M-MODE BERHAD ( M-MODE OR THE COMPANY ) PROPOSED DIVERSIFICATION INTO THE CONSTRUCTION BUSINESS 1. INTRODUCTION On behalf of the Board of Directors of M-Mode ( Board ), TA Securities Holdings Berhad ( TA Securities ) wishes to announce that the Company and its subsidiary companies ( M-Mode Group ) are proposing to diversify into the construction business ( Proposed Diversification ). 2. PROPOSED DIVERSIFICATION Presently, M-Mode Group is principally involved in the business of investment holding, provision of mobile contents, data application services, production and distribution of magazines as well as acting as a media advertisement agent. M-Mode Group intends to diversify into the construction business by way of securing construction projects. As announced on 26 May 2017, the Company s wholly-owned subsidiary E&J Builders Sdn Bhd ( E&J ) had on the same day entered into a joint venture agreement ( JVA ) with Rexallent Construction Sdn Bhd ( RCSB ) to undertake and complete the remaining construction of a residential development project, known as H2O ( H2O Project ) for a contract sum of RM180 million. The details of the H2O Project are as follows: Description of H2O Project (i) 3 blocks of 15-storey service apartments with a total of 877 units; (ii) 1 block of 15-storey SOHO (Small Office Home Office) with a total of 480 units; and Type of development Postal address and identification Size of land Commencement date of E&J s contract work Expected completion date of E&J s contract work (iii) 1-storey clubhouse on top of 7-storey podium which consists of a 7-storey car park with shop offices and amenities. Residential Lot 91995 (No. Lot Lama PT 1424), Jalan PJU 1A/3, Ara Damansara, Mukim Damansara, Daerah Petaling, Selangor Darul Ehsan 6.039 hectares 1 June 2017 31 December 2018 Titijaya PMC Sdn Bhd ( TPSB ) is the project management company of the H2O Project. On 22 May 2015, TPSB appointed RCSB as its main contractor for the H2O Project. E&J and RCSB will develop the H2O Project in accordance with the terms and conditions as set out in the Letter of Award from TPSB to RCSB dated 20 May 2015. 1
3. RATIONALE FOR PROPOSED DIVERSIFICATION M-Mode Group intends to diversify into the construction business in order to provide it with additional sources of income and to enhance its prospects. The Proposed Diversification will be undertaken through the H2O Project and other construction projects to be secured. The Board believes that the Proposed Diversification would contribute positively to M-Mode Group s future earnings, and improve M-Mode Group s financial position. The Board expects the construction business to potentially contribute at least 25% to the net profits of M-Mode Group and/or the diversion of at least 25% of M-Mode Group s net assets towards its construction business. In this regard, the Board proposes to seek the approval of the shareholders of M- Mode for the Proposed Diversification pursuant to Paragraph 10.13 of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad, at an extraordinary general meeting ( EGM ) to be convened. M-Mode Group intends to continue with its existing business in largely the same manner. If the Proposed Diversification is approved by shareholders, M-Mode Group will in future be principally involved in its existing business and the construction business. 4. INDUSTRY OUTLOOK AND PROSPECTS OF M-MODE GROUP 4.1 Overview and outlook for Malaysian economy The Malaysian economy recorded a stronger growth of 5.8% in the second quarter of 2017 (1Q 2017: 5.6%). Private sector spending continued to be the main driver of growth. On the external front, growth was further supported by the robust expansion in real exports of goods and services (9.6%; 1Q 2017: 9.8%) following strong demand for manufactured and commodity products. Real imports moderated slightly to 10.7% (1Q 2017: 12.9%) following more moderate expansion in investment. On a quarter-on-quarter seasonally-adjusted basis, the economy recorded a growth of 1.3% (1Q 2017: 1.8%). Domestic demand grew by 5.7% in the second quarter of the year (1Q 2017: 7.7%), supported by continued expansion in both private sector expenditure (7.2%; 1Q 2017: 8.2%) and public sector spending (0.2%; 1Q 2017: 5.8%). Private consumption recorded a growth of 7.1% (1Q 2017: 6.6%), supported by the improvement in private sector wages amid continued strength in employment growth. During the quarter, consumer sentiments continued to improve, providing further impetus to household