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Extracted from Annual Report 2016

Business Overview

Salcon Berhad is an investment holding company with its core business in the provision of water and wastewater engineering services not only in Malaysia but also overseas. To date, it had successfully undertaken projects in Sri Lanka, Vietnam, Thailand and China. The Group has successfully completed more than 900 water and wastewater projects to date and is currently in the midst of implementing the single largest water contract in Malaysia, the Langat 2 Water Treatment Plant project.

In line with its commitment of enhancing long-term shareholder value, the Group, continuously reviews its business strategy and in recent years has embarked on strategies to diversify into businesses in the high growth segment by forging strategic partnerships, creating new platforms and making strategic acquisitions. Besides its traditional water and wastewater business, the Group has since expanded its portfolio to include Property Development in 2012 and most recently into Technology Services and China Tourism e-commerce. By continuously exploring potential growth areas and markets, the Group is able to ensure sustainable growth and returns especially in the current challenging economic and financial environment.

Moving forward, the Group is confident of the growth opportunities and potential for revenue growth in our diversified business portfolio by leveraging on the Group's financial strength and strategic partners for specialised knowledge and technologies in addition to Salcon's in-house expertise and proven track record not only in Malaysia but also overseas.

Although the Group is principally operating in Malaysia, it has business operations across the Asian region as tabulated below:

Construction of the Langat 2 Water Treatment Plant with capacity of 1,130MLD is in good progress.

Financial Performance

For the year under review, the Group recorded consolidated revenues of RM98.97 million, a decrease of 19.6% from RM123.07 million in FYE2015 due to the completion of various projects. Additionally, due to the adoption of equity accounting method on our major existing construction joint venture projects ie the Langat 2 WTP and Langat CSTP, revenue contributions from these 2 projects are not being recognised during the year.

Nevertheless, the Group recorded a Profit After Tax (PAT) at RM11.84 million, which is 113.8% higher than the previous year, resulting in an increase in Earnings Per Share (EPS) for the full year from 0.82 sen to 1.81 sen. This is mainly attributable to the exceptional gain of RM42.06 million from the completion of the disposal of Salcon Linyi (HK) Ltd. For the FYE 2016, the Group also recognised RM10.59 million in share of profits from the Langat 2 Water Treatment Plant (WTP) and the Langat Centralized Sewage Treatment Plant (CSTP) projects.

The Group declared a first and final dividend of one (1) treasury share for every eighteen (18) existing ordinary shares held in the Company.

During the year under review, the Group bought back 30,009,300 ordinary shares of RM0.50 each of its issued share capital from the open market, at an average cost of RM0.59 per share. The total consideration paid for the share buy-back amounted to RM17.99 million and was financed by internally generated funds.

The Group's financial position remains healthy with total cash and cash equivalents of RM215.9 million, notwithstanding that this is a reduction of 22.3% compared to the previous year due to dividend payment, shares buy-back and land purchase in Australia for property development purpose. The Group's gearing ratio remains low at 0.15 as at 31 December 2016 with borrowings totalling RM73.1 million.

Engineering & Construction Division

Financial Highlights

The Engineering & Construction Division was the Group's largest revenue contributor during the year under review with total revenues of RM83.1 million, representing 84% of the total consolidated revenues. Compared to the previous year, revenues recorded a drop of 11% as two (2) of the Group's main subsidiaries has completed most of its old projects during the year and new projects just kicked off.

However, the division's profit rose 275.7% this year from a loss of RM3.70 million to a profit of RM6.5 million. This turnaround was largely due to the Group's share of profit from the Langat 2 WTP and Langat CSTP, under joint venture arrangement.

As at 31st December 2016, the Group's total order book stood at RM1.28 billion comprising water and wastewater projects, both locally and overseas with RM645.6 million balance of works to be carried out.

Operational Highlights

The business activities in the Engineering and Construction Division were implemented mainly by the Group's subsidiary, Salcon Engineering Berhad and Envitech Sdn. Bhd. Currently, the division is undertaking the single largest water contract in Southeast Asia, Langat 2 WTP and the Langat CSTP project, which is expected to be completed in 2018 and 2020 respectively. Physical progress of both projects have reached 72% and 36% respectively as at FYE 2016.

Langat Centralized Sewage Treatment Plant will accommodate an inflow of 920,000 P.E. upon its completion.

