Industry Overview

7. INDUSTRY OVERVIEW 7. INDUSTRY OVERVIEW
PIlOTEGE ASSOCIATES SDN BHD ,m”.I”, SUITE C-06-06, PLAZA MONT’ KIARA 2 JALAN KIARA, MONT’ KIARA 50480 KUALA LUMPUR, MALAYSIA GEN +603 6201 9301 FAX +603 6201 7302 www.protege.com.my ———————————BRA NOr FIN A NeE I MAR K E T

27 MAY 2016 The Board of Directors Dancomech Holdings Berhad No.191 Jalan Pelukis U1/46, Temasya Industrial Parkl 40150 Shah Alaml Selangor DearSirs/ Executive Summary ofthe Strategic Analvsis of the Process Control Eguipment and Measurement Instruments Market in Malaysia and an Overview of the Indonesian Mark~t This Executive Summary .of the ‘strategic Analysis of the Process Control Equipment and Measurement Instruments Market in Malaysia and an Overview of the Indonesian Market’ is prepared by Protege ASsociates Sdn. Bhd. (“Protege Associates”) dated May 2016 for inclusion in the Prospectus of Dancomech Holdings Berhad (“Dancomech” or “the Company”) in relation to the proposed listing of and quotation for the entire issued and paid~up share capital of Dancomech on the Main Market of Bursa Malaysia Securities Berhad. 7. INDUSTRY OVERVIEW (Coil/’ll)

MALAYSIAN ECONOMIC OVERVIEW The Malaysian economy registered a strong finish In 2014, It expanded at a faster pace of 6,0 percent in 2014 on the back of continued expansion in domestic demand and an improvement in external trade performance. In 2015, the Mt:\laysianeconomy remained resilient despite a challenging external enVironment, including lOWing world trade, declining commodity prices and volatility in financial markets. The Malaysian economy expanded by 5.0 percent in 2015. The Malaysian economy is expected to grow by between 4.0 to 4.5 percent in 2016. The services sector and manufacturing sector are expected to remain the largest contributor to the economy by accounting for more than half of Malaysia’S real Gross Domestic Product (“GDP”) in 2016. 2 STRATEGIC ANALYSIS OF THE PROCESS CONTROL EQUIPMENT AND EASUREMENT INSTRUMENTS MARKET IN MALAYSIA 2.1 INTRODUCTION AND BACKGROUND The market for process control equipment and measurement instruments is a branch of the larger industrial automation market. Industrial automation, as opposed to manual labour, revolves around the use of information technologies and control systems to automate the production of goods in the industrial sector. The different segments of industrial automation include process control equipment and measurement instruments, laser and robotic equipment, system products and solutions, mechanical power transmission equipment, and machineries. • The laser and robotic equipment segment includes 2 types of technologies namely laser technology and robotic technology. Laser technologies pertain to the 7. INDUSTRY OVERVIEW (Col1t’d)
use of laser during the manufacturing process, while robotic technologies involve the application of robots as well as robotic automation. • The system products and solutions segment refers to the application of technological products and solutiohS that integrate hardware and software to
automate a process.
• The mechanical power transmission equipment segment entails the use of mechanical elements such as chains, belts,gears; strews, pneumatics, hydraulics, pumps, motor and related products to harness powertransmission.
• The machineries segment includes devices utilised to facilitate the conversion of input energy into certain automated processes.
• The process control equipment and measurement instruments segment inclucles the equipment and instruments used to provide appropriate signal transformation and variable measurement, and to direct a process according to signals.

In Malaysia, process control equipment and measurement instruments are wiclely used in sectors such as oil and gas, palm oil, water services and manufacturing industries as a component of the inclustrial pipeline systems. The process control equipment and measurement instruments market comprises 2 categories I.e. process control equipment and measurement instruments as depicted in Figure 1 below. Figure 1: Process Control Equipment and Measurement Instruments Segmentation
Source: IMR report 7. INDUSTRY OVERVIEW (Collt’d)
Process Control Equipment Process control equipment refers to equipment used to provide appropriate signal transformation and direct a process according to signals. Process control equipment includes but is not limited to, actuators) bursting discs, expansion joints, float traps, flow products, positioners, sensors, strainers, switches, tank protection devices, tank ball floats and valves. Measurement Instruments Measurement instruments are equipment and instruments that are used in variable measurement. Measurement instruments include but are not limited to gauges, pressure transmitters, recorders and sight glasses. Dancomech Holdings Berhad and its subsidiaries (”/)ancomech Group”) is principally involved in the process control equipment and measurement instruments market by supplying process control equipment and measurement instruments for industrial piping systems in Malaysia. Therefore)’ this report will focus on process control eqt;ipment and measurement instruments marketfor industrial piping systems in Malaysia. An overview of the process control equipment and measurement instruments market will also be prOVided for Indonesia. 2.2 PRODUCT FLOW OF THE PROCESS CONTROL EQUIPMENT AND MEASUREMENT INSTRUMENTS MARKET The product flow of process control equipment and measurement instruments in Malaysia typically involve 4 groups of market participants namel)’ 0) manufacturers, (ii) traders and distributors, (iii) contractors and (iv) end users. These market participants contribute towards the development and manufacture, distribution aM purchase and use of the products respectively. 7. INDUSTRY OVERVIEW (Col1t’d)
Figure 2: Product Flow of the Process Control Equipment and Measurement Instruments Market
Note: -‘-1’  denotes import Ofprod(Jcts  Source: IMR report  Manufactur~rs  are the producers of process control equipment and  measurement
instruments in Malaysia. These manufacturers! whether domestic or foreign] typically market their products under their brand names. There are also manufacturers offering original equipmentrneI1ufat,tul’er (‘OEMlJ) services to their clients. Traders and distributors are the distribution channel for both locally-manufactured and imported process control equipment and measurement instruments. They conduct the marketing! sales and distribution of the various categories of products. Contractors typically undertake facilities development projects for the end-users on a turnkey basis. Facilities development projects may range from the construction of new production/ processing facilities to the refurbishment or maintenance of existing facilities. These projects require the use of numerous products! including those from the process control equipment and measurement instruments market. End users of process control equipment and measurement instruments are industrial sectors deploying automation systems! such as the palm oil industry! oil and gas industry, water services industry] manufacturing industry and others. 7. INDUSTRY OVERVIEW (Con/’tl)
2.3 END-USER  MARKETS  FOR  THE  PROCESS  CONTROL  EQUIPMENT  AND  MEASUREMENT  INSTRUMENTS
The following sub-sections provide em ovelView of selected key end-user segments for process control equipmentand measurement instruments. 2.3.1 The Oil and Gas Industry The oll and gas industry revolves around the exploration/ extraction and processing of fossil fuelS/ namely crude oil and natural gas. Malaysia’s total average production increased by 2.3 percent from 1,621;000 barrels of oil equivalentCboe”) per day in 2013 to 1,658,000 boeperday in 2.014, attributed to sound reservoir management which include intensified production enhancement, as well as improved oil recbVeryadivities at maturing fields. The year 2014 saw the new production from 13 fields, thus increasing the total number of producing oil and gas fields in Malaysia to 14$ fields as compared to 132 fields in 2013. Dna closer look, the average crude oil and condensate productibnin Malaysia Jncteased by 4;9· percent to 603JOOO boe per day in 2014 as compared to 575,QOO boe per,dayln 2013 while gas production averaged at l,055/000boeper day in 2014 as compared to 1,046,000 boe per day in 2013. Figure 3 depicts Malaysialsaverage oil and gas production from 2011 to 2014. Figure 3: Malaysia’s Average on and Gas Production; 2011-2014
Source: IMR report The overall production level of crude oil in Malaysia is shaped bythe National Depletion Policy! Which was implemented to safeguard the exploitation of the national oil reserves and therefore ensuring the sustalnability of its development Malaysia’s total discovered 7. INDUSTRY OVERVIEW (Cont’d)
resources as at 1 January 2015 stood at 23.2 billion boe as compared to 22.6 billion boe as at 1 January 2014. In 2014, close to 12.6 million metric tonnes of crude petroleum and close to 25.1 million metric tonnes of liquefied natural gas C’LNGI/) were exported -higher than the 11.8 million metric tonnes of crude petroleum and 24.9 million metric tonnes of LNG exported in 2013. During the same year, total imports volume for crude petroleum increased to lOA million metric tonnes as compared to 8.9 million metric tonnes in 2013. Moving to 2015, crude petroleum exports increased to 15.6 million metric tonnes while LNG exports were higher at slightly over 25.1 million metric tonne. During the same year, total imports volume for crude petroleum dropped to 8.9 million metric; tonnes. At the downstream side, the production volume of selected main refined petroleum products in Malaysia from 2011 to 2015 is depicted in Figure 4. In 2014, the production of diesel oil, gasoline, liquefied petroleum gas and naphtha dropped as compared to the previous. However, production of fuel oil, kerosene and blended lubrication oil improved in 2014. In 2015, the productIon of blended lu!?ricating oU, fuel oil, gasoline, liquefied petroleum gas declined as compared to 2014. However, production of diesel oil, kerosene and naphtha increased compared from the previous year. Figure 4: Production Volume of Selected Main Refined Petroleum Products in Malaysiar 2011..2015
S6vrce: IMR report 7. INDUSTRY OVERVIEW (Col1t’d)
In 2014, the export volume of petroleum products decreased to 22.4 million metric tonnesas compared to 22.9 million metric tonnes in 2013. During the same year, total import volume for petroleum products increased to 26.6 million metric tonnes as compared to 25.4 million metric tonnes in 2013. In 2015, the export volume of petroleum products further dropped to around 20.9 million metric tonnes while import volume expanded to around 29.4 mil/lon metric tonnes. More recently, the oil and gas industry was affected by unfavourable prices. Lower oil prices adversely affect the business profitability of oil companies thus fordng them to reassess their development projects and focus on driving prudent cost management. In Malaysia, PETRONAS expects oil prices to remain low in 2016 and accordingly has announced a cut in its operational expenditure and capital expenditure for 2016 by between RM15 blllion to RM20 billion. The reduction is also part of PErRONAS’ move to reduce the capital expenditure and operational expenditure by RM50 billion dver the next 4 years. Nonetheless, growth in the local all and gas industry is expected ,to be supported by the inclusion of oil, gas and energy as one of the National Key Ecohomic Areas (“NKEAs”) that are given priority in terms of investments and policy support under the Economic Transformation Programme [‘ETP”). A 5.0 percent annual growth in the deCade from 2010 to 2020 is being targeted by the oil, gas and energy NKEA. The Petrochemicals Industry Petrochemicals refer to chemicals derived from hydrocarbons that <:Ire produced from petroleum refining activities. Major finished products of crude oil refining include fuels, petrochemical feedstock, solvents, process oils, lubricants and special products such as wax, asphalt and coke. Together with the availability of natural gas, growth in the petrochemical industry is supported by a stable supply of petrochemical feedstock. There are 6 operating refineries in Malaysia with a total refining capacity of over 500,000 barrels per day. 3 of the refineries, namely PETRONAS Penapisan (Melaka) Sdn Bhd, Malaysian Refining Company Sdn Bhd and PETRONAS Penapisan (Terengganu) Sdn Bhd, are PETRONAS-owned while remaining 3 refineries are operated by foreign operators. The production of feedstock in Malaysia provides a stable raw material supply to the participants of the petrochemical industry. To date! The Malaysian Petrochemicals Association, an industry association representing the petrochemical industry of Malaysia, 7. INDUSTRY OVERVIEW (Collt’d)
has 27 members involved in the production and trading of petrochemicals and plastic resins. To sustain the competitiveness of the Malaysian petrochemical industry, value integration through inter-plant synergies is promoted by the local government. The development of petrochemical zones where petrochemical plants are clustered together has created a value chain, which ensures the progressive devel0pment of downstream petrochemicals activities. To date, 3 major petrocbemicalzones have been established in Kertih, Terengganu; Gebang, Pahang;an9 Pasir Gudang/ Tanjung Langsat, Johor. Other petrochemical plants in IVlalaysia include the ammOnia and urea plants in Bintulu, Sarawak and Guran, Kedah; acrylonitrile butadiene styrene plant in Penang; methanol:. .. plant in Labuan and ~he nitrlle-bl.ltadiene tI:,Jbberplant in ~Iuang, Johor.

