Extracted from Annual Report 2015
On behalf of the Board of Directors, I am pleased to present the Annual Performance Report of APM Automotive Holdings Berhad for financial year ended 31 December 2015.
The last financial year was indeed challenging with continuing uncertainties in the global economy, and on the home front, protracted weakening of the Malaysian currency and subdued consumer demand had impacted the Group's financial performance.
Operating in such an economic environment, the two-pronged strategy to expand to overseas markets and the strengthening of the research and development capabilities have enabled the Group to pursue growth and sustained performance. Overseas expansion as a strategy to reduce reliance on the domestic market yielded results as our operations outside Malaysia contributed 10% to Group revenue in 2015 from 6% in the previous year. Through the application of technologies and innovative designs from the research and development company, our premier coach seat was well accepted by Original Equipment Manufacturer ("OEM") customers in South Korea.
As one of the largest automotive parts manufacturers in the local market with a comprehensive range of products covering suspension parts, seats, interior and exterior plastics, heat exchange and electrical components, our revenue stream is largely dependent on the performance of the local automotive industry, which generally indicates the country's economic performance.
Under the difficult economic environment, Group revenue for financial year ended 31 December 2015 dropped 6.1% to RM1,152.8 million from RM1,227.9 million in the previous year. Lower off-take from OEMs for certain car models and slower sales from the domestic replacement market were main contributors for the decline. Impressively, our operations outside Malaysia saw a 52.5% jump in revenue growth, improving its contribution to Group revenue to 10%.
Group profit before tax for the year was at RM95.0 million, down 34.6% from the year before. Higher raw material prices arising from unfavourable foreign currency movements, reduction in total production volume while production overheads remaining relatively fixed and an one-off adjustment on inventory value in the Interior and Plastics Division had resulted in the significant decline in the Group profit before tax.
Despite the profitability pressure, the Group's financial position remained healthy with shareholders' fund at RM1,183.4 million as at 31 December 2015, an increase of RM39.8 million as a result of the impact of foreign currency translation of RM18 million as well as the net profit for the year.
Likewise, our disciplined approach to working capital allowed us to once again generate solid free cash flow with the cash and cash equivalents and other investments having consistently exceeded RM300 million in the past five years.
The Suspension Division continuously strives to improve performance through raising quality, innovative products and world-class manufacturing system. The Division intends to evolve from components manufacturer to system provider, which will allow higher revenue and better deployment of design expertise and technology, providing integrated solutions across suspension system.
The Suspension Division recorded a revenue of RM224.3 million, a reduction of 8.7% from RM245.7 million in the previous year because of lower demand from OEM customers and local replacement market. However, the Division has consistently maintained stable growth in profitability over the past three years as profit before tax grew 1.4% to RM22.0 million compared to RM21.7 million in 2014, mainly attributed to improved cost rationalization exercise and operational efficiency as well as lower steel price which helped to mitigate unfavourable foreign exchange rates.
Going forward, the Division will continue to focus on bringing about product differentiation in new segments being identified as key growth pillars.
The Group believes that being nearer to customers would serve them better. As such, the manufacturing facilities of this Division are centralised mainly in Bukit Beruntung for the benefit of its major OEM customers. Similarly, a new manufacturing plant in Kulim, to be constructed close to our customer's manufacturing facilities, will be ready for production by end of 2016.
The Interior and Plastics Division remained the Group’s largest division, contributing 65% to Group revenue in 2015 despite recording an 11.1% decline in revenue to RM754.0 million compared with RM848.6 million in the preceding year. The Division posted a profit before tax of RM44.0 million against RM89.8 million in 2014. The decline in both top and bottom-line were due to lower demand from OEM customers as two key OEM customers had scheduled no production for most of the second half of the year, unfavourable product mix as certain vehicle models were of lower sales value, thus affecting margins, and an one-off adjustment on inventory value.
To position for growth in this Division, we will continue to leverage on the existing good working relationship with major car manufacturers and through our partnering with global technical alliances to develop full-fledged modular solutions.
This Division produces products such as air-conditioning systems, radiators, cooling modules, starter motors, alternators, wiper systems and other electrical parts.
With certain car models reaching the end of production during the last quarter of 2014, the lower demand in 2015 had resulted in the full year revenue falling by 14.9% to RM173.4 million compared to the previous year of RM203.8 million. Profit before tax fell 40.3% to RM15.1 million. Higher operating costs had affected the profitability of the Division.