View of 120MLD Sg. Lebam Water Treatment Plant and distribution system in Johor was completed within schedule

During the year under review, the Group secured nearly RM300.0 million worth of new contracts to replenish its order books, namely the Kuala Terengganu Utara Water Supply Scheme (KTU), Langat CSTP – Conversion of 10 sewage treatment plants into network pumping stations and the upgrading of Sg. Lebam, Johor water treatment plant & distribution system. The KTU project is valued at RM217.67 million and involves the engineering, procurement, construction and commissioning of the Kuala Terengganu Utara water treatment plant works in Kuala Terengganu. The Langat CSTP – Conversion of 10 sewage treatment plants into network pumping stations is valued at RM66.8 million whilst Sg Lebam Water Treatment Plant is awarded by PAAB with contract value of RM14.52 million.

These projects are currently on-going and implementation is progressing well.

The Group is also actively involved in tendering for overseas projects and building strategic alliances with potential partners and associates to carve out win-win partnerships to gain market share in the overseas market.

Looking Forward

The Group sees a better and fruitful year ahead for this division with the commencement of work of the new projects that have been successfully secured during the year. Its current outstanding order book of RM645.6 million is expected to keep the Group busy for the next 3 years.

Malaysia remains the core market for the Group's growth and expansion especially in the area of wastewater treatment where the Government is undertaking a programme towards the construction of centralised sewage treatment plants in various cities and major towns to meet the growing needs of the nation. The Group foresees playing a leading role in this area where our experience, expertise and track record will stand in good stead.

The Group will continue to seek suitable opportunities in the water and wastewater market both locally and overseas markets such as Sri Lanka, Vietnam, and Myanmar.

The Group has successfully completed four projects in Sri Lanka ie Hambantota Water Supply Project, Batticaloa Water Supply Project, Kelani Right Bank Water Supply Project and the Kandana Water Supply Project. With the excellent track record and successful completion of these projects, the Group is confident of securing more projects in Sri Lanka in the near future.

In the coming year, the Group's main priority is to replenish its order book, strive for excellence in quality as well as innovation in delivering its services while constantly looking at ways to increase operational efficiency.

View of sedimentation tank at Kandana Water Treatment Plant in Sri Lanka.

Concession Investments Division

China Concession

The Group completed the disposal of its last China water concession in Linyi City, Shandong Province when Salcon Water (Asia) Ltd, entered into a Share Sale & Purchase Agreement with Orient Harmony Holdings Limited for the disposal of Salcon Linyi (HK) Limited. The sale was completed on 26 April 2016 with proceeds received on the same day.

With the completion of the disposal, the Group realised a net gain of RM42 million and this marks the final disposal of all Salcon's water and wastewater assets in China.

Vietnam Concession

The Binh An water concession located in Ho Chi Minh City contributed a consistent recurring income to the Group since it commenced operations in 1999. For FYE 2016, this concession contributed a net profit of RM4.3 million to the Group.

Property Development Division

Aerial view of rés280 construction in Selayang

Financial Highlights

The Property Development Division has yet to contribute financially in FYE 2016 due to the Group's adoption of the Malaysian Financial Reporting Standards (MFRS) to recognise revenue and profits only upon completion of a development. As a result, this division recorded a loss of RM4.9 million compared to a loss of RM3.2 million the previous year.

Operational Highlights

The Group's small office home office ("SOHO") development project in Selayang "res280" is expected to be completed by the second half of 2017. Upon completion of this mixed residential and commercial development, an estimated Gross Development Value of RM157.5 million is expected for the Group.

The other property development projects on hand include Eco Midtown in Johor and Belfield Crest in Kuala Lumpur. With the recent softening of the Malaysian property market, the Group is reviewing the development strategy of both projects.

Given the general slowing down of the Malaysian property market, the Group has since diversified its property development portfolio overseas. During the year under review, the Group via its subsidiary Salcon Development (Australia) Pty Ltd acquired a plot of freehold commercial land in Melbourne, Australia. This acquisition will give the Group the opportunity to establish a presence in the Australia property market, where the demand for properties has remained strong in key cities such as Melbourne, in particular in the inner city areas. The land acquired is situated approximately 4 km south-east of the Melbourne Central Business District ("CBD") and is well serviced by public transport connections including the South Yarra Train Station and city trams. The Group intends to develop the property into a residential-led mixed use development project consisting of a 27 storey building.

Looking Forward

The Group looks forward to the maiden contribution from the property development division in FYE 2017, with the completion of its "res280" project in Selayang.

Other Divisions


The transportation division which is operated by Eco Coach & Tours (M) Sdn. Bhd. (Eco-Coach) has maintained a steady performance recording revenues of RM13.62 million, which is 13.7% of the Group's total revenue during the year under review.