2.3.2 The Polm Oilln,dusfry The palm oil industry features a diverse range of value generating actiVities ranging from oil palm plantation and milling to var10us downstream palm oil refining and processing activities. The year 2014 recorded a mixed perrormancefor the palm oil industry in Malaysia. Crude palm oil (‘CPo”) production saw improved petformance against the prior year, while export was moderated in the sakI year, The CPO prices were generally increasing in January and February and peaked at RM2,855 per tonne in March before decreasing from April to September. The declining pridng trend was attributed to a stronger global edible 011 supplies and a weaker demandfrortl China that caused an oversupply in the market. Nonetheless, CPO prices rebounded in October to RM2,172 per tonne from September’s RM2,056 per tonne. Despite the slight decline of CPO prices to RM2,144 per tonne in December, average CPO prices in 2014 increasetl to RM2,408 per tonnes compared to RM2,371 per tonne in 2013. In 2014, the toteloil palm planted area stood at 5A million hectare [‘ha”), an increase of 3.1 percent of the 5.2 million ha from the preVious year. This was mainly due to an increase of5.0 percent Of planted area in Sabah and 5arawak from 2.6 million ha in 2013 to 2.8 million ha in 2014. 7. INDUSTRY OVERVIEW (Collt’d)
In addition, CPO production increased by 23 percent to reach 19.7 million tonnes in 2014 against 19.2 million tonnes in 2013, driven by the higher oil extraction rate that increased to 20.6 percent as opposed to 20.3 percent in 2013. In 2015, CPO production improved against the prior year, while prices declined during the year. CPO was traded at an average of RM2,219 per tonne in the first half of 2015 and trended downwards during the second half of 2015. The declining trend was attributed to weaker prices ofsoybean and rapeseed oil (which can be used as a substitute of palm oil), a weaker demand from China, and the continued weak crude oil prices that affected the demand for biofuel. The average CPO price in 2015 stood at RM2,153 per tonne. In 20151 thetotaldil palm planted area stood at 5.6 million ha, an increase of 4.6 percent from 504 mUllan ha in 2014. This is mainly due to the increase in planted areas In Sarawak, which expanded by 13.9 percent from close to 1.3 million ha in 2014 to around 104 mIl/ion hain 2015. In addition! CPO production increased by 2.3 percent to dose to 20.0 million tonnes in 2015 against 19.7 million tonnes in 2014, driven by the higher amount of fresh fruit bunches C’FFf3/) processed by mills that increased to 97.6 million tonnes as opposed to 9504 mUlioh tonnes in 2.014. Figurta 5: Sumll1ary of the Palm Oil Industry Performance, 2012,-2015
Palm oil export (million toMes)  17.6  18.1  17,3  17.4
Source: IMR report 7. INDUSTRY OVERVIEW (COlll’d)
Exports of palm oil also decreased by 4.8 percent to 17.3 million tonnes in 2014 compared to 18.1 million tonnes in 2013. The decrease in l’v1alaysian palm oil export in 2014 was mainly due to lower demand from China, Pakistan, USA, Ukraine and Iran in addition to the impact of new CPO export duty structure. India overtook China’s position as Malaysia’s largest palm oil export market for 2014, importing 3.2 million tonnes or 18.5 percent of total palm oil exports. This was followed by China with 2.8 million tonnes (16.4 percent), the European Union C’EU/I) with 2.4 million tonnes (14.0 percent), Pakistan with 0.8 million tonnes (4.7 percent), USA with 0.8 million tonnes (4.5 percent), Vietnam with 0.6 million tonnes (3.5 percent) and Japan with 0.5 million tonnes (3.0 percent). These 7 markets combined accounted for around 11.19 million tonnes or about 64.8 percent of Malaysian total palm oil exports in 2014. Exports of palm oil increased marginally by 0.8 percent to 17.4 million tonnes in 2015 compared to 17.3 million tonnes in 2014. The increase in Malaysian palm oil exports in 2015 was mainly due to higher demand from India, Turkey, Philippines and South Africa. India continued to be the largest Malaysian palm oil export market in 2015 by importing 3.7 million tonnes or 21.2 percent of total palm oil exports. This was followed by the EU with 2.4 million tonnes (13.9 percent), China with 2.4 million tonnes (13.6 percent), Pakistan with 0.7 million tonnes (4.1 percent), USA with 0.7 million tonnes (4.0 percent), Philippines with close to 0.7 million tonnes (3.7 percent) and Vietnam with close to 0.6 million tonnes (3.3 percent). These 7 markets combined accounted for 11.15 million tonnes or 63.9 percent of total Malaysian palm oil exports in 2015. In 2014, exports of oleochemical prodUcts increased by 3.7 percent to 2.83 million tonnes. The major expolt destinations for locally produced oleochemicals were the EU with 0.6 million tonnes (22.6 percent of total oleochemical exports), China with 0.4 million tonnes (15.2 percent), USA with 0.3 million tonnes (9.2 percent), Japan with 0.2 million tonnes (7.8 percent). The major oleochemical products exported were fatty acids (32.2 percent of total oleochemical exports), followed by methyl ester (20.1 percent), fatty alcohol (18.7 percent), soap noodles (15.2 percent) and glycerine (12.4 percent). Meanwhile, exports of palm oil biodiesel decreased by 61.5 percent from 175,032 tonnes in 2013 to 67,354 tonnes in 2014 due to a slumping crude oil prices that caused a slowdown in the demand for biodiesel. 7. INDUSTRY OVERVIEW (Collt’d)
In 2015, exports of oleochemical products increased by 0.7 percent to 2.85 million tonnes. The major export destinations for locally produced oleochemicals were the EU with close to 0.6 million tonnes (19.8 percent of total oleochemical exports), China with 004 million tonnes (14.4 percent), USA with 0.3 mil/ion tonnes (8.9 percent), Japan with 0.2 million tonnes (8.2 percent), and India with close to 0.2 million tonnes (SA percent). The major oJeochemical products exported were fatty acids (32.6 percent of total oleochemical export), followed by fatty alcohol (19.3 percent), methyl ester (17.2 percent), soap noodle (16.1 percent) and glycerine (13.3 percent). On the other hand, exports of palm oil biodiesel increased by 104.8 percent from 87,356 tonnes in 2014 to 178,942 tonnes in 201S, mainly attributed from increased exports to key importing countries such as China, SOuth Korea and Singapore. 2.3.3 The Water Services Industry The water services industry in Malaysia comprises 2 main elements i.e. the supply of dean water through water treatment, and wastewater management through sewage systems. Water treatment involves the process of removing undesirable chemicals, physical and biological contaminants from raw or contaminated water to produce water that is suitable for specific applications, such as human consumption, medical and pharmacology, chemical and industrial applications. The year 2013 saw an increase in total number of operationt;11 water treatment plants to 486 from 475 in 2012, thus raising the water treatment capacity from 17,901 million Iitres per day (“MLD”) to 18,322 MLD. However, the additional capacity is yet to cope with the demand for water treatment services in Malaysia as the reserve margin in water treatment plants fell from 16.1 percent to 15.2 percent due to increased production from 15,012 MLD to 15,531 MLD. This issue is particularly severe in Kedah where its production of 1,322 MLD exceeded its capacity of 1,300 MLD in 2013. Other than that, Selangor is also facing shortages in treated water supply with 4,563 MLD of production versus 4,606 MLD of capacity, leaving only 0.9 percent of reserve margin in 2013. Demand for clean water continued to rise in 2014 to 10,176 MLD. During the year, total number of operational water treatment plants improved to 505 plants, thus increasing the water treatment capacity to 18,730 MLD. Reserve margin in water treatment plants expanded to 15.7 percent but Kedah and Selangor continued to exhibit low reserve 7. INDUSTRY OVERVIEW (Collt’d)
margin of less than 1 percent. In Kedah, production of treated water stood at 1,299 MLD with its capacity of 1,300 MLD while Selangor’s production stood at 4,594 MLD with its capacity of 4,606 MLD. Aside from the water treatmentl wastewater treatment is the other essential component in water services. Wastewater treatmentlrivolves removal of physical, chemical and biological contaminants to produce an environmentally-safe treated effluent system. The sewage systems in Malaysia consist Of public sewage treatment plants, private sewage treatment plants, septic tanks and pour flushes. Public sewage treatment plants have the largest share of 60.7 percent, or around 22.5 million of population equivalent in the sewage treatment services industry. The wastewater tre.atment industry is prImarily led by Indah Water KonsortiurYl Sdn Bhd, TaHwork.$C6rporation Berhadand VeoHa Water Malaysia, together with 200to 300 srYlallanct mediumetiterprises. 2.4 MARKET DYNAMICS ANALYSIS

