D.B.E. GURNEY RESOURCES BERHAD D.B.E. GURNEY RESOURCES BERHAD. D.B.E. GURNEY RESOURCES BERHAD (Company No A)

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1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the course of action to be taken, you should consult your stockbroker, bank manager, solicitor, accountant or other professional adviser immediately. THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. Bursa THIS CIRCULAR Malaysia Securities IS IMPORTANT Berhad takes AND no REQUIRES responsibility YOUR for the IMMEDIATE contents of ATTENTION. this Circular (as defined herein), makes no If you representation are in any doubt as to as its to accuracy the course or completeness of action to be and taken, expressly you should disclaims consult any your liability stockbroker, whatsoever bank for manager, any loss howsoever solicitor, If you are accountant in arising any doubt from or or as other in to reliance the professional course upon of the adviser action whole to immediately. be or any taken, part you of the should contents consult of this your Circular. stockbroker, bank manager, solicitor, accountant or other professional adviser immediately. Bursa Malaysia Securities Berhad takes no responsibility for the contents of this Circular (as defined herein), makes no Bursa representation Malaysia Securities as to its Berhad accuracy takes or completeness no responsibility and for expressly the contents disclaims of this any Circular liability (as whatsoever defined herein), for any makes loss howsoever no representation arising as from to or its in accuracy reliance upon or completeness the whole or and any expressly part of the disclaims contents of any this liability Circular. whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Circular. D.B.E. GURNEY RESOURCES BERHAD (Company No A) (Incorporated in Malaysia under the Companies Act, 1965) D.B.E. GURNEY RESOURCES BERHAD D.B.E. GURNEY RESOURCES BERHAD (Company No A) CIRCULAR TO SHAREHOLDERS (Incorporated in Malaysia (Company under No A) the Companies Act, 1965) (Incorporated in Malaysia under the Companies Act, 1965) CIRCULAR IN RELATION TO SHAREHOLDERS CIRCULAR TO SHAREHOLDERS TO THE IN RELATION TO THE PROPOSED BONUS ISSUE OF UP IN TO RELATION 2,344,081,972 TO THE FREE WARRANTS IN D.B.E. GURNEY RESOURCES PROPOSED BONUS BERHAD ISSUE ("DBE ) OF ON UP TO THE 2,344,081,972 BASIS OF ONE FREE (1) WARRANTS FOR IN D.B.E. EVERY GURNEY TWO (2) RESOURCES PROPOSED BONUS EXISTING DBE BERHAD ISSUE SHARES ("DBE ) OF HELD ON UP TO ON THE 2,344,081,972 THE BASIS SAME OF ENTITLEMENT ONE FREE (1) WARRANTS DATE AS FOR IN D.B.E. THE EVERY GURNEY PROPOSED TWO (2) RESOURCES EXISTING BONUS DBE BERHAD ISSUE SHARES ("DBE ) OF HELD ON SHARES ON THE ( PROPOSED THE BASIS SAME OF ENTITLEMENT ONE (1) WARRANT BONUS ISSUE DATE OF WARRANTS ) AS FOR THE EVERY PROPOSED TWO (2) EXISTING BONUS DBE ISSUE SHARES OF HELD SHARES ON ( PROPOSED THE SAME ENTITLEMENT BONUS ISSUE DATE OF WARRANTS ) AS THE PROPOSED BONUS ISSUE OF SHARES ( PROPOSED BONUS ISSUE OF WARRANTS ) AND AND NOTICE OF EXTRAORDINARY GENERAL MEETING NOTICE OF EXTRAORDINARY GENERAL MEETING Principal Adviser Principal Adviser Principal Adviser (A Participating Organisation of Bursa Malaysia Securities Berhad) (A Participating Organisation of Bursa Malaysia Securities Berhad) The Notice of the Extraordinary General Meeting ( EGM ) of D.B.E. Gurney Resources Berhad to be held at Intan 1, The The Notice Orient of the Star Extraordinary Resort (A Participating Lumut, General Lot Organisation 203 Meeting & 366 ( EGM ) Jalan of Bursa Iskandar of D.B.E. Malaysia Shah, Gurney Securities Resources Lumut, Berhad) Berhad Perak to on be Thursday, held at Intan 29 December 1, The Orient 2016 Star at Resort a.m., Lumut, or at Lot any 203 adjournment & 366 Jalan thereof, Iskandar together Shah, with the Proxy Lumut, Form, Perak are enclosed on Thursday, herein. 29 December 2016 at a.m., or at any adjournment thereof, together with the Proxy Form, are enclosed herein. The You Notice are entitled of the to Extraordinary attend and vote General at the Meeting EGM or ( EGM ) appoint of a D.B.E. proxy or Gurney proxies Resources to attend Berhad and vote to on be your held behalf. at Intan If 1, you You The wish are Orient entitled to do Star so, to you attend Resort may and Lumut, deposit vote Lot at the the 203 Form EGM & 366 of or Proxy appoint Jalan at Iskandar DBE s a proxy registered or Shah, proxies office to attend Lumut, No. and , Perak vote on Wisma Thursday, your Sri behalf. Mata, 29 If December Jalan you wish Van to 2016 Praagh, do so, at you may a.m., Penang deposit or at not any the less adjournment Form than of forty-eight Proxy thereof, at DBE s (48) together hours registered with before the office the Proxy time at No. Form, and , date are enclosed stipulated Wisma Sri herein. for Mata, the EGM. Jalan Van The Praagh, lodging of the Form Penang of not Proxy less will than not forty-eight preclude you (48) from hours attending before the and time voting and in date person stipulated the for EGM the You should EGM. are The you entitled lodging subsequently to attend of the wish and Form vote to of do at Proxy so. the EGM will not or preclude appoint a you proxy from or proxies attending to and attend voting and vote in person your at the behalf. EGM If you should wish you to subsequently do so, you may wish deposit to do the so. Form of Proxy at DBE s registered office at No , Wisma Sri Mata, Jalan Last day, Van date Praagh, and time for Penang lodging the not Form less than of Proxy forty-eight : Tuesday, (48) hours 27 before December the time 2016 and at date a.m. stipulated for the EGM. Day, Last day, date The date and lodging time and time of the for EGM Form lodging of the Proxy Form will of not Proxy preclude : Thursday, Tuesday, you from 27 attending 29 December and voting at at in person a.m. a.m. at the EGM should Day, date you and subsequently time of the wish EGM to do so. : Thursday, 29 December 2016 at a.m. Last day, date and time for lodging the This Form Circular of Proxy is dated : Tuesday, 9 December 27 December at a.m. Day, date and time of the EGM This Circular is dated : Thursday, 9 December December 2016 at a.m. This Circular is dated 9 December 2016

