GOING BEYOND HG METAL MANUFACTURING LIMITED Annual Report 2011

GOING BEYOND HG METAL MANUFACTURING LIMITED Annual Report 2011

GOING BEYOND YEARS OF STEEL CONTENTS 1 Corporate Profile 2 Chairman s Statement 6 Managing Director & CEO s Message 9 Financial Highlights 10 Board of Directors 12 Key Executives & Shared Services 13 Key Milestones 14 Operations & Financial Review 16 Corporate Information 17 Corporate Governance 31 Financial Contents

CORPORATE PROFILE Supported by a 40-year track record in the steel industry, SGX Mainboard-listed HG Metal Manufacturing Limited ( HG Metal ) is today a leading steel distributor and processor in the region. Our highly experienced management team possesses an average of 20 years of experience in the Asia steel industry. We leverage on the expertise and relationship network of our major shareholder and foundation steel specialist, the Oriental Castle Group, to execute our multi-pronged growth strategy in ASEAN. With more than 800,000 square feet of land area, HG Metal has one of the largest steel warehouse and processing facilities in Singapore, storing more than 2,000 varieties of steel products. Together with our comprehensive range of downstream value-added and processing services, HG Metal offers customised steel solutions for our regional customer base along the entire supply chain. GOING BEYOND ANNUAL REPORT 2011 1

CHAIRMAN S STATEMENT The new leadership signifies a fresh direction for HG Metal, as the Group charts a new beginning in our drive for sustainable growth. Dear Shareholders Celebrating 40 Years of Steel 2011 marked an important milestone for HG Metal as we commemorated 40 years in the steel business. The company was founded by our Executive Director, Mr Tan Chan Too, along with three other partners in 1971, as Hock Guan Hardware and Company. Today, HG Metal is widely regarded by customers and peers as one of the regional leaders in steel distribution and processing, and I am privileged to be a part of this dynamic company. Following four decades of track record in the steel industry, the Group continues to build sustainable growth under new leadership. We are blessed with a strong management team Mr Tan, who spearheads the Group s distribution and trading business, is now joined by Mr Goh Kian Sin, who had assumed the role of Chief Executive Officer on 1 July 2011. Armed with more than 20 years of experience in the steel industry, Mr Goh is also the founder of the Oriental Castle Group ( OCG ) which is one of the region s key players in the foundation steel sector. HG Metal will leverage on the expertise and relationship network of OCG to execute our multi-pronged growth strategy in ASEAN. The Company remains committed to enhance value for our customers and to create long term shareholder value. 2 HG Metal Manufacturing Limited

beyond expectations Year in Review Even when challenged with an uncertain global economy and volatile trading conditions, the Group stayed focused to end FY2011 on a strong note. Our positive results in FY2011 was due to increased sales volumes mainly in Singapore, Malaysia and Indonesia. The Group achieved a 18% growth in top line to reach S$238.8 million, while gross profit rose 10% to hit S$26.0 million. Due to a competitive business environment, gross profit margin declined marginally by 0.8 percentage points from 11.7% in FY2010 to 10.9% in FY2011. On an operating level, other operating expenses declined significantly by 65% to S$7.1 million mainly due to the S$12.9 million inventory write-down in FY2010. Finance expenses also dropped by 72% to S$1.9 million following the repayment of our long-term loan facility. Overall, our net profit in FY2011 surged significantly to reach S$16.3 million, compared to S$0.3 million in FY2010. A share buyback s impact on share price comes from changes in the Company s capital structure and, more critically, from the positive signals a buyback sends. The share buyback enables us to return the Group s excess funds to shareholders expediently and cost-efficiently. We will have the opportunity to acquire shares when the shares are undervalued, to help mitigate short-term market volatility and short-term speculation. In Appreciation On behalf of the Board of Directors, I would like to express our sincere gratitude to all our stakeholders. To our shareholders thank you for your continued support and confidence. To my fellow board members, management team and employees thank you for your hard work and commitment. To our customers, suppliers and business partners we are grateful for your trust and confidence in us and look forward to many more years of support. Enhancing Shareholder Value HG Metal is committed to creating long-term sustainable growth, and to returning value to you, our shareholders. In view of our robust results in FY2011, the Board of Directors is pleased to propose an interim tax-exempt cash dividend of 0.6 Singapore cents per share. To further enhance shareholder value, the Directors are also seeking your approval for a share purchase mandate. The mandate will give the company the flexibility to purchase or acquire the company s shares, if and when circumstances permit. Mr. Yap Xi Ming Non-Executive Chairman GOING BEYOND ANNUAL REPORT 2011 3

董事长致词 超越期望 亲爱的股东, 庆祝 40 年的钢铁生意 2011 年是福源金属的重要里程碑, 标志着我们在钢铁工业 40 年 公司在 1971 年由执行董事, 陈春土先生, 以及三位合作伙伴成立, 名为福源硬件公司 今天, 福源金属在新加坡和区域内已成为钢铁分布和加工领域的领导者, 而我确实感觉非常荣幸能够成为这公司的一份子 新的领导班子, 标志着福源金属的新方向, 作为本集团持续增长的一个新开始 以这四十年在钢铁工业的经验为后盾, 福源金属富有信心面向未来 我们背靠强而有力的管理层 - 由陈先生负责集团的业务分布及贸易, 再加上吴建勋先生的加入, 于 2011 年 7 月 1 日上任为首席执行官 新的领导班子, 标志着福源金属的新方向, 作为本集团持续增长的一个新开始 吴先生在钢铁行业的经验超过 20 年, 他也是 Oriental Castle Group( OCG ) 的创始人, 而其公司是区域内基础钢铁工业的主要营业者之一 有了 OCG 的加入, 作为我们的主要股东, 再加上本集团多管齐下的增长策略, 福源金属致力于为我们的客户增值, 并进一步发展我们在钢铁分布和加工领域的地位 年度回顾虽然面对着世界经济困难, 我们在 2011 财政年度取得了积极的成果 在全球经济软化与不明朗的背景下, 本集团仍保持集中, 取得成果 我们 2011 财政年度的业绩, 多归于销售量增加, 尤其在新加坡, 马来西亚和印度尼西亚 4 HG Metal Manufacturing Limited

本集团取得顶线增长 18%, 达到两亿三千八百八十万新元, 而利润总额增长了 10%, 达到两千六百万新元 本集团取得顶线增长 18%, 达到两亿三千八百八十万新元, 而利润总额增长了 10%, 达到两千六百万新元 由于商业环境竞争激烈, 总的利润率轻微下跌 0.8 个百分点, 从 2010 财政年度的 11.7% 跌至 2011 财政年度的 10.9% 在经营运作方面, 其他经营开支显著下降 65% 至七百一十万新元, 主要是由于 2010 财政年度写下的慢动库存总值一千两百九十万新元 财务费用也因为我们偿还了长期贷款设施而下降了 72% 至一百九十万新元 总而言之, 相比于 2010 财政年度的三十万新元净盈利, 我们在 2011 财政年度净盈利大幅度上升, 达到一千六百三十万新元 提升股东价值福源金属致力于确保公司在长期内可持续增长, 并为我们的股东取得盈利 鉴于在 2011 财政年度我们强胜的业绩, 董事会很高兴提出中期免税现金股息每股新币 0.6 分 我们在集团的股本结构和股利政策上有更多的灵活性, 以提高盈利和 / 或每股净资产值 由衷感谢在此我代表董事会, 向所有的股东表示诚挚的谢意 致我们的股东 - 感谢您持续的支持和信心 致我的董事会成员, 管理层团队和员工们 - 感谢你们的辛勤工作和奉献 致我们的客户, 供应商和业务伙伴 - 我们感谢你给予我们的信任与信心, 并期待着有你们更多年的支持 叶玺明先生非执行董事长 为了进一步提高股东价值, 董事会亦寻求批准获得购股授权 这将在情况许可下给予公司有灵活性地购买或收购公司的股份 在适当的价格水平购买股票, 是让我们可以增强集团的净资产收益率的方法之一 这使我们能够在符合成本效益的情况下, 适当地向股东归还集团的剩余基金, 远远超过我们的普通资本金要求 我们将有机会在股价被低估时收购股份, 以帮助缓解短期市场波动和短期的投机行为 购股授权也将让 GOING BEYOND ANNUAL REPORT 2011 5

