Business Overview

S. INFORMATlON ON THE HEVEABOARD GROUP S. INFORMATlON ON THE HEVEABOARD GROUP 5.1  INFORMAnON ON HEVEABOARD  5.1.1  History and Background  HeveaBoard  was  incof(X)rated  on  3 September  1993  under the Act  as  a private  limited
company under the name of HeveaBoard Sdn Bhd. Tht”: Company was subsequently converted into a public limited company on l6 February 2004 and as.o.umed its present name. HevenBoard is principally involved in the uading and manufacturing of particleboard while its subsidiaries are involved in down stream furniture manufacturing as well as the trading and distribution of wood-relaled products. Particleboard is essentially a reconstituted wood panel made of particles derived from rubber wood branches and wood waste. It is mainly used in the m,lOufaclureof furniture. speaker boxes and panels for flooring and doors. The cOf(X)rate group structure of the Heve3Board Group is set out below: HcveaBoard I ’00” I ‘000. I ‘000. I HPSB BWSB HMSB  1 000. I HOSB  The construction of HeveaBoard present manufacturing plant began in  August  1994. after
being granted a manufacturing lict”:nse with Pioneer Tax Status for (5) years by the MITl to produce plain and laminated particleboard. HeveaBoard Pioneer Tax Status expired on 31 July 2001. Since commercial production began in April 1996, HeveaBoard has develop«l into one of the leading particleboard manufacturers in Malaysia. with an installed annual capacity of 120,000 m1. The manufacturing plant. warehouse and offices of H~veaBoard are located on 8 10 acre site in Gemas, approximately 100 kilometres south of Seremban. HeveaBoard produces particleboard for both the local and export markets. The local mark~t takes up approximately 65% of the plant’s production capacity. more than half of which is supplied to one of its subsidiaries, HPSB, for RTA furniture manufacturing. The rest of the domestic sale:s are obtained from decorative door manufacturers. speaker box manufacturers and a few selected authorised distributors. The particleboard ell.port sector, on the other hand. caters mainly to direct end users comprising furniture manufacturers in Southern Chin::.. Ihe Philippines. Vielnam. Hong Kong. Japan and India. Besides HeveaBoard particleboard manufacturing acllvltles, the Group’s wholly-owned subsidiary. HPSB which is involved in RTA furniture manufacturing activities also plays a significant role in terms of its contribution to the Group’s tolal turnover. Since HPSB’s inception in 2000 when its contribution to total Group turnover totaled approximately 16%, HPSB has grown rapidly in securing major market shares in the RTA furniture market. particularly overseas, and currently contributes more than 50% of lotal Group turnover. , Company No, 275512·A j S. INFORMATION ON THE HEVEABOARD GROUP
5.2 SHARE CAPITAL As at Ihe date of this Prospeclus. HeveaBoard has an aUlhorised share capital of RM500.000.000 comprising 500.000,000 Shares. The issued and paid-up share capilal of Ihe Company is RM64.960,OOO comprising 64.960.000 Shares. Upon completion of the Public Issue. tm: cnbrged issued and paid-up share capiral of HeveaBoard shall be RM80,OOO,OOO comprising SO.OOO,OOO Shares. The details of the changes in the issued and paid-up share capital of HeveaBoard since incorpor.uion until the date of rhis Pr06pectus are as follows: Ible or Allotmmt  No. 01’ Sbares  Consideration  Cumulative Issued l1Ind hid-up Share Capital (RM)  03-‘)9.199] 02.03.1994 25.0.:1.1994 24.08.1994 30.12.1994 18.10.1995 19.11.2000 30.12.2000 30.12.2003 31.12.2003  2 1.999.998 9.000.000 9.000.000 6.000.000 3,000.000 500.000 20,333.000 10,161.000 3.960JlOO  Cuh I Subscribers’ shares “”” “”” “””ea.h C”h C”h Bonus Issue Bonus Issue Share Swap  2 3,000,000 12,000,000 21,000.000 27.000.000 30.000.000 3O.soo,000 50,833,000 61,000,000 64.960,000
5.3
