of the Malaysia revenue with freight forwarding, transportation and distribution accounting for the balance.
With the successful implementation and provision of value-added integrated logistics solutions services such as Vendor-Managed Inventories ("VMI"), operation of distribution centres, on-site logistics management and cross-border transportation to its customers, the Group is continuing its efforts to grow it's business in this segment.
Over the years, ILB has developed a commendable reputation amongst its customers by providing logistics services which improve the customers' competitiveness in their respective industry. This was accomplished through the minimization of logistics costs, resulting in lower overall production costs. ILB's major clientele comprise mainly multinational companies ("MNC") involved in manufacturing, fast-moving consumer goods and general commodities. The Group is continuing with its plan to diversify its customer base and to smoothen out potential uncertainties in the logistics industry.
ILB's haulage division maintained its transport fleet of 129 prime movers and 910 trailers during the year. The haulage sector has weathered a consolidation phase which saw major players reducing their fleets and only a few smaller players emerging stronger. The sector has thus become more competitive with emphasis on quality of services. Our haulage sector's turnaround and improved performance in 2006 was mainly due to a more efficient utilization of trucks. The tariff rate adjustments and a higher fuel adjustment factor ("FAF") have also helped to compensate for increased diesel prices.
As a measure to diversify its existing businesses, ILB has partnered with Jardine Shipping Services Holdings Limited to operate a joint venture company whose business activities are in the provision of general shipping services in Malaysia, with the objective of growing the shipping business of ILB.
ILB is moving towards realising its vision to become an international logistics player through its recent joint venture to estalish a logistics company in Dubai to provide full logistics services in the Middle East. By leveraging on its expertise and partnering with a leading trading and logistics company in Dubai, the Group strives to become an international logistics player by establishing its presence and becoming a main hub for distribution and logistics activities in the Middle East. This expansion is in tandem with the recent special tax incentive package awarded by the relevant authority to Integrated Logistics Solutions Sdn Bhd, a wholly-owned subsidiary of ILB, for the undertaking of "international integrated logistics" activities.
CHINA
China's economy grew in 2006 on the back of strong growths in investment, export and consumption. According to the National Bureau of Statistics of China, China achieved a strong gross domestic product (GDP) growth rate of 10.7%, led by the secondary sector including industrial and manufacturing sectors, with a strong growth rate of 12.5%. The GDP totaled 20.94 trillion yuan (2005: 18.23 trillion yuan), or approximately US$2.68 trillion (2005: US$2.26 trillion), with the primary industry accounting for 11.8% of the GDP, compared to 48.7% and 39.5% from the secondary industry and tertiary industry respectively.
ILB maintained its position as the leading foreign logistics players in China, having established itself as a provider of high value added logistics services. The Group is presently operating five warehouses in Shenzhen and Shanghai, with a total warehouse space of about 1.8 million square feet. In addition, it has rented additional warehouse space of about 400,000 square feet in Shenzhen to cater for strong demand from its clients. In 2006, the China operations' revenue and pre-tas profit contribution to the Group have increased to 45% and 71% respectively. The increased contributions are attributable to full-year operations arising from the additional warehousing capacity created in 2005 as well as the higher volume of handling activities at the Shenzhen and Shanghai warehouses.
During the year, the Group entered into an investment agreement to invest in Shanghai Puhwa Logistics Co Ltd. ("SPL") in order to fast-track its growth in the transportation segment. SPL is a Shanghai-based third-party logistics company which provides integrated transportation and warehouse management services to multinational and local corporations in China.
CORPORATE DEVELOPMENT
During the year, the Group completed an internal restructuring of the Company's investments in Hong Kong and China ("Restructuring Exercise"). As part of the Restructuring Exercise, incorporation of the following subsidiary companies took place:-
- ILB International (BVI) Limited (“ILB BVI”) was incorporated in Tortola, British Virgin Islands, on 9th May 2006;
- ISH Logistics Group Limited (“ISHLG Cayman”), a wholly-owned subsidiary of ILB BVI, was incorporated in Grand Cayman, Cayman Islands, on 9th May 2006; and
- ISH Group (BVI) Limited (“ISHG BVI”), a wholly-owned subsidiary of ISHLG Cayman, was incorporated in Tortola, British Virgin Islands, on 10th May 2006.
On 30th May 2006, ILB transferred 50,000,000 ordinary shares of HK$1.00 each (respresenting 100% equity interest) in Integrated Logistics (H.K.) Limited (“ILHK”) to ISHG BVI, a wholly-owned subsidiary of ISHLG Cayman which in turn is a wholly-owned subsidiary of ILB. Pursuant thereto, ILHK has become an indirect subsidiary of ILB.
Pursuant to a sale and purchase agreement dated 1st June 2006, ILB and Shun Hing China Investment Limited own 70% and 30% of ISHLG Cayman respectively.
During the year, the Group completed an internal restructuring of the Company's investments
in Hong Kong and China On 11th July 2006, ILB acquired two (2) ordinary shares of RM1.00 each (representing 100% equity interest) in Integrated Cargo Services Sdn Bhd (“ICS”) for a total consideration of RM2.00. ICS was incorporated on 19 April 2006.
On 12th July 2006, ILB entered into a Joint Venture Agreement with Jardine Shipping Services Holdings Limited to jointly participate in ICS as the joint venture vehicle, with ICS principally involved in the provision of general shipping services. ICS commenced operations in August 2006.
On 18th October 2006, ILB entered into a Shareholders’ Agreement with National Trading & Development Establishment and Argan Ventures Pte. Ltd to jointly participate in Integrated National Logistics Limited (“INL”), with its principal activities being the provision of full logistics services. INL is a limited liability company to be registered in the Dubai Logistics City, Emirates of Dubai, United Arab Emirates.