A critical strategy for this Division is to develop products that provide connectivity of devices, systems and services that enables the Division to benefit from Internet of Things ("IoT") opportunities. We see great opportunity in IoT. Our joint venture with Tinnos Asia Sdn Bhd, a subsidiary of Tinnos, Inc., to carry out the business of developing, manufacturing and supplying automotive In-vehicle Infotainment systems and IoT products was the significant step we took last year. It will take time to see results, but we have confidence that, as we execute our strategy, sales will grow over the next few years.
The main activity of this Division is the trading and distribution of automotive components and parts manufactured by the Group for domestic replacement and export markets.
Full year revenue was RM179.1 million, down by 11.4% compared to RM202.3 million achieved in 2014. Weak consumer sentiment post Goods and Services Tax ("GST") implementation, dealers' intention to reduce stockholding, poor demand for suspension parts in East Malaysia due to the cutback in logging activities had affected the sales of the domestic replacement market. Correspondingly, the Division's profit before tax was lower by 5.6% to RM7.6 million from RM8.1 million achieved in the previous year. The drop in profit before tax was cushioned by the strong US Dollar and lower logistic costs enjoyed by our marketing export arm.
APM Auto Parts Marketing (Malaysia) Sdn Bhd is an international trading establishment with accreditation of International Procurement Center and has a presence in 64 countries. The company participated in several major international exhibitions as part of its continuous efforts in promoting the APM brand and broadening its customers' base. The company intends to pursue sophisticated Information and Communication Technology ("ICT") tools, such as interactive e-catalogue, to support and manage the company's customers across the 64 locations worldwide.
Of our domestic replacement market, we can humbly claim that APM is one of the largest and trusted replacement parts suppliers. Our products are known for their high quality which is of global standards and value. Moving forward, the Division focuses to improve customer engagement across all touchpoints, accelerate the fulfilment of customers' orders and grow customer base. With continuous strengthening of our product development capability to accelerate the launches of new products and developing relevant and innovative products range by the research and development division, the Division is well positioned to grow market share.
This business segment refers to our operations mainly in Indonesia, Vietnam, Australia and the USA ("operation outside Malaysia"). Presently, APM has manufacturing facilities in 3 countries namely, Vietnam, Indonesia and Australia and a distribution warehouse and trading capabilities in the USA. Construction of new production facilities in Thailand is progressing well while the plant manufacturing leaf springs in Indonesia is scheduled to be operational by the second half of 2016.
Our operations outside Malaysia continue to grow and increase their contribution to the Group. This Division posted a revenue of RM113.6 million for the year, an increase of 52.5% from RM74.5 million recorded in 2014. The impressive growth was a result of consolidating the full year revenue of the Australian coach seat business, which was acquired on 1 August 2014, of RM48.5 million compared to the 5-month period of RM18.3 million recorded in the previous year. Likewise, profit before tax for the year has improved to RM4.7 million from RM3 million previously.
The strong achievement by our overseas operations has clearly demonstrated that investing overseas to diversify revenue contribution is the right strategy for the Group. Our investments in manufacturing facilities in Indonesia and Thailand and the distribution centres in the mid-west of the USA augurs well with the transformation and growth process of the Group to strive for a balance contribution of domestic and overseas revenues.
We will continue to drive growth through potential mergers and acquisitions as well as joint-ventures where products are synergistic to the Group's business and which have relatively established networks that will integrate with the Group's products and customers' base.
The World Bank forecasts that the global economy will grow at a slower pace to reach 2.9% in 2016. It expects several major forces to shape the global outlook in 2016, among them, a more protracted slowdown across large emerging markets, uncertainty in the recovery in advanced economies, continued soft commodity prices and weak global trade.
Malaysia's economy is expected to grow at a moderate pace with Gross Domestic Product growth forecasted at between 4% and 5% in 2016. Economic growth is expected to be driven by the Economic Transformation programme, domestic demand and increased private investments in large scale infrastructure projects. However, the weak Ringgit and prolonged low crude oil price which affect government spending and consumer confidence weighed down by the rising cost of living will pose challenges to growth.
Against this backdrop, 2016 is expected to be a slower year for the automotive sector. Malaysian Automotive Association has forecasted lower total industry volume by 2.5% to 650,000 units compared to 666,674 units achieved in the year 2015.