There are no outstanding warrants, options. CQnverlible securities and uncalled capital in HeveaBoard. SUBSIDIARY COMPANIES Derails of HCVCllBoard subsidiary companies arc as follows:-Nameuf’  Date of  Issued and  EIr«tlv.!  Principal Activities  Company  Incorporation  Paid-Up Capilal  Equity  (RM)  Inlcrest  (%)  HPSB  19.1 1.l987  29,800,000  100.0  Manufacture  ~d  trading  of  RTA furniture.  HMS.  24.06.1983  250.000  100,0  Ret:ail  ,.,.,  of  plain  “‘”  laminaletl  particleboard  .od  trading Qf  other  panel  wood  products.  BWSB  2O.07.2tXX1  600.000  100.0  Marketing,  trading  “d  dismbution of RTA funticure.  HOSB  25.01.1995  1.SOO.<m  100,0  Curn:nlly  dormaot.  n~  intended business activity is.'” rnanufocrure of par,icleboard and Lami-OSB
As at the date of this Prospectus. HevcaBoard does nor have any associ3ted companie…. 5. INFORMATION ON THE HEVEABOARD GROUP

5.4 INFORMATION ON SUBSIDIARY COMPANIES 5.4.1 Information on HPSB (a) History and Business HPSB was incorporated in Malaysia under the Act on 19 November 1987 as a private limited company. HPSB is principally engaged in the business of manufacturing and Iradillg of RTA furniture:. It commenced its business operations on 19 November 1987 as a logging contractor. From 1999 to 2000, HPSB was principally engaged in the lrading of particleboord 31ld other wood produt:ts. From October 2000 onwards. I-WSB changed its business activities 10 thai of manufacturing and trading of RTA fumituce. (b) Share Copilot The authorised and issucd and paid-op shtlre capital ofHPSB is as follows:­No. of Shares  Amount (RM)  Authorise<l ls§ued and Paid-Un  50,000,000 29,800,000  50,000,000 29,800.000
Delails (If the changes in the issued and paid·up share capilal of HPSB since its date of incorporation are as follows:-Oatf of Allotment  No. of Shares  Consideration  Total  (RM)  19.11.1987  2  Cash I Subscribels’ Shales  2  29.06.1988  39,998  Cash  40,000  23.10.2000  1,J60.000  Cash  1,100.000  29.12.2000  1,800.000  Cash  3.000,000  30.11.2001  3,000,000  Cash  6.000,000  22.04.2003  3.000,000  Cash  9.000.000  27.10.2003  900,000  Bonus Issue  9.900.000  06.0iI.2004  9,900,000  Capitalisation of inter-comp:lny Joan  19.800,000  23.07.2004  10,000.000  Capitalisation of imer-compnny Joan  29.800,000
There are no outstanding warrants, options, convertible securities and uncalled capital in HPSB. (c) Subsidiary and Associated Companies HPSB does not have any subsidiary or associated companies_
5.4.2 Information on HMSB (a) Hi.v,ory and Business HMSB was incorporated in Malaysia under lhe Act 00 24 June 1983 as a privale limited company. HMSB commenced ils oper:llions on 28 September 1998 and is principally engaged in the retail sales of plain and laminated particleboard and the supply of MDF for overseas (:ustomers_ The particleboard distributed for the domesli(: market is manufactured by HeveaBoard whilst the MOF boards are obtained from MDF manufacturers as Q service provided to common customers_ l 5. INFORMATION ON THE HEVEABOARD GROUP (b) Share Capilot The authorised and issued and paid-up share capital of fTh1SB is as follows:­No. of Shares  Amount (RM)  Authorised Issued and Paid·Up  2,000,000 250.000  2,000.000 250.000
Details of the changes in the issued and paid-up share capital of HMSB since its date of incorporation are as follows:­Date of AI~lment  No. of Sharts  Conskleralion  Total  (RM)  24.<16.1983  4  Cash I Subscribers’ Shares  4  14.01.1986  2,997  Cash  3,001  16,12.1986  41.999  C~h  45.000  ILl2.1998  205,000  C~,  250.000
There :Ire no outstanding warrants, options. convertible securilies :lnd uncalled c:lpital in HMSB. (c) Subsidiary and Associated Companies HMSB does nol have any subsidiary or associated companies. 5.4.3 Information on BWSB (a) HLuory and Business BWSB was inoorporated in Malaysia under the Act on 20 July 2000 as a private limited company and commenced its business operations on I December 2000. BWSB is principally engaged in mark.eting, trading and distribution of RTA furniture. (b) Share Capital The authorised and issued and paid-up share capital ofBWSB is as follows:­No, of Shares  Amount (RM’  Autoo..ised Issued and Paid·Up  1.000,000 600,000  1,000,000 600,000
Details of the changes in the issued and paid-up share capital of BWSB since its date of incorporation are as follows:­Dale of Allotmenl  No. of Shares  Consideration  T”””  (RM)  20.07.2000  2  Cash I Subscribers’ Shares  2  28.03.2002  599,998  Cash  600,000
