Industry Overview

6. INDUSTRY OVERVIEW AND OUTLOOK 6. INDUSTRY OVERVIEW AND OUTLOOK 6.1 OVERVIEW OF THE MALAYSIAN ECONOMY The Malaysian economy registered a growth of 4.6% in 2008, amidst the international financial turmoil and sharp deterioration in global economic environment. Robust domestic demand, in particular sustained private consumption and strong pUblic spending, supported growth during the year. While external demand was strong in the first half of 2008, the sharp and rapid deterioration in the global economic conditions as well as major correction in commodity prices in the second half led to a contraction in Malaysia’s export performance in the latter part of the second half year. Given the high degree of openness of the Malaysian economy, the contraction in exports adversely affected income and domestic demand. Private investment activities and private consumption moderated significantly in the fourth quarter of 2008. The economy grew strongly by 7.1 % in the first half of 2008 supported by robust domestic and external demand. Domestic demand was led by continued strong expansion in private consumption, supported by a steady increase in disposable income, positive labour market conditions and favourable financing environment. External demand was supported by very high commodity prices and strong export volume. Demand from the regional countries was also strong. When the global downturn intensified in the second half of 2008, with several major advanced economies slipping into recession and growth in a number of regional economies moderating rapidly, net external demand declined significantly. Nevertheless, real gross domestic product (“GOP”) growth remained positive in the second half-year, expanding modestly by 2.4%, supported by strong public consumption and continued expansion in private consumption. The Malaysian economy is expected to experience the full impact of the global downturn in 2009. In response, several policy measures have been put in place with a primary focus on supporting domestic demand, as well as mitigating the impact of the global slowdown on the affected segments of the economy. On 4 November 2008, the Government announced the first stimulus package amounting to RM7 billion. The funds would be allocated to projects which have a high and immediate multiplier impact on the economy. In addition, several measures to directly support private consumption were also introduced, such as a reduction of Employees Provident Fund contributions from 11 % to 8% and higher vehicle loan eligibility for civil servants. As the global economic conditions deteriorated further in the fourth quarter of 2008 and in the early part of 2009, a second economic stimulus package of RM60 billion or almost 9% of GOP was announced on 10 March 2009. The package will be implemented over 2009 and 2010, and will involve spending on training, job creation, improving public infrastructure, school facilities and basic amenities, as well as establishing guarantee facilities. (Source: Bank Negara Malaysia Annual Report 2008)
6.2 OVERVIEW AND PROSPECTS OF THE OIL AND GAS INDUSTRY IN MALAYSIA Production of crude oil (including condensates) averaged 694,141 barrels per day (“bpd”) in 2008, representing an increase of 2%. The higher production was driven entirely by the doubling in crude oil output in Sabah to 150,792 bpd (2007: 74,800 bpd). Sabah now accounts for 21.7% of total oil output. In keeping with the production limits set by the National Depletion Policy, production in Peninsular lVIalaysia declined by 8.9% to 337,369 bpd, to account for 49% of total output of crude oil of the country. Meanwhile, condensates continued to contribute significantly, accounting for 17.5% of the total oil production, at 121,511 bpd. Output of natural gas contracted by 4.9% to 5,579 million cubic feet per day due mainly to lower external demand for liquefied natural gas (“LNG”). In addition, production was also affected by unplanned maintenance shutdowns at several gas fields in Peninsular Malaysia. Oil reserves in the country increased to 5.46 billion barrels or 22 years of lifespan as at 1 January 2008, supported by the rising reserves from the deepwater discoveries in offshore Sabah. Meanwhile, natural gas reserves is at 14.67 billions of barrels oil equivalent, sufficient to cover 36 years of gas output at current production levels. The oil and gas industry continued to experience higher activity, especially in building rigs, platforms and storage terminals. (Source: Bank Negara Malaysia Annual Report 2008) 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d) Industry observers believe that it would be a matter of time before the major oil and gas operators in Malaysia will award new contracts to the local supporting oil and gas. Previously when crude oil prices were on a declining trend, it was believed that many oil and gas majors had re-evaluated some of its new contracts with the local supporting oil and gas companies to determine their feasibility. However, with crude oil price stabilising, many are expected to resume its intended exploration and production capital expenditure expansion plan. Moving forward, the oil and gas majors are expected to continue to focus on deepwater development and the revival of eXisting platforms. As for the shallow water platforms, most of them are located off the coast of Terengganu and have been fully developed. Hence, the potential work would be to refurbish the abandoned or existing platforms to increase oil and gas production. In addition, the oil and gas majors in Malaysia have also been aggressively looking for new deepwater fields in the last ten (10) years and have been waiting to develop them to replace the depleting shallow water fields. Hence, all these development should benefit the local oil and gas companies as based on historical trends in the award of contracts, preference is usually given to locally licensed oil and gas companies unless they do not have the available resources, technology or expertise. (Source: Management) 6.3 INDUSTRY PLAYERS AND COMPETITION Some of the other major worldwide offshore crane service providers and manufacturers includes Favelle Favco Berhad (Malaysia), National OilWell Inc. (USA), Seatrax Inc. (USA), Energy Cranes International (USA) and MS Herkules Sdn Bhd (a subsidiary of Ramunia Holdings Berhad). However, Favelle Favco Berhad and MS Herkules Sdn Bhd are the only companies which have a presence in the Malaysian market. Competition among offshore crane service providers and manufacturers are based on a number of factors, including, range and quality of products and services, technical compliance to customers’ specifications, cost competitiveness, technological advancement, HSE management and prompt delivery/completion. We believe that our Group is well positioned in the market as:­.:. Our Group is a niche player in the offshore pedestal crane market servicing the oil and gas industry. Our Group is one of only two (2) API licensed companies operating in Malaysia that manufacture offshore pedestal cranes and is the only company in Malaysia to provide fully integrated offshore crane services to the oil and gas industry. In addition, only companies that are licensed or registered by PETRONAS are allowed to bid directly for work from PETRONAS and PSC operators and contractors. All companies who wish to obtain contracts from the Government or to bid directly for work prOVided by PETRONAS and PSC operators/contractors in the oil and gas industry are also reqUired to register as contractors with the MOF; .:. High barriers to entry due to the highly specialised and technical nature of the business, crane design and crane development. Customized crane manufacturing requires a high level of expertise to meet the demanding specifications required in offshore applications and also to meet the stringent safety standards imposed by the industry; .:. Our Group has the proven in-house capabilities to design and develop customised cranes according to certain specifications to meet the unique performance reqUirements requested by customers; 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d) .:. Our Group has successfully established a track record associated with quality, reliability, technical expertise and safety as well as service excellence. Our track record serves as an important reference to win new customers; and .:. Our Group has recently emerged as an engineering lifting solutions provider for workover projects. We have provided lifting solutions for workover campaigns in Peninsular Malaysia, Sabah and Sarawak on the drilling and workover enhanced recovery campaign. This has been ongoing, utilising our rental crane fleet for the past two (2) years and is expected to continue for the foreseeable future.