MANAGING DIRECTOR & CEO S MESSAGE As at 30 September 2011, the Group achieved basic earnings per share of 1.72 Singapore cents, up from a loss of 0.32 Singapore cents a year ago. Our net asset value also grew to 13.07 Singapore cents, from 12.71 Singapore cents last year. Given our strong performance this year and in appreciation of your support, the Group s directors would like to return value to you in the form of an interim tax-exempt cash dividend of 0.6 Singapore cents per share. Subject to your approval, we also plan to buy back our shares at the appropriate time so as to enhance shareholders value. Improving Our Operations FY2011 was a busy year for us as we worked hard to lay the ground for the creation of a stronger HG Metal. Our Group s full-year turnover reached S$238.8 million, up 18% year-on-year, while our gross profit rose 10% to S$26.0 million. Dear Shareholders A Commendable Performance HG Metal s financial performance in FY2011 was a success by any measure, as we made a sterling finish with good sales and earnings growth. Our Group s full-year turnover reached S$238.8 million, up 18% year-on-year, while our gross profit rose 10% to S$26.0 million. With a major drop in operating and finance expenses, our net profit in FY2011 surged significantly to reach S$16.3 million, compared to S$0.3 million in FY2010. Since the beginning of the financial year, the Group has taken definite steps to drive growth. We not only extended our product portfolio to include more standard steel and higher grade products, but also actively pushed the sales of our slower-moving stock. As a result, we managed to grow our sales volumes and regain some market share, mainly in Singapore, Malaysia and Indonesia. We have also widened our sales coverage, on a smaller scale, to Sri Lanka, Thailand, Myanmar and Vietnam. We took a step back and restructured our activities into key business units namely, distribution, project sales and processing (flat, long and specialised processing). We believe creating these new business units would improve our organisational structure and processes, create clear lines of accountability, as well as refocus our activities to add greater value to our customers. What was also necessary was the strengthening of our talent. We appointed two new Chief Operating Officers: Mr Ho Vui Soon, Chief Operating Officer of the Flat Steel Processing Business Unit, and Mr Georges Keipes, Chief Operating Officer of the Long Processing Business Unit. Both Vui Soon and Georges have challenging tasks before them, which they are tackling head on. During the year, we continued to improve the quality and efficiency of our business, which has always been one of our priorities. In line with the steel industry s efforts to increase quality standards, the Group has been reviewing our processes along the supply chain with the aim of implementing a system that allows the traceability of steel source and material composition. Furthermore, we are looking at ways to enhance our operational efficiency in areas such as our processing services, warehousing, sales and transport. In terms of our facilities, we are in the midst of constructing the final building block at our third and new premise at Jurong Port Road. When construction is completed in mid 2012, it will cement HG Metal s position as a steel player with one of the largest steel warehouse and processing facilities in Singapore, with more than 800,000 square feet of land area. 6 HG Metal Manufacturing Limited

beyond boundaries Some of these corporate initiatives to rewire our organisation and set the stage for sustainable growth are still work-in-progress. Although these initiatives will take time and investment cost to come to fruition, we are confident that we are on the right track. Going Beyond One of HG Metal s key value propositions has always been our one-stop hypermarket strategy of providing a wide range of steel products at competitive prices. While this strategy has served and continues to serve us well, we are acutely aware that we need to go beyond this strategy and formulate a forward-looking plan to stay ahead in this increasingly competitive industry. To this end, we have developed a broad-based roadmap covering five core areas: 1. DIVERSIFY BUSINESS MODEL We are diversifying our commodity-based steel stockist business model to focus on higher value, niche products and services. With the recovery of our distribution business, we are shifting our attention to adding value to our steel products, as well as direct sales with end-users who require large and customised orders for specific projects. 2. EXPAND PRODUCT RANGE To strengthen our one-stop hypermarket strategy, we are adding higher grade, difficult-to-attain steel products to our portfolio such as high-strength beams, hot formed hollow sections, high-strength plates for pressure vessels, abrasionresistant plates, high-strength rebars for construction and high-strength plates for shipbuilding. 3. WIDEN GEOGRAPHICAL REACH With ASEAN being the next growth engine in Asia, we will leverage Singapore as a hub to expand into South East Asia, South Asia, Middle East and Australia. The steel markets in the region are highly fragmented and lack high-value products which provides opportunities for us to tap on. 4. STRENGTHEN CUSTOMER RELATIONSHIPS HG Metal has a large and diversified base of 1,000 customers, including smaller steel stockists, hardware companies, trading companies and companies in the engineering, marine and construction industries. Our strategy is to directly engage the end-users of steel, so as to understand their needs and in turn provide more comprehensive solutions and enhance customer loyalty. With this strategy in mind, our new project sales team is actively seeking opportunities GOING BEYOND ANNUAL REPORT 2011 7

MANAGING DIRECTOR & CEO S MESSAGE to work directly with construction, civil engineering, marine engineering, energy, and oil & gas companies. 5. ENHANCE PROCESSING CAPABILITIES We aim to add greater value to our end-users by offering more downstream customisation services in flat and long processing. Presently, HG Metal mainly provides flat steel processing services such as purlin hole-punching, shearing, sandblasting, coating and coil slitting. We are also the only pipe manufacturer in Singapore, producing a wide range of pipes, square/rectangular/hollow sections, lip channels, metal deck, scaffolds and flat bars. In future, we hope to expand our capabilities to include flattening hot rolled coils and cold rolled coils and shearing them to required lengths, beveling, 2D-profile cutting and plasma cutting, as well as kitting. Our multi-pronged strategy aims to enlarge HG Metal s business and position the Group for long-term and sustainable growth into the future. Emerging Economies to Drive Steel Growth In view that steel is an essential material for a wide range of industries, we remain confident of the long-term prospects of the steel industry and believe that ASEAN will be the next growth engine in Asia. The World Steel Association forecasts that world steel demand will grow by 5.4% in 2012, with emerging and developing economies accounting for 73% of world steel demand. According to the South East Asia Iron and Steel Institute, the ASEAN steel industry has picked up significantly after the financial crisis in 2008. Total steel consumption in the region touched nearly 49 million tonnes in 2010, an increase of 17.5% year-on-year. The substantial increase was led mainly by the high growth rate in Thailand, Indonesia and Malaysia. ASEAN s steel consumption continues to have room for growth because of its political and economic stability and high growth potential. Steel consumption in ASEAN in the first half of 2011 reached 26.1 million tonnes. Despite the severe flooding experienced in Thailand, the overall growth in 2011 is expected to be healthy although demand will increase at a slower rate. Hence, steel consumption for 2011 could either come close to or surpass 50.0 million tonnes. On the global front, the outlook for the steel industry is mixed. Recovery in global steel demand is anticipated to slow down in line with the sluggish growth in the world economy. Since July 2011, the global financial markets have been very volatile, triggered by the European debt crisis. With heightened global downside risks, the Ministry of Trade and Industry has lowered its growth forecasts and expects Singapore economy to grow by around 5% in 2011 and by 1% to 3% in 2012. Given the global economic uncertainties and volatility, the Group is cautiously optimistic of our performance for FY2012. We expect margins to remain competitive and will continue to be prudent in the use of our balance sheet, with particular focus on cost management, foreign exchange hedging and non-core asset restructuring. Commitment to Shareholders Our 40-year track record attests to the viability and strength of our steel business. I wish to assure you that HG Metal is committed to deliver sustainable returns and value to all our shareholders. In closing, please allow me to express my deepest appreciation to you, our shareholders, for your confidence in HG Metal; our Board of Directors for their invaluable contribution; our employees for their dedication and hard work; and last but not least, our customers, suppliers, bankers and business partners for their indispensable support. We look forward to your continued support to make FY2012 an even more successful one for HG Metal. Mr Goh Kian Sin Managing Director and Chief Executive Officer 8 HG Metal Manufacturing Limited

