Management Q & A

Dear Investors,

Thank you very much for the questions and the opportunities to clarify them. We hope you have a better understanding of our business through this online exchange.

Your questions will be reposted in blue followed by our replies in black.

Rgds,
The Management Team
OKP Holdings Ltd

The payment of S$25.46 million in trade and other payables are due to reduction in work done as some of the existing projects were completed or were near completion as at 31 December 2011.

Dear Ng Hing Yew, you wrote:

1. 2011 dividend payout 1c+2c (earning 9c) vs 1c+2c+2c (2010)(earning 6c) seems cautious in retaining surplus fund in the company. Has the company identify opportunities in countries outside Singapore?

   The Group has announced its plans to move into property development and investment. OKP management thus thought it prudent to conserve its cash so that it will have some financial flexibility should the right opportunity arise. It is our desire and intent that our business activity will continue to generate profitability and, ultimately, help deliver value to our shareholders. We continue to explore opportunities overseas, but have yet to identify any concrete deals. When we do, we will make the necessary announcements.

2. Much hype has been given in the past to opportunity for joint venture with China Sonangol but lately no update has been given. I understand that China Sonangol has bought some properties in Katong and in Jakarta. Any comments?

   OKP is currently involved in the construction of a luxury condominium at 21 Angullia Park. The contract, valued at S$83.5 million, was awarded by Angullia Development Pte. Ltd. to Forte Builder Pte. Ltd., a joint venture between OKP's wholly-owned subsidiary Or Kim Peow Contractors (Pte) Ltd and Soil-Build (Pte) Ltd. This move follows a team-up between OKP and strategic partner China Sonangol International (S) Pte Ltd, through a share placement exercise that made the latter a substantial shareholder of OKP. Angullia Development Pte. Ltd., a wholly-owned subsidiary of China Sonangol Land Pte Ltd ("CS Land"), is the owner of the development site at 21 Angullia Park, which formerly housed The Parisian condominium. China Sonangol and CS Land are related companies. China Sonangol is a subsidiary of China Sonangol International Limited, an overseas conglomerate that specialises in oil, gas, and minerals investment and explorations, crude oil supply and national infrastructure construction projects with headquarters in Hong Kong.

   In 2011, a condominium, Amber Towers, was sold in an en bloc deal to China Sonangol Land for $161.6 million, or $1,118 per square foot per plot ratio (psf ppr).

Dear Sudhan, you wrote:

1. The high margins seen in FY2011 are highly commendable. This was mainly contributed by the cost savings in certain design-and-build construction projects. What are design-and-build construction projects and how do they contribute to high margins?

   The design-and-build projects are those that require the company to manage the project from start to finish, from design through to execution. They give the company autonomy and flexibility in design, project management and labour management,

   The design-and-build projects that OKP is currently executing are:

   • Design and Build of Interchange at TPE/Sengkang West Road/ Seletar Aerospace Way: LTA, April 2011/Oct 2014
   • Widening of Central Expressway from Pan Island Express to Braddell Interchange
   • Widening of Old Choa Chu Kang Road from Sungei Tengah Road to Lim Chu Kang Road

   The increase in our gross profit was due mainly to cost savings in certain construction projects which yielded higher gross profit margins. These were mainly due to better project management such as proper site planning, detailed planning in the construction processes, effective site management; and tighter cost controls eg minimise construction material wastage at site, employ effective methodologies in every stage of construction. In addition, certain design-and-build projects afford us the autonomy and flexibility in design, project management and labour management, helping to boost margins further.

2. The cash flow from operations plummeted a lot from $39 mil in FY2010 to $5.5 mil in FY2011 due to $25.6 mil paid under "Trade and other payables". What's your take on this? Going forward, will such huge payment of payables in one year affect OKP's cash flow?

   The payment of S$25.46 million in trade and other payables are due to reduction in work done as some of the existing projects were completed or were near completion as at 31 December 2011.

   We have always maintained a strong cash flow balance. We had a net cash position of S$91.4m as at 31 Dec 2011. We will be prudent with our cash flow management and monitor our receivables and payables closely. Should we require cash for huge CAPEX items, expansion, we are able to tap on our banking facilities as well as the equity market.

The Group has announced its plans to move into property development and investment. OKP management thus thought it prudent to conserve its cash so that it will have some financial flexibility should the right opportunity arise. It is our desire and intent that our business activity will continue to generate profitability and, ultimately, help deliver value to our shareholders.