2 DEFINITIONS Except where the context otherwise requires, the following definitions shall apply throughout this Circular: ACP or Noteholder or Subscriber : Advance Capital Partners Pte Ltd, being the subscriber of the Notes pursuant to the Notes Issue Board : Board of Directors of DBE Bursa Depository : Bursa Malaysia Depository Sdn Bhd Bursa Securities : Bursa Malaysia Securities Berhad Circular : This circular to the shareholders of DBE in relation to the Proposed Bonus Issue of Warrants dated 9 December 2016 DBE or Company : D.B.E. Gurney Resources Berhad ( A) DBE Group or Group : DBE and its subsidiaries, collectively DBE Share(s) : Existing ordinary shares of RM0.01 each in DBE Deed Poll : The deed poll constituting the Warrants to be executed by the Company EGM : Extraordinary general meeting Entitled Shareholders : Shareholders of our Company whose names appear in the Record of Depositors of the Company as at the close of business on the Entitlement Date Entitlement Date : A date to be determined and announced by the Board, on which the names of shareholders of the Company must appear in the Record of Depositors of the Company in order to participate in the Proposed Bonus Issue of Warrants EPS : Earnings per share FYE : Financial year ended/ending, as the case may be Kenanga IB : Kenanga Investment Bank Berhad (15678-H) Listing Requirements : Main Market Listing Requirements of Bursa Securities LPD : 30 November 2016, being the latest practicable date prior to the printing of this Circular Market Day : Any day between Monday and Friday (inclusive of both days) which is not a public holiday and on which Bursa Securities is open for the trading of securities NA : Net assets Notes : Redeemable Convertible Notes issued/to be issued by the Company to ACP pursuant to the Notes Issue Notes Issue : Issuance of Notes with an aggregate principal amount of up to RM50.0 million undertaken by DBE in 2015 Official List : A list specifying all securities listed on the Main Market of Bursa Securities i

3 DEFINITIONS (Cont d) Outstanding Notes : Notes with a nominal value of RM2,050,000 issued by the Company to ACP but yet to be converted into DBE Shares or redeemed by the Company as at the LPD Proposed Bonus Issue of Warrants : The proposed bonus issue of warrants of up to 2,344,081,972 Warrants in DBE on the basis of one (1) Warrant for every two (2) existing DBE Shares held on the Entitlement Date Record of Depositors : A record of depositors established by Bursa Depository RM and sen : Ringgit Malaysia and sen respectively, being the lawful currency of Malaysia Subscription Agreement : Subscription Agreement dated 27 April 2015 entered into between DBE, Advance Opportunities Fund and ACP in relation to the Notes Issue Unissued Notes : Notes with a nominal value of RM34,000,000 yet to be issued by the Company to ACP as at the LPD VWAP : Volume weighted average market price Warrants : Up to 2,344,081,972 free warrants in DBE to be issued pursuant to the Proposed Bonus Issue of Warrants All references to you in this Circular are references to shareholders of DBE. Words denoting the singular shall, where applicable, include the plural and vice versa. Words denoting the masculine gender shall, where applicable, include the feminine and/or neuter genders and vice versa. References to persons shall include corporations. Any reference to any enactment in this Circular is a reference to that enactment as for the time being amended or re-enacted. Any reference to a time of day in this Circular is a reference to Malaysian time, unless otherwise specified. ii

4 TABLE OF CONTENTS LETTER FROM THE BOARD TO THE SHAREHOLDERS OF DBE IN RELATION TO THE PROPOSED BONUS ISSUE OF WARRANTS CONTAINING: SECTION PAGE 1. INTRODUCTION 1 2. DETAILS OF THE PROPOSED BONUS ISSUE OF WARRANTS 2 3. UTILISATION OF PROCEEDS 5 4. RATIONALE FOR THE PROPOSED BONUS ISSUE OF WARRANTS 6 5. INDUSTRY OVERVIEW AND FUTURE PROSPECTS 6 6. EFFECTS OF THE PROPOSED BONUS ISSUE OF WARRANTS HISTORICAL SHARE PRICES APPROVALS REQUIRED INTERESTS OF DIRECTORS, MAJOR SHAREHOLDERS AND/OR PERSONS CONNECTED WITH THEM DIRECTORS RECOMMENDATION CORPORATE EXERCISES ANNOUNCED BUT PENDING COMPLETION ESTIMATED TIMEFRAME FOR COMPLETION EGM FURTHER INFORMATION 17 APPENDIX APPENDIX I FURTHER INFORMATION 18 NOTICE OF EGM FORM OF PROXY ENCLOSED ENCLOSED iii

