Chairman Statement


DEAR SHAREHOLDERS,


On behalf of our Board of Directors, it is my pleasure to present our annual report for the financial year ended 31 December 2018 (“FY2018”).

Since my re-designation as the Chairman of the Group in May 2018, I have been proactively engaging key management, employees, stakeholders, and customers, placing great emphasis on fulfilling our obligations to all stakeholders. I will be working along with the team to set policies and goals to further increase shareholders’ value. Most importantly, we will continue to identify new business opportunities and improve on our current businesses to steer the Group back to profitability. 

In FY2018, the Group recorded revenue of $83.8 million, representing an increase of 38.0% from $60.7 million in FY2017. This was due to higher contribution from Environmental Systems(“EE Systems”) as well as sales from trading of chemical and spare parts but partially offset by a decrease in Water Management Services (“WM Services”). China remained as our key market with a contribution of $44.0 million, or 52.5% to the total revenue in FY2018. However, the Group recorded a net loss of $1.8 million in FY2018 mainly due to higher administrative expenses, finances costs, marketing and distribution expenses coupled with a tough business environment.


PEOPLE’S REPUBLIC OF CHINA

Revenue from China increased significantly from $26.1 million in FY2017 to $44.0 million in FY2018, representing a growth of 68.6%. China remains as one of our top markets, contributing 52.5% revenue to the Group.

During the year, the Group has secured 51 water treatment contracts worth an aggregate of RMB286.26million in China. One of the notable projects, an Engineering, Procurement and Construction (“EPC”) project in Hebei with a contract value ofRMB53.8 million was awarded by Huaneng Power International Inc. The project involves capacity expansion of the water reuse facility of one of the largest thermal power plants located in the center of the southern Hebei Power Grid. It is also the largest thermal power plant in southern Hebei.

The contracts win for the projects in China underscores our strong technological capability in providing an effective solution to our customers. China offers tremendous growth opportunities to the Group in the environmental protection industry. By leveraging on Wuhan Kaidi’s track record and technical expertise, we strive to continue building on the growing momentum in China.

Furthermore, the Group has also signed a non-binding Letter of Intent with Mr. Wang Zhi in respect of a proposed investment in a Build-Operate-Transfer(“BOT”) Gaoyi Domestic Waste WaterTreatment Project (the “Project”) which has a concession period of 30 years.Mr. Wang Zhi will transfer 100% of his equity interest in the Project to the Group, which he held through He BeiKai Yuan Cheng He Water EngineeringCo., Ltd., a PRC company where he was the controlling shareholder, in satisfaction of his obligation, pursuant to his deed of undertaking dated 23 November 2017. The total consideration would be RMB60.0million which will be funded by a combination of the Group’s internal resources and debt financing.

The Plant is located in Hebei Province, Shijiazhuang Capital, Gaoyi County, covering an area of 45 acres. It mainly involves the Anaerobic/Anoxic/Oxic treatment process to treat wastewater for residential and non-residential sources. The Plant is currently undergoing upgrading process and refurbishment and it is expected to be completed by December 2018. The wastewater treatment capacity of Phase I is20,000 ton/day with a concessionary period of 30 years and its capacity will further increase to 40,000 ton/day in 2028 upon completion of the Phase 2 construction.

This proposed investment will strengthen the earnings profile of the Group where the Group can generate recurring income stream from the BOTwastewater treatment asset. Looking ahead, we will strive to look for more opportunities in China especially for BOT or BOO water treatment projects to further strengthen our foothold in China’s water industry.


MALAYSIA

Revenue from Malaysia improved from $20.3 million in FY2017 to $31.1 million in FY2018, representing a growth of 53.0%. Malaysia remains as one of our top markets, contributing 37.1% revenue to the group the Group’s wholly owned subsidiary, Ness Plus Trading Sdn. Bhd. (“Ness”) has signed an exclusive distribution agreement with Aquaporin A/S (“Aquaporin”) in Malaysia, allowing Ness to distribute revolutionary products containing the AquaporinInside® Forward Osmosis Technology in Malaysia and Singapore. This also marks Aquaporin’s first exclusive distribution agreement signed in Malaysia. 

Aquaporin Inside® Forward Osmosis Technology, a proprietary technology developed by Aquaporin, increases operational efficiency as it consumes less energy and eventually lower the operating costs. The Malaysian government aims to have 99% of the population served with clean and treated water by 2020. Therefore, the timely introduction of this technology in Malaysia is well-positioned to tap on a favorable trend.

The collaboration built upon a previously announced successful joint development project and is in line with our dedication to be an integrated environmental solutions provider. The Aquaporin Inside®Forward Osmosis Technology’s distribution right is initially for Malaysia and Singapore. With the Group’s know-how in building and operating forward osmosis systems, the Group is ideally poised to capture market shares in the growing market for forward osmosis-based solutions. Besides that, the Group’s subsidiary, Darco Water System Sdn Bhd, has clinched a project with a total contract value of RM15.4 million (~S$5.2million) from ASM Technology (M)Sdn Bhd. (“ASMT”), the world’s No. 1player in semiconductor packaging and assembly equipment industry. It is ranked as the Top 100 Global Technology Leaders 2018 by ThomsonReuters. The project involves the delivery of a 4,000 m3/day ultrapure water treatment package consisting of reverse osmosis and deionization systems, and a 2,000 m3/daywastewater treatment package toASMT’s plant in Johor. The project is expected to be completed within 6 to 12 months.