FINANCIAL HIGHLIGHTS Turnover by Region (%) Turnover by Products (%) SINGAPORE 64% INDONESIA 19% MALAYSIA 13% OTHERS 4% SHIP PLATES / STEEL PLATES 44% BARS 24% BEAMS 11% PIPES 11% OTHERS 10% SINGAPORE INDONESIA MALAYSIA OTHERS SHIPPLATES / STEEL PLATES BARS BEAMS PIPES OTHERS Net Profit S$(million) Turnover S$(million) Shareholders Fund S$(million) 30 25 20 15 10 5-5 18.3 22.7 07 08 09 0.3 16.3 10 11 1000 800 600 400 200 438.1 732.9 581.8 203.1 238.8 130 110 90 70 50 115.8 136.5 100.5 98.6 132.8-10 -15-20 -25-30 -35-40 -45-50 -55 07 08 09 10 11 07 08 09 10 11-60 (58.8) GOING BEYOND ANNUAL REPORT 2011 9

BOARD OF DIRECTORS 1 2 3 4 1 Mr Yap Xi Ming Non-Executive Chairman Mr Yap Xi Ming, was appointed to the Board in April 2010. Mr Yap is the Managing Director of Chye Hin Hardware Pte Ltd, which is a stockist, importer and exporter for structural and mild steel products. He is a businessman with more than 25 years of experience in the steel industry. Mr Yap is a member of the Remuneration Committee and Nominating Committee. 2 Mr. Goh Kian Sin Managing Director and Chief Executive Officer Mr Goh Kian Sin, was appointed to the Board in November 2010. With more than 20 years of experience in the steel industry, Mr Goh spent his first 10 years in a Kuala Lumpurlisted major steel stockist in Malaysia. In 1999, he founded Oriental Castle Sdn Bhd and led it to become one of the region s key players in the steel application and provider sector, with offices throughout South East Asia and China. Besides steel, Mr Goh also developed his family s used car business and co-founded Telagamas Motors Sdn Bhd, a new car dealership with a network of service centres in North Malaysia. An accountant by training, Mr Goh is a Certified Public Accountant of Australia. He has a Bachelor of Business degree from University of Southern Queensland. Mr Goh is a member of the Nominating Committee. 3 Mr. Tan Chan Too Executive Director Mr Tan Chan Too, is one of the three founders of the Group in 1971. He has 40 years of experience in the steel industry. In the 1980s, Mr Tan was instrumental in developing the Group s export markets and established a new customer base in East Malaysia and Indonesia. Mr Tan is currently heading the Group s steel distribution business. 4 Wong Kean Shyong, Kenn Non-Executive Director Mr Wong Kean Shyong, was appointed to the Board in November 2010. Mr Wong has extensive commercial experience in the international steel trading industry. He is currently the Chief Marketing Officer of Oriental Sheet Piling Sdn Bhd, and heads the company s steel foundation business in China as well as its oil and gas and civil construction divisions. From 1989 to 2002, Mr Wong worked for the Marubeni Group, serving in the group s offices in Japan, Singapore and Hong Kong. He subsequently joined VSC Holdings in 2002 and last held the position of President Construction Material Group in 2008. 5 Dr Tan Eng Liang Independent Director Dr Tan Eng Liang, was appointed to the Board in January 2010. He sits on the boards of several companies, including public-listed companies, namely SunMoon Food Company Limited, Tung Lok Restaurants (2000) Limited, Pokka Corporation (Singapore) Limited, United Engineers Limited, Progen Holdings Limited, Jackspeed Corporation Limited and Hartawan Holdings Limited. Dr Tan has a wealth of experience and was a Member of Parliament (1972 to 1980), the Senior Minister of State for National Development (1975 to 1978) and Senior Minister of State for Finance (1978 to 1979). He also served as the Chairman of the Urban Development Authority and the Singapore Sports Council. Dr Tan has a Doctorate from Oxford University, England. Dr Tan has been awarded the Public Service Star (BBM), Public Service Star (BAR) and the Meritorious Service Medal by the Singapore Government. He is the Chairman of the Audit Committee and member of the Remuneration Committee and Nominating Committee. 6 Mr Gui Kim Young @ Gui Kim Gan Independent Director Mr Gui Kim Young @ Gui Kim Gan, was appointed to the Board in February 2002. Mr Gui has more than 30 years of experience in accounting, audit and tax. He is presently a director of a public accounting corporation, and also acts as an independent director in three other listed companies. Mr Gui graduated from the then Nanyang University with a Bachelor of Commerce in 1973. He is a Fellow of the Institute of Certified Public Accountants of Singapore and a member of the Singapore Institute of Directors. He is the Chairman of the Remuneration Committee, and a member of the Audit Committee and Nominating Committee. 10 HG Metal Manufacturing Limited

5 6 7 7 Mr Ling Chung Yee, Roy Independent Director Mr Roy Ling, was appointed to the Board in January 2010. He is currently the Head of Asia Investment Banking and Managing Director at RL Capital Management. He also sits on the Boards of several organizations and SGX-listed companies. Prior to working for RL Capital, Mr Ling was a senior investment banker with JPMorgan s Asia real estate investment banking team. He was responsible for the origination and execution of investment banking mandates for regional clients. Prior to JPMorgan, Mr Ling held senior banking positions with Lehman Brothers, Goldman Sachs and Salomon Smith Barney, performing a broad range of corporate finance, equity research and real estate financings. Mr Ling is a Chartered Financial Analyst and was formerly a Board Director of the CFA Society of Japan. He graduated from INSEAD with a Global Executive MBA and from the National University of Singapore with a Bachelor of Business Administration with Honours. Mr Ling is the Chairman of the Nominating Committee and a member of the Audit Committee and Remuneration Committee. GOING BEYOND ANNUAL REPORT 2011 11

KEY EXECUTIVES & SHARED SERVICES 1 Mr Ho Vui Soon Chief Operating Officer (Flat Steel Processing Business Unit) Mr Ho heads HG Metal s flat steel processing business unit, with four years of experience in the steel industry. Prior to joining the Company, he was General Manager of Strategy of the Oriental Castle Group and Senior Manager of Oriental Steel Piling. Mr Ho also brings with him 7 years of experience in a global data solutions company, Recall Asia Pte Ltd and has held several positions as Commercial Planning Manager and Regional Chief Financial Officer. 2 Mr Georges Keipes Chief Operating Officer (Long Processing Business Unit) Mr Keipes is in charge of the long processing business unit. He has a solid 16 years of experience in the steel industry, serving in the Arcelor Group of Companies, having moved up the ranks from Director of Mill Sales to Managing Director of International Development. He was also Professor-Engineer at Luxembourg Ministry of National Education for 6 years. 3 Ms Foong Lee Heng, Jasmine Chief Financial Officer Ms Foong, who joined the Company in 2000, is a key member of the senior management team and is responsible for all financial, treasury and accounting functions as well as oversees the corporate advisory matters of the Group. She has 18 years experience in audit and accounting, and is a fellow member of the Association of Chartered Certified Accountants, United Kingdom and a member of the Institute of Certified Public Accountants of Singapore. 4 Ms Foo Chih Yuen Senior Manager, Supply Chain Ms Foo joined the group in 2011. She assists the CEO and the Business Unit Heads in Supply Chain planning and control. She is responsible for putting in a place Management Information System to support supply chain decisions and for developing procedures and guidelines for supply chain management. Ms Foo graduated from NUS with a Bachelor in Business Administration and holds a Post-graduate Diploma in Systems Analysis from NUS-ISS. She has 17 years of working experience in IT, Product Development and Banking. Prior to joining the Group, she was in Corporate Banking serving the steel industry. 5 Ms Khong see yun Senior Manager, Finance & Operations Ms Khong is the Senior Manager overseeing the functions of finance and operations of the flat steel and long processing business units. She joined the Group in 2011. She is a fellow member of The Chartered Association of Certified Accountant, United Kingdom. Prior to joining the Group, Ms Khong was in the building material industry with the Hong Leong Group, Malaysia for 11 years. She had held various positions including Finance Manager, Group Finance Manager and Financial Controller with the Hume Cemboard Sdn Bhd and Group Financial Controller with Guocera Tile Industries Sdn Bhd. 6 Ms Tan Yee Lee, Elise Head of Sales Ms Tan joined the Company in 2007 to lead the Sales Team. Her key responsibilities include sales, marketing and procurement of Company s products, strategizing the Company s market position, developing new market opportunities, formulating sales policies and procedures to improve efficiency and providing better customer service. Ms Tan graduated from NUS (B.Sc, Information Technology in Business focus) and joined the Group s wholly owned subsidiary Oriental Metals Pte Ltd in 2005, assisting sales and marketing for the Company. Prior to joining the Group, she has held various management positions in government-related organizations. 7 Ms Melly Rahardja Project and Product Development Manager Ms Rahardja is in charge of purchasing and joined the Group in 2011. She has 14 years of commercial experience within the steel industry, holding various positions in a steel trading and steel manufacturing firm. 8 Ms Tan Yee Wen Customer Development Manager Ms Tan joined the Company in 2007 to manage credit risk. She is responsible for assessing credit worthiness of customers and to minimise the risk exposure of the Company while supporting the Company s efforts to expand sales and increase market share. Her role has since grown to include exploring and developing new customer base, opening up new market segments, providing sales intelligence support to the Sales Team. She has had extensive experience in international trading after graduating from NUS with a bachelor s degree in Information Communications Management. 12 HG Metal Manufacturing Limited