5 D.B.E. GURNEY RESOURCES BERHAD (Company No A) (Incorporated in Malaysia under the Companies Act, 1965) Registered Office No , Wisma Sri Mata Jalan Van Praagh Penang 9 December 2016 Board of Directors Dato Ding Chong Chow (Executive Chairman) Dato Ding Seng Huat (Group Managing Director) Cheng Lay Miew (Executive Director) Dato Ting Heng Peng (Senior Independent Non-Executive Director) YM Ungku A Razak Bin Ungku A Rahman (Independent Non-Executive Director) Lee Kean Cheong (Independent Non-Executive Director) To: The Shareholders of D.B.E. GURNEY RESOURCES BERHAD Dear Sir/Madam, PROPOSED BONUS ISSUE OF WARRANTS 1. INTRODUCTION On 18 October 2016, Kenanga IB had, on behalf of the Board, announced that the Company proposes to undertake the Proposed Bonus Issue of Warrants. On 31 October 2016, Kenanga IB had, on behalf of the Board, announced that the listing application in relation to the Proposed Bonus Issue of Warrants has been submitted to Bursa Securities. On 30 November 2016, Kenanga IB had, on behalf of the Board, announced that Bursa Securities, vide its letter dated 29 November 2016, approved the following: (i) (ii) (iii) The admission of the Warrants to the Official List of Bursa Securities; The listing of and quotation for the Warrants on the Main Market of Bursa Securities; and The listing of and quotation for the new DBE Shares to be issued upon the exercise of the Warrants on the Main Market of Bursa Securities. 1

6 THE PURPOSE OF THIS CIRCULAR IS TO PROVIDE YOU WITH DETAILS OF THE PROPOSED BONUS ISSUE OF WARRANTS AND TO SEEK YOUR APPROVAL FOR THE RESOLUTION PERTAINING TO THE PROPOSED BONUS ISSUE OF WARRANTS TO BE TABLED AT THE FORTHCOMING EGM. THE NOTICE OF THE FORTHCOMING EGM AND THE FORM OF PROXY ARE ENCLOSED IN THIS CIRCULAR. YOU ARE ADVISED TO READ AND CAREFULLY CONSIDER THE CONTENTS OF THIS CIRCULAR TOGETHER WITH THE APPENDICES CONTAINED HEREIN BEFORE VOTING ON THE RESOLUTION PERTAINING TO THE PROPOSED BONUS ISSUE OF WARRANTS TO BE TABLED AT THE FORTHCOMING EGM. 2. DETAILS OF THE PROPOSED BONUS ISSUE OF WARRANTS 2.1 Basis and number of Warrants to be issued The Proposed Bonus Issue of Warrants will entail a bonus issuance of up to 2,344,081,972 Warrants in DBE on the basis of one (1) Warrant for every two (2) DBE Shares held by the Entitled Shareholder on an Entitlement Date. As at the LPD, the Company has issued and paid-up share capital of RM10,831,639 comprising 1,083,163,945 DBE Shares. In addition, the Company has the following outstanding and unissued Notes pursuant to the Notes Issue: i. Outstanding Notes with a nominal value of RM2,050,000 issued to ACP but yet to be converted/redeemed as at the LPD; and ii. Notes with a nominal value of RM34,000,000 yet to be issued by the Company to ACP as at the LPD. In the event all the Unissued Notes and Outstanding Notes are fully converted by the Subscriber at the minimum conversion price of RM0.01, being the par value of DBE Shares, a total of 3,605,000,000 new DBE Shares will be issued to the Noteholder. The bases of computing the minimum and maximum number of Warrants to be issued in respect of the Proposed Bonus Issue of Warrants are set out below: Minimum Scenario: Maximum Scenario: Assuming that none of the Outstanding Notes and Unissued Notes is converted into new DBE Shares, prior to the implementation of the Proposed Bonus Issue of Warrants. Assuming that all of the Outstanding Notes and Unissued Notes are converted into new DBE Shares at the par value of RM0.01 each, being the minimum conversion price, prior to the implementation of the Proposed Bonus Issue of Warrants. 2

7 Based on the abovementioned Minimum Scenario and Maximum Scenario, the number of Warrants and in turn the number of new DBE Shares to be issued upon the exercise of Warrants are as follows: Minimum Scenario Maximum Scenario Number of DBE Shares as at the LPD 1,083,163,945 1,083,163,945 Number of new DBE Shares to be issued upon full conversion of Outstanding Notes and Unissued Notes (1) - 3,605,000,000 Number of Warrants to be issued upon Proposed Bonus Issue of Warrants Number of DBE Shares to be issued pursuant to full exercise of the Warrants 1,083,163,945 4,688,163, ,581,972 2,344,081, ,581,972 2,344,081,972 Note (1) : Assuming full conversion of the Outstanding Notes and Unissued Notes at the minimum conversion price of RM0.01, being the par value of DBE Shares. Any fractional entitlements arising from the Proposed Bonus Issue of Warrants will be disregarded and shall be dealt with in such manner as the Board shall in its absolute discretion deem fit and expedient, and to be in the best interest of the Company. The Proposed Bonus Issue of Warrants will not be implemented in stages over a period of time. 2.2 Basis of determining the issue price and exercise price of the Warrant The Warrants will be issued at no cost to the Entitled Shareholders. The exercise price of the Warrants has been fixed at RM0.05 per Warrant, representing a premium of approximately 24.4% over the five (5)-day VWAP of DBE Shares up to and including the LPD of RM The exercise price of the Warrants of RM0.05 per Warrant was fixed after taking into consideration, amongst others, the following: (i) (ii) (iii) (iv) (v) prevailing market conditions; the historical volatility of the underlying DBE Shares; the Warrants being exercisable at any time within a five (5) year period from the date of issue of the Warrants; the potential future earnings of DBE Group; and the par value of DBE Shares of RM0.01 each. 2.3 Ranking of the new DBE Shares to be issued upon exercise of the Warrants The holders of the Warrants will not be entitled to any voting rights or participation in any form of distribution other than on winding-up, compromise or arrangement of DBE to be set out in the Deed Poll and/or any other offer of further securities in DBE until and unless such holders of the Warrants exercise their Warrants into new DBE Shares. The new DBE Shares to be issued upon the exercise of the Warrants shall, upon allotment and issuance, rank pari passu in all respects with the existing DBE Shares, save and except that the new DBE Shares will not be entitled to any dividends, rights, allotments and/or any other distributions which may be declared, made or paid to the shareholders of the Company, for which the entitlement date is prior to the date of allotment of the new DBE Shares to be issued pursuant to the exercise of the Warrants. 3