spending. Public consumption growth moderated to 3.3% (1Q 2017: 7.5%) following slower growth in the spending on emoluments, and supplies and services. Given the continued strong performance in the second quarter of 2017, the Malaysian economy recorded a strong growth of 5.7% in first half of 2017. Private consumption will be underpinned by continued wage and employment growth, with support from various policy measures to raise disposable income. On the external front, exports are expected to benefit from the improvement in global growth, especially among Malaysia s key trading partners. Overall, the economy is expected to record a stronger growth in 2017. (Source: Economic and Financial Developments in the Malaysian Economy in the 2nd Quarter of 2017, Bank Negara Malaysia) The Malaysian economy recorded a sterling growth of 5.8% during the second quarter of 2017 (Q2 2016: 4%) supported by domestic demand and improved external sector. On the supply side, all sectors recorded positive growth led by services and manufacturing sectors. 2
Domestic demand expanded 5.7% in the second quarter of 2017 (Q2 2016: 6.1%) supported by robust private sector activities. Private consumption expanded strongly by 7.1% (Q2 2016: 6.2%) on account of continued growth in disposable income driven by stable labour market conditions and better export earnings. This was reflected by higher consumption of food & nonalcoholic beverages (7.7%), communication (10.4%) as well as restaurants and hotels (7.4%). Meanwhile, public consumption moderated 3.3% (Q2 2016: 5.4%) due to lower spending on supplies and services. The services sector posted a stronger growth of 6.3% during the second quarter of 2017, accounting for 54.2% of Gross Domestic Product ( GDP ) (Q2 2016: 5.7%; 54%). Growth was supported by intermediate services which increased 6.8% (Q2 2016: 5.5%) driven by information and communication as well as finance and insurance subsectors. Meanwhile, the final services rose 6.6% (Q2 2016: 6.1%) attributed to robust wholesale and retail trade subsector. The real estate and business services subsector edged further to 7.3% (Q2 2016: 6.9%) with real estate segment expanding 5% (Q2 2016: 4.7%). The business services segment recorded 8.5% (Q2 2016: 7.9%) supported by professional services, particularly in engineering, legal and accounting services. Other services subsector increased 5.2% (Q2 2016: 4.5%) led by private education which rose 6% (Q2 2016: 6.4%) and private health which expanded 5.3% (Q2 2016: 5.4%). Meanwhile, government services grew 4.5% (Q2 2016: 4.9%). Value added of the manufacturing sector grew strongly by 6% during the second quarter (Q2 2016: 4.2%) underpinned by steady performance of both export and domestic-oriented industries. Manufacturing output increased significantly by 6.2% (Q2 2016: 3.9%), while sales registered a double-digit growth of 16.2% to RM185.8 billion (Q2 2016: 1.2%; RM160 billion). Export-oriented industries expanded 6.3% (Q2 2016: 5.1%) on account of higher E&E products (10.1%) following higher output of electronic components and boards. In addition, output of palm oil based products grew 12.4% following a rebound in crude palm oil (CPO) production. Other major segments such as chemicals and chemical products recorded a sustained growth of 3.4%, while refined petroleum and wood products rose 1.8% and 6.8%, respectively (Q2 2016: 4.9%; 5%; 7.9%). Meanwhile, output of domestic-oriented industries surged 5.9% (Q2 2016: 0.7%) mainly attributed to stronger consumption of food products (12.2%) during the holidays and festive season. Output of transport equipment rebounded 3.5% (Q2 2016: -7.4%) driven by higher production of parts and accessories for cars as well as building of ships and boats, while output of construction-related cluster was supported by vibrant construction activity. In 2017, taking into cognisance of the favourable world output and trade performances as well as the robust growth during the first half of the year, the Malaysian GDP is expected to expand at a faster rate than the earlier projection. Economic expansion will be underpinned by robust domestic demand and strengthening exports, with private sector continuing to provide the main impetus to growth. Domestic labour market is expected to continue to be stable, while inflation remains manageable. Despite the external risks, Malaysia s strong macroeconomic fundamentals and diversified economic structure will continue to support growth. (Source: Quarterly Update on the Malaysian Economy 2nd Quarter 2017, Ministry of Finance Malaysia) 3
