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home > Annual Report 2014: Chairman’s Statement

Dear Fellow Shareholders,

The global economy witnessed a slow pace of recovery in 2014, against a backdrop of lacklustre economic growth in the United States, Japan and the Eurozone. Investment sentiment across various international markets was further mired by geopolitical instability in several countries such as Ukraine, Syria and Egypt.

Domestically, the Malaysian economy fared better with a 6.0% growth in gross domestic product, recovering from 4.7% a year ago. This was largely fuelled by strong private sector consumption, combined with growth in exports of goods and services.

However, the local manufacturing industry was faced with new challenges, such as the surge in crude oil prices throughout the first half of the year, causing a corresponding rise in the costs of petroleum related raw material products and transportation. This was accompanied with an upward revision to electricity tariffs in early 2014, close on the heels of the minimum wage policy implemented in 2013.

Nevertheless, Daibochi Plastic And Packaging Industry Berhad (Daibochi) recorded another positive year with strong growth in revenue, benefiting from expanding demand for flexible packaging products from the regional food and beverage (F&B) and fast-moving consumer goods (FMCG) industries.

On that note, it is my pleasure to present to you on behalf of the Board, the Annual Report and Financial Statements of the Group and Company for the financial year ended December 31, 2014 (FY2014).

Operational Highlights

The year under review brought renewed focus on business expansion.

The Group’s most notable highlight in FY2014 was the successful completion and commencement of our new manufacturing plant, Daibochi Plastic Plant 2 (DPP2), in the second quarter of 2014. Located in Jasin, Melaka, DPP2 is situated approximately 18 kilometres from our first plant in Ayer Keroh. With DPP2, the Group increased our total production floor space to 460,000 square feet from 385,000 square feet.

The newly expanded manufacturing capacity allows us to more readily cater to rising production demand from existing as well as new clients in the future. Furthermore, the larger space afforded us the opportunity to streamline our film-making and metalizing processes to yield better manufacturing efficiency. Daibochi invested RM16 million into the building and new machinery for the new plant in the year under review.

Collectively, our expansion efforts in FY2014 have contributed towards strengthening our capabilities and business profile, thus setting the stage for future growth and performance.

Financial Review

Daibochi is pleased to report commendable growth in FY2014, which saw the Group achieving a new milestone in topline performance.

For the year in review, we recorded revenue of RM344.5 million, expanding 11.0% and charting a new record from the previous year’s high of RM310.3 million.

Our core business of flexible packaging remained the primary contributor to group revenue, increasing by a convincing 13.0% year-on-year to reach RM340.1 million in FY2014 from RM301.1 million previously. This was mainly attributed to higher sales volume to existing export customers in the F&B and FMCG sectors, including contributions from several new MNC export customers since the 3rd quarter of 2013. We are proud to serve them alongside our existing portfolio comprising some of the largest F&B brands in the world. Exports made up approximately 50% of packaging revenue, significantly higher from 40% in previous years.

The remaining portion of group revenue came from the property development segment, which stood at RM4.4 million, in contrast with RM9.2 million previously. The Group has since 2011 been phasing out the property development business to focus on our core strength in flexible packaging manufacturing.

While we posted sturdy topline performance, the Group’s profitability was adversely impacted by higher cost of sales as well as increased operating cost i.e. a larger wage bill and rise in electricity tariff compared to the previous year.

As a mitigating measure to the higher electricity tariffs, we installed a total of 54 units of e-Savers for key production machinery by end-2014, which allows us to benefit from optimized electricity consumption via smarter heat management. The installations are expected to offset a substantial portion of the increased electricity costs.

As most of our key raw materials are derivative products of crude oil, cost of sales rose in tandem with the surge in global crude oil prices in the first half of 2014. Despite having contractual cost-pass-through mechanism with our major customers, Daibochi faced a time lag preceding pricing reviews.

Following these developments, group profit before tax (PBT) and net profit amounted to RM31.0 million and RM23.7 million respectively in FY2014. In comparison, the Group achieved group PBT and net profit of RM36.4 million and RM27.5 million respectively a year ago.

Amidst the challenging global economic environment, the Board takes a commendable view of this financial report card. We believe that our ongoing efforts in improving operational efficiency and focus on product innovation would translate into positive results for the Group going forward.

That said, I am pleased that Daibochi maintained a strong balance sheet as at December 31, 2014, in line with our prudent financial policy. Shareholders’ equity in end-FY2014 continued to grow on the back of higher retained profits, reaching RM168.3 million compared to RM162.1 million in the previous year-end. As at December 31, 2014 the Group has a current ratio of 1.45 times and a manageable level of net gearing ratio of 0.31 time. The Group’s borrowings amounting to RM59.5 million reflected our higher working capital requirements in line with the enlarged business operations as well as financing of new machinery investments.