KEY MILESTONES A LOOK BACK 40 AT OUR PAST 1971 Started steel trading business under the name, Hock Guan Hardware & Company A smaller retailer of steel products, including secondary pipes, flat bars and hollow sections Carried out business from a temporary retail space of 5,000 square feet at MacPherson Road 1973 Expanded business from a steel retailer to a steel stockist by importing steel products from Thailand and the PRC 1980s Acquired a 60,000 square feet warehouse in Tuas in 1984, to cope with the increase in volume of business Expanded business by exporting and supplying steel products to neighbouring countries including Malaysia and Indonesia Annual sales grew to more than S$10 million 1988 HG Metal was incorporated Acquired 100,000 square feet of warehouse space at Liu Fang Road Expanded product range to include ship plates, deformed bars and H-beams 1998 Moved to current premises at 30 Jalan Buroh 1999 Moved up the value-chain to provide steel product manufacturing and processing services, by acquiring Oriental Metals 2000 Oriental Metals built a new factory and warehouse at its existing premises at 28 Jalan Buroh Oriental Metals manufactured flat steel bars and mild steel lip channels YEARS 2002 HG Metal is listed on SESDAQ 2004 HG Metal upgraded to the SGX Mainboard 2008 Expanded with 150,000 square feet of warehouse space at Jurong Port Road Acquired a stake in BRC Asia Limited 2010 Entry of strategic investor, Oriental Castle Group 2011 HG Metal celebrates 4 decades of heritage in the steel industry GOING BEYOND ANNUAL REPORT 2011 13

OPERATIONS & FINANCIAL REVIEW With the proceeds of S$15.6 million from the issue of new shares and S$7.3 million from the issue of call option shares, the Group recorded higher cash and cash equivalents of S$9.1 million as at 30 September 2011, compared to S$4.3 million as at 30 September 2010. Turnover and Earnings Growth HG Metal delivered a good set of financial results for the 12 months ended 30 September 2011 ( FY2011 ). The Group achieved an 18% growth in turnover to S$238.8 million, compared to S$203.1 million in FY2010, underpinned by increased sales volumes mainly in Singapore, Malaysia and Indonesia. During the year in review, we actively pushed the sales of our slower-moving stock and expanded our product portfolio to include more standard steel and higher grade products. Sales volume in FY2011 reached approximately 235,000 metric tonnes ( MT ), up from about 154,000 MT a year ago. In tandem with the increase in revenue, the Group s gross profit rose by 10% from S$23.7 million in FY2010 to S$26.0 million in FY2011. However, against a more competitive business environment, gross profit margin declined marginally by 0.8 percentage points from 11.7% in FY2010 to 10.9% in FY2011. Other operating income for FY2011 decreased by 33% to S$6.6 million from S$9.8 million in FY2010. In FY2011, other operating income included a fair value gain of S$5.2 million for the call option and warrants, whereas in FY2010, it included a fair value gain of S$1.5 million for the warrants and a S$6.4 million gain on the disposal of subsidiary, BRC Asia Limited ( BRC ), in FY2010. Other operating expenses dropped significantly by S$13.4 million to S$7.1 million in FY2011, from S$20.5 million in FY2010. This was mainly due to the S$12.9 million write down of inventory value and the S$1.9 million loss on the disposal of shares in an associate company in FY2010. Following the repayment of our long term loan facility, finance expenses in FY2011 decreased by 72% to S$1.9 million from S$6.9 million in FY2010. As a result of the above factors, the Group posted a net profit after tax of S$16.3 million in FY2011, a significant jump from S$0.3 million in FY2010. Segmental Performance On a geographical basis, the Group continued to widen our sales reach beyond Singapore. We saw an increase in sales across all countries, with a bulk of the growth coming from Singapore, Malaysia and Indonesia. Singapore remained the largest contributor of sales, accounting for 64% of FY2011 turnover. Indonesia was the second largest sales contributor, generating 19% of the Group s turnover. Malaysia contributed 13%, while the other remaining countries like Sri Lanka, Thailand, Myanmar and Vietnam contributed the remaining 4%. Breaking down our revenue by products, ship/steel plates accounted for 44% of our FY2011 revenue. Ship/steel plates are typically major contributors to our revenue, recording the highest margins. The rest of our FY2011 revenue came from bars (24%), beams (11%), pipes (11%) and others (10%). 14 HG Metal Manufacturing Limited

Balance Sheet and Cash Flows In line with the increase in sales volumes, the Group s inventories increased to S$96.7 million as at 30 September 2011, as compared to S$62.5 million as at 30 September 2010. In spite of the increase, inventory days improved to 137 days in FY2011, from 207 days last year, as a result of the implementation of a more systematic inventory management in FY2011. As at 30 September 2011, trade and other receivables amounted to S$44.9 million, versus S$30.3 million for the same period last year. Debtor days remained within the general credit period extended to customers at 52 days. Trade and other payables increased to S$44.5 million, up from S$31.5 million as at 30 September 2010, due to higher purchasing volumes to support our sales growth. With the proceeds of S$15.6 million from the issue of new shares and S$7.3 million from the issue of call option shares, the Group recorded higher cash and cash equivalents of S$9.1 million as at 30 September 2011, compared to S$4.3 million as at 30 September 2010. Net cash flows of S$30.6 million were used in operating activities in FY2011 as a result of higher working capital usage. Overall, the Group maintained a healthy financial position in FY2011. Our gearing ratio* remained low at 0.3 times as at 30 September 2011. Per Share Data With the latest robust performance, the Group s basic earnings per share in FY2011 was pushed up to 1.72 Singapore cents, based on the weighted average number of shares of 934,978,212. This compared to a loss of 0.32 Singapore cents, based on the weighted average number of shares of 775,671,962, in FY2010. Likewise, the Group s net asset value rose to 13.07 Singapore cents as at 30 September 2011, from 12.71 Singapore cents as at 30 September 2010. Outlook The Group expects margins to remain competitive and will continue to be prudent in the use of our balance sheet, with particular focus on cost management, foreign exchange hedging and non-core asset restructuring. The Group will continue to build on our competitive positioning by diversifying our business model, expanding our product range, forging strong customer relationships and enhancing our value added processing services. * Gearing ratio: Bank borrowing over net tangible assets. GOING BEYOND ANNUAL REPORT 2011 15

CORPORATE INFORMATION BOARD OF DIRECTORS MR. YAP XI MING Non-Executive Chairman MR. GOH KIAN SIN Managing Director and Chief Executive Officer MR. TAN CHAN TOO Executive Director MR. WONG KEAN SHYONG, KENN Non-Executive Director DR. TAN ENG LIANG Independent Director MR. GUI KIM YOUNG @ GUI KIM GAN Independent Director MR. LING CHUNG YEE, ROY Independent Director AUDIT COMMITTEE Dr Tan Eng Liang (Chairman) Mr Gui Kim Young @ Gui Kim Gan Mr Ling Chung Yee, Roy REMUNERATION COMMITTEE Mr Gui Kim Young @ Gui Kim Gan (Chairman) Dr Tan Eng Liang Mr Ling Chung Yee, Roy Mr Yap Xi Ming NOMINATING COMMITTEE Mr Ling Chung Yee, Roy (Chairman) Dr Tan Eng Liang Mr Gui Kim Young @ Gui Kim Gan Mr Yap Xi Ming Mr Goh Kian Sin JOINT COMPANY SECRETARIES Foong Lee Heng, Jasmine Tan Swee Gek REGISTERED OFFICE 30 JALAN BUROH SINGAPORE 619486 tel: (65) 6268 2828 fax: (65) 6268 3838 www.hgmetal.com SHARE REGISTRAR M&C SERVICES PRIVATE LIMITED 138 Robinson Road #17-00 The Corporate Office Singapore 068906 AUDITORS ERNST & YOUNG LLP Public Accountants and Certified Public Accountants Singapore Partner-in-charge: Ho Shyan Yan (With effect from financial year ended 30 September 2011) PRINCIPAL BANKERS OVERSEA-CHINESE BANKING CORPORATION LIMITED UNITED OVERSEAS BANK LIMITED 16 HG Metal Manufacturing Limited

