Investor Relations > Corporate Information > Chairman & CEO's Joint Statement

Chairman & CEO's Joint Statement

Extracted from the Annual Report 2007

Dear Shareholders,

Year 2007 was a challenging year for the semiconductor industry in general and the Group was not spared from the conditions of slow growth, weakening US dollar, rising commodities prices and sliding semiconductor chip prices caused by a supply glut.

The global economic climate in 2007 started on a firm footing but ended on a weaker note as issues with US sub-prime mortgages took its toll and threatened to push the US economy into a recession. There are concerns that the impact of slowing growth in the US will weaken global growth further. Against this backdrop, the initial 2007 growth forecast for semiconductor device sales started out averaging 8% but actual growth turned out to be about 3%. The full year growth for semiconductor capital expenditure ended up about 3% in 2007 after the impressive growth of 26% in the previous year [source: SIA, SEMI Dec 2007].

Financial Highlights

AEM's strategy to focus its growth on the consumables materials and services business, particularly on the organic substrates business, is on track. The Substrates and System Packaging (“SSP”) Division was the Group's largest revenue contributor, accounting for 53.3% of the Group's revenue in FY2007, up from 36.4% in FY2006. The Division posted a revenue growth of 18.9% from S$86.3 million in FY2006 to S$102.6 million in FY2007. Revenue from the Group's Precision and System Integration (“PSI”) Division, comprising equipment and precision engineering businesses, on the other hand, fell by S$57.9 million or 49.1% on the back of significantly lower PSI Division's equipment revenue, as a result of low market demand due to weak market sentiment. The sharp fall in equipment revenue resulted in a decrease in the Group's revenue from S$237.2 million in FY2006 to S$192.8 million in FY2007, down 18.7% or S$44.5 million.

At the operating level, i.e. excluding research and development costs, asset write-offs/impairment provisions, the Group recorded an operating profit of S$10.2 million in FY2007, down 60.4% as compared with FY2006. The lower profit was principally due to the decline in PSI Division's equipment sales as above mentioned and start-up operating losses of S$5.6 million incurred by Qualitek, the newly acquired Printed Circuit Board ("PCB") manufacturing business in Malacca.

In FY2007, asset write-off and impairment provisions amounted to a total of S$6.5 million (FY2006: S$1.5 million). The asset write-off and impairment provisions comprised mainly of PSI Division's write-off of old equipment inventories and technologically obsolete assets and some long-overdue debts, as well as business impairment for Materials and Services Division's plating services business in Suzhou due to slower growth prospects and discontinuation of the manufacturing services business in Tianjin. Overall, the Group suffered a net loss of S$3.0 million in FY2007 as compared to a net profit of S$16.6 million in FY2006.

The Group's net assets and net borrowings-to-equity ratio as at 31 December 2007 were S$83.0 million and 0.38 respectively. Net asset value per share was S$0.20. Operating cash flow for FY2007 was positive at S$3.9 million despite a significant decline in contribution from the Group's PSI Division. Investing cash outflow for FY2007 was S$13.9 million, the bulk of which was for the acquisition and upgrading of Qualitek's manufacturing facilities as the Group invested to expand its substrates business and technology capabilities to meet the rising demand for organic substrates. Cash and cash equivalents at the end of 31 December 2007 stood at S$6.8 million.

The Year In Review

Investment in Second Substrates Manufacturing Facility
On 5 January 2007, the Group announced that its wholly-owned subsidiary, Microcircuit Technology (s) Pte Ltd ("MCT"), had acquired a 100% interest in the equity of Qualitek. The principal activity of Qualitek is the production of rigid PCB in Malacca. For the year, Qualitek incurred a start-up loss of S$5.9 million from the PCB business due to weak PCB margins amidst stiff price competition, rising materials costs and operational instability brought about by high staff turnover and poor production yields from its manufacturing process. Replacement of key positions was completed in 4Q2007 and operational controls have been stepped up to improve its manufacturing efficiencies. Contribution from the Malacca plant is expected to grow as more technologically advanced micro-PCB and high density products and organic substrates are added to its manufacturing and production capabilities.