8 2.4 Listing of and quotation for the Warrants and new DBE Shares to be issued upon exercise of the Warrants Bursa Securities had vide its letter dated 29 November 2016 approved the listing of and quotation for the Warrants and the new DBE Shares to be issued arising from the exercise of the Warrants on the Main Market of Bursa Securities. 2.5 Indicative salient terms of the Warrants The indicative salient terms of the Warrants are set out below: Issue size Form Exercise price Tenure Exercise period Exercise rights Mode of exercise Entitlement Board lot Participating rights of the Warrant holders in any distribution and/or offer of further securities : Up to 2,344,081,972 Warrants, under the Maximum Scenario : The Warrants will be issued in registered form and constituted by a Deed Poll : RM0.05 per Warrant : Five (5) years from and including the date of issue of the Warrants : The Warrants may be exercised at any time within five (5) years commencing on and including the date of issuance of the Warrants. Warrants not exercised during the exercise period will thereafter lapse and cease to be valid : Each Warrant entitles its registered holder to subscribe for one (1) new DBE Share at the exercise price at any time during the exercise period, subject to the provisions to be included in the Deed Poll : The registered holder of the Warrant is required to lodge an exercise form with the Company s registrar, duly completed and signed together with payment of the exercise price via banker s draft or cashier s order or money order or postal order drawn on a bank or post office operating in Malaysia : Subject to the provisions to be included in the Deed Poll, each Warrant shall entitle the registered holder to subscribe for one (1) new DBE Share at the Exercise Price during the Exercise Period : For the purpose of trading on Bursa Securities, one (1) board lot of Warrants shall comprise 100 Warrants carrying the rights to subscribe for 100 new DBE Shares at any time during the exercise period, or such other denomination as determined by Bursa Securities : The Warrant holders are not entitled to vote in any general meetings of the Company or participate in any form of distribution other than on winding-up, compromise or arrangement of DBE and/or in any offer of further securities in the Company until and unless the Warrant holder becomes a shareholder of DBE by exercising his/her Warrants into new DBE Shares or unless otherwise resolved by DBE in a general meeting 4

9 Adjustment in the exercise price and/or number of Warrants Modifications Transferability Governing law : The exercise price and/or the number of unexercised Warrants shall be adjusted in the event of alteration to the share capital of the Company, capital distribution or issue of shares in accordance with the provisions to be included in the Deed Poll : Subject to the approval of Bursa Securities (if required), any modifications to the Deed Poll may be effected only by the Deed Poll, executed by the Company and expressed to be supplemental hereto and comply with the requirements of the Deed Poll. The Company must notify the Warrant holders of any modification within thirty (30) days after such modification is effected in accordance with the Deed Poll : The Warrants shall be transferable in the manner provided under the Securities Industry (Central Depositories) Act, 1991 and the Rules of Bursa Malaysia Depository Sdn Bhd : The Warrants and the Deed Poll shall be governed by the laws and regulations of Malaysia 3. UTILISATION OF PROCEEDS The Company will not raise any funds upon the issuance of the Warrants as the Warrants will be issued at no cost to the Entitled Shareholders of DBE. The exact quantum of the future proceeds that may be raised by DBE pursuant to the exercise of the Warrants would be dependent on the actual number of Warrants that are exercised during the tenure of the Warrants. As such, the exact timeframe for utilisation of the proceeds cannot be determined at this juncture. For illustration purposes, assuming full exercise of the Warrants at the exercise price of RM0.05 per Warrant, the proceeds potentially raised by the Company pursuant to the Proposed Bonus Issue of Warrants are as follows: No. of DBE Shares to be issued pursuant to the exercise of the Warrants Minimum Scenario Maximum Scenario 541,581,972 2,344,081,972 Proceeds (RM million) Such proceeds to be raised, as and when the Warrants are exercised, shall be utilised for the future working capital requirements of the DBE Group which include, amongst others, payment to trade and other payables, staff costs, utilities and other operating expenses. The proceeds to be utilised for each component of working capital are subject to the DBE Group s operating requirements at the time of utilisation and therefore cannot be determined at this juncture. 5

10 4. RATIONALE FOR THE PROPOSED BONUS ISSUE OF WARRANTS The Warrants 2011/2016 previously issued by DBE has expired on 22 March Therefore, the Board intends to undertake the Proposed Bonus Issue of Warrants to reward the existing shareholders of the Company for their continuous support by enabling them to participate in an equity derivative of the Company without incurring any cost and at the same time provide an opportunity for the existing shareholders of the Company to increase their equity participation in DBE arising from the exercise of Warrants. The Board is also cognizant that it had not declared any dividends since 2004 and the Proposed Bonus Issue of Warrants is mainly to reward its existing shareholders. Additionally, the Proposed Bonus Issue of Warrants will allow the Company to strengthen its capital base and market capitalisation. Although the Proposed Bonus Issue of Warrants is not for the purpose of raising funds, the Warrants will provide additional working capital to the DBE Group as and when they are exercised. The additional funds will be utilised for the future working capital requirements of the Group as set out in Section 3 of the Circular. The Warrants will be also traded separately from DBE Shares, which will provide the Entitled Shareholders an avenue to monetise the Warrants should they choose to do so. Furthermore, the Board notes the potential dilution to the existing shareholders shareholdings in DBE from the conversion of the Outstanding Notes and Unissued Notes pursuant to the Notes Issue undertaken by DBE in The Proposed Bonus Issue of Warrants will provide an opportunity for the existing shareholders of the Company to reduce the dilution impact to their shareholdings as a result of the Notes Issue as the Board is of the view that it is unlikely for the Outstanding Notes and Unissued Notes to be fully converted into new DBE Shares prior to the Entitlement Date. 5. INDUSTRY OVERVIEW AND FUTURE PROSPECTS 5.1 Overview and Outlook of the Malaysian Economy The Malaysian economy expanded 4.3% during the third quarter of 2016 (Q2 2016: 4%) amid a challenging external environment. The growth was backed by higher domestic activities and a rebound in net exports. On the supply side, all sectors registered positive growth except agriculture. The services and manufacturing sectors remained as the key driver of growth, contributing 54.2% and 22.7% of GDP, respectively. Domestic demand grew 4.7% during the third quarter of 2016 driven mainly by resilient private sector activity (Q2 2016: 6.3%). Private sector expenditure, constituting more than 70% of GDP expanded 6% (Q2 2016: 6.1%). Meanwhile, public sector expenditure grew at a slower pace of 0.3% (Q2 2016: 6.9%). Private consumption increased further by 6.4% (Q2 2016: 6.3%) supported by several measures by the Government, including one annual salary increment for civil servants and an upward revision of minimum wage. Higher consumption was recorded in clothing & footwear, communication as well as food & non-alcoholic beverages segments. The continued growth in consumer spending was reflected in major consumption indicators such as sales of motorcycles (9.5%) and food (8%) as well as credit cards spending (2.5%). Headline inflation, as measured by the annual change in the Consumer Price Index (CPI), stood at 1.3% in the third quarter of 2016 (Q2 2016: 1.9%). The slight moderation was due to a slower increase in prices of food and non-alcoholic beverages group at 3.4% (Q2 2016: 4.2%) as well as housing, water, electricity, gas and other fuels group at 2.2% (Q2 2016: 2.5%). Similarly, prices in the alcoholic beverages and tobacco group also increased at a slower pace of 19.7% (Q2 2016: 21.3%). These groups cumulatively contributed 2.67 percentage points to the CPI increase. However, the transport group declined 7.4% during the quarter, reducing the total CPI by 0.98 percentage points. Average inflation for the first nine months of 2016 grew 2.2% (January September 2015: 1.9%). 6

