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Chairman's Statement

(Extracted from Annual Report 2019)

Chairman

Dear Shareholders,

The year under review had not been easy as the economic climate worldwide was still facing headwinds with anti-globalisation and protectionist fervour, trade wars and financial market instability prevailing. The outbreak of the coronavirus (Covid-19) in late 2019, which started in China and spread to many countries, has adversely affected not only China but many other countries around the world. These economic disruptions and political turmoil will continue to negatively affect business operations worldwide including those in Singapore.

According to the Ministry of Trade and Industry's statistics announced on 17 February 2020, the Singapore economy grew by 0.7 per cent, a drop from the 3.4 per cent growth in 2018. The construction industry performed better as it rose by 2.8 per cent in 2019, an improvement from the 3.5 per cent contraction in 2018, due to support from both public sector and private sector construction works.

Despite the difficulties faced in the Singapore economy, OKP Holdings Limited (OKP) remains optimistic that the Group can overcome these challenges by remaining focused on its vision to be a leading transport infrastructure and civil engineering company in Singapore, the region and beyond. Our vision will continue to be the key motivating factor in driving OKP ahead as we fortify our strengths and overcome challenging times to achieve our business goals in order to build a company with a sunny and sustainable future.

The Group is committed to executing its strategy, which is to focus on its core competencies, exploring overseas business opportunities, and diversifying earnings through property development and other investments. Our firm belief is that this strategy will enable us to attain continuous business growth and strengthen our competitiveness.

We aim to maintain our leadership position in our core business of construction and maintenance in the public sector, while gradually developing our private sector business.

We have positioned ourselves as a progressive and agile company by widening our skills and proficiency through forming joint ventures to develop properties and bid for complex projects. Our joint ventures to develop properties have brought good results. The Group and its joint venture partners continue to be involved in developing and acquiring property projects in Singapore and overseas. Together with our partners, we have completed two residential projects, Amber Skye and LakeLife, in 2017. In addition, OKP and a joint partner had won the bid in February 2018 to acquire a land parcel at Chong Kuo Road, Singapore. The Group has launched the condominium project comprising two five-storey blocks with 84 units named The Essence on this land parcel in March 2019.

As part of our strategy to explore overseas business opportunities and diversify OKP's earnings, the Group jointly with HSB Holdings Pte. Ltd., acquired its first overseas property, a freehold office complex in Perth, Australia in April 2018. This Australian property continues to provide a source of recurring rental income. As at 31 December 2019, the property is fully tenanted.

Since its founding, OKP has grown considerably with its staff strength growing from 10 employees in 1967 to 409 in 2002 and 814 today.

In overcoming numerous difficulties while undergoing the ups and downs of the business cycle, we have matured to become a stable and reliable business in the transport infrastructure and civil engineering business in Singapore and the region. The Group continues to be inspired by its mission - to be the first and preferred civil engineering contractor for the various industries, here and overseas. We will continue to drive ourselves forward in achieving this mission by gradually extending our capabilities and outreach so as to stay ahead of our competitors. Through the years, the company's reputation has grown due to its numerous advantages, which have strengthened its leadership position in the construction industry. These advantages include our solid track record, widely-recognised expertise, capable management team, and knowledgeable and able workforce in civil and engineering projects.

The Group considers sustainability issues in the formulation of its strategies. We believe that sustainability means operating our business in a way that is not only profitable but also makes a positive impact on our stakeholders and the environment. We believe this is a strategic approach which leads to greater effectiveness and good business performance. Since 2010, OKP has published a sustainability report and for the fifth year running, is presenting a sustainability report based on the Stock Exchange (SGX) Sustainability Reporting Guide and the Global Reporting Initiative (GRI) Standards.

Performance Review

The past financial year was a difficult time for OKP as it continues to build a more resilient company with a stable and sustainable future. It saw revenue of $81.4 million during the financial year ended 31 December 2019 (FY2019), which was a decrease of 10.0 per cent compared to $90.4 million for FY2018.

The drop was due mainly to a 36.4 per cent drop in revenue from the maintenance segment to $25.7 million. However, this decrease was partially offset by an 8.5 per cent rise in revenue from the construction segment to $50.0 million and a 42.4 per cent increase in rental income.

The main contributor to the Group's revenue continued to be the construction segment, which accounted for 61.4 per cent (FY2018: 50.9 per cent) of total revenue for the financial year. The maintenance segment accounted for 31.5 per cent (FY2018: 44.6 per cent) of OKP's overall revenue.

