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annual report 2014 39 th annual general meeting Menara Hap Seng Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Thursday, 4 June 2015 at 10am. Contents Hap Seng Consolidated Berhad | Annual Report 2014 16 Chairman's Statement 81 Financial Statements 75 Corporate Social Responsibility 2 Corporate Information 3 Directors' Profile 13 Group Financial Highlights Chairman's Statement Review of Operations Statement on Corporate Governance Statement on Risk Management and Internal Control 65 Board Committees 16 22 47 59 75 Corporate Social Responsibility 81 217 219 221 223 224 227 229 230 Financial Statements Additional Information Particulars of Top Ten Properties of the Group Plantation Statistics Share Buy-Backs Summary Analysis of Shareholdings Analysis of Warrantholdings Directors' Shareholdings Notice of Annual General Meeting Proxy Form Hap Seng Consolidated Berhad | Annual Report 2014 Corporate Information BOARD OF DIRECTORS Lt. Gen. (R) Datuk Abdul Aziz Bin Hasan Independent Non-Executive Director Dato' Jorgen Bornhoft Independent Non-Executive Chairman Datuk Edward Lee Ming Foo, Managing Director JP Dato' Mohammed Bin Haji Che Hussein Independent Non-Executive Director Lee Wee Yong Executive Director Tan Ghee Kiat Independent Non-Executive Director Cheah Yee Leng Executive Director Ch'ng Kok Phan Non-Independent Non-Executive Director Datuk Simon Shim Kong Yip, JP Non-Independent Non-Executive Director 2 Company Secretaries Lim Guan Nee (MAICSA 7009321) Quan Sheet Mei (MIA 6742) Registered Office 21st Floor, Menara Hap Seng, Jalan P Ramlee . 50250 Kuala Lumpur Tel : 603-2172 5228 Fax : 603-2172 5286 Website\t: www.hapseng.com.my E-mail : inquiry@hapseng.com.my Place of Incorporation Malaysia Share Registrar Symphony Share Registrars Sdn Bhd (378993-D) Level 6, Symphony House, Pusat Dagangan Dana 1 Jalan PJU 1A/46, 47301 Petaling Jaya Tel : 603-7841 8000 Fax : 603-7841 8151 / 8152 Auditors Ernst & Young (AF:0039) Chartered Accountants Level 23A, Menara Milenium Jalan Damanlela, Pusat Bandar Damansara 50490 Kuala Lumpur Principal Bankers Malayan Banking Berhad DBS Bank Ltd HSBC Bank Malaysia Berhad Hong Leong Bank Berhad AmBank (M) Berhad Affin Bank Berhad RHB Bank Berhad OCBC Bank (Malaysia) Berhad Group Hap Seng Consolidated Berhad together with its subsidiaries Hap Seng Consolidated Berhad | Annual Report 2014 Directors' Profile Dato' Jorgen Bornhoft Independent Non-Executive Chairman Dato' Jorgen Bornhoft, a Dane, aged 73, is the independent non-executive chairman of Hap Seng Consolidated Berhad. He was first appointed to the Board as an independent non-executive director on 24 January 2005 and became the chairman on 1 February 2007. He is also the chairman of the Audit Committee, Remuneration Committee and Nominating Committee. In addition, Dato' Bornhoft is an independent nonexecutive director of Hap Seng Plantations Holdings Berhad, the Company's subsidiary listed on the Main Market of Bursa Malaysia Securities Berhad. He is a non-independent non-executive director of Fraser & Neave Holdings Bhd and also the vice-chairman of International Beverage Holdings Limited. Dato' Bornhoft holds a degree in Accountancy and Finance (Bachelor of Commerce) from the Copenhagen Business School and attended executive management courses at INSEAD. Dato' Bornhoft joined Carlsberg Brewery Malaysia Berhad (Carlsberg Malaysia) in 1991 as its chief executive officer, and assumed the position of managing director from 1995 to 2002, after which he was the chairman from 2002 to 2005. He re-joined the board of Carlsberg Malaysia as a non-executive director from 2006 to 2007. He also assumed the position as the chief executive officer of Carlsberg Asia Pte Ltd in Singapore from January 2003 to June 2004. Prior to him joining Carlsberg Malaysia, he was the vice-president of Carlsberg International A/S, Denmark responsible for foreign subsidiaries and new projects. Dato' Bornhoft does not have any family relationship with any director and/or major shareholder nor does he have any conflict of interests with the Company save for the related party transaction disclosed in Note 38 to the Financial Statements. He has not been convicted of any offence in the past 10 years. He attended all the 5 board meetings held during the financial year ended 31 December 2014. 3 Hap Seng Consolidated Berhad | Annual Report 2014 Directors' Profile Datuk Edward Lee Ming Foo, JP Managing Director 4 Datuk Edward Lee Ming Foo, JP, a Malaysian, aged 60, is the managing director of Hap Seng Consolidated Berhad. He was first appointed to the Board on 1 November 2000 as a non-independent non-executive director, became an executive director on 25 March 2002 and assumed the current position since 31 March 2005. He is also a member of the Remuneration Committee. In addition, Datuk Edward Lee is the managing director of both Gek Poh (Holdings) Sdn Bhd (Gek Poh) and Hap Seng Plantations Holdings Berhad. Gek Poh is the holding company of Hap Seng Consolidated Berhad. Datuk Edward Lee graduated with a degree in Bachelor of Arts from the McMaster University in Canada in 1977. He joined the Malaysian Mosaics Sdn Bhd (formerly Malaysian Mosaics Berhad) group of companies in 1980, became the group chief operating officer in 1995 and was the managing director from 31 March 2005 to 31 January 2007. Datuk Edward Lee does not have any family relationship with any director and/or major shareholder nor does he have any conflict of interests with the Company save for the related party transactions disclosed in Note 38 to the Financial Statements. He has not been convicted of any offence in the past 10 years. He attended all the 5 board meetings held during the financial year ended 31 December 2014. Hap Seng Consolidated Berhad | Annual Report 2014 Directors' Profile Lee Wee Yong Executive Director Lee Wee Yong, a Malaysian, aged 67, is an executive director of Hap Seng Consolidated Berhad and was appointed to this position on 2 February 2011. In addition, Mr. Lee is a director of Gek Poh (Holdings) Sdn Bhd and an executive director of Hap Seng Plantations Holdings Berhad. Mr. Lee holds a degree in Bachelor of Commerce and Administration from Victoria University in New Zealand and is a member of the Malaysian Institute of Accountants and Institute of Chartered Accountants of New Zealand. He joined Malaysian Mosaics Sdn Bhd (formerly Malaysian Mosaics Berhad) group of companies in 1992, assumed the position of group chief financial officer from 1 March 2003 to 15 December 2005, and was an executive director from 1 March 1999 to 6 March 2007. Mr. Lee does not have any family relationship with any director and/or major shareholder nor does he have any conflict of interests with the Company. He has not been convicted of any offence in the past 10 years. He attended all the 5 board meetings held during the financial year ended 31 December 2014. 