4.2 Overview of the construction industry in Malaysia The construction sector recorded moderate growth in 2016 (7.4%; 2015: 8.2%). The faster pace of expansion in the civil engineering and residential sub-sectors was partially offset by a decline in non-residential activity. Growth in the civil engineering sub-sector was driven by higher activity in existing multi-year projects, particularly in the petrochemical, transportation and utilities segments. Activity in the residential sub-sector was supported by large property launches in the previous years while growth in the special trade sub-sector continued to be supported by early and end-works activity. Growth in the non-residential sub-sector, however, was weighed down by slower activity in the commercial property segment amid the oversupply of office and retail space. (Source: Bank Negara Malaysia Annual Report 2016) The construction sector is projected to grow 8.3% (2016: 8.7%) mainly supported by the commencement of large infrastructure projects such as MRT Sungai Buloh Serdang Putrajaya Line, Pan Borneo Highway, Sungai Besi Ulu Klang Elevated Expressway and Damansara Shah Alam Elevated Expressway. The upgrading road works from Klang Container Terminal North Port and the construction of infrastructure in Malaysia Vision Valley are expected to further support the sector. The residential subsector is projected to expand driven by affordable housing programmes, particularly 1Malaysia Civil Servants Housing. Meanwhile, the non-residential subsector is expected to benefit from the mixed commercial development mainly in Klang Valley, Johor and Pahang. The residential subsector grew 10.4% supported by steady growth in incoming supply at 13.1% to 816,174 units (January June 2015: 13.5%; 10.3%; 721,730 units). Klang Valley, accounting for 26.2%, continued to contribute the most of the incoming supply mainly due to increasing affordable housing schemes (January June 2015: 25.6%). However, during the period, new approvals declined significantly by 32% to 44,389 units as developers are clearing unsold properties, while buyers are more cautious amid increasing uncertainties in the global environment (January June 2015: -2.1%; 65,231 units). Likewise, housing starts declined 16.8% to 60,378 units (January June 2015: 15%; 72,545 units). Of which, terrace houses and condominiums/apartments accounted for 43.6% (26,324 units) and 29.9% (18,070 units), respectively, while low-end houses 11% (6,617 units). The take-up rate for residential units was lower at 25.6% in the first half of 2016 largely reflecting softer demand for high-end units (January June 2015: 29.8%) During the first half of 2016, a total of 102,096 residential properties valued at RM32.7 billion were transacted, accounting for 62.4% of total property transactions (January June 2015: 119,446 transactions; RM36.5 billion; 64.1%). Residential properties transacted in Kuala Lumpur recorded a marked contraction of 20.1%, followed by Selangor (-14.1%), Pulau Pinang (-13.5%), and Johor (-10.9%). The softening of the transaction was partly due to the buyers cautious sentiment and measures to contain the accelerating house prices. The residential overhang increased 63.1% to 13,438 units with a total value of RM7.6 billion during the first half of 2016 (January June 2015: -24.1%; 8,238 units; RM2.7 billion) with Johor accounting for the highest overhang units at 21.1% (2015: 23.3%). Malaysia House Price Index ( MHPI ) continues to moderate reflecting implementation of various measures to contain spiralling prices. The MHPI stood at 235.4 points (at base year 2000) during the second quarter of 2016, increasing 5.3%, the lowest since the fourth quarter of 2009 (Q2 2015: 223.5 points; 7.5%). All states recorded a positive growth except Kelantan (- 0.2%) and Sabah (-0.6%). Johor registered the highest increase of 7%, followed by Kuala Lumpur (6.9%), Selangor (6.6%), Kedah (6.5%) and Negeri Sembilan (6.2%). The average allhouse price increased to RM326,241 in the second quarter of 2016 relative to RM309,705 for the corresponding period in 2015, with detached houses recording the highest increase at 6.5%, followed by high rise units (6%) and terrace houses (5.7%). 4