Dear Weiliam, you wrote:

Dear Management,

Firstly I would like to congrats for the effort made which resulted to an increase in profit margin. I would like to seek management assistance for my below queries:

1. Noted that there have a decrease of revenue which at least 50% compare to last year. Understand that this is due to revenue recognition from several new project. As such , am i right to say that for financial year Q1 , I would see an increase in revenue at least? Besides, if we were to include the project that is excluded in FY2011, how many % increase of revenue could we see?

   OKP Group registered a revenue of $109.8 million for FY2011 which is 21.5% lower than the $139.9 million recorded in FY2010. The decrease in revenue from both construction and maintenance segments was due mainly to the higher degree of completion of existing projects, coupled with a lower percentage of revenue recognised from a few newly-awarded projects in FY2011.

   It is not appropriate for the management to provide guidance on future revenue and profit numbers. However, OKP's view is that the outlook for the construction industry over the next three years will be healthy based on government projections, and it should follow that the outlook for OKP would be optimistic.

2. I am very impressed with the cost saving method which increases profit margin. What are the main reason of the decrease in cost? Could such method help to decrease cost yearly?

   The increase in our gross profit was due mainly to cost savings in certain construction projects which yielded higher gross profit margins. These were mainly due to better project management such as proper site planning, detailed planning in the construction processes, effective site management; and tighter cost controls eg minimise construction material wastage at site, employ effective methodologies in every stage of construction. In addition, for certain design-and-build projects us the autonomy and flexibility in design, project management and labour management, helping to boost margins further.

3. Are there any plan of expansion (in road construction and maintenance) to overseas? Which would be the country that the company would like to venture in?

   Should the opportunity arise, we would also expand our business through acquisitions, joint ventures and/or strategic alliances that we believe can complement our construction and maintenance business. These can potentially provide us access to new markets and prospective clients.

   While we actively prospect for growth opportunities, we remain committed to prudent cost management and improving operational efficiency.

4. Who are the major competitor or big player of the industry for OKP? What is competitor advantage of OKP to compete against these big player.

   Major competitors include contractors listed in the Building and Construction Authority (BCA) list.

   Some of the BCA Grade A1 players in the industry include:

   • Hock Lian Seng Infrastructure Pte Ltd
   • Koh Brothers Building & Civil Engineering Contractor (Pte) Ltd
   • Koon Construction & Transport Co Pte Ltd.
   • Samwoh Corporation Pte Ltd
   • Tiong Seng Contractors (Private) Limited
   • Woh Hup (Private) Limited
   • Hwa Seng Builders
   • Chye Joo Construction

   Some of our competitive advantages:

   • Good track record & sound reputation
   • Strong, highly-experienced management team
   • More than 40 years' experience in infrastructure & civil engineering works
     • airport runways and taxiways,
     • expressways, flyovers, vehicular bridges, (Eg CTE widening, TPE)
     • urban and arterial roads,
     • airport infrastructure and
     • Oil & Gas related infrastructure for petrochemical plants and oil storage terminals. (eg Exxon Mobile SPT in Jurong Island)
   • Market-leadership in public sector
     • public sector agencies such as CAAS, HDB, JTC Corporation, LTA, Nparks, PUB

Dear Christopher Foo, you wrote:

Before I posted the following questions, I would like to congratulate the management for the Great work done and great performance for the past years. I am heavily invested in OKPH and strongly believe that OKPH would add more value to us as a shareholders. The questions are as follow:

1. What is the goal OKPH set for herself in the next 3 years and 5 years? How will the management execute the plan and ensure the goal is achieved?

   There are a number of things that OKP aims towards:

   • to retain its leading position in the public sector arena
   • to extend its presence in other sectors and industries, such as oil and gas and building construction
   • to diversify its earnings through its property development and investment arm

   The above would contribute to our financial performance.

   Some ways we aim to achieve these include:

   • Retaining good capable staff
   • Selecting our contracts carefully and going for those that will give us the best margins
   • Staying alert to market opportunities
     
     
2. What do you see is the strength of OKPH as compared to her competitors? Is this easily copied by her competitors?

   OKP has a good track record and sound reputation with more than 40 years' experience in infrastructure & civil engineering works. It has a strong, highly-experienced management team market-leadership in public sector and strong customer and supplier relationships. It has strong financials that makes it possible for OKP to take on bigger, more complex jobs and also to avail itself to any opportunities that arise. It is our view that some of these strengths would be hard for a new-comer in the space to replicate.

3. What is the progress so far on property venture? What is your view on the bearishness over Singapore property market? Will it affect your plan to further expand into property development?