2.4.1 Market Dynamics Scorecard Figure 6: Market Dynamics Scorecard for the Process Control Equipmel1tand Measurement In:struments Market in Malaysia
2015 to 2020 Demand Conditions Favourable over the long term and underpinned by growing demand for the water services indUstry, continued growth in the manufacturing industry, expansion in the palm oil industry, continuous investment in the oil and gas industry, growing trend for industrial automation,and enforcement of environmental protection legislations Increasing
7. INDUSTRY OVERVIEW (CoIlI’d)
Note: * Market size and CAGR forecast on process control equipment and measurement instruments market for industrial pipeline systems in Malaysia Source: IMR. report
2.4.2 Historical Market Performance and Growth The process control equipment and measurement instruments market for industnal pipeline systems in Malaysia is set to see sustained growth from 2014 to 2020. The groWth trend is in contrast to the decline seen in 2013. During that year, the process control equipment and measurement instruments market for industrial pipeline systems was valued at RM2.04 billion, q 6.9 percent decline from the RM2.19 billion achieved in 2012. This was due to sluggish oUand gas project implementation domestically, particularly the delay in the Refinery and Petrochemical Integrated Development C’RAPID”) project as PETRON,1$ conducted aprojeet review in light of cost escalations. In 2014) the process conJrol ~quipl1)entand meCjsurement instruments market for industrial pipeline systems rebounded from’ its negative growth as PETRONAS announced its final investment decision to approve theclevelopment of the RAPID project. In 2015, the pr()cess control equipment and measLJrement instruments market for industrial pipeline Systems iii MalaySia grew at a slower pace in tandem with the downward pridng trends ofcrude Oil and CPO. During the year,average crude oil prices declined by 41.2 percent to USD50.8 per barrel from USD96.2 per barrel in 2014 while average CPO prices dropped 9.7 percent to RM2,153 per tonne from RM2,384 per tonne recorded in the previous year, Consequently, market players within the oil and gas and palm oil industries were pressured on the business profitability and have shied away from new investment or reduce or defer their investment deci$ions. Despite the unfavourable conditions in the oil and gas and palm oil industries, the process control equipment and measurement instrument market for industrial pipeline systems in Malaysia registered a positive growth of 1..3 percent, supported by demand stemming mainly from the water services and manufacturing industries. Growth was also supported by the needs for facilities maintenance and eqUipment replacement within the oil and gas and palm oil industries 7. INDUSTRY OVERVIEW (Conl’d)
Figure 7: Market Size and Growth Forecast for the Process Control Equipment and Measurement Instrument Market for Industrial Pipeline Systems in Malaysia,2012~2020
CAGR (2016-2020): 3.2pen.:~nt Nate: All figures ate fQt)ndM; the base year is 2015. Source: IMR report Moving fOlWard, the market is forecasted to exhibit irregular growth in relation to the performanC€!of end~user markets. Growth is expected to remain modest In 2016 amid unfavourable crude oil prices which may hinder investment in the 011 and gas industry. In the oil and gas industry, lower oil prices adversely affect the business profitability of oil companies thus forcing them to reassess their development projects and focus on driving prudent cost management. In Malaysia, PETRONAS expects oll prices to remain low in 2016 and ac<:;ordingly has announced a cut in its operational expenditure and capital expenditure for 2016 by between RM15 billion to RM20 billion. The reduction is also part of PETRONAS’ move to reduce the capital expenditure and operational expenditure by RM50 billion overthe next 4 years. Nonetheless, the market is expected to be supported by sustained demand stemming from the water services and manufacturing industries. The process control equipment and measurement instrument market for indl,1strial pipeline systems is also expected to grow on the back of expansion in the palm oil industry Despite the unfavourable pricing trend in 2015, CPO prices began to exhibit signs of recovelY as prices increased from RM2,251 per tonne in January to RM2,647 per tonne in April 2016. CPO prices are also expected to continue to gain growth momentum amid 7. INDUSTRY OVERVIEW (CoIlI’d)
anticipated lower CPO supply due to prolonged EI Nino drought that affect the fresh fruit bunches yield thus resulting in lower feedstock for CPO production. CPO supply is expected to decline in tandem with lower production, thus augurs well for the growth of CPO prices. The palm oil industry in Malaysia is also likely to see a growth in demand over the long term considering that its products cater for the global marketplace. The Food and Agricultural Organisation (“FAO”) has projected that the world population will grow to 9.73 billion by 2050 (from 7.35 billion as at 2015) with the majority of growth occurring in Asia. The process control equipment and measurement instruments market for industrial pipeline systems in Malaysia is expected to register slower growth in 2016 and improve over the medium to long term, stemming from the growing demand for the water services industry, continued growth in the manufacturing industryr expansion in the palm oil industry, continuous investment in oil and gas industry, growing trend for industrial automationr and the enforcement of environmental protection legislations. On the supply side, government support to position the country as the main distribution centre in the region for all types of machinery and equipment is likely to spur the growth in the process control equipment and measurement instruments market particularly in the trading/ distribution segment. The process control equipment and measurement instruments market for industrial pipeline systems is projected to register a CAGR of 3.2 percent from 2016 to 2020 and valued at RM2.52 billion in 2020. 7. INDUSTRY OVERVIEW (Collt’d)

 