11 The Malaysian economy is expected to remain on its growth trajectory in the fourth quarter of 2016, supported by strong macroeconomic fundamentals as well as pro-growth fiscal and accommodative monetary policies. Despite the uncertainties in the external environment, domestic demand will continue to be the main engine of growth supported by private sector activity. On the supply side, services, manufacturing and construction sectors will remain the key drivers of growth. The economy continues to operate under conditions of full of employment and inflation is expected to remain manageable. (Source: Quarterly Update on the Malaysian Economy 3 rd Quarter 2016, Ministry of Finance) 5.2 Industry Outlook The agriculture sector recorded a smaller contraction of 5.9% (Q2 2016: -7.9%) mainly on account of improved CPO production which recorded 5 million tonnes (Q2 2016: 4.2 million tonnes) despite the lagged El Niño effect. Meanwhile, value-added of the other agriculture subsector grew 4.2% (Q2 2016: 4.9%) supported by the higher production of vegetables and fruits. Value-added of the livestock subsector rose 4.2% (Q2 2016: 4.9%) mainly driven by higher demand for cattle. However, the fishing subsector grew moderately by 3.2% (Q2 2016: 6.6%) due to lower marine and aquaculture produce. The forestry and logging subsector recorded a smaller contraction of 2.4% (Q2 2016: -5.8%) due to higher output, particularly from Peninsular Malaysia and Sarawak. Meanwhile, the rubber subsector declined further by 9.2% (Q2 2016: -4.5%) attributed to lower prices which discouraged tapping activities. During the quarter, rubber price (SMR20) traded at RM5.25 per kilogramme (Q2 2016: RM5.43 per kilogramme). (Source: Quarterly Update on the Malaysian Economy 3 rd Quarter 2016, Ministry of Finance) The agriculture sector contracted 6% in the first half of 2016 due to lower output of CPO and rubber (January June 2015: 0.3%). Nevertheless, the production of food commodities such as livestock, fruits and vegetables grew supported by various programmes and initiatives by the Government to achieve self-sufficiency level. For the year, value-added of the agriculture sector is envisaged to decline 3.3% mainly weighed down by lower CPO production (2015: 1.2%). Value-added of agro-food subsector grew 4.5% during the first half of 2016 in line with the Government s effort to enhance food security (January June 2015: 3.7%). Livestock subsector increased 4.9% largely attributed to higher output of poultry (January June 2015: 3.7%). Value-added of other agriculture subsector grew 5.5% on account of higher production of fruits and vegetable (January June 2015: 3.6%). Meanwhile, value-added of fishing subsector grew 2% supported by higher marine fish landings (January June 2015: 2.2%). (Source: Economic Report 2016/2017, Ministry of Finance Malaysia) In 2015, a production of million day-old chicks was reported by the poultry industry and the production of broilers was million birds. For 2016, a production of million day-old chicks and million broilers is projected. There are 24 broiler parent stock companies with annual day-old chicks production capacities ranging from 2.14 to million birds operating in Export of live broilers in 2015 was million birds showing a 9.5% higher than the previous year. The importation of chicken cuts in 2015 increased by 0.15% from In Malaysia, the poultry industry is most successful segment of the livestock sector and has the highest output value per worker in the agriculture sector. Malaysia has one of the highest per capita consumption of chicken in the world. Chicken meat is the most popular and cheapest source of meat protein among Malaysians, largely because there are no dietary prohibitions or religious restrictions against chicken consumption. Malaysian consumers today demands safe and high quality food at a reasonable price from the industry. The Malaysian consumers are also price-sensitive and look for value-for-money products. The poultry industry is increasingly challenged to produce new innovative products at lower costs without compromising on the quality. (Source: The Broiler Chicken Industry in Peninsular Malaysia Status of the Industry in 2015 and Prospects in 2016, Federation of Livestock Farmers Associations of Malaysia) 7