There are no outstanding WalTanlS. options, convertible securilies and uncalled capital In BWSB, (c) Subsidiary and Associated Compallies BWSB does 001 have any subsidiary or associated companies. , Company No. 215512·A l 5. INFORMAnON ON THE HEVEABOARD GROUP 5.4.4 Information on HOSS (0) His/Dry and Bu.\’illess HOSB was incorpof3.ted in Malaysia under the Act on 25 January 1995 as a privaTe limited company, HOSB has not commenced operations since incorporaTion. However, its intended business tlctiv;ty is the manufacture of particleboard and Lami-OSB. (bJ Share Capitol The authorised and issued and paid-up share C3pital of HOSB is as follows:­No. of Shares  Amount  (RM)  Authorised  50,000,000  50.000.000  Im~d and Paid-Un  7,500,002  7.500.002
[)e(ails of lhe changes in the issued and paid-up share capilal of HOSB since its date of iocorpor:uivn are as follows:-Ople of Allotlllt’ni  No, of Shares  Consideration  Tolal  (OM)  25.01.1995  2  Cash I Subscribc:r~’ Shares  2  23.JO.2000  6,000,000  Acquistlon of Ihree parcels of I:lnd  6.000.002  held under  P.T 4571 H.S (0) t0478  P.T 4578 H,S (D) 10476  Lot 1943 C,T. 14353  29.12.2000  1,500,000  Cash  7,500,002
There are 00 outstanding warrants, options. convertible securilies and uncalled capital in HOSB. (c) Subsidiary D”d AssociLJJed Companies HOSB does not have any subsidiary or associated companies. 5.5 PUBLIC ISSUE The Public Issue of a 10lal of 15.040.000 Shares al an Issue Price of RM2.00 per Issue Share shall be subject 10 the Itrms and conditions of this Prospectus and. upon accept:mce, will be allocated in the following manner:­(a) 3,740.000 new HeveaBoard Shares represeming approximately 4.7% of the enlarged share capital of 80.000.000 HeveaBoard Shares have been reserved for eligible Directors, employees and persons who h:lVe contributed 10 Ihe success of Ihe HeveaBoard Group;
(b) 7,300,000 new HeveaBoard Shares representing approximately 9.1 % of the enlarged share capital of 80,000,000 HeveaBoard Shares have been reserved for Bumiputera investors nominated and approved by the MITl; and
(c) 4,000.000 new HeveaBoard Shares representing 5.0% of the enlarged share capital of 80.000,000 HeveaBoard Shares art available for application by the Malaysian Public. companies. societies, (:o–operatives and institutions.

S. INFORMATION ON THE HEVEABOARD GROUP In conjunction with the Public Issue, the Company shall also offer 40,OCXJ,OlXl Warrants to be issued and allotted at no consideration to the Entitled Shareholders of HeveaBoard on a rights basis of one (1) new Warrant for every two (2) HeveaBoard Shares held as at the Entitlement Date. Upon completion of the Public Issue, the issued and paid-up share capital of HeveaBoard will increase from RM64,960,OOO, comprising 64,960,000 HeveaBoard Shares to RM80,ooo,ooo, comprising 80,000,000 HeveaBoard Shares. Assuming all the Warrants are subsequently exercised, the issued and paid-up share capital of HeveaBoard will increase by RM40,OOO,OOO from RM80,OOO,000, comprising 80,000,000 HeveaBoard Shares to RM120,OOO,OOO, comprising 120,000,000 HeveaBoard Shares. All the Issue Shares shall rank pari passu in all respects with the existing HeveaBoard Shares including voting rights and rights to all dividends and distributions that may be declared, paid or made subsequent to the date of the allotment thereof. 5.5.1 Salient Terms of the Warrants The salient terms of the Warrants are as follows: Board Lot Subject to such conditions which Bursa Securities may impose from time to time, a board lot of Warrants will be 100 Warrants, carrying the rights to subscribe for 100 new HeveaBoard Shares or in such other denomination as Bursa Securities may approve from time to time. Deed Poll The document constituting the Warrants executed by the Company on 10 December 2004. Entitled Shareholders Shareholders of the Company as at the Entitlement Date. Entitlement Date The date to be specified by the Company for the purpose of determining the persons entitled to the Warrants, which shall