DRB-HICOM BE rh A D (203430-W) Performance Review Chairman’s Statement 25 Group Managing Director’s Review of Operations 30 • Automotive 31 • Services 39 • Property & Infrastructure 43 • Defence 47 24 A n n u A l R e p o R t 2 0 0 6 DRB-HICOM BE rh A D (203430-W) Chairman’s Statement DeAR ShAReholDeRS, It is my honour to present, on behalf of the Board of Directors, the Annual Report and the audited financial statements of DRB-HICOM Berhad for the financial year ended 31 March 2006. It gives me great pleasure to address you for the first time since my appointment as Chairman of DRB-HICOM Berhad on 28 October 2005. The financial year under review marked a period of change for the Group with the entry of a new controlling shareholder and a new Management team. As we turn a new chapter in the history of DRB-HICOM, much has already been achieved to take us into a period of long-term growth and sustainability. oveRview The theme of change and challenges presently form a common thread across corporate Malaysia. Today’s operating climate has become fiercely competitive and globalisation has become a primary imperative for the survival of most companies. The DRB-HICOM Group is keenly aware of the industry’s evolving landscape and competitive environment. Strategically, we are moving with greater agility to provide our list of growing customers with the widest breadth of products and services. Toward this end, DRB-HICOM is aggressively broadening its business platform by identifying and focusing on areas that hold the most promise. We have successfully enriched our product mix, forged new partnerships and strengthened existing alliances to build the Group’s presence in the domestic market. Ladies and gentlemen, The year under review was significant for many reasons, in particular the expansion of our defence business, which has emerged as a new pillar of growth for the Group. DRB-HICOM Defence Technologies Sdn. Bhd. A n n u A l R e p o R t 2 0 0 6 25 DRB-HICOM BE rh A D (203430-W) Chairman’s Statement (DEFTECH), which is spearheading the Group’s venture in the military car. DaimlerChrysler also widened its assembly operations in Pekan to business, has strengthened its position as the country’s leading land- include the Actros trucks and bus chassis. Another subsidiary, Automotive based supplier of defence vehicles. It secured its first overseas contract Manufacturers (Malaysia) Sdn. Bhd., began mass assembly of two new to supply 69 units of HICOM Handalan II to the Royal Brunei Armed models for Naza and expects to commence the assembly of the Suzuki Forces, and also 108 units of HICOM Handalan to the Malaysian Army. Swift model in 2007. The nation’s largest automotive distributor, Edaran DEFTECH is strategically positioned to tap regional markets to boost Otomobil Nasional Berhad (EON), remains committed to its core business, its exports and diversify its income base, and is expected to contribute as Super Dealer for Perusahaan Otomobil Nasional Berhad (PROTON) but significantly to DRB-HICOM Berhad’s revenue in the coming years. it has widened its reach in an effort to diversify and maximise its earnings potential. EON began distributing the Mitsubishi marque with the sales The roll-out of the country’s National Automotive Policy (NAP) in March of Colt, Lancer 1.6, Lancer Evo, L200, Grandis and Outlander models 2006 marked an exciting development for the industry and for DRB- in July 2005, and expects to boost its platform to include the Audi and HICOM Berhad which is the country’s single largest integrated automotive Hyundai Inokom brands. Another unit, Honda Malaysia Sdn. Bhd., marked company. The NAP offers immense opportunities for both local and a bumper year as sales hit a record high in 2005. It launched new models foreign automotive players to enhance and deepen their foothold in and expanded exports of its Constant Velocity Joint (CVJ) components to Malaysia, which remains the top passenger car market in Southeast Asia. the United Kingdom and Turkey in September 2005. Companies under the Group’s automotive sector stand to benefit from incentives to enhance local capabilities, increase exports and promote The Group’s Services sector also turned in an encouraging performance, automotive components and parts manufacturing. generating RM1.3 billion for the year under review, contributing 37% to the Group’s total revenue. Companies within this segment expanded The NAP has also earmarked Pekan, Pahang, as one of five automotive their scope with new branches and products, implemented continuous hubs in the country. This will be a strong impetus to attract foreign cost-cutting measures and leveraged on new technologies to boost investors to assemble their vehicles in Pekan, particularly in the Group’s operational efficiency to tide through a difficult operating climate. plant. Despite a tough marketplace characterised by stiff competition, the automotive sector