Management Discussion and Analysis

Extracted from Annual Report 2016

Hock Seng Lee Berhad is a marine engineering, civil engineering and construction company. It has two active wholly-owned subsidiaries, namely Hock Seng Lee Construction Sdn Bhd which is involved in property development and HSL Land Sdn Bhd which is involved in investment in real properties.

In 2016, the Group registered total revenue of RM498.55 million with profit before tax of RM75.17 million. Revenue and profit before tax for 2015 were RM654.74 million and RM101.24 million respectively. The fall in revenue is mostly attributable to the completion of projects and the fact that the two mega projects secured in 2016, that is, the Kuching Centralised Wastewater Management Project, Phase 2 and Package 7 of the Pan Borneo Highway Project, are still in their early stages. Revenue from property development activities in 2016 reached RM63.07 million, up from RM32.16 million in 2015.

Clearly the triumph of 2016 was seeing our procurement initiatives bear fruit in a decisive fashion. We set new bench marks in terms of the value of new contracts secured. Our order book peaked at RM2.7 billion mid-year.

We acquired RM1.94 billion worth of new projects in 2016, having added RM275 million in 2015. Including property projects, the value of projects in hand stood at RM2.6 billion of which RM2.1 billion remained outstanding as at 31 December 2016.

The significant injection of new works required the channelling of resources into site establishment, additional staff recruitment and machinery mobilisation. At the same time, we maintained progress on existing projects, completing an impressive RM590 million worth of contracts during 2016.

Included were several projects in the growth node towns of the vast Sarawak Corridor of Renewable Energy (SCORE). In Tanjung Manis, we completed the Pumping Station and the infrastructure works for the riverbank filtration system for the water supply as well as access roadworks to the Halal Hub. In Samalaju, we finished the weir and the raw water intake from Sungai Similajau as well as infrastructure works and government quarters for the Samalaju Industrial Park. Similarly, in Mukah, we completed a second package of the RM68 million Tingkas raw water intake as well as the access road to the new UiTM campus.

Outside of the SCORE region, projects completed included various roadworks in Bintulu Division and Sri Aman, Sekolah Seni Malaysia and a Petanque complex in Kuching.

There were 14 new projects secured during 2016. Aside from the two mega projects - a section of the Pan-Borneo Highway and the second package of Kuching's sewerage system - there were further contract wins in the SCORE area. At Samalaju we now have the Boulevard project and a substation establishment contract worth a combined value of RM122 million.

Work has commenced on our package of the Pan-Borneo Highway which is the stretch from Bintangor Junction to Julau Junction and Sibu Airport to Sg Kua Bridge. This is a challenging package which involves upgrading the existing single carriage way to a superior dual carriage way and constructing various interchanges and bridges, notably the 1.7 km Durin Bridge over Batang Rajang. Together, the earth works, piling, drainage works, road works, interchanges, bridges and related M&E works will continue into 2020. We have established an operations centre in Sibu and increased our technical team to handle the works. Further equipment mobilisation, site clearing, earth works, piling and drainage works are presently underway.

We expect to see this project build momentum during this year reaching milestones for progress claims.

Kuching's Centralised Waste Water Management System Package 2 was the other major project awarded in 2016. It remains in the preliminary planning stages with site and soil investigations taking place. Laser guided tunnel boring is a complex, highly technical endeavour and we look forward to applying our expertise to this important project and to others in the future. In fact, we have just secured through open tender the initial phase of similar sewerage works for Miri city.

Property Development

We had anticipated a strong 2016 for our property development sector and this was borne out during the year. Hock Seng Lee Construction Sdn Bhd (HSLC), a whollyowned subsidiary, launched new projects worth some RM84 million. Revenue as at 31 December 2016 had risen to RM57.98 million up 80 percent from the RM32.16 million achieved as at 31 December 2015. This result was partly due to some sales revenue from new launches in late 2015 being recognised in 2016.

The robust sales of premium homes at our 200-acre flagship mixed development La Promenade, was the major contributor to the growth figures. Located off the Kuching- Samarahan Expressway, the innovative project embraces a modern living concept with an emphasis on security and landscaping. There are 2-tiers of manned guardhouses, electrical perimeter fencing, CCTV and inter-com systems while the environs comprise an impressive pine-tree lined boulevard, abundant linear parks, walking paths and a lake. The first residential offering, called Precinct Premiere, including Phases 1 and 2, is approximately 80 percent sold with a sales value approaching RM80 million. Prices for the luxury homes range from RM1.35 million to RM3.10 million.

Also at La Promenade, we have launched Phase 1 of a second residential estate known as Precinct Luxe with a Gross Development Value of some RM30 million. Further release of double-storey super-link homes within Precinct Luxe will be available for sale during the year. Along the prominent street frontage of La Promenade, we have opened a property Sales Gallery, while HSL's new corporate headquarters is under construction and due for completion in 2018.

To Kuching's north, the homes at Samariang Aman continue to sell well. Since the completion of our award-winning 642 units for Samariang Aman a few years back, we have built an additional 250 units for Samariang Aman 2. Further launches at this estate are scheduled for 2017 and include 84 units of double-storey terraced and double-storey semidetached homes for Phases 3 and 6. These have a combined Gross Development Value of some RM45 million.

Other residential projects which will have an impact in 2017 include Highfields at Batu Kawa where a new phase of 22 units of double-storey semi-detached homes with a Gross Development Value of RM17 million has been launched in the first quarter of 2017.