be a date before the Listing. Exercise Date In relation to any warrant, the Market Day during the Subscription Period on which a duly completed subscription form in exercise of the Subscription Rights is received by the share registrar together with the Subscription Price. Expiry Date The day falling five (5) years from the Issue Date and, if such a date is not a Market Day, on the Market Day immediately preceeding such a day. Form The Warrants will be issued in registered form and will be traded on Bursa Securities. Issue Date The date of issue and allotment of Warrants. Subscription Period The period commencing on the 2nd anniversary of the Issue Date and expiring at 5.00 p.m. on the Expiry Date. Subscription Price In relation to each Warrant, RM2.oo is payable in respect of each new HeveaBoard Shares upon the exercise of the Subscription Rights but subject always to such adjustments thereto in accordance with conditions in the Deed Poll. Subscription Rights The rights of a Warrant Holder to subscribe for new HeveaBoard Shares at the Subscription Price upon the terms of and subject to the conditions contained in the Deed Poll. ~. INFORMATION ON THE HEVEABOARD GROUP TransferabiHty The Warrants 3re transferable in accordance with the provisions of the Deed Poll. Listing Status The Company shtlll, upon completion of the Public Issue, obtain the approval of Bursa Securities for the listing of and quotation for the Warrants and the new HeveaBoard Shares TO be issued pursuant to the Subsription RighTS, ”In the Official List of Bursa Securities. Market Day A day on which the stock market for Bursa Securities is open for trading. Ranking of the new The new HeveaBoard Shares to be alloted and issued HeveaBoard Shares to be pursuant to the exercise of the Warrants will. upon allotmem issued upon the exercise and issue. rank pari passu in all respects with the HeveaBoard of tOe Warrant.~ Shares already in issue e:u.:epl lhal they will not be entitled 10 the rights. dividends. allOfl1’lenl or other distributions. for which the relevant record date (being the date on which The holders of the new HeveaBoard shares must be registered in order to qualify (or the entitlement) precedes the date of allotment of such HeveaBoard Shares. Governing Law The Warrants will be governed by and construed itt accordance with the laws of Malaysia. Warrants 40,000.000 warrants to be issued to the Entitled Shareholders on a righlS basis of one (I) Warrant for every two (2) Heve3.Board Shares held on the Entitlement Date.
5.6 APPROVALS, LICENSES AND PERMITS The major licenses and permits that have been obtained by The HeveaBoard Group which are still applicable as at the date of this Prospectus are as follows: License Issuing Party Purpose Issue Date Expiry Date Manufacturing License MITI To ,eo , licensed 21.03.1994 -He…eaBoard manufacturer ” of plain and laminated particleboflrd Manufacturing License MITI To manufacture wooden 27.07.2002 • HPSB furniture Manufacturing License MITI To manufacture wooden 10.03.2003 ·BWSB furniture Manufacturing Licence MITI To manufacture Lami-OSB 14.07.2000 -HOSB with and without overlay Business Trade License Majlis Daerah To carryon the business of 1.01.2004 31.12.2004 • HeveaBoard Tampin an Industrial Manufacturing Factory
, Company No. 275S12·A ~ S. INFORMATION ON THE HEVEA80ARD GROUP License Issuing Party Purpose Issue Date Expiry Date Business Trade License Majlis To conduct business 1.01.2004 31.12.2004 -HPSB Perbandaran operations Nilai Business Trade LiCOl~ Majlis Daerah Trade license N/A NfA -BWSB • Tampin Business Trade License Majlis D:lerah Trade license 1.01.2004 31.12.2004 -HMSB Tampin License under the Sales Royal To act as licensed 9.10.2000″ Tax Act· HPSB Customs and manufacturer Excise