Corporate governance HG Metal Manufacturing Limited (the Company ) is committed to complying with the Code of Corporate Governance 2005 ( Code ) so as to ensure greater transparency and to safeguard the interests of shareholders. This statement describes the Company s corporate governance practices and activities with specific reference to the Code established by the Singapore Corporate Governance Committee and relevant sections of the Listing Manual issued by the SGX-ST. 1 BOARD MATTERS Principle 1: Every company should be headed by an effective Board to lead and control the company. The Board is collectively responsible for the success of the company. The Board works with Management to achieve this and the Management remains accountable to the Board. 1.1 Role of the Board The Board of Directors (the Board ) comprises 2 Executive Directors and 5 Non-Executive Directors. 3 of the 5 Non-Executive Directors are Independent Directors. The Board s primary role is to protect and enhance longterm shareholder value. To fulfill this, apart from its statutory responsibilities, the Board s principal functions include the following: (a) (b) (c) (d) (e) (f) (g) (h) approving the Group s corporate and strategic directions; establishing goals for management and monitoring the achievement of these goals; ensuring management leadership of high quality, effectiveness and integrity; approving annual budgets, investment and divestment proposals; appointment of Board Directors and key managerial personnel; ensuring an effective risk management framework is in place; reviewing financial performance and implementing financial policies which incorporate risk management, internal controls and reporting compliance; and assuming responsibility for corporate governance. 1.2 Board Processes To assist the Board in the discharge of its oversight function, certain functions have been delegated to various Board Committees, namely, the Audit Committee ( AC ), Nominating Committee ( NC ) and the Remuneration Committee ( RC ), each of which has its own written terms of reference. The minutes of meetings of these committees are circulated among the Board. Formal Board meetings will be held at least once every quarter to oversee the business affairs of the Group and approve any financial or business strategies or objectives. Where necessary, additional Board meetings are held to deliberate on urgent substantive matters. The Board also approves transactions through circular resolutions which are circulated to the Board together with all relevant information relating to the proposed transaction. The agenda for meetings is prepared in consultation with the Chairman and Chief Executive Officer. The Agenda and submissions are circulated in advance of the scheduled meetings. GOING BEYOND ANNUAL REPORT 2011 17

Corporate governance 1.3 Directors meeting held in Financial Year 2011 The attendance of the directors at meetings for the financial year ended 30 September 2011 are as follows: Board of Directors Audit Committee Remuneration Committee Nominating Committee Held Attend Held Attend Held Attend Held Attend Yap Xi Ming (1) 6 6 1 1 Goh Kian Sin (2) & (3) 6 6 1 Tan Chan Too 6 5 Wong Kean Shyong, Kenn (2) 6 4 Gui Kim Young @ Gui Kim Gan 6 6 5 5 1 1 1 1 Dr Tan Eng Liang 6 6 5 5 1 1 1 1 Roy Ling Chung Yee 6 5 5 4 1 1 1 1 Chng Hee Kok (4) 6 2 Notes: (1) Appointed to the Nominating Committee and Remuneration Committee on 3 December 2010. No Nominating Committee or Remuneration Committee meetings were held during the financial year under review after his appointment to the Nominating Committee and the Remuneration Committee. (2) Appointed on 15 November 2010. (3) Appointed to the Nominating Committee on 3 December 2010. No Nominating Committee meetings were held during the financial year under review after his appointment to the Nominating Committee. (4) Resigned on 2 March 2011, two Board meetings were held prior to his resignation. The directors were appointed based on their experience, stature and potential to contribute to the proper guidance of the Group and its businesses. As such, we believe that each individual director s contributions can be reflected in ways other than the reporting of attendances at Board meetings and/or Board committee meetings. 1.4 Matters Requiring Board Approval The directors have identified a few areas for which the Board has direct responsibility for decision making such as the following: approval of the quarterly results announcements; approval of the annual report and accounts; declaration of interim dividends and proposal of final dividends; convening of shareholders meetings; approval of corporate strategy; authorisation of major transactions; approval of Board changes and appointments on Board committees; increase in investment in businesses and subsidiaries; divestment in any of the Group companies; and commitments to term loans and lines of credit from banks and financial institutions by the Company. 18 HG Metal Manufacturing Limited

Corporate governance While matters relating in particular to the Company s objectives, strategies and policies require the Board s direction and approval, Management is responsible for the day to day operation and administration of the Company in accordance with the objectives, strategies and policies set by the Board. 1.5 Training of Directors Our directors are provided with extensive background information about our Group s history, mission, values and business operations. Changes to regulations and accounting standards are monitored closely by management. To keep pace with such regulatory changes, the Company provides opportunities for ongoing education on Board processes and best practices as well as updates on relevant new laws and regulations. Directors also have the opportunity to visit the Group s operational facilities and meet with management to gain a better understanding of the business operations. The Company has set up a more formal procedure for the issue of the appointment letter setting out the directors duties and obligations. Newly appointed directors shall also be briefed on the business and organisational structure of the Group and its strategic directions. 1.6 Board Composition and Balance Principle 2: There should be a strong and independent element on the Board, which is able to exercise objective judgement on corporate affairs independently, in particular, from Management. No individual or small group of individuals should be allowed to dominate the Board s decision making. All directors exercise independent judgements and make decisions objectively in the best interest of the Company. The assessment criteria in the Chairman s assessment of directors include intensity of participation at meetings, quality of interventions and special contribution. The Board comprises members with diverse expertise and experience in the steel, finance and business industries. As of the date of this report, the Board comprises the following directors: Executive Directors Mr Goh Kian Sin (Managing Director and Chief Executive Officer) - Appointed on 15 November 2010 Mr Tan Chan Too NON-EXECUTIVE AND NON-INDEPENDENT DIRECTORS Mr Yap Xi Ming (Non-Executive Chairman) Mr Kenn Wong Kean Shyong - Appointed on 15 November 2010 INDEPENDENT Non-executive Directors Dr Tan Eng Liang Mr Gui Kim Young @ Gui Kim Gan Mr Roy Ling Chung Yee The profiles of the Board are set out in pages 10 and 11 of the Annual Report. The composition of the Board is determined in accordance with the following principles: to form a strong independent element on the Board, it should comprise at least one-third of non-executive independent directors; the Board should have enough directors to serve on various committees of the Board without overburdening the directors or making it difficult for them to fully discharge their responsibilities; the Board should comprise directors with a broad range of competencies and expertise both nationally and internationally; and GOING BEYOND ANNUAL REPORT 2011 19

