Wah Seong Corporation Berhad Annual Report 2019

28 WAH SEONG CORPORATION BERHAD INDUSTRIAL TRADING & SERVICES (“ITS”) Discussion of strategies, operational capabilities to achieve the desired business objectives and results The ITS Group experienced a challenging year in 2019 on the back of lacklustre construction industry in Malaysia. The general theme of project shelving, cost reviews and renegotiations has led to margin compression amongst industry players that have dragged ITS profitability. In 2019, ITS Group continued to focus on getting an exclusive distributorship agreement to focus on construction equipment and power generation. During the year, the Group won exclusive distributor for Mitsubishi Heavy Industries Engine System Asia Pte. Ltd., Japan and Doosan Infracore Co., Ltd, Korea for the whole of Malaysia. It also signed a new distributorship agreement with Lingong Group Jinan Heavy Machinery Co., Ltd. (China) and Sandvik Ltd, Sweden construction equipment brands preferred in the mining industry. During the period under review, approximately 70% of ITS revenue was contributed from its construction equipment business, which included its Doosan product range. ITS was also successful in delivering products and services to the Pan Borneo Highway, Slum Key Dam, Tenom Pangi Dam, Bali Dam and West Coast Expressway Projects. The remaining 30% of revenue was contributed by its power systems business, where it delivered gensets to various projects such as South Key Mall, UOB Bank, NTT Data Center and Thomson Hospital, Singapore. Demand for Spirolite HDPE products was also stronger in the second half of the year, driven by demand from East Malaysia. In 2019, the ITS Division HDPE business introduced a higher-margin product line to the market, which included its HDPE Tank and specialised engineering products. Positive response in the market could potentially improve the business product mix in the future. During the year, ITS also secured orders to supply building materials to amongst others South Key Mid Valley Mall development project, LRT train projects and the SUKE and DUKE Highway Concessions. MANAGEMENT DISCUSSION AND ANALYSIS Discussion on Key Financial and Operational Indicators for the segment For the year under review, ITS segment recorded revenue of RM426.1 million and a segment loss of RM2.1 million. Unfavorable economic conditions especially in the construction industry have resulted in lower revenue and negative contribution to the profit before taxation of the Group. ITS enters 2020 with an order backlog of RM43.6million. Discussion of anticipated or known risks that may have a material effect on, among others, the sustainability of the group’s results or operations, financial condition or liquidity The impact of the COVID-19 outbreak and credit risk continue to be significant for the ITS Group. To mitigate this risk, ITS has taken prudent measures in the extension of credit to its customers, and is satisfied that its portfolio of customers has sound and good financial track record. Discussion of expectations of future results According to the MOF’s Economic Outlook Report 2020, the construction sector is expected to grow further by 3.7% on account of acceleration and revival of megaprojects as well as the building of affordable homes. The infrastructural housing projects would most likely be delayed due to the uncertainty shrouding the Malaysian political environment and the outbreak of COVID-19. Furthermore, in periods of uncertainty, investment decisions tends to be put on hold, which would impact the sector negatively as the construction industry needs a growth catalyst driven by private demand. Faced with continuing uncertainties, the business outlook for 2020 will be challenging. The Group hopes that its recent exclusive distributorship agreement with strong brands, such as Mitsubishi Heavy Industries Engine System Asia Pte. Ltd., Japan and Doosan Infracore Co., Ltd, Korea, will add to its competitiveness, improving the Group’s chances of securing pockets of opportunities for projects.