Forestry Department Jabatan Hut3n To operate particleboard 27.12.2003 31.12.2004 License Negeri factory -HeveaB<XlId Sembilan Pioneer SlatuS to carry MITf Pioneer profit exempted 2.01.2002 1.01.2007 out pioneer activities in from tax the manufacture of wooden furniture (for HPSB) Certificate of MTIB For the export of 1.10.2004 30.09.2005 Registration for particleboard HeveaBoard Certificate of MTIB For lhe export of 18.10.2004 31.12.2005 Registration for HMSB particleboard Approval for license MIT! To manufacture plain and N/A N/A for the second laminated particleboard manufacturing line” Noles: • The rdevD.n1 applit:uIWri Iws /Hen mode 10 Maj/M Dturuh Tampin/or Ihe renn\.”01 o/Ehl! said licmse. Pending /unher updares/rom th~ approl1illg au/horiJy. MITI had ~’ide iu I~lfl!” dated 15 Sepfe”,INr 1004 approwd Hev~aBoa,.d appJicalwn /0,. a manil/aclilring license to manu[ot:1urt: plain and laminated particleboard (in rt/aJiotJ ro the s~cond lTUUlu/acluringline) at th~ Silt kttOK71 as Lol 1943. PT4snand PT4578. ITHE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK I Company No. 275512-A i 5. INFORMAnON ON THE HEVEABOARD GROUP 5.7 LANDED PROPERTIES The HeveaBoard Group currently OWI\S the following landed properties:
Registered owner  Title Details I Address  D~crlption exislin& use  Tenure of’.00  Land area I Built-up area  Approximate alem  Issuance ol «rtificatt  Audited “‘BV as at JOJuM  1. R~trkti()ns in interest 2. Encumbrances  buildinS  of fitness  2004  (years)  (RM’OOO)  HeveaBoard  (.)  HSD  10474,  PT 4190,  Three (3)  Freehold  31,605 sq. m./  ,  Issued on 28  12.690  I.  Nil.  Bandar Oemas.  Daerah  storey office  • Factory  June 1995  Tampin,  Negeri  block annexed  7,609 sq. m.  by Majlis  2.  Otarge ,rellled hy HeveaBoord in favour of Bank  Sembilan Dnru! I(hosus;….  with a single StCfCy faclory  • Office 3,252 sq. m.  Daerah Tampin  Bwniputra Malaysia Sdn Bhd (now Vtsled in Dilnaharta Urus Sdn Bhd) was registered on  block, a twO  -Warehouse  05{10I1994 vide presentation DO. 1341011994 Jil.  (b)  GRN 73788, Lot  1942,  (2) stOfey  4,789 sq. m.  1031 Fo!. 21. This charge was vested in favour of  Mukim Qemas,  Daerah  mechanical &  Danaharta  Urus  Sdn  Bhd  atKI  registered  on  Tampin.  Negeri  engineering  21.10.2003 vide preM:ntation no.  102(912003)  Sembilan DatUl Kltusus,  building and  “”‘. bearing  postal  address  a singk: Sloreyw=””‘*  2.  Charge ‘reated by HeveaBoard in favour of Bani: Bumipulra Malaysia Berha<! was registered on  Lo<  1941  &  Lo<  1942  22.07.1996 vide presentation 00. 14519119% lil.  r~pectivcly.  Datu Tiga, Jalan  1219Fol. 6.  Tarnpin, 13400 Geffi3$, Negeri  Sembilan Daml Khusus  (Source: Land Search results as at 3/(21’2004)  HeveaBoard  (0)  HSD 8429, PT 2584;  Staff quarters  Leasthotd  276 sq. m. per  ,  Issued on 22  287  1.  TIle  Land  cannot  be  transferred,  leased  or  (b) (0)  HSO 8430, PT 2585: HSD 8431. P’T 2586: ,…  ,omprising 4 units of single storey  99 “‘” expiring on 21.2.2090  unittOiallinl; 1,104 sq. m.1 2 houses of  No\’tmber 1990 hy Majlis  charged save with State Authority.  the wrillell consent of (he  (d)  HSD 8432, PT 2S87,  semi-detachedh<>=,  136 sq. m. per unit t()(aling  D,,,.. Tampin  2.  Charge created by HcveaBoord Malayan Banking Berhad was  in favour registered  of on  all of Taman Sungai Gemas,  2n sq. m. and  29.05.1996 vide presentation no.  1Q470fl996 1il.  Mukim  Gemas,  Daerah  another 2  1168 Fol. 11.  Tampin,  Negeri  Sembi!an  llousesof 10J  Daru! Khusus  sq.m. pu unil  2.  Charge created by  HeveaBoard  in  favour  of  totaling 206  Malayan  Banking  Berttad  was  regi~lered  on  sq.m.  22.07.2004 vide preseml’lion no. 1993512004.  (Sour,e: Land Search results as :u3l12l2(04)
48
Company No, 275512-A i 5. INFORMATION ON THE HEVEABOARD GROUP
Registered  Title Details I Address  Description I  Tenure of  Land area I  Approximate  Issuance of  AuditedNBV  1. Restrictions in intt’rest  owner  existing use  land  Built-up area  age of  certificate  as at 30 June  2. Encumbrances  building  of fitness  2004  (vears)  (RM’OOO)
