RM 32.8 consumer sentiment. The Group intends The Group is also undertaking an million to RM 48.7 million. to continue to strategically expand its efficiency and profitability improvement market reach and anticipates a net project in this segment which will increase The Telecommunications business increase in outlets during 2019. the operating cost in the first half of 2019. continued to grow very strongly as our However, this project will deliver sales key client continued to expand their Dividend optimization and cost efficiencies during network and take market share. The Group remains committed to rewarding 2019 and an ongoing improved cost base our shareholders through dividend and profitability in the long term. The outlook for this segment is payments and paid out a single tier interim optimistic