Overall, our balance sheet remains strong and capable to mitigate potential financial risks, with adequate leeway to fund future business growth.

Certifications

In 2014, Daibochi became the first F&B-based flexible packaging manufacturer in Malaysia to be certified in accordance with the Food Safety System Certification (FSSC) 22000, Version 3 2013. The FSSC 22000, Version 3 2013 certification represents our commitment towards the highest standards in food safety practices in line with the interests of our valued clientele.

Managed by the Foundation for Food Safety Certification in Netherlands, the FSSC 22000 scheme is regarded as the leading assessment framework for food safety management systems in the F&B industry globally.

Dividends

Daibochi has a dividend policy to distribute not less than 60% of group net profit to shareholders and has consistently paid dividends on a quarterly basis.

The Group adhered to this policy in the year under review, declaring dividends amounting to 13 sen per share in respect of FY2014. These were paid out to shareholders via four interim single tier dividends of 3.5 sen, 3.5 sen, 2.5 sen and 3.5 sen in the first, second, third and fourth financial quarters respectively.

The total dividend payout in respect of FY2014 amounted to RM14.8 million, representing 62.2% of net profit for the year.

Corporate Governance

Daibochi is also committed to excellence in corporate governance and transparency, and complies with all applicable provisions in Bursa Malaysia’s Main Market Listing Requirements and the Malaysian Code on Corporate Governance 2012.

In FY2014, we are proud to be awarded the Top Corporate Governance Recognition for Mid Cap public listed companies in Malaysia (having market capitalisation of between RM100 million and RM750 million) for the second consecutive year by the Minority Shareholder Watchdog Group (MSWG).

The Group is also ranked favourably among its peers in Malaysia, and is listed among the Top 50 Companies in the Malaysian Chapter of the MSWG-ASEAN Corporate Transparency Index 2014.

Industry Outlook & Growth Prospects

Packaging research authority Smithers Pira forecasted the global flexible packaging market to grow 3.5% annually from 2013 to reach USD231 billion by 2018. Of this, Asia Pacific is expected to lead the higher demand for consumer-based flexible packaging owing to rapid population growth, rising consumer affluence and urbanization.

Interestingly, demand for flexible packaging is anticipated to be sustained – or even be on an uptrend – during economic slowdown, as consumers prefer to purchase smaller portion of F&B products in line with their reduced affordability. This phenomenon lends credence to the recession-proof nature of the flexible packaging sector, especially in supporting the F&B and FMCG industries.

Additionally, South East Asia has increasingly become the destination of choice for global MNCs to source their flexible packaging requirements, owing to the cost-competitiveness and high quality. The setting up and expansion of global MNCs’ manufacturing plants in Malaysia lend credence to this trend and bode well for regional suppliers like Daibochi.

Being a market leader in this region, Daibochi has established a strong reputation for providing high-quality and innovative flexible packaging products that meet the stringent requirements of our MNC clients. With our track record, we believe that we stand in good stead to secure a wider share of the rapidly growing flexible packaging market.

In this regard, we will continue to expand our customer base, especially amongst growth oriented MNCs in the F&B and fast moving consumer goods (FMCG) sectors in South East Asia. At present, we are exploring new business opportunities with a number of MNCs from South East Asia, Australia and New Zealand.

Additionally, we emphasise on maintaining a strong culture of intensive research and development in a bid to develop more innovative and value-added products, ultimately bringing them to full-scale production with our clients.

This is true of our recently-commercialized high speed film, an innovative product that allows high-speed applications, benefiting F&B producers who seek greater productivity in a high volume production environment. Another example of our industry-leading innovation is our new two-layer film which utilizes less raw materials than the previous generation four-layer film while retaining barrier and strength functionality.

While opportunities abound, we remain vigilant over rising costs in our business environment. To mitigate these effects, we continue to strive for enhanced operational efficiency and better waste management to optimize our operational costs in the long term. These also help to contribute significantly to long term sustainability and profitability of our business.

Collectively, our strategies have thus far helped to set us apart from our peers, as we demonstrate not only cost-competitiveness, but also a keen ability to meet stringent quality standards and satisfactory client services.

Also, in line with the implementation of the Goods and Services Tax (GST) in April 2015, the Group has ensured full compliance and adopted appropriate cash flow management strategies. The GST implementation is not expected to pose a material impact to the Group’s financial performance.

Our persistent efforts, along with the milestones attained to date, underscore my confidence in Daibochi’s ability to readily meet the evolving demands of the flexible packaging industry. I am therefore positive of our growth prospects and look forward to us charting new heights in the coming year.

Appreciation

Our achievements to date could not have been made possible without the hard work and dedication of our Directors, management personnel and all employees of the Group. On behalf of the Board, I would like to extend our gratitude for your valued contributions to date.


P. JAMES EDWIN A/L LOUIS PUSHPARATNAM

CHAIRMAN

March 31, 2015

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