(;gi’;'”t::f””,,,,, ~,. -j f ‘;’ The process control equipment and measurement instruments market is highly competitive and comprises around 1,800 to 2,000 market participants. There are 5 known manufacturers in the process control equipment and measurement instrument market, with the rest involved in the market as traders! distributors, or as subsidiaries of international market players. ManUfacturers consist of local market players who manufacture and distribute process control equipment and measurement instruments under their own brand names. Some manufactqrers also distribute products of other brand names -usually those of global manufacturers -in the local market as a means to comprehensively cater to the broad needs of end-users. Traders and distributors consist of market players involved in the distribution of process control eqUipment and measurement instruments. Larger and more established market players are able to procure distributorship of renowned global equipment producers, and act CIs the agency of these brands in the country. Some traders and distributors areal.so involved in the provision of products other than process control equipment and measurement instruments. Larger distributors are distinguishable from smaller players by the size of their product portfolio and past experience. Subsidiaries of international market players consist of local subsidiaries of multinational companies manufacturing or distributing process control equipment and measurement instruments. Subsidiaries of international manufacturers usually have sole distributorship of their parent brands in the local market, and usually only distribute their parent brands. On the other hand, subsidiaries of international distributors distribute process control equipment and measurement instruments of more than 1 brand. Examples of subsidiaries of international market players include Alfa Laval Malaysia Sdn Bhd, AVK Valves Manufacturing Malaysia Sdn Bhd, Cameron (Malaysia) Sdn Bhd, Emerson Process Management (Malaysia) Sdn Bhd, Mikuni eM) Sdn Bhd, Mokveld Malaysia Sdn Bhd, Penaga Dresser Sdn Bhd and Pentair Valves & Controls Malaysia Sdn Bhd (formerly known as Tyco Valves & Controls (M) Sdn Bhd). 7. INDUSTRY OVERVIEW (Collt’d)
2.5.1 Key Market Players Dancomech Group is principally involved in the trading and distribution segment of the process control eqUipment and measurement instruments market for industrial pipeline systems in Malaysia. Therefore/ Protege Associates has further listed below key market players Within the trading and distribution segment of the Malaysia’s process control equipment and measurement instruments market for industrial pipeline systems that are comparable to Dancomech Group/ their key activities and latest financial results. These market players are selected based on primary and secondary research conducted. The Jist of key players is not exhaustive and each player’s product offerings may not exactly coincide with others. These key market players are selected based on their product offerings as well their size as represented by theIr respective financial performance. .. DancomechGroup Dancomech Group is principally involved in the trading and distribution of process control equipment and measurement Instruments. Dancomech Group is a distributor for products of various foreign brand names, such as Ayvaz/ Crane Flowseal, DHC, Diaval, DSC/ Eurotec/ Festo, Fival, Korea Float, Korea Steel Power Corporation, Leser, Max Mueller, NewaYl Power-Genex, Rembe, Ritag, Rototherm, Sun Yeh/and Uni.-D. In addition, DancOll1ech Group also engages OEM services. from manufacturers to produce process control eqUipment and measurement instruments and sell the prodUcts under its own brand names, namely Omaval, VMX and Wagi. Dancomech Group’s products are supplied to both domestic and export markets, including Indonesia. For the financial year ended (‘FYEJ) 31 December 2015/ Dancomech Group recorded revenue of RM68.3 million. Process control eqUipment and measurement instruments for industrial plpmg systems are supplied mainly to the oil and gas, palm oil, water services and manufacturing industries that are also the end-users of the other product segments of the industrial automation sector namely laser and robotic equipment, system products and solutions, mechanical power transmission equipment and machineries. Therefore, market players within the process control equipment and measurement instruments market, like Dancomech GrouPJ is well positioned to expand into other segments Within the industrial automation sector. AccordinglYl in 2015, Dancomech Group has expanded their products offerings with the supply of pumps to the palm oil industry. 7. INDUSTRY OVERVIEW (Col1t’d)
• Encord Sdn Bhd (“Encord”) Encord is principally involved in the provision of control valves equipment in Malaysia, and to China and Singapore for various industries, such as oil and gas sector, petrochemical plants, shipyards, processing industry and other general sectors. Encord distributes control valves equipment of various foreign brand names, such as Ebro Armaturen, Ritag, ifm-electronic, Ari-Armaturen, Diaval, Schneider, HK Contromatic Co Ltd, YTC, Unicom, Liangjiang Group, Taiwan Valve Company Ltd, C­Max, CO, etc. For the FYE 31 December 2014, Encord recorded revenue of RM20,2 million. • Mikuni (M) Sdn Bhd (“Mikuni”) Mikuni was incorporated in 1983 when MEC Corporation, a subsidiary of Mikuni Kikai Kogyo Co Ltd and also an export agent for Km Japan for Singapore and Malaysia, decided to set up a company in Malaysia to tap into the country’s industrial development. Mikuni is involved in the process control equipment and measurement instruments market as a distributor of valves and actuator for several international manufacturers, such as Km, OI”lB, Tomoe, Tomoe Tritec, GoodWin, Mogas, Friulco, Convol, Lazaro Ituarte, etc, in Malaysia. In addition, Mikuni is also involved in the provision of repair and maintenance services, such as on-line services on leak repair, off-line services on controlled bolt tightening, fabrication, retro-fitting and modification of valve, actuator and rotating eqUipment, eqUipment troubleshooting and other testing services, For the FYE 31 December 2014, Mikuni recorded revenue of RM40.9 million, • Sakti Suria (M) Sdn Bhd (“Sakti Suna”) Sakti Suria was incorporated in Malaysia in 1986. It is principally involved in the supply of valves, gear motors, water meters, penstocks, water and wastewater treatment systemst biogas capturing systems and a wide range of industrial products in Malaysia. For the FYE 31 December 2014, Sakti Suria recorded revenue of RM43.3 million. • Unimech Group Berhad (\\Unimech”) Unimech is currently listed on the Main Board of Bursa Malaysia Securities Berhad. Unimech is involved the process control equipment and measurement control market with distribution of valves, fittings, meters, pumps and actuators, pipes etc of own brand names and foreign branded products in Malaysia, Singapore, Indonesia, 7. INDUSTRY OVERVIEW (Collt’d)
Thailand, China, Australia, Korea and Philippines. Its self-manufacturing brands include Arita, Q-Flex, Unijin, SVR, Sanitariom I-Contronic; whereas foreign brand names include Riello and Rotatool brand. For the FYE 31 December 2015, Unimech recorded revenue of RM239.s million. • Valrnatic Engineering Sdn Bhd (“Valmatic”) Valmatic is principally involved in the provision of valves and pipes under its own brand, Valmatic, and other foreign brand names such as Ari-Armaturen, Cephas, Dong Yang, Frese, Hattersley, I-Tork, Jord Bellow, KJS,Matco Norca, Miyawaki, Sirca, SWI, Tecofi, Watts Aev and Yoneki. Valmatk supplies its products in Malaysia and to Indonesia, China and Vietnam. For the FYE 31 December 2014, Valmatic recorded revenue of RM47.1 million.
2.5.2 Market Share Analysis For FYE 31 December 2014, Dancomech Group garnered revenues of RM61.8 million from the Malaysian market, equivalent to 2.9 percent share of the process control equipment and measurement instruments market for pipelinesysterns in Malaysia during the year. This is based on Dancomech Group’s revenue ofRM61.8 million attributable to sales within Malaysia against the total Malaysian market revenue of RM2.14 billion in 2014. Figure 8: Dancomech Group’s Market Share in the Process Control Equipment and Measurement Instruments Market for Industrial Pipeline Systems in Malaysia, 2014
Group 2.iWo Source: IMR report 7. INDUSTRY OVERVIEW (Collt’d)
For FYE 31 December 2015, Dancomech Group garnered revenues of RM53.8 mill10n from the jYJalaysian market, equivalent to 2.5 percent share of the process control equipment and measurement instruments market for pipeline systems in Malaysia during the year, as illustrated in Figure 9. This is based on Dancomech Group’s revenue of RM53.8 million attributable to sales within Malaysia, against the total Malaysian market revenue of RM2.17 billion in 2015. Figure 9: Dancomech Group’s Market Share in the Process Control Equipment and Measurement Instruments Market for Industrial Pipeline Systems in Malaysia, 2015
Dancomech Group .25% Source:IMR report [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 7. INDUSTRY OVERVIEW (Cont’d)
/. j; ! 2.6 DEMAND AND SUPPLY CONDITIONS figure 10: Demand and Supply Conditions Affecting the Process Control Equipment and Measurement Instruments Market in Malaysia, 2016 Demand Conditions Growing Demand for the Wilter Services Industry Continued Growth In the Manufacturing Industry ExpansIon in the Palm Oil Industry Continuous Investmant In the Ot!and Gilslndustry …”” Growing Trend f<;lr Industrial Automation iIll· Enforcement of Environmental Protection Leglslathicns II
Source: IMR report