12 5.3 Prospects of the Group Historical financial performance of the Group The financial performance of the Group for the past three (3) financial years up to FYE 31 December 2015 is set out below: < Audited > < FYE 31 December > RM ( 000) RM ( 000) RM ( 000) Revenue 153, , ,550 Gross profit/(loss) 9, ,502 Profit/ (Loss) after taxation (513) (10,176) (10,753) Accumulated losses (23,639) (32,117) (16,710) NA 67,002 56,826 49,758 Total borrowings 28,190 23,028 24,057 Gearing ratio (times) The financial commentaries of the Group s financial performance for the past three (3) financial years are set out below: (i) FYE 31 December 2013 The Group s loss after taxation in FYE 31 December 2013 has decreased by RM14.97 million to RM0.51 million, mainly due to higher revenue recorded during the year. The higher revenue of RM million recorded in FYE 31 December 2013 was mainly attributable to the increase in the sales and average selling price of live broilers during the year. The reduction in the Group s NA as at 31 December 2013 was due to the loss after taxation recorded during the year. Despite the loss after taxation of RM0.51 million recorded in FYE 31 December 2013, the Group s accumulated losses had decreased by RM9.72 million from the previous year to RM23.64 million mainly due to the disposal of property, plant and equipment in FYE 31 December 2013, which gives rise to a realisation of asset revaluation of RM10.23 million. In addition, the Group s total borrowings has decreased by RM11.33 million from RM39.52 million as at 31 December 2012 to RM28.19 million as at 31 December 2013, which resulted in a lower gearing ratio of 0.42 times as at 31 December (ii) FYE 31 December 2014 The decrease in the gross profit of the Group from RM9.19 million in FYE 31 December 2013 to RM0.65 million in 31 December 2014 was mainly due to higher direct cost of sales recorded during the year. As a result, the Group also recorded higher loss after taxation of RM10.18 million in FYE 31 December 2014 as compared to loss after taxation of RM0.51 million in the preceding year. The higher direct cost of sales recorded in FYE 31 December 2014 was mainly due to shortage of supply of live broilers from the DBE Group s poultry breeding farms during the year, which resulted in the Company purchasing live broilers from third party at higher purchasing price. In addition, the increase in Malaysian minimum wages structure during the year also contributed to the higher direct cost of sales incurred by the Group in FYE 31 December

13 The decrease in the Group s NA as at 31 December 2014 was in line with the loss after taxation recorded during the year. The Group has also recorded lower gearing ratio during the year due to decrease in total borrowings as at 31 December (iii) FYE 31 December 2015 The decrease in revenue from RM million in FYE 31 December 2014 to RM million in FYE 31 December 2015 was mainly due to the decrease in sales of feeds. In 2015, the Group began to operate the leased poultry farms themselves, instead of third party contractors, resulting in sales of feeds not being recognised as revenue. Consequently, the Group recorded a lower direct cost of sales during the year which led to higher gross profit of RM5.50 million recorded in FYE 31 December 2015 as compared to RM0.65 million recorded in FYE 31 December However, the Group continues to record a loss after taxation of RM10.75 million in FYE 31 December 2015 mainly due to impairment of long outstanding debts of RM3.5 million, expenses incurred for undertaking Notes Issue in 2015 of RM1.5 million and increase in the administrative fees incurred during the year. Notwithstanding the loss after taxation recorded in FYE 31 December 2015, the Group s accumulated losses has been reduced to RM16.71 million as at 31 December 2015 mainly due to the Group utilising RM22.02 million of the credit from Par Value Reduction undertaken by DBE in 2015 to offset against the accumulated losses of DBE of RM22.02 million at the Company level as at 31 December The decrease in the NA as at 31 December 2015 coupled with the increase in the total borrowings of the Group due to the issuance of Notes during the year has increased the Group s gearing ratio to 0.45 times as at 31 December Future prospect of the Group DBE is an investment holding company. Through its wholly owned subsidiary, DBE Poultry Sdn Bhd ( DBE Poultry ), being the Group s main operating company, the Group operates as an integrated poultry producer which comprises feeds production, breeder farms, hatchery, poultry broiler farms, processing plant and products logistic. The local poultry industry continues to face challenges, particularly in controlling operating costs which are to certain extent influenced by the weakening Malaysian Ringgit, rising commodity prices and energy prices. Despite these challenges, efforts have been intensified to improve the overall financial and business performance of the Group such as: (i) financial risk management to minimize the Group s exposure to financial risk factors; (ii) optimize the capacity utilization of the food processing plant; (iii) implement stringent cost-cutting measures at all levels; (iv) emphasize on operational efficiency, reduce wastage and increase productivity; and (v) exploring retailing opportunities to enhance business activities. In addition to the above, since 2015, the Group has reduced the outsourcing of its live broiler production by third party contractors and managed the live broilers production in-house to reduce the Group s operating costs. This has resulted in the Group recorded lower direct costs of sales of RM million during the year which led to the Group s higher gross profit of RM5.50 million in FYE 31 December 2015 as compared to the preceding year. 9

14 On 18 November 2015, DBE Poultry entered into Supply of Poultry Products Agreements with Kentucky Fried Chicken (Malaysia) Sendirian Berhad, KFC (Peninsular Malaysia) Sdn Bhd and QSR Stores Sdn Bhd (collectively as Retailers ), to supply poultry products to the Retailers at the designated KFC outlets in the territories of Perak and Selangor. Subsequently, DBE Poultry had on 11 November 2016 renewed the agreements to supply poultry products to the Retailers for one year period effective from 1 January 2017 to 31 December This augurs well with the Group s intention to increase its market share locally and sustain its business competitiveness. The renewal of agreements is expected to generate approximately RM50.0 million in revenue to the DBE Group in FYE 31 December In addition, the Group has also ventured into the retail of chicken products under the HARUMi brand. This new venture will expand the Group s business activities and enhance its presence in the local market. As at the LPD, the Group has obtained all the relevant approvals in relation to the operation of HARUMi brand and has commenced its retailing business since July Presently, there are approximately 200 outlets under HARUMi brand (including food trucks and kiosks) operated by DBE Group in Malaysia. Furthermore, DBE Poultry has also entered into a joint venture agreement with Distinct Legacy Sdn Bhd and Tengku Faizwa Binti Tengku Razif, as announced on 20 July 2016, to jointly establish an entrepreneur development programme for the setting up of HARUMi retail outlets with selected entrepreneurs ( JV Business ). The joint venture will provide the Group with a competitive edge in the local poultry industry in the foreseeable future. The Group expects to commence the JV Business in the 2 nd quarter of 2017 and set up approximately 1,000 HARUMi kiosks throughout Malaysia. The renewal of poultry supply agreements, the venture into HARUMi brand as well as the reduction in outsourcing of the broiler production are expected to improve the financial performance of the Group moving forward. This is also reflected in the DBE Group recording profit of tax of RM1.18 million for the 9 months financial period ended 30 September 2016 as compared to loss after tax of RM5.58 million recorded for the same period in the preceding year. The proceeds potentially raised from Proposed Bonus Issue of Warrants of up to RM million may be used by the Group to fund the working capital for the supply of poultry products to Retailers and the operation of the Group s retailing business under HARUMi brand. This is expected to contribute positively to the Group s future revenue and earnings and in turn may increase the equity value of the shareholders. (Source: Management of DBE) 10

