Results for the third quarter ended 30 September 2008 (3Q08)


Q. Please explain the reason for the allowance for impairment of trade receivables of S$701,000 in 3Q08? What is the default risk like for the remaining trade receivables of S$35.5 million?
Q. Why did the Group continue to increase its stock in 3Q08, despite the falling trend in steel prices? In view of a likely slowdown in demand for steel in the near-term, does the Group intend to continue building up inventory or run down its current stock level? How does the Group mitigate risks in the event of a sharp downturn in steel prices?
Q. A large proportion of your current steel inventory was purchased at higher prices in the earlier part of 2008. How will this impact the profitability of your sales in the quarters ahead? What would be a reasonable range of gross profit margin that can be achieved in 4Q08?
Q. Banks worldwide have been pulling back on their credit lines to companies. How has the tight credit market situation affected Asia Enterprises thus far?
Q. How is the near-term outlook like for your sales to the shipbuilding and marine-related sectors? How will the Group cope with the slowing marine sector and worldwide economies?

Q. Please explain the reason for the allowance for impairment of trade receivables of S$701,000 in 3Q08? What is the default risk like for the remaining trade receivables of S$35.5 million?


A. The allowance for impairment of trade receivables of S$701,000 was made for a single customer. We are still collecting the sum from customer but at a much slower pace. As such, we have adopted a prudent approach by making a full provision in 3Q08.

With constant emphasis on credit management, we have not found any significant default risk for the remaining trade receivables. Our average debtor turnover has improved to 64 days in the first nine months of 2008 from 76 days in FY2007. At the same time, the ageing profile of our trade receivables remains healthy, with around 61% of our trade receivables outstanding for less than 60 days as at end-September 2008.

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Q. Why did the Group continue to increase its stock in 3Q08, despite the falling trend in steel prices? In view of a likely slowdown in demand for steel in the near-term, does the Group intend to continue building up inventory or run down its current stock level? How does the Group mitigate risks in the event of a sharp downturn in steel prices?


A. The increase in our inventories is attributable to the arrival of materials in 3Q08 for orders that were placed during the first six months of 2008 in anticipation of customers' needs. In light of tight demand-supply conditions in the first half of 2008, delivery lead time by steel producers was approximately three to four months.

Our present intention is to run down our existing inventory, while maintaining our focus on profitability and liquidity. As the Group is not heavily geared, we are not under extreme pressure to liquidate our stocks unfavourably.

Our inventory replacement decisions will continue to hinge on our assessment of the steel industry and those industries which our customers operate in to ensure that the Group is able to fulfill the requirements of our customers in a timely manner.

In addition to our conscientious inventory management, we will continue with our prudent approach to credit and debt management. This will ensure that we maintain a sound financial position to overcome market challenges and to capitalize on opportunities.

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Q. A large proportion of your current steel inventory was purchased at higher prices in the earlier part of 2008. How will this impact the profitability of your sales in the quarters ahead? What would be a reasonable range of gross profit margin that can be achieved in 4Q08?


A. As a regional steel distribution centre, the Group has to maintain an adequate stock level to satisfy our customers' requirements. Our procurement decisions are based on our assessment of the supply and demand situations within the steel industry and those industries in which our customers operate. While steel prices were high in the earlier part of 2008, we still had to purchase inventory in anticipation of our customers' future requirements as supply conditions were exceedingly tight at the time.

Steel prices took an unexpectedly sharp decline in August, which has inevitably led to keener competition and price pressure in the steel distribution industry. We do not have a practice of providing specific forecasts, but we do not envisage gross profit margin in 4Q08 to reach the levels in 2Q and 3Q, which we have stressed were considered exceptional.

Nonetheless, we will adhere to the underlying business principles that are centred on sound inventory practices and financial management which have enabled the Group to remain profitable throughout difficult economic cycles over the past 35 years. As the Group is not heavily geared, we are not under extreme pressure to liquidate our inventory unfavourably.

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Q. Banks worldwide have been pulling back on their credit lines to companies. How has the tight credit market situation affected Asia Enterprises thus far?


A. Our borrowings from banks are mainly trust receipts used to finance the purchases of our inventories. Given our healthy balance sheet and proven creditworthiness, the Group has not faced any difficulty securing credit facilities in current times, nor in the past.

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Q. How is the near-term outlook like for your sales to the shipbuilding and marine-related sectors? How will the Group cope with the slowing marine sector and worldwide economies?


A. The slowdown of worldwide economies, coupled with tight credit markets, generally dampens business and consumer sentiment in most industries. While there has been a slowdown in steel purchases from the shipbuilding and marine-related sectors in the last quarter due partly to delays in projects and a shift in purchasing patterns towards smaller order sizes, we believe the ongoing requirements of our customers in this segment should continue to support demand for steel in the region.

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

In light of present circumstances, we believe it is imperative for us to remain vigilant and prudent in our financial management, particularly with respect to credit exposure, receivables collection and inventory procurement decisions. The Group will ensure it continues to maintain a solid financial foundation to better withstand economic slowdown as well as be ready to capitalise on any opportunities that may arise.

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