Results for the first quarter ended 31 March 2009 (1Q09)


Q. Was the 45% year-on-year decline in 1Q09 Group revenue due more to a drop in sales volumes or selling prices?
Q. Compared to 4Q08, Group revenue in 1Q09 was an improvement of around 20%. Going forward, can we expect this growth momentum to carry through into the remaining quarters of 2009?
Q. With a historically strong focus on the shipbuilding and marine-related sectors, will the Group be able to adjust operations quickly to capitalise on the construction industry's prospects? Do you see sales to the construction sector contributing a significantly larger proportion of Group revenue in 2009 compared to 2008?
Q. The Group reported 46% quarter-on-quarter growth in sales to the shipbuilding and marine-related sectors in 1Q09. Can you give us an update on the trend of steel demand as well as customers' purchasing patterns in the current quarter? What is the outlook like for your sales to the shipbuilding and marine-related sectors in 2009?
Q. Given that the Group has already made a significant write-down on inventory at the end of last year, why was there a further erosion of gross profit margin from 4Q08 level?
Q. Looking ahead, how do you see steel prices trending for the rest of this year? Do you expect further erosion of the Group's gross profit margin in the remaining quarters of 2009 should steel prices remain weak?
Q. What is your current inventory strategy? Given that steel prices are coming down, is the Group taking this opportunity to purchase more steel and lower your average cost of inventory?

Q. Was the 45% year-on-year decline in 1Q09 Group revenue due more to a drop in sales volumes or selling prices?


A. The decline in Group revenue was due largely to reduced sales volumes from the year-ago period, as the onset of the global economic crisis in the latter part of 2008 has severely dampened overall market demand for steel products. In anticipation of slower business activities and a continued downtrend in steel prices, end-users have been purchasing their steel requirements in smaller quantities to fulfill their immediate needs.

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Q. Compared to 4Q08, Group revenue in 1Q09 was an improvement of around 20%. Going forward, can we expect this growth momentum to carry through into the remaining quarters of 2009?


A. The sequential improvement in Group revenue was driven by a gradual recovery in orders from our customers in the shipbuilding and marine-related sectors, as well as the construction industry during the first three months of 2009. However, it is difficult to provide an accurate assessment of the momentum going forward given the typically short order visibility in the steel distribution business, present uncertainty surrounding future steel prices, and subdued end-user demand for steel expected in the remaining quarters of 2009.

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Q. With a historically strong focus on the shipbuilding and marine-related sectors, will the Group be able to adjust operations quickly to capitalise on the construction industry's prospects? Do you see sales to the construction sector contributing a significantly larger proportion of Group revenue in 2009 compared to 2008?


A. As steel is a basic commodity that has wide and varied applications, we have the flexibility to vary our product mix and marketing strategies quickly according to different market conditions. Furthermore, we also regularly serve a variety of other industries such as construction, engineering/fabrication, and manufacturing.

In 1Q09, the Group was able to capitalise on improving demand for steel products from the construction industry, which raised revenue contribution from this customer segment to 11%, from 3% in 4Q08.

With higher government spending on infrastructural projects expected to present more business opportunities for the Group, we are progressively increasing our business in the construction segment. However, we still expect the shipbuilding and marine-related sectors to continue accounting for the larger share of our Group's revenue in 2009. Backed by a sound financial position, we have the ability and readiness to respond to changes in market trends and business opportunities.

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Q. The Group reported 46% quarter-on-quarter growth in sales to the shipbuilding and marine-related sectors in 1Q09. Can you give us an update on the trend of steel demand as well as customers' purchasing patterns in the current quarter? What is the outlook like for your sales to the shipbuilding and marine-related sectors in 2009?


A. The quarter-on-quarter improvement in sales to the region's shipbuilding and marine-related sectors in 1Q09 was due mainly to increased orders as customers in this segment gradually returned to the market to fulfill their steel requirements after holding back their purchases in the immediate aftermath of the financial crisis.

Against a weaker economic backdrop, the shipbuilding and marine sectors have been witnessing reduced level of activities. While we continue to receive sales enquiries from this customer segment, market sentiment generally remains cautious and customers continue to purchase steel in smaller quantities only to fulfill their immediate needs.

In the near term, demand for steel from these sectors should be supported by the outstanding order books of the major yards, continued shiprepair and ship conversion work, as well as ongoing offshore oil and gas projects.

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Q. Given that the Group has already made a significant write-down on inventory at the end of last year, why was there a further erosion of gross profit margin from 4Q08 level?


A. We wrote-down the value of our inventory at the end of FY2008 in view of the sharp correction in steel prices during the later half of the year. This was a comprehensive and prudently conducted exercise to reflect the lower of net realisable value and cost of our inventory.

However, global steel prices have continued on a downward trend over the first three months of 2009 as worldwide demand for steel remained weak. Increased competition in the region also put further pressure on selling prices and profit margins for steel distributors. These factors have contributed to a softer gross profit margin in 1Q09.

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Q. Looking ahead, how do you see steel prices trending for the rest of this year? Do you expect further erosion of the Group's gross profit margin in the remaining quarters of 2009 should steel prices remain weak?


A. While the rate of decline in global steel prices has slowed since the beginning of the year, the future price trend remains uncertain as industry forecasters expect steel consumption to stay slow in 2009. Furthermore, the anticipated decline in raw material (iron ore) prices may also exert downward pressure on steel prices in the near term. If general market conditions deteriorate, it is inevitable that the steel supply chain may witness contraction in profit margins.

Having said that, Asia Enterprises has always been very thorough with our inventory purchase and sale decisions, while giving due emphasis to factors like profitability and cash flows to ensure we can maintain a sound balance sheet. With a strong financial backing, the Group is not under extreme pressure to liquidate our inventory at totally unfavourable prices.

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Q. What is your current inventory strategy? Given that steel prices are coming down, is the Group taking this opportunity to purchase more steel and lower your average cost of inventory?


A. In light of the present uncertainties surrounding the steel market and major steel consuming sectors in the region, we intend to continue running down our existing stock while selectively replacing steel items to fulfill customers' requirements. As at 31 March 2009, we have lowered our inventory by 24% to S$62.3 million, from S$82.0 million at end 2008.

All these years, we have remained consistent in our approach to inventory management - our decisions are based on assessment of the industries that our customers operate in, as well as the demand and supply dynamics of the steel market. We will also continue to balance our inventory management decisions with business conditions and financial considerations such as credit management and working capital needs.

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