SINGAPORE

Revenue from Singapore decreased by 24.3% to $7.9 million in FY2018from $10.4 million in FY2017, representing a contribution of 9.4%to the Group’s revenue. 

Following the Group’s success in securing projects for the building of centralized domestic waste collection in Singapore in 2016, the Group’s wholly owned subsidiary, PV Vacuum Engineering Pte. Ltd. (“PV Vacuum”) has been awarded a S$23.5 million contract for the retrofitting of a District Pneumatic Waste Conveyance System (“PWCS”) into the Teck Ghee Estate under the HDB Greenprint Program. PV Vacuum shall also be involved in the maintenance of the PWCS over the next 10 years, generating a recurring income stream for the Group. The project is expected to be completed in 2020.

PWCS is a sustainable and green initiative by HDB, providing a more efficient, manpower-light approach to waste collection within the estate, while reducing pest and odour nuisance resulting from exposed waste. It transports waste from rubbish chutes to a centralized bin centre via a network of pipes (under or above-ground), thus removing the need to manually collect waste. It is mandatory for developments with 500 housing units and above to have a PWCS starting from April 2018. Leveraging on our strong technological capability, we are determined to secure more contracts in this segment to further enhance our profitability.


STRENGTHENING PRESENCE IN NEW MARKET

Riding on the industrial growth and favourable government policies in Vietnam, the Group has further exerted its presence in that region by securing an RM7.0 million (~S$2.3million) contract to build a water treatment plant for First Solar’s manufacturing facility in Vietnam. First Solar is a leading global provider of photovoltaic solar systems, and this project includes designing and building an ultrapure water system with a treatment capacity of 70 m3/hr, as well as a lifting batch tank system to collect the wastewater generated. The project is expected to be completed within 6 to 12 months.

Vietnam is one of the countries that enjoys the most sunlight in the world. However, their solar power accounts for only 0.01% of the total energy output. Thus, Vietnam’s government introduces policies to promote the use of solar power and aims to increase its total output of solar power to 3.3% and 20% by 2030 and 2050 respectively. Solar power is expected to become the main renewable energy source in Vietnam, presenting huge business opportunities in Vietnam’s solar power industry.

Therefore, the Group has issued a Letter of Intent to purchase ConDao Green Solar Power Park in Vietnam which will have a capacity of 5-megawatt peak(MWp) upon completion. The Farm shall be situated at Dat Doc beach area in ConDao District, Vietnam with an area of 84,535 m2. The Farm is expected to have the capability to generate an electricity output of 6.8Wh per year. The investment cost of the Farm is about US$7.2 million. The Letter of Intent allows the Group to carry out preliminary due diligence before signing the Sale and Purchase Agreement.

Solar panels were expensive in the past, thus making it difficult to generate profits without government subsidies. However, the advancement in technology over the years has further reduced the cost of solar panel production, making it relatively affordable to the users. Due to its lower cost, solar power has become one of the viable options in power generation, relatively competitive to fossil fuels. It is a choice business decision, but the biggest barrier of entry remains the ability to secure land, as Solar Farms require extensive land surface.

The business model in the solar power industry is very much similar to water concession and wastewater BOO/BOT projects, as it involves mechanical and electrical installation, as well as operation and maintenance. Inadvertently, operating a solar powerplant is much simpler, involving only one type of input – sunlight, whereas the input of water treatment plants may vary.

We see business opportunities in the solar power industry as the industry is growing largely driven by increase in environmental pollution and reduction in cost of solar power. Thus, we intend to venture into Vietnam’s solar power industry on a small scale and eventually have plans to extend it to other markets upon our successful expansion.


WORDS OF APPRECIATION

First of all, I would like to welcome Mr. Wang Zhi as the Non-Executive Deputy Chairman of the Company. Mr. Wang has more than 15 years of experience in the business of water and wastewater treatments and water supply. He is currently the Chairman of Future Holdings Group Co., Limited, (“FHG”) a company incorporated in HongKong which is involved in investment and management of water supply, renewable energy and tourism and ecological agriculture businesses. With his wealth of experience and knowledge, we believe that he will be able to provide valuable insights and guidance to the Group.

In addition, Mr. Thye Kim Meng who was the Chairman, Managing Director and Chief Executive Officer of the Company has been re-designated as the Managing Director and ChiefExecutive Officer with effect from8 May 2018. Mr. Thye would continue to implement current growth strategy and policies of the Group. I would like to take this opportunity to express my sincere appreciation to our customers, employees, management, suppliers and shareholders for their unwavering support. Last but not least, I would like to express my gratitude to the Board for their guidance and counsel. As we embark on a growth journey, we aim to continue to deliver greater value to the shareholders.


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WANG YAOYU
Executive Chairman

Sourced from Darco Water Technologies Limited FY2019 Financial Statements