YONGNAM HOLDINGS LIMITED • ANNUAL REPORT 2005 ANNUAL REPORT YONGNAM HOLDINGS LIMITED • annual report 2005 YONGNAM HOLDINGS LIMITED 51 Tuas South Street 5, Tel: (65) 6758 1511 Singapore 637644 Fax: (65) 6758 0753 www.yongnam.com.sg [email protected] Contents 1 Corporate Profile • 2 Chairman’s Statement • 4 Board of Directors • 6 Key Executives 7 Corporate Information • 8 Operations Review • 12 Financial Highlights 13 Financial Contents YONGNAM HOLDINGS LIMITED :: Annual Report 2005 1 Corporate Profile Shaping the city skyline, adding structural and aesthetic value to buildings, laying solid foundations that give people the confidence to build upon – Yongnam aspires to be the name synonymous with such ideals. Steel is increasingly the material of choice for the construction of buildings and temporary support for deep excavations. The advantages of using steel over conventional material such as concrete for building construction are numerous. The higher speed of construction, superior material strength to volume ratio, flexibility in design and aesthetics are just some of the benefits of using steel. Yongnam excels in adding value to steel. Its steel fabrication experience has spanned more than 30 years. Together with production facilities in Malaysia, the Group has a total production capacity of 45,000 tons of steel fabrication. Its Singapore operations are housed at its mega-site in Tuas. The Group utilizes latest steel technologies to exploit innovative designs and methods. Yongnam’s technical and value engineering solutions for steel fabrication and erection have resulted in increased productivity, improved yield and lower costs. Furthermore, our in-house pool of experienced and qualified engineers, technicians, welders, riggers, fitters and detailers are consistently adding value to our clients’ project requirements. Yongnam is an ISO-9001:2000, IQNet qualified company and accredited SI classification from Singapore Structural Steel Society (“SSSS”). Its Quality Management System takes a planned approach towards continuous improvement of our products, processes and services to meet or exceed our customer’s expectations at all times. The most cost-effective methods of design, fabrication and installation are adopted in close consultation with our clients’ specific project needs, be it steel structures for buildings or strutting systems for deep excavation support requirements. The end results are steel structures that are meticulously designed, fabricated to exacting standards, and installed in the most safe and efficient manner, to the satisfaction of our clients. YONGNAM HOLDINGS LIMITED :: Annual Report 2005 2 Chairman’s Statement Results for the Group fell short of its forecast for the The construction of ORQ is nearly completed. The year ended 31 December 2005. The unexpected delays key project for year 2005, Fusionpolis at One-North in the Circle Line and Kallang/Paya Lebar Expressway is progressing well and we expect it to be near (KPE) projects hampered the Group’s recovery. In our completion before 2006 year end. The contract amount industry, delays in projects often result in margins for Fusionpolis is the highest for a single project in the being compressed due to irrecoverable overheads and history of our Group’s structural steel work projects. escalating costs. The Group’s also experienced great difficulty in hiring professionals such as engineers and Specialist Civil Engineering accountants, as well as skilled labour. Though the Board and management are disappointed by these Specialist Civil Engineering business registered revenue events, we remain confident that the Group’s future of $37.6 million, a decrease of 9% compared to $41.5 prospects are sound. million in 2004. Following the collapse of the Nicoll Highway in April 2004, the government had imposed The Group’s results for FY2005 were as follows: Group more stringent safety requirements, which caused the revenue was $81.4 million (2004: $63.6 million), Gross delay in the MRT Circle Line and Kallang-Paya Lebar profit was $15.7 million (2004: $15.5 million), Profit Expressway (KPE) projects. from operating activities was $4.9 million (2004: $10.6 million), Profit before tax was $0.7 million (2004: $7.4 Currently, about 86% of the C421 KPE work is million). completed. This contract, commenced in 2002 and scheduled to complete in October 2004, has been Overall gross profit percentage was adversely affected delayed. The estimated completion date is now end by change in sales mix arising from higher sales in 2006. Despite constrictions on the Group’s cash flows, the lower margins structural steelworks. The margins substantial variation works has been carried out due to were also considerably weakened by a number of low the inherent difficulties in executing