5 Hap Seng Consolidated Berhad | Annual Report 2014 Directors' Profile CHEAH YEE LENG Executive Director 6 Cheah Yee Leng, a Malaysian, aged 46, is an executive director of Hap Seng Consolidated Berhad and was appointed to this position on 1 June 2014. Ms. Cheah joined Hap Seng Consolidated Berhad group of companies in 1997 and is presently its Corporate Affairs Director. She is also the Group Company Secretary of Hap Seng Plantations Holdings Berhad and a non-independent nonexecutive director of Paos Holdings Berhad. Ms. Cheah holds a Bachelor of Economics Degree and Bachelor of Laws Degree from Monash University in Australia. Ms. Cheah does not have any family relationship with any director and/or major shareholder nor does she have any conflict of interests with the Company. She has not been convicted of any offence in the past 10 years. She attended all the 2 meetings held subsequent to her appointment to the board on 1 June 2014 during the financial year ended 31 December 2014. Hap Seng Consolidated Berhad | Annual Report 2014 Directors' Profile Datuk Simon Shim kong Yip, JP Non-Independent Non-Executive Director Datuk Simon Shim Kong Yip, JP, a Malaysian, aged 58, is a non-independent non-executive director of Hap Seng Consolidated Berhad and was appointed to this position on 16 February 1996. He is also a member of the Audit Committee, Remuneration Committee and Nominating Committee. In addition, Datuk Simon Shim was appointed as a non-independent non-executive director of Hap Seng Plantations Holdings Berhad on 9 August 2007 and became the deputy chairman on 23 February 2015. He is also an independent non-executive director of Lam Soon (Thailand) Public Company Limited, a company listed on the Stock Exchange of Thailand. Datuk Simon Shim is a director of both Lei Shing Hong Limited and Lei Shing Hong Securities Limited. Lei Shing Hong Securities Limited, a company registered with the Securities and Futures Commission Hong Kong, is a wholly-owned subsidiary of Lei Shing Hong Limited, a company incorporated in Hong Kong. Datuk Simon Shim is the managing partner of Messrs Shim Pang & Co. He holds a Master Degree in law from University College London, London University and is a Barrister-at-law of the Lincoln's Inn, London, an Advocate and Solicitor of the High Court in Sabah and Sarawak, a Notary Public and a Justice of the Peace in Sabah. He is a Chartered Arbitrator and a Fellow of both the Chartered Institute of Arbitrators, United Kingdom and the Malaysian Institute of Arbitrators. He was a member of the Malaysian Corporate Law Reform Committee and its working group on Corporate Governance and Shareholders' Rights. Datuk Simon Shim does not have any family relationship with any director and/or major shareholder nor does he have any conflict of interests with the Company save for the related party transactions disclosed in Note 38 to the Financial Statements. He has not been convicted of any offence in the past 10 years. He attended all the 5 board meetings held during the financial year ended 31 December 2014. 7 Hap Seng Consolidated Berhad | Annual Report 2014 Directors' Profile Lt. Gen. (R) Datuk Abdul Aziz Bin Hasan Independent Non-Executive Director 8 Lt. Gen. (R) Datuk Abdul Aziz Bin Hasan, a Malaysian, aged 69, is an independent non-executive director of Hap Seng Consolidated Berhad. He was first appointed to the Board on 24 September 2003 as a non-independent non-executive director and was subsequently re-designated as an independent non-executive director on 29 November 2012. Currently, Datuk Abdul Aziz is a non-independent non-executive director of NCB Holdings Berhad and its audit committee, an independent nonexecutive director of Nam Fatt Corporation Berhad (in liquidation) and Pyrotechnical Ordinance (M) Sdn Bhd, a subsidiary of Boustead Heavy Industries Corporation Berhad. Datuk Abdul Aziz started his career in the Malaysian Army since 1964 and retired in 2001 as Deputy Chief of Army. Upon retirement from 2001 to 2002, he was an executive director of Arsenal Industries (M) Sdn Bhd, a subsidiary of Penang Shipyard and Construction Industries. He was also a director of Jotech Holdings Berhad from 2001 to 2006, Konsortium Muhibbah Engineering/Lembaga Tabung Angkatan Tentera from 2001 to 2007 and Transnational Insurance Brokers Sdn Bhd from 2003 to 2010. He was the chairman of Tien Wah Press Holdings Berhad and its audit committee from 2000 to 2005, the chairman of Tabung Haji Plantations Sdn Bhd and its audit committee from 2002 to 2005 as well as the chairman of Hospital Pusrawi Sdn Bhd and a member of its audit committee from 2008 to 2012. Datuk Abdul Aziz holds a Bachelor of Social Science degree with Honours from USM (1981), a Masters in Business Administration from UKM (1986) and a Diploma in Islamic Studies from UKM (1987). He also completed the Wolfson Programme in Wolfson College, University of Cambridge in 1992. Datuk Abdul Aziz does not have any family relationship with any director and/or major shareholder nor does he have any conflict of interests with the Company. He has not been convicted of any offence in the past 10 years. He attended all the 5 board meetings held during the financial year ended 31 December 2014. Hap Seng Consolidated Berhad | Annual Report 2014 Directors' Profile dato' mohammed hussein Independent Non-Executive Director Dato' Mohammed Hussein, a Malaysian, aged 64, is an independent non-executive director of Hap Seng Consolidated Berhad and was appointed to this position on 15 July 2008. He is also a member of the Audit Committee and Nominating Committee. Dato' Mohammed graduated with a degree in Bachelor of Commerce (Accounting) from the University of Newcastle, Australia in 1971 and completed the Harvard Business School Advanced Management Program in Boston, USA in 2003. Dato' Mohammed is the independent non-executive chairman of Gamuda Berhad and Danajamin Nasional Berhad. In addition, he is also a director of PNB Commercial Sdn Bhd and a member of the Corporate Debt Resolution Committee sponsored by Bank Negara Malaysia to facilitate resolution and restructuring of major corporate debts. Prior to 31 March 2015, Dato' Mohammed was the non-independent non-executive chairman of Quill Capita Management Sdn Bhd which manages Quill Capita Trust, a real estate investment trust listed on the Main Market of Bursa Malaysia Securities Berhad. During his 31-year career with the Malayan Banking Berhad (Maybank) group, Dato' Mohammed was a member of the senior management committee for 20 years to catalyze the progression of Maybank into Malaysia's leading financial services group. The various senior management positions he held include Head of Corporate Banking, Head of Commercial Banking, Head of Malaysian Operations, Head of Investment Banking Group, Executive Director (Business Group). Prior to his retirement in January 2008, he was the deputy president/executive director/chief financial officer. He is also an independent non-executive director of Bank of America Malaysia Berhad and CapitaCommercial Trust Management Ltd which manages CapitaCommercial Trust, a real estate investment trust listed on the Singapore Stock Exchange. Dato' Mohammed does not have any family relationship with any director and/or major shareholder nor does he have any conflict of interests with the Company. He has not been convicted of any offence in the past 10 years. He attended 4 of the 5 board meetings held during the financial year ended 31 December 2014. 9 Hap Seng Consolidated Berhad | Annual Report 2014 Directors' Profile TAN GHEE KIAT Independent Non-Executive Director 10 Tan Ghee Kiat, a Malaysian, aged 66, is an independent non-executive director of Hap Seng Consolidated Berhad and was appointed to this position on 1 January 2011. Prior to this, he was a non-executive director of the Company from 31 December 2002 to 31 January 2007. He is also a member of the Audit Committee. Mr. Tan has more than 30 years of experience in audit and corporate advisory services. He is a fellow member of the Institute of Chartered Accountants in England & Wales as well as a member of both the Malaysian Institute of Accountants and the Malaysian Institute of Certified Public Accountants. He is a partner in Sekhar & Tan, a firm of chartered accountants which he founded in 1993 after he left Deloitte, Touche & Tohmatsu, Malaysia. He is a director of Prestige Jaya Labuan Limited and also a trustee of Yaw Teck Seng Foundation and Dijaya Tropicana Foundation. Mr. Tan does not have any family relationship with any director and/or major shareholder nor does he have any conflict of interests with the Company. He has not been convicted of any offence in the past 10 years. He attended all the 5 board meetings held during the financial year ended 31 December 2014. Hap Seng Consolidated Berhad | Annual Report 2014 Directors' Profile CH'NG KOK PHAN Non-Independent Non-Executive Director Ch'ng Kok Phan, a Malaysian, aged 64, is a nonindependent non-executive director of Hap Seng Consolidated Berhad and was appointed to this position on 1 June 2014. Mr. Ch'ng has over 30 years of senior management experience in the automotive industry and has worked in several Asian countries. He has been with the Lei Shing Hong group of companies for more than 18 years. He is also the chairman of Lei Shing Hong Auto (China) Management Co. Ltd. In addition, Mr. Ch'ng is also an executive director of Lei Shing Hong Limited, a company incorporated in Hong Kong. Mr. Ch'ng does not have any family relationship with any director and/or major shareholder nor does he have any conflict of interests with the Company. He has not been convicted of any offence in the past 10 years. He attended all the 2 meetings held subsequent to his appointment to the board on 1 June 2014 during the financial year ended 31 December 2014. 