MCT's acquisition of Qualitek and its PCB plant in the Batu Berendam Free Industrial Zone in Malacca attracted the attention and support of the local state government. The Chief Minister of Malacca, Datuk Seri Haji Mohd Ali bin Mohd Rustam led a 15-person delegation to MCT in Tuas to gain a first-hand understanding of MCT's operations, investment plans and strategies. AEM plans to upgrade the technological capabilities of the Malacca plant to the level necessary to produce organic substrates and high-density PCBs.

Growth Through Mergers and Acquisitions
With a total of 7 manufacturing facilities in Singapore, China and Malaysia, employing a workforce of more than 1,700 worldwide, the Group currently supplies to markets in Asia, Europe and the USA. During the year, AEM's sales and technical teams have been aggressively seeking new opportunities in these markets. The Group will continue to seek growth opportunities and diversification from the semiconductor industry through strategic acquisitions and technology development and market alliances. This will be a critical component of the Group's strategy to re-gain its momentum of growth and to establish for itself a leading position in the supply of high technology components and integrated systems equipment to the global semiconductor market as well as in other high growth industries.

Developments in Innovation and R&D
In a highly competitive and fast developing technology environment, R&D and innovation are the key pillars of our strategy to grow and compete in the global market. In FY2007, the Group invested a total of S$6.9 million, including capital expenditure of S$1.5 million, on R&D. This is about 3.6% of its revenue.

Our focus and emphasis on channelling our R&D efforts and resources to working with customers to develop more advanced substrates and integrated modules as well as non-semiconductor products such as holography, laser and vision products are beginning to yield commercialisation prospects. During the year, MCT was selected by a major US customer to produce substrates for the radio frequency modules for high performance wireless products using the customer's proprietary advanced multi-layer organic technology. In the PSI Division, through collaborative arrangements with tertiary institutions and government research institutes in Singapore and China, the AEM Centre of Innovation developed and sold new holographic instruments and incorporated new fiber lasers components and vision software into our own equipment products.

Corporate Social Responsibility
As a good corporate citizen, AEM is committed to helping the less privileged among us. During the year, the Group awarded a number of scholarships to hardworking and deserving students to help them further their tertiary education as well as making donations to a number of welfare organisations. Our staff also organised and participated in gatherings and outings with less privileged children. AEM is also ever mindful to address the environmental impact of our operations and activities, making sure that we meet the international RoHS (Regulatory on Hazardous Substances) Standards and to exceed the stringent standards laid down by regulators and industry organizations.

Prospects

Diversifying our operations to expand into other industries will continue to be a key emphasis as we continue to look for new products and high growth opportunities in other non-semiconductor industries through acquisitions and strategic alliances.

FY2008 will be a very challenging year as the US is facing a weaker economy affected by issues with subprime mortgages. There is now an increasing risk of a US recession which will lead to weaker global consumer demand. This would undoubtedly have an impact on our industry as there is a general expectation that capital expenditures will be about 10% lower in 2008 [source : SEMI, Jan 2008]. However, the organic substrates market remains healthy as the substrates market is forecast to continue to grow at a CAGR of 12% over the next five years [source : TechSearch, Nov 2007]

With the underlying economic uncertainties and slowing global growth, there is limited visibility on the 2008 outlook, particularly for the second half of the year. Nevertheless, we will continue to focus our sales efforts on selective Asian markets which are still expanding and continue with tightening cost controls and improving our operational efficiency in 2008.

Director

On 20th April 2007, Mr Will Hoon Wee Teng stepped down as a Non-Executive Director. We would like to express our sincere appreciation for his contributions during his term of service to the Company. We would also like to place on record our appreciation to Mr Tok Kian You who has resigned and stepped down as Chief Executive Officer and Executive Director of the Company on 18 February 2008.

Appreciation

We thank all staff of AEM, customers, suppliers, bankers and business associates for their support as we look forward to their continuing collaboration in the current financial year. Last but not least, we thank you, our shareholders, for your continued belief in us over the years.