The increase in revenue from the construction segment was due mainly to the higher percentage of revenue recognised from a number of existing and newly awarded construction projects as they progressed to a more active phase in FY2019. In the case of the maintenance segment, the drop in revenue was due mainly to a lower percentage of revenue recognised from a few newlyawarded maintenance projects in FY2019.

One bright spot is the rise in rental income generated from investment properties, which was due mainly to rental income generated from the property at 6-8 Bennett Street, East Perth, Western Australia. This property has been fully occupied since the second quarter ended 30 June 2019. Rental income accounted for 7.1 per cent (FY2018: 4.5 per cent) of our company's revenue.

Gross profit decreased by 39.5 per cent to $10.8 million for FY2019 from $17.9 million a year ago. The lower gross profit margin in FY2019 was due mainly to lower profit margins for new and some current construction projects as a result of a more competitive pricing environment and rising manpower cost.

However, other gains achieved a turnaround to $2.5 million for FY2019, from a loss of $0.6 million for FY2018. These gains mainly came from a technical management consultancy fee in Jakarta, Indonesia; an increase in fair value gain from the revaluation of some investment properties; and a rise in miscellaneous income from the sale of construction materials. In line with lower revenue and gross profit, higher share of loss of associated companies and joint ventures, and higher administrative expenses due to legal fees incurred for an ongoing trial, net loss attributable to equity holders stood at $0.4 million for FY2019 as compared to a net profit attributable to equity holders of $6.5 million a year ago.

The Group's balance sheet stayed sound. With a healthy cash position of $64.6 million as at 31 December 2019, net tangible assets were $119.4 million, a slight dip from $121.8 million a year ago. This was equivalent to net tangible assets per share of 38.71 Singapore cents, compared to 39.49 Singapore cents per share in the previous year.

To reward shareholders for their continuous and loyal support, the Board of Directors has proposed a final cash dividend of $0.007 per share. The proposed dividend represents a dividend yield of 3.5 per cent, based on OKP's closing share price of 20 cents on 31 December 2019.

Building Our Strengths And Resilience

The Group's diligent efforts and competent skills have been well recognised in the industry as OKP has won numerous accolades for its work through the decades.

During the year under review, the company continued to build its strengths and resilience by winning a total of six projects - three construction projects and three maintenance projects. The Group has completed one construction project, which was handed over successfully to the client. In addition, we completed another construction project under a joint venture partnership, Chye Joo - Or Kim Peow JV. We continued the execution of 10 ongoing construction projects and five maintenance projects, which have been secured since February 2015. Currently, our net order book stays healthy at $283.1 million, with projects extending till 2023.

Looking Confidently Towards The Future

In the foreseeable future, the Singapore construction industry maintains an optimistic outlook with a constant pipeline of construction projects.

The Building and Construction Authority (BCA) gave some bright estimates for the industry. It announced on 8 January 2020 that the value of construction contracts to be awarded in 2020 will range between $28.0 billion and $33.0 billion, comparable to the $33.4 billion awarded in 2019.

The sunny construction outlook is due to sustained public sector construction demand of between $17.5 billion and $20.5 billion in 2020, compared to between $16.5 billion and $19.5 billion in the previous year. The public sector demand, which will contribute about 60 per cent of the total projected demand, is expected to be driven by major, larger and more complex infrastructure projects. These projects are the Integrated Waste Management Facility, infrastructure works for Changi Airport Terminal 5, Jurong Region MRT Line and Cross Island MRT Line.

In the case of the private sector, construction demand is expected to remain steady at between $10.5 billion and $12.5 billion in 2020, same as in 2019. The potential projects will come from the redevelopment of en bloc sale sites, recreational developments at Mandai Park, Changi Airport new taxiway, and berth facilities at Jurong Port and Tanjong Pagar Terminal. The 2020 forecast could reach higher demand as it excludes any construction contracts by the two Integrated Resorts, pending confirmation on the timeline and the phasing of the expansion projects. Indeed, these upbeat projections are promising signs for the construction industry in Singapore as a whole.

Looking ahead over the medium term, BCA foresees a steady increase in construction demand, projecting demand to achieve between $27.0 billion and $34.0 billion per year for 2021 and 2022 and between $28 billion and $35 billion per year for 2023 and 2024.

From 2021 to 2024, the public sector will continue to lead demand, contributing an estimated $16 billion to $20 billion per year. Half of the demand will come from building projects and civil engineering works, including public residential developments and various mega infrastructure projects. In the case of the private sector, construction demand is projected to stay moderate due to the continuing global uncertainties plus current overhung in the supply of private residential housing units. In addition, the planned expansion of the two Integrated Resorts will add to the private sector construction demand.