As we are embarking on the transformation for growth, the Group has clear strategies in place, with explicit five-year goals in respect of growth, operations, research and development and branding priorities. Importantly, the growth priority is focused on diversifying revenue as our existing revenue streams come under pressure due to margin squeeze and global sourcing by most of our OEM customers from ASEAN countries apart from Malaysia, coupled by intensifying competition in replacement markets. The Group remains steadfast in expanding to regional markets, upstream and downstream businesses and developing new products that will be generating synergies with the Group's core businesses.
The Group's level of investment has not been curbed in the face of the challenging operating environment. In 2015, we acquired assets and business from Bent Holding B.V., a company in Netherlands, for a cash consideration of £450,869 to grow the business of developing suspension products for the automotive market in Europe. In addition, the Group has purchased a piece of land for building manufacturing facilities in Melaka that is dedicated to one of our OEM customers and as part of our capacity expansion plan.
The recent completed acquisition of locomotive seat manufacturing and services business in Australia is evidence of the Group's commitment to expansion. This acquisition provides an opportunity for the Group to gain a foothold in the Queensland market by providing turnkey service, i.e., seat installation and refurbishment, to local bus builders and bus operators.
Continuous efficiency improvements are embedded in our culture at every level of the Group. We focus on the optimisation of our manufacturing processes via standardisation and automation to achieve a lean and efficient operating cost base. The APM Manufacturing System ("AMS"), which was implemented last year, will be a recurring theme within the Group. Key features of AMS include standard performance measurement tools, benchmark standard to drive improvement, know-how management and sharing of Best Practices.
Increased savings from procurement are through broadening of multi-sourcing platforms and centralising purchases that benefit through economies of scale. APM is transforming procurement organisation to constantly reduce costs while maximising value from suppliers’ relationship.
Moving on to the strategic opportunities in research and development, the Group is convinced that collaboration with institutes of higher learning and leveraging on our global technical partners are the right focus. To enhance our engineering capabilities, the Group has implemented the Product Lifecycle Management (“PLM”), an information management system that can integrate data, processes, business system and people, allowing organisation works as a single team to design, produce, support and retire products while capturing best practises. PLM establishes a digital platform to drive revenue through repeatable processes.
In APM, our employees are our greatest assets and a key determinant of our success. We remain committed to create a working environment that practises fairness, supportiveness and respect for individual rights. The Group encourages diversity in age, gender, ethnicity, religious beliefs and abilities that give us the benefit of different life experiences, perspectives and ideas. We manage talent through our human resource management system, which involves monitoring performance against yearly Key Performance Indicator ("KPI") and setting training and development objectives. The system also forms the basis for nurturing high-potential employees, identifying candidates for succession and facilitating recruitment. In 2015, we were recognised as HR Asia Best Companies to work for in Asia, awarded by Business Media International.
The Group has built a sound foundation for its businesses and a strong domestic brand presence. We remain committed to put in place these strategies and action plans going forward and is cognisant of the responsibilities to capture opportunities for sustainable investment and growth, as well as growing long-term value for our stakeholders.
The Board recommends the payment of a single-tier final dividend of 12 sen per ordinary share for the financial year ended 31 December 2015 (2014: 12 sen per ordinary share) for shareholders' approval at the forthcoming Annual General Meeting. Combined with the earlier interim single-tier dividend of 7.5 sen per ordinary share paid on 29 September 2015, the total dividend for the year is 19.5 sen per ordinary share (2014: 19.5 sen per ordinary share).
The amounts, if approved at the forthcoming Annual General Meeting, will result in a total net dividends payment of RM38.2 million (2014: RM38.2 million) for the financial year ended 31 December 2015. The Group is committed to deliver attractive returns to shareholders while it seeks to find the right balance between the investments needed to sustain the Group's ability to generate earnings in a highly dynamic environment.
On behalf of the Board, I wish to extend our heartfelt appreciation to the management and staff of the Group for the tremendous efforts, passion, continuous dedication and commitment in achieving sustained growth in a volatile environment. I would also like to sincerely thank all our valued principals, customers, business partners and loyal shareholders for the unwavering support and confidence in the Group.
In closing, I express my deep gratitude to my fellow Board members for their wise counsel, continuous guidance and support.
On behalf of the Board,Dato' Tan Heng Chew