such work along margins contracts committed in the past - especially the Kallang Basin. It is widely acknowledged that C421 projects in Hong Kong and Malaysia. KPE is an extremely complex and difficult project. The Group has not cut corners and indeed gone the extra Key highlights from the three business segments are mile to deliver safe and quality workmanship in its as follows: execution. In addition to the variation claims, the Group is seeking extension of time prolongation claims from Structural Steelworks client and owner. Revenue for Structural Steelworks saw an increase of Mechanical Engineering 71% from $21.9 million in 2004 to $37.4 million in 2005. Major projects which contributed to revenue The revenue for this sector jumped from a modest were: One Raffles Quay (ORQ), Fusionpolis, Changi $0.2 million in 2004 to $6.5 million in 2005. This is T3 Terminal, Tanjung Bin’s fabricated steel structure mainly contributed by the Tanjung Bin Power plant and Viviocity. Except for ORQ and Tanjung Bin, all project in Malaysia, which was secured in 2004 at a other projects revenues included steel as raw material very competitive rate. There are risks of cost escalation in the contract. This resulted in the steep increase in as productivity rates, particularly pertaining to ESP revenue. However, in such cases, margins would not mechanical erection falls below expectations. We are commensurate with the increase in revenue. also incurring additional costs to incorporate various YONGNAM HOLDINGS LIMITED :: Annual Report 2005 3 “Yongnam has entered 2006 with a strong order book and is poised to take advantage of market conditions.” method, design and engineering changes. We have decided With every project we complete, new lessons are learned. not to recognize the expected profits until the variations As a result of an internally driven review, improved risk are approved by clients. assessment measures will be applied to determine the viability of complex projects. Particular attention will be given to the customer’s preferred procurement route and A CHALLENGING YEAR- Despite facing many difficulties contract form. Also, the Group will focus on a number in project execution due to an increase in orders received, of larger structural steel projects such as the Marina we expect revenues to continue to grow in FY2006. We Bay Bridge, Bayfront development, the integrated resort have made good progress by improving our forward sales projects, Orchard Turn Mega Mall and the fully underground position. Our total order book is currently at a record high MRT downtown Extension / Coastal highway. of $180 million. We have taken firm action to simplify and strengthen our business structure and performance. We Moving forward, the focus for procuring new work will be have proven plans in place to execute our projects and on negotiated terms. The Group will also focus on delivering overhead cost savings. We expect to reap the benefits of the unexecuted order book contracts on time and within these actions in coming years - in particular, to recover our budgets. It will continue to further develop key strategic gross margins. relationships with subcontractors and to ensure reliable performance project delivery and prompt payment. In the medium term our business structure has retained the ability to grow. Our proprietary modular strutting system continues to grow from strength to strength. The group Corporate Governance has captured a large share of the current ongoing works at KPE C421, C423, and C424, and at the Circle Lines The Group recently welcomed on Board an additional C825, C851A, C853A, C854 and C855. Most consultants, independent director, Dr. Richard Liew. Following this contractors and authorities in Singapore have recognized appointment there will be three independent directors and the proven efficiency, safety and cost effectiveness of our five executive directors. Independent directors now chair strutting system. We will continue to enlarge and capitalize the Audit Committee, the Remuneration Committee and on our market leadership and dominance in the specialist the Nomination Committee. All directors are committed to civil engineering market, not only in Singapore but also in provide effective governance. the region. I would like to acknowledge with thanks the dedication In the last two years, the Group had been cautious in shown by the employees of the Group and the support given contract negotiation with regard to the raw material steel by our major banker, UOB. With enhancements to our risk prices. It was propitious that we have not been exposed to management procedures and strong underlying business rapidly rising world steel prices. Where customers preferred fundamentals, we are confident the Group can deliver to include steel