Corporate governance directors appointed by the Board are subject to election by shareholders at the following Annual General Meeting ( AGM ) and thereafter, directors are subject to re-election according to the provisions in the Articles of Association. Article 89 of the Articles of Association of the Company states that one third of the directors shall retire from office by rotation with the exception of the director holding office as Managing Director. The Board regularly examines its size and, with a view to determining the impact of its number upon effectiveness, decides on what it considers an appropriate size for itself, taking into account the scope and nature of the Company s operations. The composition of the Board is reviewed on an annual basis by the NC to ensure that the Board has the appropriate mix of expertise and experience to enable management to benefit from a diverse perspective of issues that are brought before the Board. The NC is of the view that the Board comprises directors capable of exercising objective judgment on the corporate affairs of the Company independently of management and that no individual or small group of individuals dominate the Board s decision-making process. When a vacancy exists, through whatever cause, or where it is considered that the Board would benefit from the services of a new director with particular skills and knowledge, the NC, in consultation with the Board, determines the selection criteria for the position based on the skills and knowledge deemed necessary for the Board to best carry out its responsibilities. Candidates may be suggested by directors or management or sourced from external sources. The NC will interview the candidates and assess them based on objective criteria approved by the Board such as integrity, independent mindedness, possession of the relevant skills required or skills needed to complement the existing Board members, ability to commit the time and effort to carry out his responsibilities, good decision making track record, relevant experience and financial literacy. The NC will make a recommendation to the Board on the appointment. The Board then appoints the most suitable candidate who must stand for election at the next AGM of shareholders. Particulars of interests of directors who held office at the end of the financial year in shares and share options in the Company and in related corporations (other than wholly-owned subsidiaries) are set out in the Directors Report. 1.7 Independent Members of the Board of Directors The Board has 3 independent directors, representing at least one-third of the Board: Dr Tan Eng Liang, Mr Gui Kim Young @ Gui Kim Gan and Mr Roy Ling Chung Yee. The criteria for independence are based on the definition given in the Code, which considers an independent director as one who has no relationship with the Company, its related companies or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director s independent business judgement with a view to the best interest of the Company. The independence of each director is reviewed annually by the NC. 1.8 Chairman and Chief Executive Officer Principle 3: There should be a clear division of responsibilities at the top of the company - the working of the Board and the executive responsibility of the company s business - which will ensure a balance of power and authority, such that no one individual represents a considerable concentration of power. The Company has a separate Non-Executive Chairman and a Chief Executive Officer, which ensures that there is a balance of power and authority, increased accountability and greater capacity of the Board for independent decision-making at the top of the Company. As at the date of this report, Mr Yap Xi Ming holds the post of Non- Executive Chairman, whilst Mr Goh Kian Sin holds the post of Managing Director and Chief Executive Officer. The Non-Executive Chairman ensures that board meetings are held when necessary and sets the board meeting agenda (with the assistance of the company secretary and in consultation with the Managing Director and Chief Executive Officer). The Chairman ensures that the board members are provided with complete, adequate and timely information. The Chairman ensures that procedures are introduced to comply with the Code and ensures effective communication within the board and with the shareholders. 20 HG Metal Manufacturing Limited

Corporate governance The Board has delegated the daily operations of the Group to the Managing Director and the Chief Executive Officer. The Managing Director and Chief Executive Officer leads the management team and executes the strategic plans in alignment with the strategic decisions and goals set out by the Board and ensures that the directors are kept updated and informed of the Group s businesses. 1.9 Board Membership Principle 4: There should be a formal and transparent process for the appointment of new directors to the Board. The Board has delegated to the NC the functions of developing and maintaining a transparent and formal process for the appointment of new directors, making recommendations for directors who are due for retirement by rotation to seek re-election at general meeting and determining the independent status of each director. As at the date of this report, the NC comprises the following members, the majority of whom (including the Chairman) are independent:- Mr Roy Ling Chung Yee (Chairman and Independent Director), Dr Tan Eng Liang (Independent Director) Mr Gui Kim Young @ Gui Kim Gan (Independent Director) Mr Yap Xi Ming (Non-Executive Chairman and Non-Executive Director) Mr Goh Kian Sin (Managing Director and Chief Executive Director) The NC is regulated by its terms of reference and its key functions include:- making recommendations to the Board on new appointments to the Board; determining orientation programs for new directors and recommending opportunities for the continuing training of the directors; making recommendations to the Board on the re-nomination of retiring directors standing for re-election at the Company s AGM, having regard to the directors contribution and performance (e.g. attendance, preparedness, participation and candour); ensuring that all directors submit themselves for re-nomination and re-election at regular intervals and at least every three years; determining annually whether or not a director is independent; reviewing the size and composition of the Board with the objective of achieving a balanced Board in terms of the mix of experience and expertise; reviewing the appointment of immediate family members (spouse, child, adopted child, step-child, sibling and parent) of any of the Company s directors or substantial shareholders to managerial positions in the Company; determining whether a director who has multiple board representations is able to and has been adequately carrying out his duties as director of the Company; reporting to the board on its activities and proposals; and carrying out such other duties as may be agreed to by the NC and the Board. The NC meets at least once a year. The Company s Articles of Association provide that, at each AGM, one-third of the directors for the time being (or, if their number is not a multiple of three, the number nearest to but not less than one-third) shall retire from office by rotation. A retiring director is eligible for re-election by the shareholders of the Company at the AGM, and prior to nominating a retiring director for re-election, the NC will evaluate the director s contribution and performance taking into consideration factors such as attendance, preparedness, participation and candour. GOING BEYOND ANNUAL REPORT 2011 21

Corporate governance 1.10 Board Performance Principle 5: There should be a formal assessment of the effectiveness of the Board as a whole and the contribution by each director to the effectiveness of the Board. We believe that Board performance is ultimately reflected in the performance of the Group and the Company. The Board should ensure compliance with applicable laws and Board members should act in good faith, with due diligence and care in the best interests of the Group and the shareholders. In addition to these fiduciary duties, the Board is charged with two key responsibilities of setting strategic direction and ensuring that the Group is ably led. The Board, through the delegation of its authority to the NC, will review the Board s composition annually to ensure that the Board has the appropriate mix of expertise and experience to lead the Group. The NC assesses the effectiveness of the Board as a whole and the contribution by each director to the effectiveness of the Board on an annual basis. In its assessment of the Board s effectiveness, the NC takes into consideration the frequency of the Board meetings, the rate at which issues raised are adequately dealt with and the reports from the various committees. In the like manner, the NC is able to assess the contribution of each individual director to the effectiveness of the Board. The NC has conducted a Board s performance evaluation as a whole in FY2011, participated by all directors. The assessment parameters are broadly based on the attendance records at the meetings of the Board and the relevant board committees, intensity of participation at meetings, sense of independence, quality of contributions and workload requirements. 1.11 Access to Information Principle 6: In order to fulfil their responsibilities, Board members should be provided with complete, adequate and timely information prior to Board meetings and on an on-going basis. Directors receive a regular supply of information from management about the Group so that they are equipped to play as full a part as possible in Board meetings. Detailed Board papers are circulated to all directors prior to the scheduled meetings so that members may better understand the issues beforehand, allowing for more time at such meetings for questions that members may have. The Board papers provided include background or explanatory information relating to matters to be brought before the Board. A presentation is made to the Directors at the Board meeting on budgets, forecasts and variances from the budget disclosed. All directors have separate and independent access to the advice and services of the company secretary. The company secretary attends the Board and Board Committee meetings and assists the Chairman of the Board and Board Committee meetings in ensuring that the relevant procedures are followed and that applicable rules and regulations are complied with as well as ensuring good information flow within the Board and its committees, between senior management and the non-executive directors, facilitating orientation and assisting with professional development as required. The appointment and removal of the company secretary is a matter which is approved by the Board. The Board also has separate and independent access to the Company s senior management. Each director has the right, at the Company s expense, to seek independent legal and other professional advice concerning any aspect of the Group s operations or undertakings in order to fulfill their duties and responsibilities as directors. 22 HG Metal Manufacturing Limited