During the year, Eco Coach has added 30 vans and 4 coaches to its fleet of vehicles to cater for the transportation need of multinational companies such as Intel, Western Digital Media, Paramit and B Braun Medical. To date, Eco Coach has a total of 102 vans, 35 coaches, 5 MPV, 25 limo services vehicles and 160 drivers.

Transportation services has maintained a steady performance for the Group this year.

Technology Services

The Technology Services Division under Volksbahn Technologies Sdn Bhd (VBT) recorded revenues of RM1.92 million during the year derived from the site rental for shared infrastructure as well as bandwidth charges. However, due to the adoption of equity accounting method, the division has yet to contribute financially in FYE 2016. To date, the Group has signed up with Celcom Berhad, U Mobile Sdn Bhd and Digi Telecommunications Sdn Bhd to provide mobile backhaul services bundled with site rental for shared infrastructure. The Group looks to adding more sites from these mobile operators to increase income from this division.

During the year under review, VBT has also signed a Master Services Agreement with edotco Malaysia Sdn. Bhd. (edotco), one of Asia's biggest regional telecommunication infrastructure service provider under the Axiata group, to fiberize their cell sites, located between 2km to 5km radius from our fibre optic backbone along the LRT and monorail lines in Klang valley. edotco owns over 17,000 cell sites in the region with more than 10,000 located in Malaysia. For the first phase of the exercise, both edotco and VBT have identified 600 cell sites to be fiberised to provide mobile backhaul services to other telcos.

Moving forward, the Group intends to look into new revenue streams from retail businesses and facilitate mobile convergence for operators through its fibre optic backbone.

The signing ceremony between Volksbahn Technologies Sdn. Bhd. and edotco Malaysia Sdn. Bhd. in September 2016.

Solar Power Services

The Group, via its subsidiary Salcon Power (HK) Limited has successfully completed the installation of solar photovoltaic systems on the rooftops for 1,664 residential houses in over 30 areas in the United Kingdom. The Salcon Power (HK) Limited recorded revenue of RM0.6 million for FYE2016.

China e-commerce Tourism

In FYE2016, the Group via its wholly subsidiary Beijing Xinlian Yitong Technology Co Ltd (BXYT) ventured into China e-commerce tourism in collaboration with Alibaba group unit, Alitrip, as the exclusive operator of the online tourism and marketing platform namely Malaysia Tourism Pavilion (MTP). The MTP is endorsed by Tourism Malaysia and through this channel, the Group is able to provide an excellent platform for Malaysian travel trade players to get a bigger slice of the Chinese outbound market.

The Chinese population, especially its burgeoning middle-class, has an increasingly voracious appetite for travel, with more than 300 million Chinese travelling abroad last year alone, spending over US$200 bil (RM840 bil) worldwide. Chinese travellers constituted the largest source of tourists to Malaysia, with 1.7 million arrivals in 2015 and more than 1.4 million arrivals in the first eight months of 2016. The Group targets to reach these tourists to market outbound and inbound tourism services as well as food and beverage vouchers and souvenirs.

Business Outlook

The Group maintains a positive outlook for FYE 2017. Indeed, the Group has secured nearly RM300 million worth of new water and wastewater contracts last year, bringing its total outstanding order book to RM 645 million. In the Malaysia Budget 2017, a total fund of RM 2.0 billion has been allocated to improve capacity and address water supply issues in various states.

The Group is confident that it will be able to play a role in the nation's water supply needs and will build on our experience and expertise to leverage on the programmes and projects outlined in the 11th Malaysia Plan. We remain focused on building upon our key competitive strengths in the design and construction of water and wastewater upon treatment plants, laying of water and sewer pipelines, and growing in niche markets such as Non Revenue Water management and control.

Concurrently, the Group's diversification into technology services, property development and tourism e-commerce will boost our earnings growth in the medium to long term.

In technology services, telecommunications companies which are competing to provide faster and reliable bandwidth services will need to fiberise their networks. The competition between telecommunication companies which are driven by data growth and innovative new digital services, content and applications give the group extensive opportunities to fully utilize our fibre optic backbone which is strategically located in the heart of the Klang valley to secure more income-generating ventures.

As for the property division, with the slowing down of the Malaysian property market, the Group's acquisition of the freehold commercial land in Australia will enable the Group to establish a presence in the Australian property market. Additionally, our new ventures in China e-commerce and tourism will allow the Group to innovate travel by replicating Alitrip's success.

With these strategic initiatives in place, the Group has laid a strong foundation to further strengthen our performance and enhance value for our shareholders.