remained the Group’s No. 1 revenue earner, Meanwhile, the Group’s Property and Infrastructure sector was resilient contributing RM2.1 billion for the financial year ended 31 March 2006, despite a second year of construction slump. The Group repositioned and accounting for 58% of total Group revenue. its hotel in Glenmarie as the “Holiday Inn Glenmarie Kuala Lumpur” in October 2005 while its Rebak Marina Resort in Langkawi will be During the year, the Group expanded its product line-up and built its branded as a “Taj Hotel” in November 2006 after refurbishing works multi-brand business for Honda, Suzuki, India’s Mahindra and Mahindra, are completed. The Proton City project, the Group’s largest property Chevrolet and Isuzu. Its assembly plant in Pekan received a further development project, expanded rapidly during the year with residential boost following the appointment of Malaysian Truck & Bus Sdn. Bhd. and commercial development activities and is on track to evolve into a as the first assembler in Asia for the new S-Class Mercedes luxury self-sufficient township. 26 A n n u A l R e p o R t 2 0 0 6 DRB-HICOM BE rh A D (203430-W) FinAnciAl highlightS where the effects of the global economic pendulum and other external For the financial year under review, DRB-HICOM has taken proactive factors have affected us, but we have bounced back with renewed zeal measures to review its overall operations, assets and investments, with and enthusiasm and expect to do so again. The losses incurred mainly the aim of realigning its core businesses and to focus on the way forward. reflect an adjustment to values and do not have impact on DRB-HICOM’s In assessing its long-term business strategy, DRB-HICOM has made cash-flow position. Hence, DRB-HICOM has recommended a first and final certain adjustments for non-operational items that have impacted the gross dividend of 2 sen per share for the financial year under review. Group’s earnings. As a result, DRB-HICOM Group incurred a loss before tax of RM134 million for the financial year ended 31 March 2006, on the back of revenue of RM3.5 billion. Key initiAtiveS DRB-HICOM is pleased to reach an amicable settlement with the Government A significant portion of the losses was due to reversal of profits amounting on the Electrified Double Track Project variation orders in May 2006. to RM149.5 million that were previously recognised in respect of the DRB-HICOM is thankful that the long-drawn episode has obtained the Electrified Double Track (EDT) Project. The Group has also wrote-off support and understanding of the Government, the relevant Ministries, preliminary expenses in respect of others sectors of the EDT Project authorities and KTMB. We record our appreciation to the consultants and totalling RM19 million. The Group also took cognisance of asset sub-contractors for their patience and understanding. impairment on its non-core property investments namely Rebak Marina Resort in Langkawi, Kenyir Lakeview Resort in Terengganu and Tekka DRB-HICOM has also taken aggressive measures to improve its future Mall in Singapore. The impairment charge of RM157 million arose from landscape. The Group, through its wholly owned subsidiary DRB-HICOM differences in existing net book values and the estimated current market Auto Solutions Sdn. Bhd., has now obtained Approved Permits (AP) to price of the above properties. In addition, DRB-HICOM had undertaken a directly import all makes and models of vehicles for the Group’s franchise Voluntary Separation Scheme (VSS) in March 2006 at the Corporate Office and distribution. Steps have been taken to manage our operational costs costing RM22 million as part of efforts in rightsizing its human capital. and trim excesses to create a leaner and more efficient organisation. We continue to tap on technological advancements to increase our work Had these prudent measures and adjustments not been taken, the competency and boost our yields. We have completed our IT Business DRB-HICOM Group would have recorded an operational profit before tax Continuity Planning programme that allows us to handle any disaster of RM214 million for the financial year under review. affecting our IT infrastructure and ensuring stability in the Group’s operations. We also successfully implemented the Corporate Secretarial Overall, the headline result is not reflective of the Group’s activities and Information System that will significantly boost efficiency in generating underlying business improvement that occurred during the year. We see and retrieving forms, documents and information as well as showing the overall Group loss as a bump along the road and remain confident greater transparency. of overcoming this fairly rapidly. We have had a history of turbulences A n n u A l R e p o R t 2 0 0 6 27 DRB-HICOM BE rh A D (203430-W) Chairman’s Statement humAn ReSouRce Development basic home facilities for flashflood victims in Shah Alam.