Corporate governance 2 REMUNERATION MATTERS 2.1 Procedure for developing Remuneration Policies Principle 7: There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his own remuneration. The Group s remuneration policy is to provide compensation packages at market rates which reward successful performance and attract, retain and motivate directors and key management executives. The RC comprises solely of non-executive directors, the majority of whom, including the Chairman, is independent. At the date of this report, the RC comprises the following members:- Mr Gui Kim Yong @ Gui Kim Gan (Chairman, and Independent Director) Dr Tan Eng Liang (Independent Director) Mr Roy Ling Chung Yee (Independent Director) Mr Yap Xi Ming (Non-Executive Chairman and Non-Executive Director) The RC meets at least once each year and at other times as required. The RC is responsible for recommending to the Board a framework of remuneration for the directors and senior management which is submitted to the whole Board for endorsement. The RC reviews and approves recommendations on remuneration policies and packages for directors and senior management in the interests of improved corporate performance. The RC s review of remuneration packages covers all aspects of remuneration, including but not limited to directors fees, salaries, allowances, bonuses, options, profit sharing (where applicable) and benefits-in-kind. In setting out the remuneration packages, the RC would take into consideration pay and employment conditions within the industry and in comparable companies. The remuneration packages should take into account the Company s relative performance and the performance of the individual directors/senior management. The RC s recommendations are submitted to the entire Board. Each member of the RC shall abstain from voting on any resolution concerning his own remuneration. The Directors fees to be paid for any one year are submitted for shareholders approval at the AGM. 2.2 Level and Mix of Remuneration Principle 8: The level of remuneration should be appropriate to attract, retain and motivate the directors needed to run the company successfully but companies should avoid paying more than is necessary for this purpose. A significant proportion of executive directors remuneration should be structured so as to link rewards to corporate and individual performance. The remuneration packages of the Managing Director and Chief Executive Officer and the executive directors are determined based on the framework recommended by the RC. In doing so, the RC reviews the length of the fixed appointment period, the notice period for termination and the terms of the compensation package in the event of the termination of any executive directors contracts of service to ensure that the terms of such clauses are not onerous to the Company. The executive directors framework of remuneration includes a fixed element as well as a variable element in the form of a bonus and a profit sharing incentive which is linked to the Company s performance. GOING BEYOND ANNUAL REPORT 2011 23

Corporate governance All non-executive Directors are paid a Director s fee, with additional fees for serving as the chairman or member of a Board committee and attendance fees for Board and Board committee meetings. These fees are recommended by the RC and submitted to the Board for endorsement. The remuneration of non-executive directors should be appropriate to the level of contribution, taking into account factors such as effort and time spent, and responsibilities of the directors. Non-executive directors should not be over-compensated to the extent that their independence may be compromised. 2.3 Disclosure on Remuneration Principle 9: Each company should provide clear disclosure of its remuneration policy, level and mix of remuneration, and the procedure for setting remuneration in the company s annual report. It should provide disclosure in relation to its remuneration policies to enable investors to understand the link between remuneration paid to directors and key executives, and performance. The remuneration of the Directors from the Company for the financial year ended 30 September 2011 is as follows:- Directors Base Salary Bonus Director Fees Others TOTAL S$742,000 to S$806,000 Goh Kian Sin 29% 67% 4% 100% Tan Chan Too 45% 44% 11% 100% Below S$250,000 Chng Hee Kok 87% 13% 100% Yap Xi Ming 100% 100% Wong Kean Shyong, Kenn 100% 100% Dr Tan Eng Liang 100% 100% Gui Kim Young @ Gui Kim Gan 100% 100% Ling Chung Yee, Roy 100% 100% 2.4 Remuneration of Employees Related to Directors There is no employee who is related to a Director or the Chief Executive Officer whose remuneration exceeds S$150,000 in the Group s employment for financial year ended 30 September 2011. 2.5 Remuneration of Top 5 Key Management Executives The key executives as referred to in page 12 of the Annual Report fall within the remuneration band of below $250,000. The Company adopts a remuneration policy for staff comprising both a fixed and variable component. The fixed component is in the form of a base salary and allowances. The variable component is in the form of a variable bonus that is linked to the Company and each individual s performance. 24 HG Metal Manufacturing Limited

Corporate governance 3 ACCOUNTABILITY AND AUDIT Principle 10: The Board should present a balanced and understandable assessment of the company s performance, position and prospects. In presenting the annual financial statements and quarterly announcements to shareholders as well as any price sensitive reports to the public, the Board aims to provide the shareholders with a balanced and understandable assessment of the Company s and the Group s performance, position and prospects. The Board is provided with an analysis of the management accounts at the quarterly Board meetings which presents a balanced and understandable assessment of the Company s performance, position and prospects. 3.1 Audit Committee Principle 11: The Board should establish an Audit Committee with written terms of reference which clearly set out its authority and duties. The AC comprises 3 members, all of whom including the Chairman are non-executive and independent directors. The AC s members are:- Dr Tan Eng Liang (Chairman, and Independent Director) Mr Gui Kim Young @ Gui Kim Gan (Independent Director) Mr Roy Ling Chung Yee (Independent Director) All 3 members have accounting or related financial management expertise or experience. The AC s main objective is to assist the Board in fulfilling its fiduciary responsibilities relating to internal controls, overseeing the external audit process, reviewing the financial information to be disclosed to the public and ensuring that arrangements are in place for the independent investigation and follow up of reports by staff of improprieties in financial reporting and other matters. To achieve this, the AC ensures that its members have the appropriate qualifications to provide independent, objective and effective oversight. Specifically, the AC meets periodically to perform the following functions: reviewing the audit plans of the external and internal auditors; reviewing the external and internal auditors reports; reviewing the co-operation given by the Company s officers to the external and internal auditors; reviewing the adequacy of the internal audit function; evaluating the effectiveness of the Group s system of internal controls, including financial, operational and compliance controls, and risk management, by reviewing written reports from internal and external auditors, and management responses and actions to correct any deficiencies; reviewing the financial statements of the Company and the Group before their submission to the Board; reviewing non-audit services provided by the external auditors to satisfy itself that the nature and extent of such services will not prejudice the independence and objectivity of the external auditors; nominating external auditors for appointment or re-appointment and approve the remuneration and terms of engagement of the external auditor; reviewing the Group s compliance with such functions and duties as may be required under the relevant statutes or the Listing Manual issued by SGX-ST, and by such amendments made thereto from time to time; and reviewing interested person transactions (as defined in Chapter 9 of the Listing Manual issued by SGX-ST) to ensure that they are on normal commercial terms and arms length basis and not prejudicial to the interests of the Company or its shareholders in any way. GOING BEYOND ANNUAL REPORT 2011 25

Corporate governance Apart from the duties listed above, the AC may commission and review the findings of internal investigations into matters where there is suspected fraud or irregularity, or failure of internal controls or infringement of any Singapore and other applicable law, rule or regulation which has or is likely to have material impact on the Company s or Group s operating results and/or financial position. The AC meets from time to time with the Group s external and internal auditors and the executive management to review accounting, auditing and financial reporting matters so as to provide the necessary checks and balances to ensure that an effective control environment is maintained in the Group. The AC also studies proposed changes in accounting policies, examines the internal audit functions and discusses the accounting implications of major transactions. Furthermore, the AC advises the Board regarding the adequacy of the Group s internal controls and the contents and presentation of its interim and annual reports. Based on the information provided to the AC, nothing has come to the AC s attention that the system of internal controls and risk management is inadequate. The AC is also authorised to investigate any matter within its terms of reference and has full access to and co-operation of the management and full discretion to invite any director or executive officer to attend its meetings, and reasonable resources to enable it to discharge its functions properly. The AC meets annually with the internal auditors and the external auditors, without the presence of the Company s management to review the adequacy of audit arrangements, with particular emphasis on the scope and quality of their audits, and the independence and objectivity of the internal and external auditors. The amount of non-audit fees paid to the external auditors for the financial year ended 30 September 2011 was S$33,000. The AC, having reviewed all non-audit services provided by the external auditors to the Group, is satisfied that the nature and extent of such services would not affect the independence of the external auditors. 3.2 Internal Controls Principle 12: The Board should ensure that the Management maintains a sound system of internal controls to safeguard the shareholders investments and the company s assets. The Board recognises that it is responsible for the overall internal control framework, but accepts that no cost effective internal control system will preclude all errors and irregularities, as the system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The AC will: satisfy itself that adequate measures are being made to identify and mitigate any material business risks associated with the Group; ensure that a review of the effectiveness of the Group s material internal controls, including financial, operating and compliance controls and risk management, is conducted at least annually. Such review can be carried out by internal auditors/external auditors; ensure that the internal control recommendations made by internal and external auditors have been implemented by the management; and ensure the Board is in a position to comment on the adequacy of the internal controls of the Group. Based on the discussions with the auditors and the management s responses to the auditors recommendations for improvements to the Group s internal controls, the Board is satisfied that there are adequate internal controls to safeguard the assets and ensure the integrity of financial statements. 26 HG Metal Manufacturing Limited