 

6.4 GOVERNMENT LAWS AND REGULATIONS 6.4.1 Government laws and regulations Oil and gas industry The oil and gas industry in Malaysia is governed by the Petroleum Development Act 1974. The power to regulate all activities in the upstream petroleum sector is vested with PETRONAS. PETRONAS, established under the Petroleum Development Act, 1974 as a state-owned enterprise, has exclusive rights of ownership, exploration and production of oil and gas in Malaysia. PETRONAS is actively engaged in the exploration, development and production of crude oil and natural gas both at home and abroad. In Malaysia, these activities are undertaken and managed through PSCs with a number of international oil and gas companies as well as with its subsidiary PETRONAS Carigali. Companies that are registered with PETRONAS are only allowed to participate in the downstream sector and maritime sector of the oil and gas industry. However, companies who also wish to participate in the upstream sector are reqUired to have a license issued by PETRONAS. Companies who apply for the PETRONAS licence are required to specify the scope of work for which the licence or registration is being applied for based on a set of Standardised Work and Equipment Categories (“SWECn). SWECs are divided into two (2) categories which are products and services. An individual licence or registration must be obtained for each SWEC. Generally, licences and registrations are effective for a period of one (1) year. However, the effective period of more than one (1) year can be considered. In addition, all companies who wish to obtain contracts from the Government or to bid directly for work provided by PETRONAS and PSC operators/contractors in the oil and gas industry are required to register as contractors with the MOF. In this respect, our Group holds a PETRONAS licence to supply equipmenUprovide services to PETRONAS and PSC operators/contractors in Malaysia and is a registered contractor with the MOF. Manufacturing industry All companies that are in the manufacturing industry having shareholders’ funds of RM2.5 million and above or engaging seventy five (75) or more full-time paid employees are required to have a manufacturing license from MIT!. Our Group holds two (2) MITI licences for manufacturing of offshore pedestal cranes, eXisting yard in Kemaman Supply Base and the other for our proposed new yard in Teluk Kalong. 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d)
6.4.2 Government Incentives PETRONAS Initiatives In an effort to reduce the operating costs of upstream operations, PETRONAS and its PSC operators/contractors have initiated the Malaysian petroleum industry’s Cost Reduction Alliance (“CORAL”), a forum which seeks to reduce costs and enhance efficiency via breakthrough measures and provides for the sharing of facilities and logistics, the standardisation of equipment specifications and the coordination of operations. Pursuant to the CORAL forum, the Malaysian Oil and Gas Services Council (“MOGSC”) was formed in 2003 to showcase the capabilities and expertise as well as spearhead the development of PETRONAS registered oil and gas service companies. MOGSC members provide engineering, process equipment, maintenance, piping, diving, installation, barge supplies, information technology, surveying, consultancy, helicopter services and catering services. Malaysian oil and gas service companies are expected to make further inroads in the international market through MOGSC, as MOSGC allows them to showcase their expertise and capabilities abroad. In this respect, HOSBB is a member of MOGSC. Manufacturing Incentives HOSSB was granted pioneer status for a period of ten (10) years by MITI under the Promotion of Investments Act, 1986 for its activity on “Manufacturing of Offshore Pedestal Cranes”. Under this pioneer status incentive, income derived from the pioneer activity is exempted from income tax for a period of five (5) years from 18 September 2005 to 17 September 2010. HOSSB is required to apply for the extension of the incentive period for another five (5) years upon the expiry of its initial five (5) years pioneer period subject to the fulfilment of all terms and conditions for the pioneer status incentive.