HeveaBoard  (a)  HSD  10476,  PT  4578,  Vacant1and  Leasehold  81,824 sq. m.  N/A  N/A  4,039  1,  The  Land  cannot  he  transferred,  leased  or  Bandar  Gemas,  Daerah  99 years  charged  save  with  the  written  consent  of the  Tampin,  Negeri  expirmg on  State Authority.  Sembilan Darul Khusus;,,’  13.8.2095  2.  Charge  created  by  HeveaBoard  in  favour  of  Malayan  Banking  Berhad  was  registered  on  (b)  HSD  10478,  PT  4577,  22107f2oo4 vide presentation no. 19936f2004,  Bandar  Gemas,  Daerah  Tampin,  Negeri  (Source: Land Search results dated 31l2f2oo4)  Sembilan Darul Khusus  both  bearing  postal  address  Lot  4578  and  Lot  4577  respectively, Batu Tiga, lalan  Tampin, 73400 Gemas, Negeri  Sembi1an Darul Khusus  HOSB  GRN 73790, Lot 1943, Mukim  Vacant land  Freehold  20,283 sq, m.  N/A  N/A  1,400  1.  Nil.  Gemas,  Daerah  Tampin,  Negeri  Sembilan  Daru1  2.  Charge created by HW in favour of acBC Bank  Khusus bearing postal address  (Malaysia) Berhad was registered on 30.09.19%  of Lot 1943, Batu Tiga, la1an  vide presentation no, 20888/19961i!. 1211 Fo!.  Tampin, 73400 Gemas, Negeri  72.  Sembilan Darul Khusus  2.  Charge created by HW in favour of DCBe Bank  (Malaysia) Berbad was registered on 12.05.1997  vide presentation no.  10915/1997 lit. 1277 Fo!.  97.  2.  Charge created by HW in favour of OCBe Bank  (Malaysia) Berhad was registered on 11.12.1997  vide presentation no. 30241/1997 lil. 1356 Fo!.  50  (Source: Land Search results dated 3fl2f21X>4)
49
J Company No. 275512·A ~ 5. INFORMATION ON THE HEVEABOARD GROUP
Registered……. Tlllt’ Details I Addnss Description I e:c-isIinl use T£DU!”t of I… Land area I Buill up area Approximal.t ageof’ building (Years) Issuance of c4’rlUicate aliiIness Audiltd NBV as at 3& JUnE’ 2″”, (RM’OOO) I. Restrictions in inttrest 2. Encumbrancts  HPSB HSD 45057, PT 406, Mukim RaMalJ, Daertlh Seremb;:an, Nt&c:ri Stmbilan DaruJ Khusll$ beating postal address PT 416, Kawano Penndustriao Sg. Gadul, KM II. Jalali Tampin, 71450 Sc:Jemban, Negcri Scmbilan Darul Khusus loousuial I Maoufac:luriog land together with fiw: buildings erected tbaeon LeaJehold 60 “‘” expiring on 24.03.~ 40,468 sq nL I to 1S years Certificale of filM$$ is still peDding _…. flOm Majlis”””””””,Nil:ti N/A It I. 2. Th£ Land cannot be trllJ:lsfm’ed. 1eaJ>cd or charr;ed save …..ith the wrilleD c(mlenl of lhc Slale Authonty. l.c:lse 00 pan of tire l:lnd for 30 yra1 from 15.2.1996 10 14.2.2026 In fa,’OUl’ of Taaga Nasioo:Jl Berbad registered 00 6.6.1996 vide presenlal;on no. 10846f1996 Jit 14 FiJI. 5. 2. Cbarge treated by HPSB in fa~’OOl of HSBC Bank Mala)’sia Bc:m3d rtl;iJtered on 23191200t “Jde prescntal.ion 1’10. ‘2713 112004. (Source: Land 5ear1:h fesults daled 3J12J2’0()4) Nuboard·Mah F:th]V Sdn Bhd C’Nuboanf’J and Hl’SB had on Z3 July 2004 entem! inlo a Sale and Purchase Agrttment fOf the s:l.1e by NuhoaJ’d and x’luisiuon by HPSB fOf the land held under HSO 53677. PT 414, Mukim Ramau. Daendl Scremban. Negeri Sembilan Darnl Khusus, fOf’ a lotal purchase consideration of RM1.5 million. 1bc Sale and Purchase Agrttmenl is still pending completion. l1lC del:llis of the 130d are 3$ follows: HSD 536n. PT 414, Mukim RanI:!U, Dati’ll!! SemnbaD, Nqu-i Sembilan DaruJ Khusus be:tring postll! address PT 414, KawllSan Perindustrian Sg. GadU!. KM II, Jalan Tampin. 71~jO Seremban, Negeri Stmbilan Darul Khusus An iDtfustrial complCll with f;letory buildings and 3n offICe block erecl~ theJeon Le:1Jehold 60 “,n expirinil on 22.01.2047 39.6.59 Jq. m. I to 15 yean; Issued 00 9(k._ 1991 by Majlis Perba0dar-3o Nilai” NIAll I. 2. 1lJe 1.:Ir.d tannOl be transferred. leased or th3rged save with lhe written tonsent of tire State Authority. Lease on pari of the land (2,025 $Q. ft.) for 30 yeaf! from 30.9.198810 29.9.2018 in favoW” of Lembaga l.ctrik. Negara, Tanah Mtlayu ft’sislered on 20.1.1989 vide present:Jlion 00. 874911989 Jil. 12 Fo!. 37. Notes: “A Certifi~le of Fitoess was ISSued by Majlis Perband3ran Nilai on 9 OClober 1992 fOi Block: Nos. I to 3 of the first factory. office bloc!.: No. I, the c~ntcen. guard house No.2, the pump hoUse anti the refu~ chamber. The other buildings are still pending appr<>val b)’ Majlis Perbandaran Nilai. It The two (2) laoded propel lies held under HSD 45051. PT 406 alld HSD 536n, PT 414 both of Mukim Ramau. Daerm Scremban, Negeli Sembil3n D:trlll Khusu were a~quired subsequent [0 30 June 2~. The NBV of the said prOperlies liS at 30 Novembcf 2~ was approximalel)’ RM5.95 million and RM7.45 million respectivel)’.