On 16th December 2006, ILB, through its 70%-owned subsidiary, Integrated (HK) Limited (“ILHK”), entered into an agreement with Shanghai Puhwa Logistics Co Ltd. (“SPL”) and the existing shareholders of SPL (“Existing Shareholders”). ILHK will subscribe to 5,384,615 new ordinary shares to be issued by SPL comprising 35% of the enlarged share capital of SPL (“Initial Investment”). The Existing Shareholders (“ILHK’s Option”). The ILHK’s Option is equivalent to 25% of the Enlarged Share Capital of SPL. Upon exercising the ILHK’s Option, ILHK will own 60% of the Enlarged Share Capital of SPL. ILHK shall have the right to exercise the ILHK’s Option anytime within eighteen (18) months from the subscription of new shares in relation to the Initial Investment.
INFORMATION TECHNOLOGY ("IT")
The Group continues to place great emphasis on leveraging technology as a form of competitive advantage. In order to better support its business growth in the region, the IT function is now centralized in Malaysia and China as the two key locations. IT resources in China have expanded to tap into the local IT talent, specifically for research and related development work. As the Group evolves to become a solutions-based logistics service provider, the agility of IT capability becomes critical for the Group to be able to enjoy the flexibility required to support the vast number of customers from various industries. Furthermore, related operational systems such as transportation and warehouse management systems will require frequent customization and fine-tuning.
FINANCIAL PERFORMANCE
The Group has maintained its performance in the current financial year with a pre-tax profit of RM31.7 million. The Group’s net profit of RM24.5 million is a commendable increase of 33.9% from the previous year’s net profit of RM18.3 million. This is partly due to the Group’s increased stake in the China operations, up from 60% to 70%, which led to increased profit contribution.
The warehousing and related value-added services segment continued to be the main contributor for the year. The haulage sector experienced a turnaround this year by contributing significantly to the Malaysian operations’ revenue. The China operations have contributed substantially to the Group’s performance, especially through lease rentals and high volumes of handling activities in relation to the warehouses, and also through its transportation segment.
DIVIDEND
The Board has recommended a final dividend of 3.0 sen per share less Malaysian tax of 27% for the financial year ended 31 December 2006. Together with the interim dividend declared and paid during the year, the total dividend for the financial year amounts to 6.0 sen per share less Malaysian tax averaging 27.5%.
FUTURE PROSPECTS
MALAYSIA
The Malaysian economy is expected to strengthen in 2007 not withstanding a more challenging external environment, with the growth being underpinned by continued expansion of private sector activities and implementation of Government’s policies and strategies to diversify and promote new sources of growth. Overall, real GDP is envisaged to expand at 6% in 2007 (2006; 5.8%). Growth will continue to be broad-based with positive contributions from all sectors of the economy.
Not withstanding the ongoing consolidation process that will reduce the number of logistics operators, the logistics market in Malaysia is anticipated to face another challenging year. It is very much dependent on the growth of the manufacturing sector. As manufacturing becomes more globalised and companies choose to locate their manufacturing operations in the most cost-competitive areas, international trading activity is expected to grow in these areas which will then have an impact on the growth in the logistics industry.
Nonetheless, with the continuing trend of companies outsourcing their logistics oprerations in order to focus on their core activities, the Group believes that its experience and expertise in the provision of customized and integrated logistics solutions, with greater cost efficiency, would enable the Group to maintain its market position in the local logistics market. It is further expected that the good performance of the haulage division will continue in year 2007 given the imposition of tariff rate adjustments and higher FAF being maintained.
CHINA
China is expected to maintain its strong growth in 2007, with an estimated 9.8% growh rate. China, as a leader in global manufacturing, is poised to grow rapidly in the coming years. 2006 is the first year that its logistics market was opened up completely, and logistics companies were seen to have undergone reorganization and integration in order to survive and thrive in the competitive environment. The China’s logistics industry is enhancing its operations efficiency to reduce logistics costs and hence realise low costs in corporations specifically and societly overall.
ILB is well-positioned and ready to expand its logistics operations, in tandem with the regional expansion of the production and assembly services of its MNC clients in China. The Group has in its pipeline the proposed investments in land and warehouses in strategic locations such as Yangshan Port in Shanghai, Wujiang in Suzhou, and Yantian in Shenzhen. These investments are in line with the Group’s strategy to expand its logistics operations in China. The warehousing and value-added services provided are synergistic with the growth of the Group’s transportation segment in China. Further growth is anticipated from its investment in SPL, a company with an established logistics network throughout China. This investment will complement the Group’s existing logistics businesses and will act as a platform for the Group to further expand its logistics network and scope of businesses in China by leveraging on the logistics networking and client base of SPL.
The China operations will continue to contribute significantly to the Group’s performance, through the increase in warehouse rentals and value-added services, and the contribution from the transportation segment in China. The Group expects the performance from its China operations to improve further, with existing and new investments.
CONCLUSION
With its establised reputation as an integrated logistics solutions provider in Malaysia and China, the Group will continue to grow its businesses, by capitalizing on its experience and expertise through a focus on the implementation of solutions such as the VMI operations and on-site logistics management. The Group is continuously seeking for opportunities to roll out its integrated solution services to its clients, and these services are expected to grow further with the trend of outsourcing of logistics operations to a third party service provider.
ACKNOWLEDGEMENTS
I would like to thank my fellow Board members for their trust and confidence in appointing me as the Chairman. On behalf of the Board, I would like to record my appreciation to the management and staff for their dedication, commitment and contributions during the year. I also wish to thank our valued clients, financial institutions, business associates and shareholders for their continuing support, guidance and contribution to the Group.
Y.B. Dato’ Lee Hwa Beng
Chairman