Shop segment recorded 6,513 transactions worth RM4.7 billion during the first half of 2016, constituting 56% of total commercial property transactions (January June 2015: 10,045 transactions; RM7.9 billion). Johor contributed the highest market volume of 17.5% followed by Selangor (16.1%). The shop overhang increased 22.6% to 5,024 units valued at RM2.5 billion during the period following a more cautious sentiment among businesses (January June 2015: -14.8%; 4,097 units; RM1.7 billion). However, demand for commercial buildings remained favourable with the average occupancy rate of retail space at 82.2% and office (83.5%), reflecting sustained demand for commercial space in prime areas. As at end-june 2016, the existing stock of shopping complexes and industrial segment stood at 14.2 million sm and 106,453 units, respectively (end-june 2015: 13.4 million sm; 103,103 units). The Purpose-Built Office Rent Index Wilayah Persekutuan Kuala Lumpur increased 4% to 128.7 points in the second quarter of 2016 (Q2 2015: 3.5%; 123.7 points). Kuala Lumpur City Center recorded the highest rental increase of 4.2% to RM4.73 per square feet (psf), surpassing the average rate of RM4.62 psf in Wilayah Persekutuan Kuala Lumpur. (Source: Economic Report 2016/2017, Ministry of Finance Malaysia) The construction sector continued to register a strong growth of 8.3% (Q2 2016: 8.9%) reinforced by higher civil engineering activities. Civil engineering subsector strengthened by 14.9% (Q2 2016: 19.1%) mainly due to higher activities in the transportation, power plant and O&G-related projects. The specialised construction activities subsector expanded further to register 9% (Q2 2016: 7.9%) supported by painting, interior design and electrical works. In addition, the non-residential subsector rebounded 6.7% (Q2 2016: -0.6%) underpinned by industrial-related projects, particularly in Klang Valley. The residential buildings subsector moderated at 2.1% (Q2 2016: 9.2%) attributed to lower construction of affordable housing projects, particularly in Klang Valley and Perak. During the quarter, total value of construction work done recorded a double-digit growth of 11.2% to register RM33.8 billion involving 9,405 projects (Q2 2016: 11.7%; RM30.4 billion; 9,983 projects). The expansion in value of construction work done was driven by positive growth in all subsectors, particularly in civil engineering (19.3%) and special trades activities (11.6%). Private sector accounted for 63.8% of the total construction activity while the remaining by public sector. (Source: Quarterly Update on the Malaysian Economy 2 nd Quarter 2017, Ministry of Finance Malaysia) 4.3 Prospects of M-Mode Group M-Mode Group has been facing challenges in its existing core business in the mobile telecommunication industry as mobile value added industry continued to come under pressure from the increasing uptake of over-the-top (OTT) applications, combined with more intense competition among existing industry participants. M-Mode Group is therefore striving to improve the situation by implementing new marketing strategies and increasing research and development initiatives to develop more innovative products. At the same time, M-Mode Group is making efforts to improve its financial performance by entering into a construction-related JVA in relation to the H2O Project, thereby leading to M- Mode Group s Proposed Diversification. Premised on the positive outlook for the construction industry, the Board is positive that with the expertise and experience of its construction-related personnel, M-Mode Group would be able to diversify into the construction business which is expected to enhance M-Mode Group s profitability and shareholder value. 5
5. RISK FACTORS RELATING TO THE PROPOSED DIVERSIFICATION 5.1 Operational/ business risks The Proposed Diversification will subject M-Mode Group to risks inherent to the construction industry. These may include property construction schedule risk (i.e., late completion or primarily risks associated with the completion of the property construction works within planned schedules), project defects, dependency on operating permits, licenses, certificates and/or regulatory approvals, adverse weather conditions, changes in the demand and supply of property, adverse changes in rental prices, difficulty in obtaining tenants, as well as changes in the regulatory framework governing the construction industry. 