For lhe purposes of lhe Listing, a vlllualion exercise was not carried QuI on Ihe above landed propenies. The above vllluali<>ns do not require the approval of the SC and is based on the audile<! NBVofthe Group. 50 7, BUSINESS OVERVIEW AND FUTURE PROSPECTS OF THE HEVEABOARD Gl{OUP 7.1 PRODUCTS, SERVICES AND OPERAnONS 1.1.1 Pal’tideboord Products Heve.uBoard manufactures particleboard. a re{;On~tituted wood prme! derived from rubberwood bnmches and wood residue.. the demand in particleboard is mainly concemrated in the munufacture of furniture panel, tabletops and kitchen cabinets, Its application alsn extends 10 the manufacture of speaker boxes. wan panding. stair treaus. dcors. roof “heathing and flooring. In mnst instance>, particleboord is the preferred alternative to other panel products as it is cheaper End morE durable, and comes in a variety of attractive paprr laminated decorative designs. The particleboard product~ manufactured by HevenBoard bave been. tested to conform to major international standard;; which include the German DIN 6878 I, British Standurd ENJ99-3, Japuncse Standard liS A 590S (2000) and the Malaysian Strmdanl MS1036, In essence, these standards require particleboard of varying bending strength and bonding characteri>itics depending on the type of llpphcMion it is used for. To this end, HeveaBcYdrd is well equipped to conduct all properties testing in its own labortltory, where rlludom samples ure tested daily while at the same time, samples are also scm periodically to FRIM and li’PIv1 for external testing and vtlIidation. To meet the ftringent hpanese stimdards on formaldehyde emis.sioo regulation, EO and Super EO product samples are sent to Japanese International Standard (“‘115″) accredited labora\oriC$ in Jilpan for testing and certification. In fll{:t, Hev¢:ilB0″rd is the firs! particleboard manufacturer in Malaysia to n:eelYB the prestigious ns certilkation for its particleboard plant. The four (4) main types of partickboHrd proctwed by HeveaBoard are as f()llow~:-7, BUSINESS OVERVIE\V AND FUTURE PROSPECTS OF THE HEVEABOARD GROUP Descn  tion and chara£terIstics  I HeveaBoard EO I and Super EO particleboard  HeveaBoard pioneered the commercial production of this type of particleboard for the. Southeaq .i\~irrn region. Thi” product is ideal for ! environmental and health-friendly applications due to its excellent oonding and low formaldehyde emission properties. In fact, sino;: this particleboard conforms to the strictest standard of Japanese EO formaldehyde emission (lIS A..~908), management believes that going forward the EO partideboard will have high potential, given that it will only be a matter of time before this strrndard is adopted by other , countIies.  HeveaBoard OF particleboard  The HevenBoard m; particleboard is a premium quality and smooth surface particleboard that comes in thickness ranging from 9mm to 36mm. The specific properties of this product make it suitable for a wide range of appllcatiolls in the furniture, building and manufacturing industries.  HeveaBoard MUF  A highly moLqure resistant particleboard suitable for interiors, with high humidity conditions, such as tor flooring, table tops and kitchen cabinets. HeveaBoard MUF is available in a standard lUllge-of panel sizes in thickness ranging fro-m 9mrn to 36mm.  ; HeveaBoard Decor  Heve-aBoard Decor is a lange of decorative finished w()(ld panel made from High Quality Grade particleboard. The range includes melamine paper in Solid Colours, Patterns and Woodgrains. HeveaBoard Decor products. are suitable for a wide range of furniture and w:rtl paneling applications.