11 Hap Seng Consolidated Berhad | Annual Report 2014 group financial highlights INCOME (RM'000) (i) Revenue (ii) Profit before tax (iii) Profit attributable to Owners of the Company FINANCIAL YEAR ENDED 31 December 2010 2011 2012 2013 2014 2,789,410 506,350 325,026 3,628,380 636,894 377,497 3,958,899 681,579 427,104 3,486,747 801,581 588,257 3,768,049 1,024,625 753,467 Assets (i) Total tangible assets (ii) Net assets (iii) Current assets 5,359,060 2,591,243 1,904,502 6,797,298 6,634,122 3,300,341 3,410,037 3,049,349 2,692,028 7,071,373 3,353,874 3,065,574 7,748,832 3,951,775 3,303,173 Liabilities and Shareholders' Funds (i) Current liabilities (ii) Paid-up share capital (iii) Shareholders' funds 1,509,219 622,660 2,591,243 1,634,653 2,186,357 3,300,341 1,728,966 2,186,364 3,410,037 2,214,740 2,205,709 3,353,874 2,476,372 2,226,779 3,951,775 19.79 1.61 10.50 28.70 1.68 16.00 36.67 1.85 25.00 1,993,085 2,158,584 2,049,324 2,054,505 563,524 a 2,180,927 d 2,113,108 2,001,678 2,137,597 6.06 12.54 1.26 0.74 0.66 5.55 11.44 1.87 0.77 0.57 6.44 12.52 1.56 0.66 0.51 8.32 17.54 1.38 0.74 0.56 9.72 19.07 1.33 0.66 0.54 FINANCIAL POSITION (RM'000) Key data PER SHARE (i) Basic earnings (sen) * (ii) Net assets (RM) ** (iii) Dividend (sen) * Based on weighted average number of shares in issue net of treasury shares ('000) ** Based on number of shares in issue net of treasury shares ('000) FINANCIAL RATIOS (i) Return on total tangible assets (%) (ii) Return on shareholders' funds (%) (iii) Current ratio (times) (iv) Gearing ratio (times) (v) Net gearing ratio (times) e 17.92 4.60 8.80 b a 1,813,525 a 18.94 1.51 8.60 c Notes: a Restated to reflect the retrospective adjustments arising from the bonus issue and rights issue completed in the financial year ended 31.12.2011 in accordance to \"FRS 133, Earnings per Share\". b Restated to reflect the retrospective adjustments arising from the bonus issue completed during the financial year ended 31.12.2011. c Dividend per share for the financial year ended 31.12.2011 was on the enlarged share capital after the private placement, bonus issue and rights issue. d Includes private placement of 43,800,000 shares, bonus issues of 1,214,643,000 and rights issue of 364,392,900 shares. e Net gearing ratio is computed after deducting money market deposits and cash and bank balances. 13 Hap Seng Consolidated Berhad | Annual Report 2014 group financial highlights Dividend Per Share (sen) Shareholders'Funds (RM'000) 2014 25.00 2013 2012 10.50 3,353,874 3,410,037 2011 8.60 2011 2010 14 3,951,775 2013 16.00 2012 2014 8.80 2010 Current Ratio (times) 2014 2,591,243 Net Gearing Ratio (times) 2014 1.33 2013 2013 1.38 2012 2012 1.56 2011 2010 3,300,341 1.87 1.26 2011 2010 0.54 0.56 0.51 0.57 0.66 Hap Seng Consolidated Berhad | Annual Report 2014 group financial highlights Revenue (RM'000) Profit Before Tax (RM'000) 2014 3,768,049 2013 3,486,747 2012 3,958,899 2011 3,628,380 2010 7,748,832 6,797,298 Net Assets 506,350 36.67 1.85 1.61 2010 2010 Total Tangible Assets 636,894 28.70 1.68 2011 2011 2,591,243 2011 2012 2012 6,634,122 5,359,060 681,579 2013 2013 7,071,373 3,300,341 801,581 2012 2014 2014 3,410,037 2013 Basic Earnings Per Share/Net Assets Per Share Total Tangible Assets/Net Assets (RM'000) 3,353,874 1,024,625 2010 2,789,410 3,951,775 2014 1.51 19.79 18.94 17.92 4.60 Basic Earnings Per Share (sen)1 Net Assets Per Share (RM)2 Notes: 1 Basic earnings per share for the financial year ended 31.12.2010 has been restated to reflect the retrospective adjustments arising from the bonus issue and rights issue completed in the financial year ended 31.12.2011 in accordance to \"FRS 133, Earnings per Share\". 2 Net assets per share were computed based on the number of shares in issue net of treasury shares ('000) as follows: Financial year ended 31.12.2010 : 563,524 shares Financial year ended 31.12.2013 : 2,001,678 shares Financial year ended 31.12.2011 : 2,180,927 shares Financial year ended 31.12.2014 : 2,137,597 shares Financial year ended 31.12.2012 : 2,113,108 shares 15 Hap Seng Consolidated Berhad | Annual Report 2014 chairman's statement DEAR SHAREHOLDERS, It gives me much pleasure to report to you another year of record performance by your Company despite the challenging business environment of 2014. The Group's profit after tax increased 28% to RM816.3 million (2013: RM635.8 million) which translated to a corresponding 28% increase in earnings per share to 36.67 sen (2013: 28.70 sen). 16 Dato' Jorgen Bornhoft Independent Non-Executive Chairman rm816 million Profit After Taxation 36.67 sen Earnings Per Share 28% Net Earnings Growth Hap Seng Consolidated Berhad | Annual Report 2014 chairman's statement 2014 Economy Overview On reflection, 2014 was a volatile year underpinned by the subdued and uneven global economic recovery. Amongst others, the plummeting Brent crude prices by almost 50% in the final quarter, depreciating currencies of the emerging economies and ringgit being the second worst-performing currency in Asia. The better-than-forecast recovery in the United States contributed to the outflows of foreign funds from emerging markets. A slower economic growth in China, being Malaysia's second largest export market, also limited the nation's export growth. Against the odds, Malaysia grew at 6% in 2014 (2013: 4.7%), among the strongest in the region, and driven principally by strong domestic demand and resilient exports. 2014 FINANCIAL RESULTS On the back of higher profit after tax and earnings per share, the Company increased its dividend payout for the year to 25 sen per share (2013: 16 sen). 17 Business Divisions Overview Plantations Despite the volatile crude palm oil (CPO) prices (ranging from RM2,144 per tonne to RM2,855 per tonne) and the challenging operating environment, the division recorded an improved average CPO price realisation of RM2,386 per tonne (2013: RM2,343 per tonne) and a much higher average palm kernel price realisation at RM1,654 per tonne (2013: RM1,288 per tonne). The improved CPO price realisation was comparable to the average CPO price realisation for Sabah at RM2,404 per tonne. Coupled with the increase in the CPO sales volume at 170,506 tonnes (2013: 161,170 tonnes), the division registered a higher operating profit at RM179.0 million (2013: RM140.6 million). PROPERTY HOLDING AND DEVELOPMENT Revenue and operating profit of the division grew to RM932.1 million (2013: RM527.5 million) and RM705.3 million (2013: RM255.8 million) respectively, mainly due to higher value unlocked from ongoing projects, fair value gains adjustments relating to investment properties and gains from the sale of certain non-core assets. In the Klang Valley, the division launched its low-density gated and guarded Andana residential development in Puchong South. D'Alpinia Business Park, an upscale commercial development next to the Andana development, was also launched. Both launches enjoyed brisk sales with more than 50% sold. Hap Seng Consolidated Berhad | Annual Report 2014 chairman's statement Menara Hap Seng 2 is a new distinctive landmark in the central business district of Kuala Lumpur. CREDIT FINANCING Benefitting from robust financing activities by small and medium enterprises (SMEs), the gross loan base and operating profit of the division grew to RM1.9 billion (2013: RM1.7 billion) and RM104.1 million (2013: RM91.5 million) respectively. Premised on disciplined lending practices and vigilant monitoring, credit risks remained comfortable. The division's gross non-performing loans ratio improved to 0.91% in 2014 (2013: 1.44%) which compared favourably with the industry average non-performing loans ratio of 1.66%. 