2.6.1 Demand Conditions Growing Demand for the Water Services Industry The water services industry has been growing in line with the population growth. With an estimated population size of 29.5 million in 2012, the Malaysian population has grown to nearly 30.Q million in 2013 -catalysing a higher demand for dean water supply and wastewater management. The water services industry has expanded accordingly, as evidenced by the higher number of water treatment plants from 475 plants of total capacity of 17,901 MLD in 2012., to 486 plants with total capacity of 18,32.2 MLD in 2013. The sewerage faCilities have also expanded to 6,374 pUblic sewerage treatment plants, 2,977 private sewerage treatment plants, and 1.3 million of individual septic tanks in 2014. The Malaysian population is also projected to grow steadily to reach 38.6 million by 2040, and this is expected to spur the continued demand for water services moving forward. A higher demand for water services will translate to greater expansion in water treatment 7. INDUSTRY OVERVIEW (Conl’d)
and sewerage facilities. More importantly, the lower reserve margin of water treatment plants at 15.7 percent in 2014 as compared to 16.1 percent in 2012 indicates the need for an expansion in plant capacities to address the increasing demand for clean water supply.
The Eleventh Malaysia Plan (“l1MplJ) reiterated the government’s commitment for the continued expansion and investment in new water and sewerage networks and treatment cappcity. Under the s~me pl;an, continued emphasis will be placed towards extending provision of rural basic infrastructure including expanding coverage of access to clean and treated water. Focus will also be given to a holistic non-revenue water reduction programme and improving the petformance of the sewerage system. By 2020, the government aims to provide 99 percent of the population with clean and treated water, 80 percent With cdnnectedsewerage services and reduce non-revenue water to 25 percent.
This market demand driver is expected to have a high impact on the process control
equipment and measurement instruments market throughout the forecast period. Continued Growth in the Manufacturing Industry The continued growth in Malaysia’s manufactUring industry brings a direct impact to the process control equipment and measurement instruments market. As end users of products from the process control equipment and measurement instruments market, growth in the manufacturing industry will lead to a hIgher demand for the construction, refurbishment and maintenance of production facUities.
The l’v1alaysian manufacturing industry has been ‘growing throughout the 2011 to 2014 period. In 2014, the manufacturing industry expanded by 6.9 percent. In 2015, the manufacturing industry expanded by 4.9 percent.
Expansion in the Palm Oil Industry In 2014, the total oil palm planted area stood at 5.4 mllJion hal an increase of 3.1 percent ofthe 5.2 million ha from the previous year. And in 2015, the total oil palm planted area further increased to 5.6 million ha. Increasing oil palm plantation calls for an Increase in palm oil processing facilities that process the FFBs into CPO and other palm oil derivatives such as oleochemicals. As a result, the palm oil industry will need to boost its processing capacities to support the growth of the plantations. This is usually carried out by either establishing new facilities and/or upgrading the capacity of existing facilities. Therefore, it
23 7. INDUSTRY OVERVIEW (Cont’d)
is expected that an expansion in palm oil processing facilities will have a positive spill over effect on the process control equipment and measurement instruments market. In 2014, number of refineries was lower from 55 refineries to 54 refineries, but capacity in operation increased from 25.3 million tonnes per year in 2013 to 26.1 million tonnes per year. In 2015, there were 52 refineries with 25.3 million tonnes of capacity in operation. The FFB mills sector has been increasing in terms of number of mills and capacity in operation from 2012 to 2014 in line with the growth in oil palm planted area. In 2015, number of mills and capacity further increased to 445 mills with total capacity in operation of 108.4 million tonnes per year. In 2015, the process control equipment and measurement instruments market witnessed lower demand from the palm oil industry amid lower CPO prices in the year that exert pressure on business profitability, resulting in cuts or deferments of investment decision within the palm oil industry for capacity expansion and equipment maintenance and upgrade. Despite the downward pricing trend in 2015, CPO prices began to exhibit signs of recovery as prices increased from RM2,251 per tonne in January to RM 2,647 per tonne in April 201G. CPO pikes are 2!lso expected to continue to gain growth momentum amid anticipated lower CPO supply due to the prolonged EI Nino drought that may affect the fresh fruit bunches yield thus resulting in lower feedstock for CPO production. CPO supply is expected to decline in tandem with lower production, thus augurs well for the growth of CPO prices. The palm oil industry in Malaysia is also likely to see a growth in demand over the long term considering that its products cater for the global marketplace. The United Nations FAa has projected that the world population will grow to 9.73 billion by 2050 (from 7.35 billion as at 2015) with the majority of growth occurring in Asia. Another important factor driving the growth of Malaysia’s palm oil industry is income. A strong economic growth will lead to a rise in income through such factors as greater economic activities and better employment opportunities taking place and ultimately drive higher consumption and demand. 7. INDUSTRY OVERVIEW (Colli’d)
The growth in the palm oil industry in Malaysia is anticipated to have direct impact all the process control equipment and measurement instruments market with the development of new processing facilities, and refurbishment and maintenance of existing facilities. This market driver is expected to have medium impact on the process control equipment and measurement instruments market In the short term, and Improve over medium to long term. Continuous Investm(‘)ntin the Oil and Gas Industry The Malaysian <JjI and gas indwstry contInues to invest and develop its upstream and downstream sector, bringing derived demand for the process control equipment and measurement instruments. In terms of PETRONAS’ expenditure ill the upstream sector in particular for exploration, devel()pmel1t and production activities, a total of RM52.32 billion was spent in 2014, up by approXimately 44.5 percent compared to the previous year’s expenditure of approximately RM36.22 biUi!:m, Out of the expenditure of RM52.32 billion, 54.0 percent or RM28.25 billion WaS invested in Malaysia. In the downstream sector, the petrochemical industry is likely to see an increase in proquction ~pacityIn tb¢: long term um:ler various government-led initiatives, including theR,APID projecti.n Johor. Located Within the PIPC in Johor, the RAPID project will house a 300,000 barrels per day capacity of etude oil refinery, a naphtha cracker that wIth a combined capacity of :3 million tonnes of olefins, and development of 22 downstream plants. The RAPID project is targeted to increase volume of the Malaysian petrochemical outputs and cater to the Asia-Pacific region’s demand for petrochemicals. Despite anticipation of continuous investment, the process control equipment and measurement instrumentstnarl<et may see reduced demand from the oil and gas industry going forward as the indUstry shies away or defers from making new investments due to unfavourable oilpric:es. Crude oil prices dropped to an average of USD50.8 per barrel in 2015. Already, PETRONAS has announced a cut in its operational expenditure and capital expenditure for 2016 by between RM15 billion to RM20 billion. The reduction is also part of PETRONAS’ move to reduce the capital expenditure and operational expenditure by RMSO billion over the next 4 years. Therefore, demand for products and services from the process control equipment and measurement instruments market could be adversely affected inthe medium term (2015 to 2018). 25 7. INDUSTRY OVERVIEW (Collt’d)
Growing Trend for Industrial Automation Continuo1l5 improvement to production facilities is an on-going trend for any progressing industry. Throughout history, the palm oil and manufacturing industries have evolved from being a labour intensive process to one that is machinery-dependent. Therefore, on­going improvements of production fqcilities are mainly applied to industrial automation. It gives the manufacturers the abiUtyto increase their output at a faster speed and/or lower operating costs, Despite needing high capital expenditure budgets for replacement and mainteni3nce costs in production facilities, there arestHl a growing number of manufacturers and palm oil millers Who recognise the value of improved production practices and are willing to upgrClde their machineries and systems to maintain its competitiveness within the industry. In vieW Df this, greqter demand pressure is being placed on the industrial automation industry to introduce and supply enhanced machineries and equipment, including process controLequipmentand measurement instruments. Enforcement of Environmental Protection Legislations The legislations related to waste management in Malaysia are very stringent in order to mihimise tlJeenvironmental impact of waste generation. Regulations have increased the neeq for effective wqste management. The implementation of the Environmental Quality Act C’EQA’j 101974 has l1elpedc;lefined the pollutant discharge standards and penalties, and thus ensure greater compliance among industries in Malaysia. Additional amendments made to the EQA in 1996 further enhanced the requirements and helped in correcting cerlqinpolicing inefficiencies. With the enforcement of stringent legislation on environment protection such as EQA, the relevant industry players will need to upgrade their industrial facilities accordingly to comply with these stringent regulations. Thus, higher demand for process control equipment and meas.urement instruments is likely to be derived from the facilities upgrade. This market driver is expected to remain low throughout the forecast period. 7. INDUSTRY OVERVIEW (Collt’d)