   We continue to be alert to opportunities that arise in the market. To date, OKP has not yet made any significant investment in property. We would assess each opportunity carefully and would only go into a venture that is deemd to have strong positive upside. We take a long-term view and that being the case, we have to be prepared to ride the ups and downs of the market.

4. There is no more news on new project in Oil and Gas sector, any reason?

   With the uncertainty in the global economy, the oil and gas sector has also been affected. In Singapore, specifically on Jurong Island, the two major investments by oil majors have either been completed or is seeing completion. Likewise, building and construction activities have also slowed, with fewer opportunities for civil engineering providers like OKP.

5. Do you foresee in the next 2 to 3 years, OKPH could maintain the current profit margin?

   Going forward, we do expect some pressure on margins in the light of increased competition and aggressive pricing.

6. With reference to the latest Financial report, any reason why the free cash flow dropped to below SGD$1 million. A sharp contrast to the previous FY11 results.

   Free cash flow of S$0.808m in FY2011 was substantially lower than the previous corresponding period. The reduction in free cash flow was due to S$25.46 million payment to trade and other creditors as there was reduction in work done for some of the existing projects, as they were nearing completion or completed as at 31 December 2011.

7. In the recent Chinese newspaper Lianhe Zaobao interviewed on SME, OKPH executive director MR Or Toh Wat mentioned that OKPH is targeting to win over 20% of the PUB 750 million drainage projects over the next 5 years. How confident is OKPH on this?

   It is a target that we hope to achieve and we are hopeful. OKP has a good track record and sound reputation with more than 40 years' experience in infrastructure & civil engineering works. It has a strong, highly-experienced management team market-leadership in public sector and strong customer and supplier relationships. But as with all public tenders, we will need to compete with other firms for the contracts.

8. How confident is OKPH in winning the North South Highway projects? Do you foresee that there will be intense competitions from local and overseas competitors on this project?

   Competition is a given. As with all public tenders, we will only know the result at the end, and there are never any guarantees. However, OKP has a good track record and sound reputation with more than 40 years' experience in infrastructure & civil engineering works. It has a strong, highly-experienced management team market-leadership in public sector and strong customer and supplier relationships.

9. How will OKPH ensure and probably maintained an over 90% award rate for the government tenders projects as it did for the previous years.

   For over 40 years, we have built up and continue to build OKP's track record and reputation in infrastructure & civil engineering works. It has a strong, highly-experienced management team market-leadership in public sector and strong customer and supplier relationships. It has strong financials that makes it possible for OKP to take on bigger, more complex jobs and also to avail itself to any opportunities that arise.

Our warrants were issued together with a bonus rights issue in [2009]. The rights issue aims to generate further equity participation in OKP by its shareholders through the exercise of the warrants, and as and when the warrants are exercised, the proceeds derived will expand and strengthen the capital base of the company and provide additional resources and working capital required to support the business activities and operations of the Group.

The share based was increased (through warrants and shares conversion) with the aim to increase the liquidity of OKP shares in the market.

We agree that it will dilute the financial ratios ie per share computation such as EPS. However, the overall shareholder value over the last 3 years has improved as we grow the company to a different level.

	FY2011	FY2010	FY2009
Weighted no of shares for the year	294,406,934	260,786,150	238,291,408
Shares at year end (31 Dec)	305,244,585	265,823,335	247,291,408
EPS (Singapore cents)	9.02	6.50	6.06
NTA/Share (Spore cents)	28.34	25.32	23.14

Dear Jackson Yeow, you wrote:

1. In constructing buildings and tunnels, we can use semi-automated prefabrication to minimise reliance on foreign workers. Is it feasible for us to do the same for constructing roads and canals?

   The construction method for roads and canals are different from those used to construct buildings and tunnels. Semi-automated fabrication is not feasible for most of the projects.

2. Does OKP currently exceed its official Man-Year Entitlement (MYE) figures and foreign worker quotas? What is the breakdown of skilled/ unskilled foreign workers?

   OKP has stayed within the quota, and the current breakdown of skilled/unskilled foreign workers is around 80-20

3. The Foreign Worker Levy (FWL) will double from $300 to $600 for unskilled workers by July 2013, this will eat $300 * 600 workers * 12 months ~ $2million into profits. What is the management doing about this? Where will the money come from?

   We are continually training our workers so that they do not fall into the "unskilled" category that attracts a higher levy. However, we recognise that an increase in labour cost is inevitable. The rise in cost means that we will have to share it with our customers, although we will need to balance this carefully so that we remain competitive.