18 The division's luxury service residence developments in the Klang Valley continued to generate strong interests, with limited units left for the Horizon Residences and more than 70% take-up rate recorded for Nadi Bangsar Service Residences. In Sabah, the division continued with its development in Astana Heights in Sandakan, Bandar Seri Indah in Tawau and Palm Heights in Lahad Datu. These three developments have continued to generate strong demand. Occupancy rates of Menara Hap Seng and Menara Citibank remained strong at 97% and 99% respectively. During the year, the division also attained another milestone with the launch of its new Grade A, Green Building Index-certified corporate office and retail building, Menara Hap Seng 2. Standing tall at 31 storeys, Menara Hap Seng 2 is a new distinctive landmark in the central business district of Kuala Lumpur. Hap Seng Consolidated Berhad | Annual Report 2014 chairman's statement 19 The launches of several highly-anticipated Mercedes models generated immense interests. AUTOMOTIVE The division turned around during the period with an operating profit of RM10.5 million against a RM18.1 million loss in the previous year. The launches of several highly-anticipated Mercedes models, namely the new flagship S-Class, the new C-Class and two brand new A-segment models, the CLA and GLA, generated immense interests. As a result, the division recorded a higher sales volume at 2,310 units (2013: 1,976 units) and a 32% market share in Malaysia. During the year, our Mercedes-Benz Autohaus in Kinrara, Puchong was appointed a dealer for \"Fuso\" trucks in West Malaysia, which further enhances its range of vehicles. In addition, the division continued to build its presence in the Mercedes-Benz commercial vehicles segment. Hap Seng Consolidated Berhad | Annual Report 2014 chairman's statement 20 FERTILIZERS TRADING In Malaysia, the division recorded a lower revenue at RM729.5 million (2013: RM861.5 milllion) due to softer global fertilizers prices. In Indonesia, the division scaled back its operations largely due to the weakness and extreme volatility of the rupiah. Notwithstanding the lower revenue, the division registered a higher operating profit at RM71.1 million as against a loss of RM8.2 million in the previous year. This was attributable to improved gross profit margins and one-off gains from the sale of certain non-core fixed assets. QUARRY AND BUILDING MATERIALS Due to overall weaker market demand and new quarries related start-up costs, the division recorded lower operating profit at RM16.9 million (2013: RM17.9 million). TRADING The division recorded a higher operating profit at RM23.9 million (2013: RM6.6 million) due to higher profit margin products and gains from sale of non-core fixed assets. SIGNIFICANT EVENTS IN AND SUBSEQUENT TO 2O14 On 27 June, 2014, the Group completed the disposal of various parcels of land with no immediate development potential in Sabah for RM278 million. This resulted in a gain of RM199.5 million to the Group. In February 2015, the Group completed the acquisition of the 51% equity in the Singapore-listed Hafary Holdings Limited (Hafary) for S$52.5 million. Hap Seng Consolidated Berhad | Annual Report 2014 chairman's statement As announced on 11 March 2015, as part of the Group's strategies to focus its credit business in Malaysia, the Company proposed to dispose of its credit business in Singapore for RM640.8 million, which if completed, would give rise to a gain of RM513.2 million. Meanwhile, the Company also proposed to acquire a purpose-built 14-storey green commercial building in Kota Kinabalu for RM395 million to strengthen its prominence in the property market in Sabah, East Malaysia. The Company will be seeking its shareholders' approval in the forthcoming extraordinary general meeting. ENHANCING SHAREHOLDER VALUE The Company is committed to creating and enhancing shareholder value. Accordingly, in line with the dividend payout policy, the Board is pleased to report that the Group had declared and paid two interim dividends totalling 25 sen per share for 2014 (2013: 16 sen). The Group is also seeking approval to renew its share buyback mandate in the best interests of all shareholders. This will undoubtedly increase shareholder value. 2015 OUTLOOK 2015 is expected to be another challenging year for the Malaysian economy which is susceptible to movements of crude oil prices and ringgit against its major trading partners. Recent consecutive interest rate cuts in China are also suggestive of a slowing Chinese economy, which may be a limiting factor to Malaysia's export growth. On a positive note, ringgit depreciation is likely to improve Malaysia's export competitiveness. The weaker ringgit may also increase foreign direct investments into Malaysia due to lower costs of doing business. The inflationary pressure associated with the 6% GST may to some extent be offset by lower crude oil prices and energy costs. The recovering CPO price trend in the later part of 2014 may continue into the early part of 2015, primarily due to anticipated lower production occasioned by dry weather in Malaysia and Indonesia. Such trend may be curtailed by the potential oversupply of vegetable and soybean oils going forward. Notwithstanding the various property cooling measures, the Group is cautiously optimistic that demand for highvalue and strategically-located residential properties in the Klang Valley may remain intact. In Sabah, the division will continue to focus on affordable housing segment which is less impacted by such cooling measures. Construction activities remain important to the Malaysian economy. Indeed, with the impending implementation of the 11th Malaysia Plan and the various government transformation programmes, the resurgent activity bodes well for our Quarry and Building Materials division. The buying momentum sparked by the various new Mercedes-Benz models launched in 2014 is expected to extend into 2015, notwithstanding the competitive environment in the premium car segment. The Credit Financing Division will continue to grow its loan base, largely to be driven by the SMEs whilst exercising prudent lending policies. Meanwhile, the Trading Division will seek to expand its product range as well as to focus on highermargin products. As for the Fertilizers Trading, the Group will focus on growing its market share in Malaysia while trimming the exposure in Indonesia. ACKNOWLEDGEMENTS In conclusion, I would like to express my sincere thanks to the management and all our staff for their significant contributions to the Group over the years. My heartfelt appreciation also goes to the Board for its wise counsel and guidance. And many thanks too, to our shareholders, business partners, clients, suppliers and other stakeholders for their unyielding confidence in the Group. Let me also take this opportunity to welcome our two new board members, Ms Cheah Yee Leng and Mr Ch'ng Kok Phan who bring with them a wealth of knowledge and experience. Jorgen Bornhoft 21 Hap Seng Consolidated Berhad | Annual Report 2014 rEVIEW OF OPERATIONS plantations Palm oil industry review Hap Seng Plantations Holdings Berhad (Plantation Division) is an oil palm plantation company listed on Bursa Malaysia. The plantation division is primarily made up of three contiguous plots of plantations land located between Lahad Datu and Sandakan. Totalling 36,354 hectares, the estates comprise the Jeroco Group of Estates (JGOE), Tomanggong Group of Estates (TMGOE) and Sungai Segama Group of Estates (SSGOE). In addition, the division also owns the Ladang Kawa Estate in Tawau, and the Pelipikan & Kota Marudu Estates in Marudu, measuring 1,276 hectares and 2,173 hectares, respectively. 