Corporate governance 3.3 Whistle-Blowing Policy The Group has adopted a constructive whistle-blowing policy and guideline in order to detect and deter any fraud or deliberate error in the preparation, evaluation, review or audit of any financial statement, financial reports and records of the Company. Demonstrating its pledge to good corporate governance, the Group provides an avenue for employees to bring their complaints responsibly to report any possible improprieties in matters of financial reporting or other matters that they may encounter to the AC or any other committees established by the Audit Committee for such purpose without fear of reprisal. The establishment of the whistle-blowing structure also augments the Group s ability to detect potential fraud, providing another level of comfort and assurance to investors. 3.4 Internal Audit Principle 13: The company should establish an internal audit function that is independent of the activities it audits. The Group has outsourced its internal audit function to Deloitte & Touche Enterprise Risk Services Pte Ltd. The aim of the internal audit function is to promote internal control in the Group and to monitor the performance and effective application of internal audit procedures. It supports the directors in assessing key internal controls through a structured review programme. The internal audit function is expected to meet the standard set by internationally recognised professional bodies including the Standards for the Professional Practice of Internal Auditing set by The Institute of Internal Auditors. The internal audit function reports functionally to the Chairman of the AC and administratively to the Chief Executive Officer. The AC ensures that the internal audit function has adequate resources and has appropriate standing within the Group. The AC, on an annual basis, assesses the effectiveness of the internal auditors by examining: the scope of the internal auditors work; the quality of the reports; the relationship with the external auditors; and the independence of the areas reviewed. 4 COMMUNICATION WITH OUR SHAREHOLDERS Principle 14: Companies should engage in regular, effective and fair communication with shareholders. Principle 15: Companies should encourage greater shareholder participation at AGMs, and allow shareholders the opportunity to communicate their views on various matters affecting the company. The Company firmly believes in high standards of transparent corporate disclosure, pursuant to the SGX-ST s Listing Rules and the Singapore Companies Act, whereby shareholders are informed of all major developments that affect the Group. Information is communicated to our shareholders on a timely basis. Where there is inadvertent disclosure made to a selected group, the Company will make the same disclosure publicly to all others as soon as practicable. Communication is made through: GOING BEYOND ANNUAL REPORT 2011 27

Corporate governance annual reports that are prepared and sent to all shareholders. The Board ensures that the annual report includes all relevant information about the Company and the Group, including future developments and other disclosures required by the Singapore Companies Act and Singapore Financial Reporting Standards; quarterly announcements containing a summary of the financial information and affairs of the Group for that period; notices of and explanatory memoranda for AGMs and Extraordinary General Meetings; press releases on major developments of the Company and the Group; disclosure to the SGX-ST; and the Company s website at http://www.hgmetal.com at which our shareholders can access information on the Group. Moreover, our shareholders are encouraged to attend the AGM to ensure a high level of accountability and to be updated on the Company s strategies and goals. The Company s Articles allow a shareholder to appoint up to 2 proxies to attend a shareholder s meeting on his behalf. The notice of the AGM is sent to our shareholders, together with explanatory notes, appendices or a circular on items of special business, at least 14 days before the meeting. The Chairmen of the AC, NC and RC are normally present and available to address questions relating to the work of their respective committees at general meetings. Furthermore, the external auditors are present to assist our Board in addressing any relevant queries by our shareholders. Each item of special business included in the notice of the meeting is accompanied, where appropriate, by an explanation for the proposed resolution. Separate resolutions are proposed for substantially separate issues at the meeting. 5 DEALINGS IN SECURITIES In accordance with Rule 1207(18) of the Listing Manual issued by SGX-ST, the Company notifies all employees that they are prohibited from trading in the Company s shares one month prior to the announcement of the Company s full year results and 14 days before the announcement of the first three quarters of the Company s financial results. The Company has also issued a policy on Insider Trading to all employees which sets out the principles of relevant laws relating to insider trading which are applicable at all times. 28 HG Metal Manufacturing Limited

Corporate governance 6 INTERESTED PERSON TRANSACTIONS The Company is required to comply with the requisite rules under Chapter 9 of the Listing Manual issued by SGX- ST for interested person transactions. To ensure compliance with Chapter 9, the AC meets quarterly to review if the Company will be entering into an interested person transaction in order to ensure that the interested person transactions are carried out on normal commercial terms and will not prejudicial to the interests of the shareholders. Disclosure according to Rule 907 of the SGX-ST Listing Manual in respect of interested person transactions for financial year ended 30 September 2011 is stated in the table below: Name of interested person Chye Hin Hardware Pte Ltd - Sales - Purchases - Other Charges Oriental Sheet Piling Pte Ltd - Sales - Other Charges Aggregate value of all interested person transactions, conducted pursuant to Rule 920 (excluding transactions less than S$100,000 and transaction conducted under shareholders mandate) NA NA NA NA Aggregate value of all interested person transactions, conducted under shareholders mandate pursuant to Rule 920 (excluding transactions less than S$100,000) 7,017,000 19,272,000 508,000 1,873,000 9,000 Oriental Steel Pipe Sdn Bhd - Purchases NA 2.662,000 Oriental Castle Sdn Bhd - Other Charges NA 303,000 Plan B Pte Ltd - Purchases - Other Charges NA NA 3,143,000 20,000 7. MATERIAL CONTRACTS Save as disclosed in the audited financial statements of this Annual Report, there are no material contracts of the Company or its subsidiaries involving the interest of the Managing Director, CEO, directors or controlling shareholder subsisting at the end of the financial year ended 30 September 2011 or have been entered into since the end of the previous financial year. GOING BEYOND ANNUAL REPORT 2011 29

Corporate governance 8. RISK MANAGEMENT Management regularly reviews the Group s business and operational activities to identify areas of significant business risks as well as deliberate on appropriate measures to control and mitigate these risks. Management is accountable to the Board for ensuring the effectiveness of risk management and adherence to risk appetite limits. On a day-to-day basis, business units have primary responsibility for risk management. The various business units provide the senior management with a timely assessment of key risk exposures and the associated management responses. These units also recommend risk appetite and control limits. The significant risk management policies are as disclosed in the audited financial statements of this Annual Report. The financial risk management policies are outlined below: Fluctuations in steel prices As a distributor of steel products, the Group purchases a wide range of steel products and maintain substantial inventories to be in a position to fulfil customers orders within a short lead time. The cost of steel products purchased is the main component of the Group s cost of sales for its steel distribution business. Prices of steel products are subject to international price fluctuations of steel. Therefore, the Group is vulnerable to any fluctuations in prices of steel. The Group, with more than 30 years of knowledge and expertise gained in this line of business, is able to make appropriate adjustments to its supplier choice, timing of purchase and shipment, contracting arrangement with its customers to address price fluctuation risk. Credit risk of its customers The Group extends credit terms ranging from 30 to 120 days to its customers, depending on their credit worthiness. From time to time, in the ordinary course of business, certain customers may default on their payment. Such events may arise due to the inherent risk from its customers business, risk pertaining to the political, economic, social and legal environment of its customers jurisdiction and foreign exchange risk. In the event that the Group s customers default on their payments, the Group would have to make allowances for doubtful debts or incur write-offs, which will have an adverse impact on its profitability. The Group performs credit check and approval before granting credit to customers and imposes a credit limit and credit term on each customer. All credit accounts are subject to monthly review. In addition, the Group is not dependant on any single customer or any single country. The Group has more than 1,000 customers. Hence, the Group is not exposed to significant credit risk posed by any single customer. Foreign exchange exposure The purchases of the Group are mainly denominated in US$ and its sales are mainly denominated in S$. As a result, the Group is exposed to fluctuations in foreign exchange rates. For FY2011, approximately 90% of its total purchases were made in US$, whilst approximately 80% and 20% of its total sales were denominated in S$ and US$ respectively. Hence, the Group may be exposed to any significant fluctuation of the US$. The Group monitors the US$ exchange rates closely and will enter into forward contracts on case to case basis to reduce its exposure. 30 HG Metal Manufacturing Limited

FINANCIAL CONTENTS Directors Report 32 Statement by Directors 35 Independent Auditors Report 36 Consolidated Statement of 38 Comprehensive Income Balance Sheets 39 Statements of Changes in Equity 40 Consolidated Cash Flow Statement 43 Notes to the Financial Statements 45 Appendix 112 Annexure I to the Appendix 125 Annexure II to the Appendix 127 shareholdings statistics 128 Notice of Annual General Meeting 130 Proxy Form GOING BEYOND ANNUAL REPORT 2011 31