Boustead – Annual General Meeting July 30, 2007

I attended the Annual General Meeting today. Below are some notes of what I gathered at the meeting and the issues and points raised by shareholders:-

Financial Statements

a) Page 82 Note 31 – Allowance for Provision for Doubtful receivables had increased from S$203K to S$6.3 million. Management explained that this related to the provision for receivables of Salcon Invest which was being voluntarily liquidated.

b) Page 63 Note 12 – Allowance for foreseeable losses on contracts of S$3.4 million. This relates to the sand export ban from Indonesia where suppliers refused to honour their agreements to sell sand to the Group at S$72 per cubic metre. The Group is now suing these contractors and making provisions for the increase in costs, as the market price for sand is now about S$150 per cubic metre. However, for FY 2008, the projects are expected to be priced higher in order to offset the effects of this cost increase, thus the impact would not be so severe.

c) Page 61 Note 8 (a) (ii) – This loan to a director is a different director from the one stated in Note 8 (a) (i), and the loan has since been fully repaid. When quizzed about the period of time required to complete the voluntary liquidation of Salcon Invent, the Chairman said that the settlement agreement has already been drawn up with the main contractor and this should be completed within the next few months. The process has dragged on for many years and the final settlement, he assured, should be within FY 2008.

d) Page 70 Note 19 – Loan receivable amount of S$18.3 million belongs to CGI Realty. The other shareholders of GBI have also provided the same proportion of the loan receivable.

e) Page 86 Note 36 (b) – Capital commitment of S$12.06 million relates to the Group’s commitment to a fund which has yet to take off. However, the agreement is non-binding and the Group is allowed to withdraw from it if it chooses to. This fund was originally set up to procure a land bank in Tianjin, China in order to replicate Boustead’s success in Singapore but no approval has been given so far. The amount stated in the notes represents 10% of the total funds to be committed assuming the approval is granted.

f) Page 78 Note 23 (c) (v) – A minor question was raised regarding the interest rate of 16% for a loan amount. The chairman said this was in relation to a loan taken up in Indonesia and the interest rates there are naturally high due to higher default risk.

Future Plans and Prospects for Boustead in FY 2008

1) A question was raised on whether minority interests (MI) will be further reduced in order to enhance earnings attributable to shareholders. The reply was that this was unlikely except for perhaps a small additional purchase in Boustead International Heaters. This amount is insignificant though.

2) Mr. Wong mentioned that Boustead’s order book was “looking good” and that the Group was hoping to clinch some Middle Eastern projects in FY 2007. However, this hit a snag because of bureaucratic requirements and resulted in delays in getting approvals for firm contracts. Thus, Salcon and the Water Solutions Alliance would have to wait some time before showing results but he is hopeful that something good will materialize soon.

3) On the Energy side, he mentioned that the Group has secured some projects (some of which are significant) which will be announced in due course. He anticipates some related announcements to be made in August 2007.

4) Incidentally, after the AGM and market close, a new contract was announced for Boustead Projects worth S$74 million, the single largest contract to date for the Group. This affirms what the Chairman had said and will help to grow their order book even further for FY 2008 (note that they now own 91.7% of Boustead Projects, up from 55% in FY 2006; thus more of the profits will accrue to shareholders for FY 2008).

5) With regards to Salcon, Mr. Wong mentioned challenging conditions in China and that margins can be pretty thin for most companies doing BOT water projects. When asked how Boustead compared to companies such as Epure and Sino-Environment (also listed onSGX-ST), he shrugged and said that it’s a very competitive landscape out there and that only the company with the lowest costs and most cutting-edge technology can manage to compete and stay alive. This is because China companies can always lower costs more effectively than Singapore companies and they also have an edge because of their Chinese connections. He admitted that one mistake he made was not entering the market earlier, thus missing out on good opportunities.

6) He maintained that Boustead will not accept BOT projects just for the sake of doing so, as some of the returns were so poor that he was forced to reject the proposal; otherwise shareholders’ returns would be affected as the ROE was not acceptable. All in all, he was offered nearly a 100+ projects regarding wastewater but he had to reject all of them due to unsuitability.

7) In a side note, Mr. Wong said that Boustead used to build factories; but now they realize that they can do the business of building high-end tech parks which command rental premiums of up to 3 times the amount for factories. The Group has thus decided to take this strategic direction in order to enhance returns for shareholders (refer to the S$74 million announcement dated July 30, 2007).

8) With Boustead’s current cash hoard, the Management is also eyeing potentialo acquisitions and Mr. Wong did not rule this out. Oil prices will remain high for the foreseeable future (he predicts it will not dip below US$40 per barrel) and thus the demand for waste to energy systems should remain high.

9) For the Jiangsu, Wuxi properties available for sale, they are not doing too badly but prospects are not exactly exciting either. Boustead chooses to manage these properties rather than build them, thus the returns will not be spectacular.

10) One shareholder asked about the possibility of rights or bonus issues in the future. While Mr. Wong did not rule out bonus issues, he said a rights issue was highly unlikely as the Group has more than enough cash already.

11) Another question was raised over succession planning and whether Mr. Wong had considered it. Mr. Wong jokingly said that the word “retirement” was not in his dictionary and that Minister Mentor Lee was already 84 (21 years older than him) yet he continued to work as well ! On a more serious note, succession planning was already underway with one person being shortlisted by Mr. Wong as a possible successor. However, more consideration and discussions with other Board members was necessary in order to determine if this person was “the right one” as the decision is not unanimous at this point in time.

12) Quarterly reporting would be done from FY 2009 onwards (the first quarter beginning June 2008). The auditor from Deloitte and Touche however, said that quarterly reporting for Boustead was not really indicative of business conditions as most project revenues were “lumpy” by nature and such reporting would necessarily use up more resources without affording shareholders the additional clarity. In fact, quarterly reporting may even encourage short-termism and this has already happened for some companies which have reporting quarterly results.

I approached Mr. Wong during the tea break to enquire on the progress of the Dinh Binh power station in-principle approval given in May 2007. According to him, regulatory requirements were still pending and the project was put on hold for the time being, thus shareholders should not expect a firm contract to be signed so quickly.

The atmosphere at the AGM was cordial and jovial and the Chairman was candid in his assessment of the Group’s future and also in giving details of various aspects of the company’s operations. I would say that a lot was learnt from this AGM alone as the questions asked were high-quality ones coming from long-term shareholders who understood the company’s business model very well. As a result of this AGM, it has affirmed my belief that choosing to remain vested in the company is the right choice to make.

Note: I will be doing a posting on Suntec REIT’s results and announcement of the acquisition of one-third of One Raffles Quay after digesting the information stated in the announcement cum press releases. Stay tuned for that !