5.2 Competition and business diversification risks M-Mode Group will face direct competition from both new entrants and existing companies involved in the construction industry. M-Mode Group may also be disadvantaged as a new entrant in the construction industry as it lacks the relevant track record and brand name compared to the existing construction companies which may enjoy established brand names and entrenched reputation in the industry. Nevertheless, M-Mode Group seeks to be competitive in the construction industry by being cost efficient through effective project management and cost control policies, providing quality products and competitive pricing as well as actively seeking new opportunities in the construction industry. 5.3 Dependency on key personnel M-Mode Group s involvement in the construction industry will depend on the abilities, skills, experience and competency of Ong Chee Koen, Yap Nam Fee and other key management personnel. The loss of any of these personnel without suitable and timely replacement may adversely affect M-Mode Group s construction business. The Board believes that M-Mode Group has the capacity, capabilities and resources to diversify into the construction industry after taking into consideration the competency and experience of Ong Chee Koen, being the Executive Director of the Company and Yap Nam Fee, being the Project Director of the Company, whom the Board deems to be the main key management personnel who will be instrumental in M-Mode Group s diversification into the construction industry. Ong Chee Koen and Yap Nam Fee have been involved in the construction industry in the long term. They will be supported by other management personnel as well as external consultants such as the architects, engineers, surveyors, subcontractors and other consultants. Ong Chee Koen, the Executive Director of M-Mode, graduated from the Federal Institute of Technology with Diploma of Civil Engineering. In 1998, he started his property and construction business primarily focusing on Ecobuild (M) Sdn Bhd. In 2017, he joined M-Mode as an Executive Director and is currently in charge of all business development, contract negotiation and management work for E&J. He has been involved in the construction industry since 1978 and has accumulated approximately 39 years of experience in the construction industry. Yap Nam Fee, the Project Director of M-Mode, graduated from Universiti Sains Malaysia in 1994 in civil engineering. He started his career as a Project Engineer in Gamuda Berhad. He was then attached with Kenneison Brothers Construction as a Senior Project Manager. He is one of the founder members of Pembinaan Infra E&J Sdn Bhd. In 2017, he joined M-Mode as a Project Director. He is currently responsible for project development, project management and project coordination for the construction works and future projects of E&J. He has been involved in the construction industry since 1994 and has accumulated approximately 23 years of experience in the construction industry. 6
5.4 Economic, political and regulatory risks Any adverse developments in political, economic, market, interest rate, taxation, regulatory and social conditions may materially affect M-Mode Group s involvement in the construction industry. These include changes which are beyond M-Mode Group s control. 6. EFFECTS OF THE PROPOSED DIVERSIFICATION The Proposed Diversification will not have any effect on the Company s share capital and substantial shareholders shareholdings in the Company. The Proposed Diversification, through the H2O Project and other future construction projects, is expected to contribute materially to M-Mode Group s earnings for the FYE 31 May 2018 and beyond, with the resulting positive impact on M-Mode Group s net assets. M- Mode Group s gearing may increase in the event M-Mode Group obtain additional external borrowings to finance the diversification into the construction business. 7. APPROVAL REQUIRED AND TIMEFRAME The Proposed Diversification requires the approval of the Company s shareholders at an EGM to be convened in the 4 th quarter of 2017. 8. INTER-CONDITIONALITY The Proposed Diversification is not conditional upon any other corporate proposals of the Company. 9. INTERESTS OF DIRECTORS, MAJOR SHAREHOLDERS AND/OR PERSONS CONNECTED WITH THEM None of the Directors or major shareholders of the Company or persons connected with them has any interest, direct or indirect, in the Proposed Diversification. 10. DIRECTORS STATEMENT After having considered all aspects of the Proposed Diversification, the Board is of the opinion that the Proposed Diversification is in the best interest of the Company. 11. ADVISER TA Securities has been appointed as the adviser of the Company for the Proposed Diversification. This announcement is dated 13 October 2017. 7