22 2014 started with crude palm oil (CPO) prices benefitting from a price recovery during the last quarter of 2013. CPO production in the first half of the year was relatively weak. As a result, CPO prices for the first half of the year peaked at RM2,855 per tonne in March 2014 and averaged at RM2,605 per tonne. However, the surge in global palm oil production and an abundant supply of global soybean, coupled with sluggish petroleum oil prices in the second half of the FY2014, dampened prices. As a result, the build up of palm oil inventory reached a high of 2.28 million tonnes in November 2014. Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations During the year, measures were taken by the Government to support the price of CPO and reduce the high inventory level. A higher biodiesel mandate from B5 to B7; and the imposition of zero export duty on CPO in September 2014 were announced to counter the falling CPO prices. The floods in the east coast of Peninsular Malaysia in December 2014, which resulted in supply cuts of CPO from the affected region, helped reduce CPO inventory. Accordingly, the CPO price fluctuated from a high of RM2,855 per tonne in March 2014 to a low of RM2,144 per tonne in December 2014, and averaged at RM2,383 per tonne against the average CPO price of RM2,371 per tonne in 2013. Division Performance In spite of the challenging operating environment, the division continued to record higher average CPO price realisation at RM2,386 per tonne (2013: RM2,343 per tonne) resulting in a 27% rise in operating profit at RM179.0 million (2013: RM140.6 million). This is comparable to the average price realisation for Sabah of RM2,404 per tonne. The division also achieved a 5.8% higher CPO sales volume at 170,506 tonnes (2013: 161,170 tonnes), on Revenue rm495.6 million Operating Profit rm179.0 million the back of a 4.1% higher CPO production at 172,980 tonnes (2013: 166,202 tonnes). The continued push to improve operational efficiencies by the division was reflected in the lower CPO production cost (excluding replanting cost and after taking into account income from palm kernel) at RM1,064 per tonne (2013: RM1,178 per tonne), higher yield for fresh fruit bunches (FFB) at 23.20 tonnes per hectare (2013: 22.96 tonnes per hectare) and improved oil extraction rate (OER) at 21.56% (2013: 21.34%). As a result, the CPO yield achieved was five tonnes per hectare. Likewise, PK price realisation was also higher, registering at RM1,654 per tonne (2013: RM1,288 per tonne) compared to Sabah's average of RM1,565 per tonne. 23 Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations plantations Planted & Mature Area The division's planted acreage reduced slightly to 35,684 hectares (2013: 35,697 hectares), with approximately 88% or 31,373 hectares (2013: 30,670 hectares) of mature areas. The average age approximates 15.4 years (2013: 15.2 years). Total immature area consists of 4,165 hectares of which 2,094 hectares are expected to mature in 2015. The Group also replanted 1,106 hectares during the year. Area statement of the Group as of 31 December 2014 was as follows: Total Area (hectares) JGOE(i) TMGOE(ii) SSGOE(iii) Ladang Kawa Pelipikan 24 Kota Marudu Total (i) (ii) (iii) * ** *** 14,117 Planted Area (hectares) * 12,808 12,331 ** 11,426 1,276 1,201 9,906 1,365 808 *** 39,803 8,761 903 585 35,684 Mature Percentage Area of (hectares) mature area 10,693 9,552 83.5 % 83.6 % 8,761 100.0% 581 64.3% 1,201 585 31,373 100.0% 100.0% 87.9% JGOE refers to Jeroco group of estates TMGOE refers to Tomanggong group of estates SSGOE refers to Sungai Segama group of estates Including 86 hectares planted with Jelutong trees Including 60 hectares planted with Sepat trees Including 81 hectares of land adjoining to the existing land of which the land title are currently under application Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations Upon the completion of this certification process, our mills and estates would have dual international accreditations and we can claim our status as a sustainable palm oil producer in compliance with global sustainability standards of agriculture production. Outlook Oil Extraction Rate & Milling The mills achieved a higher oil extraction rate (OER) of 21.56% (2013: 21.34%), comparably higher than the Sabah OER average of 21.49%. Overall, the mills improved its utilisation to 79% (2013: 77%) of its milling capacity. The division is supported by four mills, namely Jeroco Palm Oil Mill 1, Jeroco Palm Oil Mill 2, Tomanggong Palm Oil Mill and Bukit Mas Palm Oil Mill, and has a combined milling capacity of 175 FFB tonnes per hour. Milling Capacity of the four Mills Jeroco Palm Oil Mill 1 Jeroco Palm Oil Mill 2 Tomanggong Palm Oil Mill Bukit Mas Palm Oil Mill FFB tonnes per hour 60 30 40 45 175 Sustainability Policy Both Jeroco Palm Oil Mills and the Bukit Mas Palm Oil Mill are Roundtable on Sustainable Palm Oil (RSPO) certified. The Tomanggong Palm Oil Mill is in the advance stage of certification and is expected to be certified in 2015. During the year, Bukit Mas Palm Oil Mill had also embarked on the International Sustainability & Carbon Certification (ISCC). It has successfully completed the certification audit in 2014 and obtained its ISCC EU certificate in January 2015. Its other palm oil mills will commence their ISCC certification in FY2015. The global outlook for edible oils in 2015 remains bearish, with the supply of soybean and vegetable oils expected to remain excessive, coupled with a weaker demand for biodiesel stemming from low crude oil price expectations. However, the Group expects the recovering CPO price trend in the latter part of 2014 to continue into the first half of 2015. This is primarily due to the expected dry spells in Malaysia and Indonesia, resulting in lower CPO productions. While the lower production may support palm oil prices in the short-term, concerns of global economic uncertainties, foreign currency fluctuations and weak crude oil and commodities prices are likely to continue to weigh on the movements of palm oil prices for 2015. The positive measures introduced by the government, namely the imposition of zero export duty on CPO as well as mandating a higher biodiesel mix, from B5 to B7, could render some support in shoring up demand. 25 Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations property holding & Development The Property Division is involved in property development and property investment activities in both East and West Malaysia, primarily in Sabah and the Klang Valley, respectively. Nadi Bangsar continued to enjoy strong interest among local and overseas buyers, chalking up a 75% take-up rate in 2014, due largely to its strategic location in the affluent residential suburb of Bangsar. Property development in the Klang Valley With a total GDV of RM 446 million, the development is targeted to be completed in 2017. The division is in niche property development with several high profile high-rise, commercial and residential developments in the Klang Valley. 26 During the year, ongoing projects continue to achieve good take-up rate. This includes Nadi Bangsar Service Residence (Nadi Bangsar) in Bangsar, The Horizon Residences at Jalan Tun Razak and the Andana Condo and Villa at D'Alpinia in Puchong South. Nadi Bangsar Service Residence Nadi Bangsar features a block of 38-storey service residence with 416 units, located within the much sought-after Bangsar suburb. This freehold service residence comes with amenities such as a sky garden, a jogging track, an infinity pool and a gourmet kitchen, offering facilities of a modern city living. The development overlooks the vibrant suburb of Bangsar on one side and a panoramic view of the city landscape on the other, with easy access to the main commercial hub surrounding Kuala Lumpur City Centre (KLCC) while served by LRT stations and major shopping centres. The Horizon Residences The Horizon Residences is a 26-storey condominium comprising two blocks of residential towers with 335 well appointed freehold residential units. Designed by renowned architects and leading landscape designers to be an oasis within the city, this strategically located development is the division's first foray into the high rise luxury residential segment in KLCC. This development, which is located along Jalan Tun Razak, offers unparallel view of the KLCC skyline and the lush greens of the Royal Selangor Golf Club. Within its immediate vicinity are the newly launched Tun Razak Exchange, Tun Razak Entertainment Centre (TREC), embassies, international schools, medical centres, shopping, dining and transport links, making it a key address for business, pleasure and investment. Launched in January 2013, the development registered excellent take-up rate among local and overseas buyers with only limited units available. With a total GDV of RM390 million, the Horizon Residences is scheduled for completion in 2015. Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations Revenue rm932.1 million Operating Profit rm705.3 million 27 Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations D'Alpinia Integrated Development The 76-acre D'Alpinia is the division's first landed development in the Klang Valley, in the fast growing Puchong suburb. Built under the 10%-90% builtthen-sell concept, the residential and commercial development was built based on contemporary and modern theme within a guarded and gated concept. Launched in 2007, it has to date completed 538 units of landed properties with GDV of RM391 million. The development, when fully completed, will comprise 1,156 units of landed and high-rise residential development. During the year, the division launched the Andana Condo and Villa, a guarded and gated development comprising 116 residential units in two blocks of condominiums and 30 units of villas. 28 Representing the third phase of the division's successful D'Alpinia integrated development, the Andana Condo and Villa, with a total GDV of RM115 million, enjoyed good take-up rate since its launch in September 2014. It also launched 34 units of the upscale Business Park at the D'Alpinia in 2014. This commercial development is strategically located along one of Klang Valley's busiest highways, the Lebuhraya Damansara Puchong. The 34 units have a total GDV of RM108 million and are scheduled to be fully completed in 2015. It has enjoyed good uptake since its launch, with only limited units left. Future projects under planning under the D'Alpinia development include 472 units of affordable residential homes and 10 units of shop offices at Business Park D'Alpinia. Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations 29 Upcoming New Projects in Klang Valley A luxurious high-rise development in Jalan Tun Razak on 1.85 acres of freehold land, named Aria KLCC, is expected to be launched in 2015. This development is located within the immediate vicinity of the Petronas Twin Towers, Suria KLCC, the Pavilion, embassies, medical centres, dining and transport links. Aria KLCC, with an estimated GDV of RM1.1 billion, will add another notch in the division's foray in luxury high-rise developments with the introduction of full concierge services. A mixed development project in Balakong comprising both commercial and residential components is under planning and expected to be launched in the second half of 2015. This development, with an estimated GDV of RM800 million, will cater to the growing demand in the southern region of Kuala Lumpur. Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations Property Development in East Malaysia - Sabah The property division is known as an established and leading township developer in Sabah. With over 40 years of presence, it has developed many successful townships in Kota Kinabalu, Tawau, Sandakan and Lahad Datu. Kota Kinabalu Kingfisher Park, Plaza Kingfisher and Kingfisher Sulaman were the division's successful developments in Kota Kinabalu. With a total GDV of RM568 million, the development projects comprised 1,196 residential and 156 commercial units. 30 Kingfisher Inanam is slated to be the division's latest development in Kota Kinabalu. Situated within the popular Inanam neighbourhood, the 35-acre development comprises approximately 700 units of apartments. The first phase of 255 apartment units, with an estimated GDV of RM110 million, is expected to be launched in 2015. Kingfisher Putatan, comprising 14.75 acres of residential development, will be another new project for the division in Kota Kinabalu. The project is situated within Putatan, an up-and-coming neighbourhood next to the city of Kota Kinabalu. The division will be launching its first phase of development in 2015 comprising 120 units of apartments with an estimated GDV of RM44 million. Tawau Bandar Sri Indah, a 1,368-acre mixed freehold development, is the division's flagship development in Tawau. Launched in 2004, it is one of the largest fully integrated township developments in Sabah comprising residential, commercial and industrial components. The development offers modern facilities such as an eco-park adjoining the Membelua forest reserve and a private educational facility catering for both primary and secondary education. Bandar Sri Indah development has to date developed 1,787 units of mixed development, with a GDV of RM533 million. A total of 711 units of affordable housing had been launched in 2013 and 2014, bearing testament to the division's commitment in providing affordable housing to the local populace. Approximately 1,200 units of mixed development are presently under planning to meet the growing demand. Ria Heights is a 100-acre township development located close to the centre of Tawau town and surrounded by matured residential neighbourhoods and the Bukit Gemok forest reserve. The first phase of Ria Heights, comprising 469 units of residential properties with a GDV of RM150 million, is expected to be launched in 2015. Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations Lahad Datu Bandar Sri Perdana is a prominent and successful township development comprising 1,343 residential and commercial units, with total GDV of RM500 million, built to date. A further 352 residential units, with an estimated GDV of RM200 million, are currently under planning for future launch. Palm Heights is another township development in Lahad Datu. During the year, the final phases of residential development, comprising 188 units with a GDV of RM102 million, were launched. Upon completion, the 90-acre township will have 788 units of residential and commercial properties with a total GDV of RM318 million. Sandakan Astana Heights is a 98-acre mixed development project in Sandakan, with development to date of 275 units, with a GDV of RM118 million. During the year, 108 residential units were launched, with 146 residential units under planning for future launch. 31 Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations Property Investment During the year, the division's existing investment properties, Menara Hap Seng and Menara Citibank1, continued to achieve high occupancy rate, recording a 97% (2013: 90%) and 99% (2013: 98%) tenancy, respectively. 2014 also marked the completion of the division's latest investment property, Menara Hap Seng 2, adjoining to Menara Hap Seng. The new 31-storey Grade A Green Building Index-certified office tower has enhanced the Kuala Lumpur skyline and increases the division's presence in the Kuala Lumpur central business district. With the completion of Menara Hap Seng 2 in October 2014, the total net lettable area for both towers has increased to approximately 660,000 sq. ft. Division Performance 32 During the year, the division registered a strong performance, recording a 77% increase in revenue to RM932.1 million (2013: RM527.5 million), with operating profit recording a 176% increase to RM705.3 million (2013: RM255.8 million). The exceptional result was due to strong sales from ongoing projects supported by gains from disposal of non-strategic land held for development. Project sales grew by over 63% to RM526.3 million (2013: RM322.6 million). Outlook 2015 is expected to be a challenging year for the property development industry. The sharp drop in Brent crude prices by almost 50% in the final quarter has far-reaching financial repercussions, impacting government revenue and economic growth. The introduction of Malaysia's new Goods & Services Tax (GST) in April 2015 may further dampen sentiments in the property industry. In addition, the Government 1 Held under Inverfin Sdn Bhd, a 49.99% owned associate company of Hap Seng Consolidated Berhad Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations 33 had, in 2014, put in place cooling measures to curb the rise of household debt and this is expected to continue in 2015. In spite of the above, the division remains optimistic that the demand for its strategically located developments continues to be favourable. It will continue its plans to reposition its investment and development properties in the Klang Valley in 2015 with several new launches scheduled for the year. Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations 34 CREDIT FINANCING The Credit Financing Division is a prominent player in the non-bank sector, involved in the provision of industrial hirepurchase and term loans, primarily to the small and medium enterprise (SME) sector. to balance the division's loan portfolio is evident by its enhanced activities in landed property financing, while continuing to strengthen its position in equipment financing. With a network of 12 branches throughout Malaysia; six in Peninsular Malaysia, four in Sabah and two in Sarawak; the division is one of the top three credit financing institutions in Malaysia servicing over 10,000 active accounts. The division's diversified portfolio includes SMEs from the manufacturing, transportation & logistics, agriculture and landed property sector. Division Performance The division's effort in building up its term loan portfolio in 2014 in its endeavour During the year, the division registered a significant growth in operating profit of 14% to RM104.1 million (2013: RM91.5 million), on the back of a gross loan base of RM1.9 billion (2013: RM1.7 billion). West Malaysia accounted for 83% of the total loan base while East Malaysia contributed 17%. Loan disbursements also reached a high, registering RM1.4 billion (2013: RM1 billion). Revenue rm133 million Operating Profit rm104.1 million Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations The division's gross Non Performing Loan (NPL) ratio improved significantly to 0.91% in 2014 (2013: 1.44%), comfortably below the banking industry average of 1.66%. This is a testimony of the division's strong emphasis on risk management through the use of robust and stringent credit evaluation standards. Outlook In response to numerous adverse developments in the global economic landscape, the Malaysian government had in January 2015 revised the country's 2015 GDP growth downwards to 4.5% - 5.5%. Plummeting crude oil prices resulting in lower government revenue, narrowing trade surpluses and weakening currency as well as uncertainties arising from the introduction of the GST, will pose another challenging year for the credit financing business. As the SME sector contributes approximately 33% of the country's GDP and provides 57% of employment, with the expected GDP growth of 4.5% - 5.5%, the SME sector will remain robust, and the lending opportunities will be prevalent. It will also continue to focus on businesses with quality collaterals while managing its funding costs and requirements to build on its competitive edge and expertise. CREDIT FINANCING DIVISION'S BRANCH NETWORK Sandakan Kota Kinabalu SABAH Prai Miri Kuala Lumpur (HQ) Petaling Jaya Tawau Kuantan SARAWAK Melaka Batu Pahat Johor Bahru Lahad Datu Kuching Head Office Branch 35 Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations AUTOMOTIVE FY2014 was an exciting and eventful year for the Automotive Division. It achieved several milestones for the year, strongly establishing it as one of the leading dealers in Mercedes-Benz vehicles in Malaysia. It saw the official launch of its Balakong Autohaus and the completion of its expanded Kinrara Autohaus, making the division one of the few dealers to have two Mercedes-Benz one-stop 3S centres. The commercial vehicles operation in Kinrara expanded with its appointment as a Fuso dealer in 2014. With this appointment, the Kinrara Autohaus is now the most complete outlet for Daimler products in the country. 36 2014 also saw the launch of several highly anticipated new models by Mercedes-Benz Malaysia, namely the new flagship S-Class, the new C-Class and two new A-segment models, the CLA and GLA. The response from our customers has been overwhelming for these new models. Consequently, passenger vehicle sales for 2014 increased by 17% to 2,310 units (2013: 1,976 units). This accounts for approximately 32% of market share of new Mercedes-Benz passenger vehicles in Malaysia (2013: 31%). Our after-sales segment also recorded a healthy growth of 36%, with a total of 23,445 units (2013: 17,193 units) of vehicles serviced in 2014. The division continues its unwavering commitment to provide excellent after-sales service to its customers. As a testament to its commitment, the division has consistently topped the Mercedes-Benz's customer satisfaction index award, including 2014. Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations Revenue rm684.0 million Operating Profit rm10.5 million Division Performance During the year, revenue improved notably by 13% to RM684.0 million (2013: RM603.1 million) supported by higher vehicle sales and contributions from a full year's operation of the new one-stop 3S centre in Balakong. Consequently, the division's operating profit jumped to RM10.5 million (2013: RM18.1 million operating loss). Outlook The division expects intensive competition in the luxury car segment in the Malaysian premium passenger vehicles market to prevail in 2015. Nevertheless, the strong demand for new models launched in the second half of 2014 and early 2015, namely the S-Class hybrid, CLA-class, new C-class, GLA-class and E-class hybrid, is expected to boost sales in 2015. 37 Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations 38 The Fertilizers Trading Division is a leading fertilizer trader, dealing with a wide range of fertilizers that include muriate of potash (MOP), ammonium sulphate and rock phosphate. It operates from 14 strategically located warehouse facilities across Malaysia and Indonesia, through Hap Seng Fertilizers Sdn Bhd and PT Sasco Indonesia, respectively. In 2014, world fertilizer prices stabilised following the aftermath of the turmoil in the potash market in 2013. Whilst MOP prices have moved up, attempts by potash suppliers to push prices back to the pre-turmoil level have been met with strong market resistance. Supplies of ammonium sulphate from Korea and Taiwan had reduced significantly in 2014 due to weak caprolactam market. However the shortfall was met by additional new production capacity from China. Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations FERTILIZERS trading Revenue rm833.1 million Operating Profit rm71.1 million The influx of Chinese ammonium sulphate had inevitably created a more competitive environment. Operations in Malaysia During the year, the division recorded a growth in sales volume of 4% to 729,000 tonnes (2013: 701,000 tonnes) on the back of a lower turnover of RM729.5 million (2013: RM861.5 million) as a result of the prevailing weak global fertilizer prices. Despite the lower revenue, the division continued to lead the East Malaysian fertilizers business segment, by increasing its market share to 35% (2013: 31%). It also continues to be a leading player in the Peninsular Malaysia fertilizer market with market share of 11%. Operations in Indonesia The Indonesian operations were scaled down in 2014 in view of the uncertain operating environment arising from the weak Indonesian currency. As a result, its revenue declined to RM103.6 million (2013: RM246.8 million) on the back of sales volume of 133,000 tonnes (2013: 212,000 tonnes). Division Performance With a total revenue of RM833.1 million (2013: RM1.1 billion), the division recorded an improved operating profit of RM71.1 million (2013: RM8.2 million operating loss) in 2014. This is due to higher margin achieved for sales from both its Malaysian and Indonesian operations, supported by gains from the sales of non strategic assets. 