There are also ongoing commercial and industrial property projects. This year at Vista Industrial Park (VIP) in Kuching, we will launch Blocks 2 and 3 (55 industrial lots) worth RM68 million. Block 1 is approximately 75 percent sold.

Our property development sector is expanding and has new projects and phases in the pipeline. There is some dampening of the property market due to fiscal cooling measures such as stringent lending rules. However, our results suggest that innovative, well-designed, value-formoney products in strategic locations are still in demand.

Sustainability and CSR

At HSL, we have always believed that being a good corporate citizen makes good business sense. Our responsibility to society is ingrained in all our business practices and is the foundation for our business sustainability model. In this Annual Report we provide a summary of our Corporate Social Responsibility (CSR) programme on pages 12 to 14.


HSL's Quality Management System (QMS) has been accredited since 2008. In addition to annual external audits by Lloyds Register, we have twice undergone the triennial Renewal of Certification. The QMS entails essential data collection and internal auditing and is an effective tool for monitoring core office activities and procedures as well as for project management. The International Organisation for Standardisation (ISO) released a revision of ISO 9001 in 2015 requiring broad modifications and updates to the current version of 9001:2008 standard. I am pleased to report that due to the dedication of our staff to the process, we are on track to achieve compliance with the new requirements by 2017.

People First

The evolution of HSL from a one-ship dredging operation to the fully integrated construction company we are today is the result of our phenomenal human capital. We are very aware that our success over the past three decades is down to the commitment, hard work and capabilities of our employees. As at 31 December 2016, HSL Group had a total of 874 permanent staff of whom 226 are office-based, with the balance at site or at sea. This represents an increase from the 752 staff we reported as at 31 December 2015. The additional recruitment is in line with the upsurge in our order book and includes several new engineers for the Pan- Borneo Highway Project, among others.

The strategic management of our human resources is a vital component of our business plan and we closely monitor labour costs, levy expenses and other issues impacting labour supply. In contrast to general construction contractors, the mechanised nature of our specialised operations makes us less reliant on unskilled labour. Some one-third of our workforce have post-secondary qualifications, while only 17 percent are foreign.

HSL Annual Dinner is a major event on our social calendar and is an occasion for staff from sites all over the state and from ships and dredgers usually at sea, to join with office staff to celebrate a productive year. The dinner for 2016 saw another large contingent of long service staff receive awards - a reflection of the mutual respect and care staff and management have for one another. Staff members' children who excelled in government examinations were also given incentive awards on this occasion.

Even as the Group has grown over the years, HSL fosters a family-like sense of belonging in the organisation. Our people are only limited by their own abilities and ambitions as we aim to structure satisfying careers and promotions on merit for all our staff. Whether it is sponsoring charity runs or getting staff involved in our Green Week initiatives or quarterly newsletter, we promote camaraderie and teamwork. I am very proud of the adaptability, perseverance and skills of our people and know they are paramount to our success.

Business Risks

The Group is exposed to external risks such as adverse economic and market conditions and internal risks related to the Group's operations and financial management.

It has to be recognised that the Group is limited in what actions can be taken to manage or mitigate external economic risks. However, the Group has put in place a risk management framework to identify, manage and mitigate internal operational risks. Project procurement is selective and carefully considered to ensure that the Group has the requisite financial and human resource capabilities to undertake the projects successfully. Operational procedures are in place and are constantly reviewed to manage operational costs through improved efficiency and innovation.

Financial risks and cash flow risks are mitigated by maintaining substantial cash reserves and ensuring the availability of credit facilities from financial institutions. With minimal borrowings, the financial and cash flow risks of the Group are considered low.

Strong order book buoys prospects

While the Malaysian economy is growing at a modest 5 percent at present, the roll out of infrastructure works under the 11th Malaysia Plan and the government's 5-year Construction Industry Transformation Programme 2016 - 2020 ("CITP") has enabled the construction sector to achieve a growth rate of around 8 percent during 2016.

Sarawak generally exceeds these national averages by as much as 2 percent with the construction sector recording some 10 percent growth in recent years and the state attracting a high level of Proposed Capital Investments (both domestic and foreign). The draw card of low-priced electricity has lured several energy-intensive multi-nationals to set up operations in Sarawak with flow on effects to the state's economy.

Infrastructure spending remains a focus of both state and federal government agendas with the multi-billion Pan- Borneo Highway mega-project a catalyst of growth for the local construction industry. Within this scenario, and given the state's vision to achieve developed status by 2030, there are ample reasons to anticipate more opportunities for HSL. Nevertheless, we are judicious with our optimism and alert to the uncertainties across global capital markets, adverse foreign currency exchange and subdued consumer sentiment.

We have proven our resilience in the face of industry and economic challenges and will be drawing on our pedigree to strategically manage factors such as the tight labour market, volatility in material and equipment costs and a general weakening of the economic outlook.

We do expect our performance ahead to be buoyed by our strong order book with mega-projects stretching 4-6 years hence. However, with minimal gearing and substantial cash reserves, we have capacity for more. We will carry on bidding for projects particularly those which draw on our competitive edge in marine engineering. There remains a flow of infrastructure contracts from the SCORE initiative and from power generation needs. We also anticipate vying for affordable housing, water supply, flood mitigation, sewerage works, roads, bridges and building construction contracts.

HSL will continue to undertake projects with the good of the community in mind, with the welfare and development of our staff in mind, with care for the planet we are leaving future generations and with our trademark emphasis on technical excellence, profitability and shareholder value.