4. What is the direction for the next 5 years? Will we focus more on a) civil infrastructure, b) high end property construction? c) Overseas venture?

   We will continue to focus on our core competencies and civil engineering projects will continue to feature prominently as this is our area of expertise where we have build up a distinctive track record over the years.

5. If we are not pursuing semi-automated prefabrication operations, will we be buying prefabricated parts to improve productivity?

   We will still use prefabricated components when it is possible to do so.

6. What is the management's view on Green Technologies to reduce raw materials needed?

   In principle we support the use of Green Technologies. Where we can, on our worksites, we adopt a "green" approach so that we reduce environmental hazards, and in so doing, respect the needs of all our stakeholders and contribute positively to the communities in which we operate.

   Some of the practices we adopt at our worksite include:

   • Recycling and reusing construction waste;
   • Maintaining construction machinery regularly to minimise carbon emissions;
   • Reducing and treating waste water from construction activities in treatment plants before releasing into public drains;
   • Using more environment-friendly energy sources where possible; and
   • Using eco-friendly innovations such as solar powered devices and de-sanding machines to separate sand from dredging wastes.
     
     
7. Are there succession plans for younger leaders to eventually take over the helm?

   The management and leadership team at OKP is robust. Our founder and Chairman Or Kim Peow is primarily responsible for overseeing the overall management and strategic development of the Group, and his responsibilities include determining the Group's strategies and ensuring effective succession planning for all key positions within the Group. Mr Or Toh Wat, our Group MD, 44, is responsible for effectively managing and supervising the day-to-day business operations in accordance with the strategies, policies and business plans approved by the Board. Mr Or Toh Wat executes the strategic plans set out by the Board and ensures that the Directors are kept updated and informed of the Group's businesses. It is his responsibility, among others, to execute and develop the Group's strategies and business objectives and to provide quality leadership and guidance to employees of the Group. Various other management team members are still youthful. For example, Executive Director Mr Daniel Or is 34 years old and is currently responsible for business development, investor relations and corporate communications of the Group. Even so, we are mindful of the need for succession planning, and our human resource policy helps ensure that we continue to attract and retain good staff.

8. In FY2010, 6 members of the board was paid in the range of $750k to $1mil, this seems a little high particularly when compared to other industries which may be generating much higher revenues/ profits. In subsequent years, will we expect to still see such high remuneration instead of the members of the board being rewarded through their shareholdings/ dividend payouts?

   A major component of this payment is variable, and the final quantum paid is tied to the performance of the company as well as the individual. The decision is evaluated and approved by the Remuneration Committee to ensure that the amount is reasonable and in line with industry practice.

9. What is the management's view on the current budget? Obviously those who embrace higher productivity and automation will benefit further while those who do not will be penalised through the increased foreign worker levy.

   We will alleviate our exposure to the foreign worker levy by continually training our staff.

10. How confident is the management that we will continue to win future projects, particularly relating to North South Expressway, MRT tunnels/ MRT stations, canals to be upgraded etc.

    Competition is a given. Still, we will participate if we have the opportunity. As with all public tenders, we will only know the result at the end, and there are never any guarantees. However, OKP has a good track record and sound reputation with more than 40 years' experience in infrastructure & civil engineering works. It has a strong, highly-experienced management team market-leadership in public sector and strong customer and supplier relationships.

11. Is there a target for the management in the next 5 years? To double Earnings Per Share (EPS) organically?

    It is not appropriate for the management to provide guidance on future revenue and profit numbers. However, OKP's view is that the outlook for the construction industry over the next three years will be fairly healthy based on government projections, and it should follow that the outlook for OKP would be fairly optimistic. However, with the expected slowdown in the economy, we also anticipate that the competition will become more intense.

12. Industry questions: In the event of a downturn, will companies with large prefabrication plants suffer due to large inventories and high maintenance of plants? Is continual prefabrication R&D necessary to keep ahead of the game?

    The question is not relevant to OKP as we do not have large prefabrication plants.

13. What happened to the possible Angola/ Zimbabwe ventures mentioned in past years' annual reports?

    We are still exploring and evaluating. Our approach is to be more prudent and cautious as this is new unfamiliar territory.

Dear Investors,

Thank you for all your questions and the interest in OKP Holdings Ltd. We have come to the end of this Q&A session.

We have enjoyed and learnt much from your questions and we hope that you have a better insight of our Company and know more about our operations.

Rgds,
The Management Team
OKP Holdings Ltd.