15 6. EFFECTS OF THE PROPOSED BONUS ISSUE OF WARRANTS For illustration purposes, the proforma effects of the Proposed Bonus Issue of Warrants based on the Minimum Scenario and Maximum Scenario are set out in the ensuing sections. 6.1 Issued and Paid-up Share Capital The proforma effects of the Proposed Bonus Issue of Warrants on the issued and paid-up share capital of the Company are set out below: Issued and paid-up share capital of DBE as at the LPD Upon full conversion of all Outstanding Notes and Unissued Notes Minimum Scenario Maximum Scenario No. of DBE Shares Share Capital No. of DBE Shares Share Capital ( 000) (RM 000) ( 000) (RM 000) 1,083,164 10,832 1,083,164 10, (1) 3,605,000 36,050 1,083,164 10,832 4,688,164 46,882 To be issued pursuant to the Proposed 541,582 5,416 2,344,082 23,441 Bonus Issue of Warrants Enlarged issued and paid-up share capital 1,624,746 16,248 7,032,246 70,323 Note: (1) Upon converting Notes with a nominal value of RM36,050,000, which comprises the Outstanding Notes of RM2,050,000 and Unissued Notes of RM34,000,000, at the minimum conversion price of RM0.01, being the par value of DBE Shares. 6.2 NA and gearing The proforma effects of the Proposed Bonus Issue of Warrants on the NA per Share and gearing of the DBE Group are set out as below: (a) Minimum Scenario Group Level Audited as at 31 December 2015 (RM 000) Proforma (I) Proforma (II) Proforma (III) (2) Adjusted for After Proforma After Proforma (I) and (II) and Subsequent Proposed Assuming Full Events up to Bonus Issue of Exercise of the the LPD Warrants Warrants (RM 000) (RM 000) (RM 000) Share capital 7,682 10,832 10,832 (5) 16,248 Share premium 2,710 9,960 9,960 31,624 (3) Warrant reserve 6, Asset revaluation 11,301 11,301 11,301 11,301 reserve Other reserve (1) 38,578 (1) 38,578 (1) 38,578 (1) 38,578 Redeemable Convertible Notes Accumulated losses (16,709) (3) (10,648) (4) (10,848) (10,848) Total equity/ NA 49,758 60,106 59,906 86,986 No. of Shares issued ( 000) 768,217 1,083,164 1,083,164 (5) 1,624,746 NA per Share (RM) Borrowings 24,057 22,817 22,817 22,817 Gearing (times)

16 Notes: (1) (2) (3) (4) (5) Comprises the balance of credit arising from the par value reduction undertaken by the Company in 2015, which may be utilised by the Group in the future to off-set the accumulated losses of the Company. Adjusted for material subsequent events, which include the issuance of 314,947,310 new DBE Shares pursuant to conversion of Notes up to the LPD. After reversal of the warrant reserve of RM6.06 million as the Warrants 2011/2016 issued by DBE previously that has expired on 22 March After deducting the estimated expenses for the Proposed Bonus Issue of Warrant of RM0.20 million. Assuming full exercise of 541,581,972 Warrants issued under Minimum Scenario at the exercise price of RM0.05 per Warrant. (b) Maximum Scenario Group Level Audited as at 31 December 2015 (RM 000) Proforma (I) Proforma (II) Proforma (III) Proforma (IV) After Proforma (I) and After Assuming Full After Proforma (III) Conversion of Proforma (II) and Adjusted for Outstanding and Assuming Subsequent Notes and Proposed Full Exercise Events up to Unissued Bonus Issue of the the LPD Notes of Warrants Warrants (2) (RM 000) (RM 000) (RM 000) (RM 000) Share capital 7,682 10,832 (4) 46,882 46,882 (8) 70,323 Share premium 2,710 9,960 9,960 9,960 (8) 103,724 Warrant 6,061 (3) reserve Asset 11,301 11,301 11,301 11,301 11,301 revaluation reserve Other reserve (1) 38,578 (1) 38,578 (1) 38,578 (1) 38,578 (1) 38,578 Redeemable (5) Convertible Notes Accumulated losses (16,709) (3) (10,648) (10,648) (7) (10,848) (10,848) Total equity/ NA 49,758 60,106 96,073 95, ,078 No. of Shares issued ( 000) NA per Share (RM) 768,217 1,083,164 Borrowings 24,057 22,817 Gearing (times) (4) 4,688,164 4,688,164 (8) 7,032, (6) 21,877 21,877 21, Notes: (1) Comprises the balance of credit arising from the par value reduction undertaken by the Company in 2015, which may be utilised by the Group in the future to off-set the accumulated losses of the Company. (2) Adjusted for material subsequent events, which include the issuance of 314,947,310 new DBE Shares pursuant to conversion of Notes up to the LPD. (3) After reversal of the warrant reserve of RM6.06 million as the Warrants 2011/2016 issued by DBE previously that has expired on 22 March (4) After full conversion of all the Outstanding Notes and Unissued Notes into 3,605,000,000 DBE Shares at the par value of RM0.01 each. (5) After deducting the equity component of the Notes of RM0.08 million recorded in the book as at the LPD upon full conversion of the outstanding Notes. (6) After deducting the liability component of the Notes of RM0.94 million recorded in the book as at the LPD upon full conversion of the outstanding Notes. (7) After deducting the estimated expenses for the Proposed Bonus Issue of Warrant of RM0.20 million. (8) Assuming full exercise of 2,344,081,972 Warrants at the exercise price of RM0.05 per Warrant. 12