39 Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations Outlook The strong US dollar, the slowing growth in the Chinese economy and the falling commodity and oil prices are factors contributing to the uncertainty in the fertilizer market in 2015. With CPO prices having fallen in dollar terms and plantations costs going up, plantations are under considerable pressure to manage their costs. China dominated the market for nitrogenous fertilizers such as urea and ammonium sulphate in 2014. With the announcement of China rationalising the export tax for urea in 2015, the fertilizer market is expected to benefit from lower prices for nitrogenous fertilizers, bringing some relief to cost pressures for plantations. 40 The introduction of ammonium chloride as a cheaper alternative source of nitrogen to ammonium sulphate is expected to gain momentum in 2015. With additional source of supplies of nitrogenous fertilizer, the competition for market share is expected to intensify. With the MOP market expected to remain relatively stable compared to the volatility in 2014, the performance of the division remains favourable. Rock Phosphate Loongzou NPK Compound Ammonium Chloride Muriate of Potash Ammonium Sulphate Magnesium Sulphate Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations 41 FERTILIZERS TRADING DIVISION'S OPERATION NETWORK Prai Malaysia Medan Kuala Lumpur (HQ) Port Klang Dumai SABAH Lahad Datu Tawau Bintulu Pasir Gudang Padang Sandakan Kota Kinabalu SARAWAK Kuching Palembang Lampung Jakarta Indonesia Surabaya Head Office Branch Warehouse Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations Quarry & building materials The Quarry and Building Materials Division encompasses the quarry and asphalt operations and the brick operations. The quarry and asphalt operations is the third largest quarry operator in the country, with 11 operating quarries and eight asphalt plants, located in Sabah, Kelantan, Terengganu, Pahang and Johor, with a further two quarries under permitting and construction. 42 The brick operation is a major clay brick manufacturer in Malaysia. The division has four brick factories - two in Sabah and one each in Johor and Pahang, with a total monthly production capacity of 20 million bricks. Its main products, consisting common clay bricks, facing bricks, double bricks and clay pavers, are distributed locally and regionally. Quarry & Asphalt Operations In FY2014, the division added a new quarry to its operation with the commissioning of the crushing plant in the Seri Alam quarry in November 2014. The Seri Alam quarry is a joint venture strategically located in Bandar Seri Alam, Johor. With the commissioning of the Seri Alam plant in East Johor, coupled with its existing quarry at Ulu Choh in West Johor, the division can now supply to all areas in the Iskandar development region. The division recorded aggregate sales of 6.9 million tonnes (2013: 7.1 million tonnes) for FY2014. Asphalt sales for the same period reduced to 330,000 tonnes (2013: 376,000 tonnes). Revenue rm370.4 million Operating Profit rm16.9 million Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations 43 The reduced volumes were a result of weaker demand from the east coast of peninsular Malaysia impacted by inclement weather, and the completion of supply to the Sabah Oil and Gas Terminal. Demand for aggregate and building materials continued to be strong in Johor due to construction activity at the Iskandar development region and the Singapore market. Brick Operations During the year, the division continued its focus on improving its operational efficiency. As a result, brick production grew by 9% to 193 million pieces (2013: 176.4 million pieces). Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations 44 Sales volume also increased by 19% to 201.7 million pieces (2013: 169.1 million pieces). Division Performance In 2014, the division recorded a marginal 2% revenue increase to RM370.4 million (2013: RM364.8 million). Operating profit however declined to RM16.9 million (2013: RM17.9 million) as a result of start-up and development costs of the new quarries and the cost of growing the Singapore market. Margins were also compressed due to sales mix variance. Outlook 2015 is expected to see mixed operational conditions across the division's three operating regions. Continued difficult conditions are expected on the east coast of Peninsular Malaysia due to its dependence on government funded projects while lower oil prices are expected to result in government spending reduction. However, the outlook for Johor is positive with expected private investment associated with the Iskandar development region and increased activity Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations associated with the Petronas RAPID project in Pengerang. Sales to Singapore are also expected to improve in the second half of 2015, while construction activity in Sabah is expected to remain strong on the back of continued private investment and increased government spending associated with projects outlined in Budget 2015. The division is well poised to meet the expected demand in Johor and Singapore via our two existing quarries, with a full year of operation of our new quarry in Bandar Seri Alam and the commencement of a new quarry at Batu Pahat in the second half of 2015. 45 QUARRY AND BUILDING MATERIALS DIVISION'S OPERATION NETWORK Bukit Jerus Sg Serai Telipok Lian Seng Papar Batu Pahat Sedenak Ulu Choh Lahad Datu Sin On Tiku Kukusan Kuantan Merdukasa Rockplus SARAWAK Plentong Seri Alam SABAH Semporna Cukai Kuala Lumpur (HQ) Sandakan Head Office Branch Quarry Brick Factory Asphalt Plant Hap Seng Consolidated Berhad | Annual Report 2014 Review of operations 46 trading The Trading Division is a major building material trader in Malaysia, with a network of six branches - four in Sabah, one in Johor and a main office in Petaling Jaya. Having been in operation as a division since 2013, its product portfolio includes steel bars, cement, tiles, iron and metal, building chemical, interior fitting and various petroleum products. The division divested its oil and fats trading business as part of its strategy to focus on its core products. In addition, the division placed emphasis on higher margin products and managing its credit risk. Division Performance Excluding the revenue in oil and fats trading in 2013 of RM50.3 million, the division's revenue of RM RM445.3 million achieved in 2014 represented an 11.5% growth. The focus on higher margin products netted positive results with operating profit growth to RM23.9 million (2013: RM6.6 million) which also include gains from the sales of non strategic assets. Outlook The division remains optimistic on the opportunities in the trading business and will continue to expand its market presence despite the uncertainties in the property market. The ongoing implementation of the 10 Malaysia Plan, Economic Transformation Programme (ETP) and Government Transformation Programme (GTP) are expected to spur construction activities. Revenue rm445.3 million Operating Profit rm23.9 million Hap Seng Consolidated Berhad | Annual Report 2014 Statement on CORPORATE GOVERNANCE The board is pleased to report on the manner in which the principles and recommendations as set out in the Malaysian Code on Corporate Governance 2012 (Code) are applied to the affairs of the Group and the extent of compliance pursuant to paragraph 15.25 and practice note 9 of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad (Listing Requirements). It is the policy of the Company to manage the affairs of the Group in accordance with the appropriate standards for good corporate governance. The board is committed to ensuring that appropriate standards of corporate governance are practised throughout the Group as a fundamental part of discharging its responsibilities to protect and enhance shareholder value and the fina

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