Chairman’s Statement

“As an established distributor with a proven track record, we expect to continue in this trade for many more years and remain an integral part of the international supply chain for chipmakers, original equipment manufacturers and major electronic brands.”

Dear Shareholders,

Having led Serial System for 31 years now, I have encountered countless hard knocks and adversities in the semiconductor industry and in business. By sheer grit, persistence and, in some cases, a stroke of fortune, this company has weathered many of these unkind situations and emerged stronger each time. I am confident this will continue to be so even as we double down on efforts to grow our business in the wake of certain challenges last year and as the global economy turns increasingly cloudy in Year 2019.

As you might recall, Texas Instruments (“TI”) informed us in October last year that it would terminate its distribution agreements with our wholly-owned Serial Microelectronics Pte Ltd, the holding company of all our subsidiaries involved in electronic components distribution.

TI has for years been a major supplier of microchips to our business and our single-largest revenue contributor. As you can imagine, the loss of this large account has repercussions for us. We have already allowed to lapse an application to list our subsidiary Serial Microelectronics (HK) Limited on the Stock Exchange of Hong Kong. We are also in the process of rightsizing our workforce and trimming down operating expenses.

In seeking to mitigate the fallout, we announced in December 2018 a transfer of our TI distribution business to another distributor authorised to work with the chipmaker. We decided on this course of action to ensure minimal disruption to our customers’ operations and to allow us to realise some capital returns from our distribution business with TI before it ends on 30 June 2019. We have also been actively looking for other suppliers and channel partners to work with.


Financial Snapshot

Notwithstanding TI’s decision to part ways, we ended Year 2018 with a net profit of US$17.7 million, up from US$9.6 million in the previous year. The sale of our entire 27.34% stake in laundry firm SPL Holdings (Australia) Pty Ltd (“SPL”) for A$40.2 million (US$29.0 million) was a key contributor to the earnings improvement. We reaped a gain of US$18.3 million from the sale, which was completed in September 2018, and paid a special dividend of 1.00 Singapore cent a share to shareholders using part of the sales proceeds, some of which were also used to repay bank loans and for working capital.

The gain from the sale of SPL also shielded our bottom line last year from an impairment loss of US$5.4 million for the winding down of Tong Chiang Group Pte. Ltd. and its three properties entities. We invested in this group of food companies in Year 2015 with a view to develop an additional income stream and enhance our overall profitability. Unfortunately, three years later, we ended up with an impairment loss for our 21% stake after a creditor of Tong Chiang Group Pte. Ltd. sought to wind up its entire business.

In appreciation of your support for us in Year 2018, we have proposed a final cash dividend of 0.46 Singapore cent a share. Together with an interim payout of 0.40 Singapore cent and a special interim dividend of 1.00 Singapore cent a share for the SPL divestment, the total amount of dividend payout from our FY2018 financial performance is 1.86 Singapore cents a share. This is higher than the total dividend of 0.75 Singapore cent a share for FY2017.


Outlook

Even as we continue to navigate our way forward, we have to contend with an uncertain global macroeconomic outlook for Year 2019. The ongoing trade dispute between the United States and China has already taken a toll on the world’s two largest economies and on global business sentiment, prompting companies to reconsider expansion plans for fear of being caught out if the spat worsens.

While the outlook for the foreseeable future appears challenging, we remain fully committed to our core electronic components distribution business. As I had said at the start of this chairman’s statement, we have encountered and survived numerous setbacks in the semiconductor industry over the past three decades. With your support, I am hopeful we will ride out our current challenges and see better days ahead.

Indeed, there will always be demand for semiconductors as these are the building blocks for virtually all electronic devices. As an established distributor with a proven track record, we expect to continue in this trade for many more years and remain an integral part of the international supply chain for chipmakers, original equipment manufacturers and major electronic brands.

For this reason, we are reviewing our growth strategies with a view to enhancing our value proposition as a distribution intermediary between chipmakers and manufacturers of electronic end-products. The review will also examine how we can further diversify our income streams to enhance overall profitability. Some of the ideas that have emerged from this review have already been put into motion.

As announced on 30 January 2019, our subsidiary Serial Microelectronics (HK) Limited has formed a joint venture with LSD Science and Technology (Hong Kong) Co., Limited (“Lierda HK”) for the purpose of distributing semiconductors and electronic components in Hong Kong and China. This collaboration with Lierda HK, a subsidiary of China-listed Lierda Science and Technology Group Co., Ltd, is in line with our objective to deepen our presence in these two markets. The joint venture is expected to have a positive impact on our financial performance in 2019.


New Income Streams

At the same time, we will continue to look for promising businesses to invest in. In November last year, we became a shareholder of Indonesia-listed PT Sentral Mitra Informatika (“PT SMI”), a provider of managed print services, after we swapped our convertible bond issued by PT SMI into shares, which started trading on the Development Board of the Indonesia Stock Exchange on 28 November 2018. The conversion gave us a 20% stake in PT SMI.

This is our second investment in the managed print services business. We first ventured into this space in May 2017 when we acquired a 70% stake in Print-IQ Singapore Pte Ltd. Under the managed print services business model, companies outsource their printing, scanning and copying functions, as well as the management of the equipment for such services. This reduces operating costs and wastage.


Acknowledgements

On behalf of the board of directors, I would like to thank all our customers, business partners, shareholders and employees for your trust, support and hard work. Clearly, Year 2018 was a tough year for us. I appeal for your continued support as we seek to forge ahead for the rest of Year 2019 and beyond.

I would also like to extend my condolences to the family of Mr Goi Kok Neng Ben, who passed away on 3 February 2019. Ben joined us as a Non-Executive Director in April 2013 and had been dutifully contributing to Serial System as a board member all these years. He is dearly missed by everyone at Serial System.


Dato’ Seri Dr. Derek Goh Bak Heng BBM
Executive Chairman & Group CEO
March 2019

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