Looking at the above optimistic projections, civil engineering construction demand is expected to stay buoyant beyond 2020. Indeed, this sunny outlook brightens the prospects for infrastructure transport and civil engineering companies such as OKP.

In the case of the property market, the Urban Redevelopment Authority's 4th Quarter 2019 real estate statistics, which were announced on 23 January 2020, showed a small rise in home prices. For 2019, prices of private residential properties went up by 2.7 per cent, compared with the 7.9 per cent increase in 2018. After the introduction of cooling measures in the property market in July 2018, the property segment's growth had been moderate. Private home prices increased by a slight 0.5 per cent in the fourth quarter 2019, compared with the 1.3 per cent rise in the previous quarter.

Although the construction industry is very competitive, the Group is confident of achieving sustainable business as OKP is an experienced performer, especially for public sector projects. The BCA's projections of higher construction demand particularly from the public sector and for civil engineering works in 2020 is good news for the company. This is because of our good reputation in the public sector. The Group will strive to win more contracts not only from the public sector but also from the private sector in the coming year.

To move ahead of the tough competition, the company has been broadening its skillsets and developing its abilities by undertaking new and related areas of business and extending its presence overseas. This includes exploring property developments locally and overseas.

In 2017, OKP has successfully completed two property projects - the 109-unit freehold Amber Skye at Amber Road, and the 546-unit executive condominium, LakeLife at Yuan Ching Road/Tao Ching Road.

Currently, OKP is progressing well in its two new residential developments, The Essence at Chong Kuo Road and Phoenix Heights at Phoenix Road, both in Singapore.

Jointly with a partner, the Group is developing The Essence, a condominium project comprising two five-storey blocks with 84 units. It was launched in March 2019 and is now being actively marketed. Already, this property development has bagged three awards Boutique Condo Interior Design (Winner), Best Boutique Development High Density (Highly Commended) and Best Boutique Condo Architectural Design (Highly Commended) - at Property Guru Asia Property Awards Singapore 2019. This 99-year leasehold project is expected to receive its temporary occupation permit (TOP) in 2023.

Acquired at $33.1 million in 2018 through a successful tender by the Group's 25.0 per cent-owned associated company, USB Holdings Pte. Ltd., Phoenix Heights is a 74-unit residential development project with a fresh 99-year leasehold tenure. This residential project in Bukit Panjang is also well on track to be launched in 2020. It is expected to receive its TOP in 2022.

To expand its portfolio of investment properties, the Group has acquired a freehold property located at 32 Tagore Lane in Singapore for investment purposes in November 2019. The $8.0 million freehold property comprises a two-storey corner light industrial terrace factory.

The Group's overseas investment property at 6-8 Bennett Street in Perth, Australia continues to provide a source of recurring rental income. According to the Property Council of Australia's Office Market Report released in January 2020, flexible workspace operators have put Perth's office vacancy numbers on a steady downward trajectory. The latest report revealed that in the six months to January 2020, office vacancy rate in the central business district has dropped to 17.6 per cent, down from 18.5 per cent a year ago. Thus, OKP is confident that this overseas acquisition will continue to be a worthwhile investment.

Nevertheless, the company will continue to focus on its core civil engineering business, where it has a decades-long track record and strong expertise as the preferred civil engineering contractor for various industries, locally and overseas. However, we are also pragmatic and expect the operating environment in the construction industry to remain difficult. This is attributed to rising business costs, a tough labour market, and shortage of experienced and skilled manpower, as a result of the prevailing government policies and legislation involving foreign workers' employment.

To address these issues, the Group has upgraded its operations and improved its productivity through various measures. These include adopting advanced technologies and conducting training programmes.

We will intensify our efforts to tender for new projects, both locally and overseas and explore new businesses, through acquisitions, joint ventures and/or strategic alliances, that could complement our construction and maintenance business. These will enable us to step into new markets and acquire new potential clients.

A Note Of Thanks

On behalf of the Board, I would like to express my deepest appreciation for the steadfast and loyal support of our shareholders, clients, business associates and suppliers through the decades. I would like to say a big thank you to the management team for their effective leadership, cooperative efforts and solid team work. As we look ahead, I am confident that each and every one of you will give your commitment and best efforts to make OKP resilient and stronger so as achieve a sustainable future.

I would also like to express my sincere gratitude to our Board of Directors for their helpful guidance and prudent counsel. All of you have contributed your time, efforts and investments to make OKP what it is today and I am appreciative to all of you for this unflagging support.

As we work together as a united team, we can fortify our strengths to build a resilient and excellent company and achieve our vision to be one of the leading infrastructure and civil engineering companies in Singapore and the region now and in the coming years ahead.

Chairman

Or Kim Peow
Group Chairman


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