6.5 DEMAND/SllPPLY CONDITIONS The long term demand for crude oil is expected to sustain spending on exploration, development and production activities in the oil and gas industry. Servicing and maintenance activities for offshore pedestal cranes as well as workover projects lifting solutions are expected to increase in tandem with the spending of the oil and gas majors in shoring-up oil reserves and boosting production output. The crane is the critical link between platforms and onshore supply bases. All equipment, tools, consumables and in some cases personnel that are required to operate oil and gas platforms, are lifted to and from the platform using cranes. The growth of the offshore pedestal crane manufacturing industry is dependent on the growth of the oil and gas industry. New discoveries in offshore fields have been the engine of growth for the offshore pedestal cranes market. As oil and gas companies go for deepwater oil and gas production, cranes have to keep up with the needs of exploration and production activities. Since the offshore pedestal cranes are specialised cranes, the demand for offshore cranes is dependent on new offshore discoveries and projects for enhancing existing wells. In addition, our Group has recently emerged as an engineering solutions provider for workover projects. Our Group has provided lifting solutions for workover campaigns in Peninsular Malaysia, Sabah and Sarawak on dozens of platforms with the campaigns continuing into the foreseeable future. Our Group has recently purchased a new ten (10) acre yard at the Teluk Kalong industrial area in Kemaman, Terengganu Darul Iman, which will complement and increase our existing capacity to manufacture, service and overhaul pedestal cranes. The new yard is expected to cater for the growing demand for our Group’s services and cranes. The new ten (10) acre yard is expected to be completed by the second quarter of 2009 and has the capacity to manufacture, service, maintain and overhaul an average of approximately thirty (30) offshore cranes per annum compared to our Group’s current plant capacity of approximately twelve (12) cranes per annum. 6. INDUSTRY OVERVIEW AND OUTLOOK (Cont’d) 6.6 SUBSTITUTE PRODUCTS/SERVICES Our Group is a fully integrated offshore crane service provider and manufacturer specialising in the oil and gas industry. Offshore pedestal crane services playa critical role in the oil and gas industry. There are no direct substitutes for the provision of such services unless PSG contractors/operators or owners of offshore platforms undertake to perform these services internally. As offshore platforms mature, it becomes more important to maintain the integrity of the high risk offshore pedestal cranes. Over time, the wear and tear of these offshore pedestal cranes have made it costly and time consuming for PSG operators to maintain. Thus, it has become more advantageous for the operators to outsource the maintenance of offshore pedestal cranes as part of its initiatives to reduce costs and enhance efficiency. In addition, the reqUirement for API2G compliant offshore pedestal cranes also increases the demand for such service providers. Used or reconditioned offshore pedestal cranes can be a substitute for newly manufactured offshore pedestal cranes. However, when a customised platform is being designed and constructed at a substantial cost with the crane being a small proportion of the investment, operators may prefer to have a brand new customised crane included in the program. Small independent platform operators may elect to capture the relatively small cost savings by utilising used cranes. In some other cases, light tender assist rigs and larger floating self-contained workover rigs come with their own cranes. However, these rigs cannot be used on smaller platforms as they may be too heavy and costly.
6.7 INDUSTRY’S RELIANCE ON AND VULNERABILITY TO IMPORTS The main raw materials used by our Group are steel and steel-based products used in the reconditioning and fabrication of offshore pedestal cranes. These are procured from overseas and local suppliers. During the FYE 31 December 2008, purchases of steel products accounted for approximately 25% of the total proforma purchases by our Group. Our Group sources approximately 87% of our steel materials from overseas as steel used in our crane manufacturing activities are highly specialised. As these types of steel materials are easily available from suppliers overseas, any disruptions in supply are minimal. For situations where mild steel can be used, Malaysia’s large output would easily satisfy our Group’s requirements. For the past twelve (12) months up to the LPD, our Group has not experienced any significant shortage in the supply of raw materials used in our manufacturing process. THE REST OF THIS PAGE HAS BEEN INTENTJONALLY LEFT BLANK

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