On behalf of the board of directors (the “Board” or “Directors”) and management, we are pleased to present to you the annual report of Darco Water Technologies Limited (the “Company”, and together with its subsidiaries, the “Group”) for the financial year ended 31 December 2021 (“FY2021”).
In FY2021, the world continued to fight against the spread of COVID-19. With the emergence of the delta variant, many countries returned to strict lockdowns and other pandemic related measures which disrupted businesses across all industries.
Amidst a challenging environment, the Group recorded revenue of S$54.6 million for FY2021, a 30.1% decrease from S$78.1 million for the financial year ended 31 December 2020 (“FY2020”). This was mainly due to lower revenue from the Engineered Environmental Systems (“EE Systems”) segment as fewer engineering, procurement and construction (“EPC”) projects were secured in Malaysia and China in FY2021. Overall, the Group recorded a net loss of S$7.3 million for FY2021, compared to a net profit of S$1.3 million for FY2020.
While COVID-19 is the crisis of a generation, the impending climate crisis is set to affect many generations to come. Sustainability and Environmental, Social and Governance (“ESG”) factors have taken centre stage in discussions about the post-pandemic economic recovery.
Our business is aligned with the United Nations Sustainable Development Goal of ensuring the availability and sustainable management of water and sanitation for all and we continue to see room for growth across Southeast Asia as local governments continue to invest in infrastructure to provide for basic water and sanitation needs in rural areas while also seeking new green technology solutions.
Despite the loss recorded for FY2021, the Group’s financial position remains stable as we continue to seek new opportunities for sustainable growth. As at 31 December 2021, the Group had a current ratio of 1.6 while net asset value per ordinary share was 39.55 cents.
While revenue from China decreased from S$40.7 million for FY2020 to S$26.4 million for FY2021 amidst intense competition, it remains the Group’s largest market accounting for 48.3% of the Group’s FY2021 revenue. In addition to external headwinds, the Group’s 72%-owned subsidiary, Wuhan Kaidi Water Services Co., Ltd., (“WHKD”) also faced internal challenges of serious misconduct which was brought to the Board’s attention in a whistleblower report. The Board spared no efforts in ensuring that appropriate and prompt steps were taken to look into the matters raised in the whistleblower report.
As part of the Group’s ongoing efforts to strengthen its corporate governance and internal controls, the Group has appointed key management personnel to the board of directors of WHKD. Leading the effort to strengthen general oversight of WHKD is the Group’s Executive Director and Chief Operating Officer, Mr. Zhao Yong Chang who is also Managing Director of WHKD. Mr. Zhao, being a senior member of the Group’s management team and based in China, coupled with his familiarity with the Chinese business and financial environment, is most suited to oversee the China operations of the Group.
In FY2021, Malaysian authorities battled against a surge of COVID-19 infections by implementing extensive movement restrictions over an extended period which caused severe disruption to business activities. Most tenders for EPC projects previously envisaged to be awarded in FY2021 were either cancelled or postponed. Against this backdrop, revenue from Malaysia decreased from S$26.1 million for FY2020 to S$18.2 million for FY2021, accounting for 30.3% of the Group’s FY2021 revenue.
Revenue from the Group’s trading segment, which mainly focuses on sales of chemicals, consumables and spare parts to operation and maintenance (“O&M”) customers, decreased from S$9.5 million for FY2020 to S$8.7 million for FY2021 as customers experienced a slow-down in operating activities amidst extended pandemic restrictions in Malaysia.
However, revenue from the Group’s Water Management Services (“WM Services”) remained same at S$6.9 million for FY2020 and FY2021, reflecting the relative stability of the segment which focuses on providing O&M services to industrial customers.
Strict border controls aimed at controlling the spread of COVID-19 in Singapore continued to constrain the inflow of migrant workers, causing an acute shortage of manpower which has led to delays in the completion of ongoing construction projects.
As a result, revenue from Singapore decreased from S$10.3 million for FY2020 to S$7.9 million for FY2021, accounting for 14.5% of the Group’s FY2021 revenue. In line with the Singapore Green Plan 2030 launched in FY2021, the Group’s wholly owned Singapore-based subsidiary, PV Vacuum Engineering Pte. Ltd., entered into a Memorandum of Understanding with Insect Feed Technologies and Republic Polytechnic to jointly develop a fully automated recycling solution to turn food waste into commercially valuable products. The partnership has the potential to add greater value to the Group’s existing pneumatic waste conveyance system (“PWCS”) solutions as Singapore intensifies its sustainability initiatives.
While energy policy changes led to the termination of the Con Dao Project in FY2021, we remain committed to growing our business in Vietnam, one of Southeast Asia’s fastest growing economies.
Revenue from Vietnam increased from S$0.2 million for FY2020 to S$1.6 million for FY2021 as construction on the Ba Lai water supply project in Ba Tri District, Ben Tre Province, continued to progress. The project is expected to achieve commercial operation in the second half of 2022 and will have a daily designed water treatment capacity of 15,000m3 when fully operational, ensuring the basic needs of around 100,000 residents in the Ba Tri District are met.
Despite a challenging FY2021, we remain confident in the long-term prospects of the Group’s core business segments and operations across Asia.
In order to build the business further, we first had to strengthen our foundations with improvements across governance, oversight and internal controls. This was achieved following several changes to the Board in FY2021 and we will continue to emphasise the importance of these aspects across the Group.
With greater oversight of the Group’s subsidiaries across China and Malaysia, we believe there is further room for growth as we leverage our established track record and expertise in these markets to continue pursuing opportunities across engineering as well as operations and maintenance services.
To further diversify the Group’s revenue streams, we will also continue to pursue water and waste infrastructure ownership together with strategic partners for sustainable recurring income.
In addition, the Group’s PWCS solutions have significant potential for further growth in tandem with the development of new HDB estates and private developments as it forms part of the infrastructure for maximum resource recovery under Singapore’s inaugural Zero Waste Masterplan.
As we enter the third year of living with COVID-19, uncertain pandemic risks remain amidst a challenging environment. While we continue to closely monitor the evolving COVID-19 situation in China, we are encouraged by the steps taken by local authorities in Malaysia and Singapore to reopen and avoid further disruptions from movement restrictions.
We would like to extend our heartfelt gratitude to our customers, employees and shareholders for their unwavering support as the Group strived to overcome its challenges in FY2021. We remain committed towards sustainable growth and value creation for all shareholders.