17 6.3 Substantial Shareholders Shareholdings The proforma effects of the Proposed Bonus Issue of Warrants on the shareholdings of the substantial shareholders of DBE as at the LPD are set out below: (a) Minimum Scenario Substantial Shareholders Dato Ding Seng Huat Advance Capital Partners Pte Ltd (b) Maximum Scenario (I) (II) After (I) and Assuming Full Exercise of the Warrants Shareholdings as at the LPD After Proposed Bonus Issue of Warrants Direct Indirect Direct Indirect Direct Indirect No. of Shares % No. of Shares % No. of Shares % No. of Shares % No. of Shares % No. of Shares % 108,103, ,103, ,155, ,824, ,824, ,236, Substantial Shareholders Dato Ding Seng Huat Advance Capital Partners Pte Ltd (I) (II) After Assuming Full Conversion of Outstanding Notes and Unissued Notes After (I) and Proposed Bonus Issue of Warrants Shareholdings as at the LPD Direct Indirect Direct Indirect Direct Indirect No. of Shares % No. of Shares % No. of Shares % No. of Shares % No. of Shares % No. of Shares % 108,103, ,103, ,103, ,824, ,681,824,620 * ,681,824,620 * (II) After (II) and Assuming Full Exercise of the Warrants Direct Indirect Substantial No. of Shareholders No. of Shares % Shares % Dato Ding Seng 162,155, Huat Advance Capital 5,522,736,930 * Partners Pte Ltd * The above tables are to serve only as an illustration upon full conversion of Notes under the Maximum Scenario, However, it is expected that there will be no change in the Company s controlling shareholder pursuant to the Notes Issue as there will be no conversion of the Notes by ACP to transfer a controlling interest in the Company such that ACP becomes a controlling shareholder of the Company without the prior approval of the Company s shareholders, nor to hold more than 10% interest in the issued and paid-up share capital of the Company, at any time and from time to time, without the Company s prior approval pursuant to the Subscription Agreement. 13

18 6.4 Earnings and EPS The Proposed Bonus Issue of Warrants is not expected to have an immediate effect on the earnings and EPS until such time when the Warrants are exercised. The potential effect of the exercise of the Warrants on the future earnings and EPS of the Group will depend upon, amongst others, the number of Warrants exercised at any point in time and the utilisation of proceeds arising from the exercise of the Warrants. Although the exercise of the Warrants into new DBE Shares is expected to immediately dilute the EPS of the Group as a result of the increase in the Company s issued and paid-up share capital, the utilisation of proceeds raised from the exercise of the Warrants is expected to contribute positively to the future earnings of the Group. 6.5 Convertible Securities As at the LPD, the Company has Outstanding Notes with a nominal value of RM2,050,000. The Proposed Bonus Issue of Warrants is not expected to have any effect on the Outstanding Notes other than the fixed conversion price for the respective tranches of the Notes, which may be subjected to an adjustment in the event the exercise price of the Warrant is less than 95% of the market price of DBE Share on the Entitlement Date in accordance to the Subscription Agreement. However, the adjustment would not result in the fixed conversion price to be lower than RM0.01, being the par value of DBE Shares. The rights and obligations of the Notes holders will remain unchanged. As at the LPD, the Company has raised RM16.0 million via issuance of million Notes to the Subscriber. The proceeds raised from the Notes issue have been utilised by the Group as follow: Purpose As set out in Circular dated 2 July 2015 Amount raised as at the LPD Amount utilised RM 000 RM 000 RM 000 Partial repayment of bank borrowings 20,000 6,665 (1) 6,665 Future acquisition of poultry farms, 20,000 3,916 (2) 3,916 upgrading of existing production facilities and construction of a cold room Working capital purposes 5,000 3,353 (3) 3,353 Estimated expenses for the Notes Issue 5,000 2,066 2,066 Total 50,000 16,000 16,000 Notes: (1) (2) (3) As at the LPD, the Company had utilised approximately RM6.67 million of the proceeds for the partial repayment of bank borrowings to pare down the bank borrowings of the Group to approximately RM21.88 million. The Company had utilised approximately RM3.92 million from the proceeds raised to upgrade its existing feed mill equipment and production facilities to maintain its production quality and efficiency. Approximately RM3.35 million of the proceeds has been utilised by the Group to finance its day-today operations, including expenses for the purchase of raw materials, repayment of trade creditors and selling and administrative expenses. As at the LPD, save for the abovementioned Notes, the Company does not have any other outstanding convertible securities. 14

19 7. HISTORICAL SHARE PRICES The monthly highest and lowest transacted market prices of DBE Shares as traded on Bursa Securities for the past twelve (12) months from December 2015 to November 2016 are as follows: 2015 High RM December January February March April May June July August September October November Low RM Last transacted price of DBE Shares on 14 October 2016 (being the last Market Day immediately prior to the date of announcement of the Proposed Bonus Issue of Warrants) Last transacted price of DBE Shares as at the LPD RM0.045 RM0.040 (Source: Bloomberg) 8. APPROVALS REQUIRED The Proposed Bonus Issue of Warrants is subject to the following approvals being obtained: (i) Bursa Securities for the following: (a) (b) (c) The admission of the Warrants to the Official List of Bursa Securities; The listing of and quotation for the Warrants on the Main Market of Bursa Securities; and The listing of and quotation for the new DBE Shares to be issued upon the exercise of the Warrants on the Main Market of Bursa Securities; 15