2.6.2 Supply Conditions Government Support for Mliichinery and Equipment Industry The machinery and equipment industry in Malaysia is poised to grow in tandem with the government’s initiatives. As outlined in the Third Industrial Master Plan CIMP3″), the Malaysian government targets to position the country as the main distribution centre in the region for all types of machinery and equipment This is llkely to spur the growth in the process control ‘equipment and measurement jnstruments market particularly the trading/ distribution segment. Also oLitlined in the IMP3 is the government’s target. of positioning Malpysia as the regional production hub for high technology and specialised machineryan’d equipment. The initiative is Eintidpated to contribute to a greater variety ofstipply in terms of process control equipment and measurement instruments. The supply of process control equipment and measurement instruments in Malaysia is likely to groW in line with investment in machinery and equipment Industry. According tq the Malaysian Investment Development Authority eMIDA”), a total of 98 machinery and equipment projects with investments amounting to RM2.5 billion were approved in 2014. Over 70.0 percent of the approved investment was domestic investment And in 2015, a total of 97 machinery and equipment projects with investments amounting to RML8 billion were approved, of which 53.5 percent of the approved investment WZlsdomestic frivestment.
2.7 MARKEl CHALLENGES
Source: IMR report 7. INDUSTRY OVERVIEW (COlll’d)
2.7.1 Dependency on the Oil and Gas Industry Prices of crude oil generally hovered above USD100 per barrel from 2011 to 2013 alongside a stable global economic growth. In 2014, crude oil prices dropped to an average of USD96.2 per barrel. In terms of monthly price movements for 2014, crude oil prices increased from an average of USD102.3 per barrel in January to USD108.4 per barrel in June before slumping from an average of USD105.2 per barrel in July to an average of USD60.6 per barrel in December. The declining price trend can be attributed to the increasing shale oil output from the US that contributed to the increased global output along with weakening demand globally. For the period of 2010 to 2013, the US was the third largest crude oil producer, commanding 7.8 percent and 8.0 percent of the world crude oil production in 2010 and 2011 respectively. In 2012, the US registered an encouraging 15.1 percent in its production growth, and accordingly expanded its production share to 8.9 percent in the said year.. In 2013, the US continued to achieve double-digit growth ilJ its production, thus increasing its production share in world crude oil production to 10.2 percent. The expansion in US crude oil production was attributed to the development of new technology that allows the drilling of hydrocarbons deep beneath the Earth’s surface and aCCOrdingly increased its shale oil production. The expansion in crude oil production from 2.010 to 2013 was supported by rising global oildemancl. Oil demand was mainly stem from US, Western Europe, Chinaf Organisation of the Petroleum Exporting Countries C’0PEC”) and Japan. On another notef Japan’s oil demand expanded by 5.9 percent in 2012 subsequent to the loss of its nuclear capacity in Fukushima disaster which increased its dependency on fossil fuel thereafter. (In 2011, a 9.0 magnitu(je earthquake struck off the coast of Sendaif Japanf triggering a tsunami that . damaged its nuclear reactor) Moving into 2014, global crude oil production grew to 73.4 million barrels per day in line with the expansion in US production. In 2014, crude oil production from the US increased to 8.7 million barrels per day. While the production expansion from the US has raised the global crude oil inventoriesf demand has underperformed with weakening demand from Europe and Japan. These have resulted in oversupply within the oil and gas industry and accordingly, weighing on the commodity pricing. 7. INDUSTRY OVERVIEW (Collt’d)
The downward pricing trend persisted in 2015 amid high production during the year. Protege Associates estimates that the world crude oil production increased to 75.4 million barrels per day, mainly attributed to higher production from the US and OPEC. US crude oil production is estimated to improve to 9.4 million barrels per day (2014: 8.7 million barrels per day) while OPEC crude oil production is estimated to increase to 31.8 million barrels per day (2014: 30.7 million barrels per day). Nonetheless, demand has continued to underperform amid weaker demand mainly from China and Europe. Consequently, crude oil price dropped to an average of USD50.8 per barrel in 2015 due to supply glut. The situation surrounding oil prices remains volatile and its outlook remains uncertain in relation to unstable demand and supply conditions. A combination of external factors that will impact the demand and supply conditions, amongst other, are geopolitical and economic instability, inventory builds, production levels and catastrophic risk. On the global front, the supply situation shows no sign of supply tightening in the near term. In addition to the rise in shale oil in the US, the return of an Iranian supply of crude into the international oil and gas market further increase the global oil supply. In addition, other OPEC countries continue with a consistent production level thus far. The pressure on oil price recovery came amid continued oversupply in the market as incremental global demand has not followed suit. At the macro level, the current bearish scenario is largely attributed to the economic slowdown in China that is expected to soften their demand for energy products. Lower oil prices adversely affect the business profitability of oil companies thus forcing them to reassess their development projects and focus on driving prudent cost management. In Malaysia, PETRONAS expects oil prices to remain low in 2016 and accordingly has announced a cut in its operational expenditure and capital expenditure for 2016 by between RM15 billion to RM20 billion. The reduction is also part of PETRONAS’ move to reduce the capital expenditure and operational expenditure by RM50 billion over the next 4 years. Therefore, demand for products and services from the process control equipment and measurement instruments market could be adversely affected in the medium term (2015 to 2018) -particularly for market participants supplying to oil and gas customers who are focused on activities related to exploration and production expansions. 7. INDUSTRY OVERVIEW (Collt’d)
Correspondingly, a combination of unstable supply and demand conditions may prevent any significant rally from gaining traction and lead to persistently weak prices in the coming year. However, prices could also rebound and move higher if any of the factors preViously noted begin to reverse. On a positive note, demand for oil and gas is projected to be sustainable in long run. OPEC has projected the oil demand to increase by over 21 million barrels per day during the period of 2013 to 2040, reaching 111.1 mUllon batrels per day by2040. This Indicates the underlying demand for oil and gas as an energy soutce in the global market. In addition, the long term prospect of oil and gas industry is supported by an increasing global population and urbanisation thatindicate an expansion in energy demand. The United Nations C’UI\I”) has projected the global population to grow from 7.35 blllion in 2015 to reach 9.73 billion by 2050, of which urban jDopulatibh would increase from 54.0 percent to 66,4 percent during the same period. Continuous demand for energy sotJrces would contribute to a sustainable oil and gas industry, and process control equipment and measurement instruments may benefit from the heed of equipment replacement within the oil and gas industry in long run.
2.7.2 Dependency on the Palm Oil Industry The demand for process control equipment a.hd measurement instruments is de~ndent on the performance of palm oil industry as one of the end consumers. Similar to the oil and gas industry, higher investment is antidpated when palm oil pr1ces are favourable. While it is an industrial norm that palm oil prices fluctuate according to market demand and supply, any prolonged downward pricing trend on palm oil may influence the demand of process control equipment and measurement instruments as market players reduce or defer their investment decisions. In 2014, CPO was traded at a higher price during the first half of 2014 at an average of RM2,605 per tonne locally. Moving into the second half of 2014r CPO prices trended downwards and closed at an average of RM2,183 per tonne. This was attributed to a weaker price of soybean oil (which can be used asa substitute of palm oil) and slumping crude oil prices, which affected the demand for biofuel, However, the average price of CPO was higher by a marginal 0.5 percent to RM2r 384 per tonne in 2014. In 2015, CPO was traded at an average of RM2,219 per tonne in the first half of 2015 and trended downwards during the second half of 2015. The declining trend was 7. INDUSTRY OVERVIEW (Collt’d)
attributed to weaker prices of soybean and rapeseed oil (which can be used as a substitute of palm oil), a weaker demand from China, and the continued weak crude oil prices that affected the demand for biofuel. The average CPO price in 2015 stood at RM2,153 per tonne. The decl1ning prldng trend may pressure on the business profitability of the market players/ resulting in cuts or deferments Of investment decision for capacity expansion and equipment maintenance and upgrade. As such, d,emand for process control equipment and measurement instruments from palm oil industry may be affected if the downward pricing trend prolongs. Nonetheless, CPO prices began to exhibit signs of recovery asthe prices increased from RM2,251 per tonne in January to RM2,647 pertPhne ih Ap’rn 2016. Moving forward! CPO prices is expected to continue to gain groWth01omentum amid anticipated lower CPO supply due to prolonged EI Nino drought that may affect the fresh fruit bunches yield thus resulting in lower feedstock for CPO proQuct:ion. CPO supply is expected to decline in tandem with lower production! thus augurs well for the growth of CPO prices.
2.7.3 Fluctuations in Raw Materials Prices The process control equipment and measuremen~ instruments market is. subjected to constant price fluctuations on iron are, natural gas and cr\.lde oil} the 3 being the raw materials to steel and plastic resins for the manufacture of process control equipment and measurement instruments. A combination of external factors such as geopolitical instability/ economic cycle, catastrophic risk and global demand for these natural resources impacts the prices volatility. Fluctuation in raw materials price could adversely affect the market players’ results of operations and profit margins. While the market players generally attempt to pass along inctease.d raw materials prices to its customers in the form of price increases, there may bea time delay between the increased prices to the market players and the market players’ ability to increase the prices of its products. Consequently, its results of operations and financial condition may be adversely Clffected. The pricing trend of iron are continued on descending trail from January to April 2015 before going up to USD60.2 per metric tonne in May and USD62.31Jer metric tonne in June/ attributing to weaker iron are exports from Australia. Prices of iron are fluctuated between USD50 to USD60 per metric tohne from July to October before dropping to USD46.2 per metric tonne and USD39.6 per metric tonne in November and December 7. INDUSTRY OVERVIEW (Collt’d)
2015. And from January to April 2016, prices of iron are increased from USD41.3 per metric tonne to USD59.6 per metric tonne due to higher demand from China. On the other hand, natural gas prices generally trended downward since the second half of 2014 corresponding to the unfavourable crude oil prices. Nonetheless, prices of natural gas increased to USD10.0per million metric British thermal unit and USD10A per million metric British thermal unit in September and October 2015. Natural gas prices stood at USD9,4 per million metric British thermal unit and USDI0.2 per million metric British thermal unit in November andpecember 1015 respectively. Moving to 2016, prices of natural gas moderated from USDB.Spermillfon metric British thermal unit in January to USD7.0 per milHonmetric British thermal uhit in .April 2016. ThiS marKet challenge will have a low impact on the process control equipment and measurement instruments market throughout the forecast periPd. 2.8 KEY ISSUES AND TREN:DS
2.8.1 Barriers to Entry Barriers to entry are factors that affect the entry of new players into the said industry; Industries with high ba.rriers to entry are more difficult for hew market plClyers to penetrate; these barriers to entry prevent or diSCourage new market players from establishing themselves as strong competitors, and often limit their growth pcitentiaL Low barriers to entry allow easy entrance of neW market players and are. conduCive for facilitating a greater numberof new market players. The process control equipment and measurement instruments market has moderate entry barriers. Potential entran.ts may enter the trading and distribution segment with the provision of process control equipment and measurement instrument targeting for replacement of existing eqUipment in end-users segment. The entry level into replacement segment is lower as potential entrants only need to proVide their products that match the specification of the original partS. Nevertheless, there are few notable barriers to entry present in the process control eqUipment and measurement instruments market. These factors are: • Established track record of incumbentmatket players -The process control equipment and measurement instruments market is competitiver comprising local 7. INDUSTRY OVERVIEW (Collt’d)
manufacturers, as well as internationally renowned brands distributed by local traders! distributors. New entrants in the trading and distribution segment will have to compete against established market players who are well~experienced! and already have a wide range of products with secured suppliers. Potential entrants may therefore find it difficult to enter the process control equipment and measurement instruments market due to the strength of its incumbents. • Product and technical knOWledge -Product and technical.knowledge is crucial in the process control equipment and measurement instruments market as the requirement varies across different industrial sectors, such as oil and gas, pqlm oil, water services industry, etc. Having extensive product and technical competencies knowledge allows a market participant to understand the requirement for respective industrial sector thus supplying their products accordingly. This prOdUct and technical knowledge typically comes along with indl,lstrial experience. Therefore, potenti¢jl entrants may find it difficult to compete against established market players.
2.8.2 Substitute Products or Services There are no direct substitutes to process control equipment and meqsurement instruments as the term refers to any equipment and instrumentsuseds:p.ecifically to signal direction and transformation, as well as variable measurement. There is however a considerable degree of substitutability ih terms of the differing bl,lsiness models and strategies that market participants cart select as their own. M~rl<et participants depending on their business models and strategies, generally differentiate and compete on varioUS key attributes including product range, price, customer service, track record and relationship; etc.
2.8.3 Vulnerability and Reliance on Imports The trading and distribution segment of the process control equipment and measurement instruments market revolves around supply and distnbuti.on of locally manufactured and imported products. Due to the import portion of its business, the trading and distribution segment of the process control equipment and measurements instruments market does rely on imports, mainly from US, Japan, Singapore and Germany. In 2014, Malaysia imported approXimately RM7.4 billion worth of process control equipment and measurement instruments. In 2015, Malaysia imported approXimately RM8.7 billion worth of process control equipment qr\d measurement instruments. 7. INDUSTRY OVERVIEW (Cont’d)

2.8.4 Relevant laws and Regulation Other than those laws that are pertinent to the manufacturing aspect of the market, there arecl1rrently no specific regulations or law goyerning the process control equipment and measurement instruments market in Malaysia. HdWeyer, trading and distribution activities in process control equipment and measurement instruments market is subjected to the Malaysian Customs Act 1967 and Custom Regulation 1977 that stipulates the legal proyision In importation and exportation. 2.9 MARKET PROSPECTS AND OUTLOOK The process control equipment and measurement Instruments market for industrial pipeline systems in Malaysia is expected to register sloWer gtClwth in the short term and improve over the medium to long term.. The maF>kefisexpected to grow ataCAGRof3.2 percent from 2016 to 2020 to reach RM2.52 billion in 2020. figure 12: Market Size and Growth Forecast f(n theProces$ Control Equipment and Metlsurernentlnst…..ment;$ Market for Industrial Pipeline Systems in Malaysia, 2013′;2020
Year Source: IMR report The outlook ofthe process control equipment and measurement instruments market for industrial pipeline systems is supported by the outlook of key applications as detailed below: 7. INDUSTRY OVERVIEW (Cont’d)
The Oil and Gas Industry Moving forward, the growth in the local oil and gas industry is expected to be supported by the inclusion of oil, gas and energy as one of the NKEAs that are given priority in terms of investments and policy support under the ETP. A 5.0 percent annual growth in the decade from 2010 to 2020 is being targeted by the oil, gas and energy NKEA. A higher demand for plastic products is anticipated to continue to spur the demand for petrochemicals in Malaysia. The demand and usage of plastic products increases along with the population growth of the country. The size of the population in Malaysia for 2015 is estimated to stand at 30.5 million people, and is forecast to be 38.6 million by 2040. This represents a steady demand for various plastic products to be used in day-to-day activities. The petrochemical industry is also likely to see higher demand from foreign markets with the presence of free trade agreements coming into play -such as the ASEAN Free Trade Agreement CAFTA”) and Malaysia’s FTA with China. In the former, AFTA was created to strengthen and deepen intra~ASEAN industrial linkages by leveraging the huge potential and complementary economic activities in the region. As for lV1alaysia’s FTA with China, the petrochemical industry is also expected to benefit as China, being a net importer of petrochemicals, would yield new business opportunities for petrochemicals manufacturers in Malaysia. In terms of supply! the petrochemical industry is likely to see an increase in production capacity in the long term under various government~led initiatives, including the RAPID project in Johor. As for the declining prices of oil, lower oil prices adversely affect the business profitability of oil companies thus forcing them to reassess their development projects and focus on driving prudent cost management. In Malaysia, PETRONAS expects oil prices to remain low in 2016 and accordingly has announced a cut in its operational expenditure and capital expenditure for 2016 by between RM15 billion to RM20 billion. The reduction is also part of PETRONAS’ move to reduce the capital expenditure and operational expenditure by RM50 billion over the next 4 years. Therefore, demand for products and services from the process control equipment and measurement instruments market could be adversely affected in the medium term (2015 to 2018) -particularly for market 7. INDUSTRY OVERVIEW (Collt’d)
participants supplying to oil and gas customers who are focused on activities related to exploration and production expansions. The situation surrounding oil prices remains volatile and its outlook. remains uncertain in relation to unstable demand and supply conditions. A combination of external factors that will impact the demand and supply conditions, amongst other, are geopolitical and economic instab1lity, inventory builds, prodwction f¢velsandtatastrophic risk. Correspondingly, a combination of unstable supply and demand conditions may prevent any significant rally from gaining traction and lead to persistently weak prices in the coming year. However, prices COuld also rebound and mt:>v¢ higher if any of the factors previously noted begin to reVerse.

The Palm Oil Industry The growth in the palm oil industry in Mal~ysia is antiCipated to have a direct impact on the process control equipment and measurement instruments market with the development of new processing facilities, and tefutbishmentahd maintenance of existing facilities. Demand for process control equipmentand measurement instruments from the palmollinc!ustry is likely to be affected in relation to a declining CPO pricing trend. The average CPO prices dropped from I1M2,384 per tonne In 2014 to RM2,J53 per tonne in 2015.Thedeclining pricingtreMmaypressureonthebusInessprofitabilityof themarket players, resulting in cuts or deferments of investment decision forcapaqty expansion and equipment maintenance and upgrade. As such, demand for process control equipment and measurement instruments from palm oil industry may be affected if the downward pric:ing trend prolongs. Nonetheless, CPO prices began to exhibit sIgns of recovery as the prices increased from R11.12,251 per tonne In January to I1M2,547 per tonne in April 2016. Moving forwardj CPO prices is expected to continue to gain growth momentum amid anticipated lower CPO supply due to prolonged EJ Nino drought that may affect the freshfrllit bunches yield thus resulting in Ibwer feedstock for CPO production.CPOsupplyls expected to decline in tandem with Jower production, thus augurs well for the growth ofCPO prices. The outlook for Malaysia’s palm oil Industry in the long term remains favourable, underpinned by an increasing global population, rise in incomes and per capita consumption. The FAO projected that the world population wlH grow to 9.73 bilHon by 7. INDUSTRY OVERVIEW (Collt’d)
2050 (from 7.35 billion as at 2015) with the majority of growth occurring in Asia. Another important factor is income. A strong economic growth will lead to a rise in income through such factors as greater economic activities and better employment opportunities taking place and ultimately drive higher consumption and demand. The palm oil industry has been identified as one of the 12 NKEAs. To enhance the development of the palm oil indlJ$try, various initiatives under the ErP are means to boost the industry’s activities. The ErP has identified 8 entry point projects f’EPPs”) and several business opportunities worth a total of RM74.6 billion to achieve this target. Among the 8 EPPs that have been identified to ·achieve this target, the improving FFB yield and improving on extraction rate EPPs wll.l increase the’supply of palm aU in the long term. The Water Services Industry The Malaysian population is projected to grow steadily to reach 38.6 million by 2040, and this is expected to spur the continued demand for water services moving forward. A higher demand for water services will translate to greater expansion in water treatment and sewerage facilities. More importantly, the lower reserve margin of water treatment plants at 15.7 percent in 2014 as tompared to 16.1 percent in 2012 indicates the need for an expansion in plant capacities to address the increasing demand for clean water supply. The l1MP reiterated the government’s commitment for the continued expansion and investment in new water and sewerage networks and treatment capacity. Under the same plan, continued emphasis will be placed towards extending provision of rural basic infrastructure including expanding coverage of access to clean and treated water. Focus will also be given to a holistic non-revenue water reduction programme and improving the performance of the sewerage system. By 2020, the government aims to prOVide 99 percent of the population with clean and treated water, 80 percent with connected sewerage services and reduce non-revenue water to 25 percent. 7. INDUSTRY OVERVIEW (Collt’d)
3 OVERVIEW OF PROCESS CONTROL EQUIPMENT AND MEASUREMENT INSTRUMENTS MARKET IN INDONESIA

 

3.1 INDONESIAN ECONOMIC OVERVIEW The Indonesian economy experienced a slight contraction in terms of growth rate in its election year 2014, as the country received lower investments during the year. The softened growth was also attributed to a weaker export demand from its international partners, notably from China. Nonetheless, the country continued on an upward expansion by registering a 5,0 percent growth during the said year. In 2015, the IndonesianeconOlhY exhlbite.d aslower growth amid d.eceleration in fixed investment, moderated household cOhsumptionln response to higher jl1f1ation and tighter consumer credit, coupled with a weaker external sector. As a result, the Indonesian economy grewata slower pace of 4.8 percent. Figure 13: Indonesia’s Real GDPGrowtl1, 2012″2016 ~.o.
4.’14.$5.1.)

t4.0 i !3.0 C) 2.0
2013 2014 2015
VNt’ Note: p denotes projection Sources: IMR report l”1oving forward, downside risks to the outlook such as further declines in commodity prices as well as slowing demand from the main trading partner, namely China, remains a conCern to the Indonesian economic growth. Nonetheless the economy is projected to 7. INDUSTRY OVERVIEW (Cont’d)
grow at 4.9 percent in 2016, attributed to an anticipated increase in household consumption in response to an expected lower inflation rate and pay rises for thedvil service, coupled with anticipated recovery in its external trade sector. 3.2 OVERVIEW OF THE INDONESIAN PROCESS CONTROL EQUIPMENT AND MEASUREMENT INSTRUMENTS MARKET The process control equipment and measurement instruments mi;lrket in Indonesia grew in line with derived demand from its end~users segments, particularly its palm oil industry. The CPO production in Indonesia was above 26.0 million tonnes in 2012 and 2013. In 2014, Indonesia’s productit:m ofCPoamourited toa total of .31.5 million tonnes and further improved to 32.5 million torines in 2015. FaVourable conditions in the end­user segments attract capital investment for development of new production facilities· and expansion of existing production capacities] leaping toa highercJemand for industrial automation, induding the process control equipment arid measurement instruments. Similar to the Malaysian market, the Indonesian process control equipment and measurement instruments market is likely to be affectecJl.1y the downward trend in global CPO prices which dropped from US0821 per toone in 2014toUSD623 per tonne in 2015. As the investment decision is often determined by bUsinE!ssp~ofitabmty, any prolonged unfavourable priCing trend of commodity would adversely affect the investment decisions thus impacting the demand fpr the process control equfpmentand ·measurement instruments. Accordingly, the declining pricing trend may exert pressure on business profitability of palm oil industry thus leading to cuts or deferments in investment decisions to expand production capacities and the maintenance and upgrade of equipment. Despite the short term plices fluctuations, the prospect of theIndonesian process control eqLlipment and measurementinstn,Jments market remainsfflvourabJe tl:iroughout 2016 to 2020, stemming from the assoCiated growth of the palm oil industry in relation to the growing biofuel sector and government’s long term support towards the palm oil industry, as well as its developing olland gas industry; Domestic demand of palm oil expands in relation to an upward consumption of biofuel. Historically, biofuel consumption expanded over 7 fold from 4,20 million Iitres in 2010 to 7. INDUSTRY OVERVIEW (Collt’d)
1,600 million Iitres in 2014, and this augurs well for the demand growth of palm oil. As for long term outlook, demand for palm oil is set to grow amid the government’s biofuel target of 30 percent in its transportation, industry and electricity sectors by 2025. Furthermore, the government has increased the mandated bio content in diesel fuel from 10 percent to 15 percent in 2015, and is targeting to further increase to 20 percent in 2016 and 30 percent 2020. Biodiesel producers are planning to ramp up their capacity in order to meet the higher mandates. According to the Indonesian Biofuel Producers Association, the country’s biofuel capacity is expected to expand from 6.8 million kilolitres in 2015 to 8.0 million kilolitres in 2016. Strong government support toward the biofuel sector in long term is expected to encourage further investment in palm oil and biofuel production infrastructure thus driving the demand for process control equipment and measurement instruments. Growth within the palm oil industry is also anticipated in relation to the government’s long-term scheme (2015-2025) for the development of its CPO processing industry. In addition, the Indonesian palm oil industry aims to achieve 40 million tonnes of CPO production per year by 2020 -it further highlights the need for capacity expansion within the downstream segment particularly the refining sector in order to accommodate the increase in production. Likewise, the process control equipment and measurement instruments market is set to benefit from the strong government support towards its oil and gas industry in order to meet the increasing energy demand as a result of economic expansion, rapid urbanisation, rising liVing standards and population growth. Oil has been the dominant energy source since 1999 and accounted for 48.0 percent of the total primary energy supply in 2014, followed by coal (31.0 percent) and gas (17.1 percent). As the economy progresses, meeting the energy demand growth by addressing challenges of inadequate infrastructure becomes a key pillar of the country’s economic and investment policies and strategies. In tandem with the long term prospect of the palm oil and oil and gas industries in Indonesia, the process control equipment and measurement instruments market in Indonesia is forecasted to register a CAGR of 10.8 percent from 2016 to 2020, to reach RM10.18 billion in 2020. The following sub-section provides an overview of the palm oil industry in Indonesia. 7. INDUSTRY OVERVIEW (Collt’d)
3.2.1 The Palm Oillndusfry in Indonesia The Indonesian palm oil industry has recorded growth in production from 2011 to 2012. In 2013, Indonesia’s palm oil industry remained strong, with CPO production stood at 30.0 million tonnes, increase from the CPO production of 26.5 million tonnes in 2012. Moving into 2014, Indonesia’s palm oil industry was strengthened by a 5.0 percent growth in CPO production to 31.5 million tonnes. And in 2015, CPO production in Indonesia further improved to 32.5 million tonnes. Indonesia’s focus has mainly been on the upstream actiVities involving oil palm planting and CPO milling; downstream activities account for no more than 5.0 percent of the palm oil industry’s annually generated value. As compared to Malaysia, the world’s leader in oleochemicaI sector, Indonesia’s oleochemical industry lags behind in size and production capacity. Malaysia produces approximately 120 varieties of derivatives whlle l’rtdonesia prodUces less than 20. As a reSUlt, the Indonesian government is shifting its attehtion to the development of domestic downstream clusters primarily for oleochemical production -a strategic industry that could potentially provide more than 40.0 percent added value to CPO and crude palm kernel oil C’CPKO”). The Indonesian government has issued a policy development of CPO processing industry through long4etrn scheme (2015-2025). The scheme targe’t$ tp prOVide S1Jpport by means of industry clusters,raw materials, infrastructure and various projects that would boost the downstream activities. In addition, the Indonesian palm oil industry aims to achieve 40 milHon tonnes of CPO production per year by 2020 -and this further highlights the need for capadty expansion within the downstream segment particularly the refining sector in order to accommodate the increase in production. Domestic d~mand for palm oil also improved amid an upward consumption of biofuel which expanded over 7 fold from 220 million Iitres In 2010 to 1,600 million litres in 2014. As for the long term prospects) demand for palm oil is set to grow in tandem with the government’s biofuel target of 30 percent in its transportation, industry and electriCity sectors by 2025. Furthermore, the government haslhcreased the mandated bio content in diesel fuel from 10 percent to 15 percent in 2015, and is targeting to further increase to 20 percent in 2016 and 30 percent 2020. 7. INDUSTRY OVERVIEW (Collt’d)
The long term prospect of the Indonesian palm oil industry is likely to spur growth for the process control equipment and measurement instruments market as well, due to the derived demand for industry automation as the palm oil industry grows. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 7. INDUSTRY OVERVIEW (Cont’d)
Protege Associates has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the boundaries and limitations of secondary statistics, primary research and continued industry movements. Our research has been conducted to present a view of the overall industry and may not necessarily reflect the performance of individual companies in this industry. We are not responsible for the decisions and/ or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies. Thank you. Yours Sincerely,
TAN CHIN HOW Director Protege Associates Sdn Bhd

Comments are closed