Apart from the above mentioned particleboard sold. to end product mnuufacturers, the HeveaBoard Group also undertake..\ the manufacturing of RTA, do-it-yourself variety of furniture, via its wholly owned subsidiary H:PSB [n fact, more than SO’/If of the local particleboard con\umption is utilised ‘in-house’ by HPSB for this purpose. HPSB currentiy manufactures many different types of RTA furniture ranging from storage shelves and computer tables. to flex! racks and cabinets. The RTA furniture is aimed at leading “cash and carry” hypermarket chain stores gJobaJly s.uch as CarrefollI. K,1.fart, Walw!,<brt and Little Woods Retail Limited. UK-The manufaCture of RTA furniture is in line ‘with the Company’s long tern; oby;octive of mming further downstream into the manufaduring activities of the wood products indus.try. 7.1.2 Ke}’ achievements, milestones and awurdlj: The Gmup’s recent key achievements, milestones and awards are sumrn31i5cd in the table beLow: April 2003 The signing ceremony of the Master Energy Service Agreement witnessed by Yang Bahagill Amar Leo Moggie, Minister of Energy, Communication and Multimedia Malaysia, HPSB starts the hollow core RTA fumiture production which contributes­turn(iver of over RM2.o million per month, May 2003 Firsllo :mcce5sfu!ly produl.’i: Super EO particleboard 011 a commerdul ~cale in the region. June 200.1 HevcaBoanl Super EO partickbllltrd has been tested alld appro’ved for Japanese International Standard (“JIS”) certificalion by the Japanese Housing Technology Board, an approved body by Minis.try of’ Land, TnmspQrt and Infrastruc!\.lre of Japan. August 2003 HeveaBoard JSO 900:. Quality Management System was upgraded to ISO 9OOL2000by SIRIM QAS, SEpt~moor 2003 PrOOlll”1ion hit record quantity of 11,.569m’ of particleboard for the month of September. December 2003 Signing of the Memorandum of Agreement between HeveaBoard and FRIM to conduct R&D to establish optirnam manuf3cturing Pf’-OCe&S for PMDl based particleboard. HPSB receives “Values Award” from Tesco in recognition of the excellent service, innovalive design and competilive pricing for 2003, January 2004 HPSB successfully secured business with Nit0f], Japan, Nitori is one of the largest fumiture speCialist chain stores in Jup;m. February 2:004 First particleboard manufacturer in Malaysia to obtain the JIS Market Certification for its Super EO and EO particleboard product range The marking system displays the JIS mark on its Super EO ulld EO pi’Jtlcleooar<l conform.ance to n5 A5908:2003. •July 2004 HPSB achieves record sales of R1vllO.O million for the month ,-,1′ Juty. September 2004 HPSB second facwty located adj,ltcnt Lo its existing f”,,1:ory becomes fully operztionaL 7. BUSINESS OVERVIEW AND FUTURE PROSPECfS OF THE HEVEABOARD GROUP 7.1.3 Location, Production Facilities am:! Capacity i.) Partkkboard productlun HeveaBoarrl manufacturiug plant. office and warehouse is located within the vicinity of the HW lndl1~trial Park in Oernas. Gemas is a small town located in the southe<lstern region of Negeri Sembilal), approximatciy lOOkm south of Seremban and about 5kn1 from the border of Johor Daml Takzim. The H\V Indllso’iai Park spans a total area of 132 acres, and is SllITOlmded by rich r<Wi material resources -rubberwood plantations (,wnOO by FELDA, RISDA and other small piantation holders. The abunrulOce of rubberw;.’Od within the radius of SOkm of the current 10 ane factory site, ensures that sufficient supply of raw material is available to optimise HeveaBoard current prt’)(juction capacity of 400mJ a day. In taking further advnntage of HeveaBoard strategk kx:ation, and to tap intO the growtn in demand for particleboard world wide, H<oveaBoard has embarked on an expansi.on plan Wllich will significantly increase the particleboard production C1plictty of the Group, once it becomes fully operational. The development of this new prodm:ti(m line is expected to incrc;lse the capacity of the plant by fin additional 1,350m:’ a day. Please refe.r to Section 8.7 for further details pertaining to tbe said second manufacturing line. The production fadlity currently in usc wa” obtuined from pmven. wodd~rcuowned process engineering firms from Europe, These macnines run 24 hours a day. are highly auwmated, and fully customised to meet the production proces~ing needs of HeveaBoHrd. As Heve;:Boord is h:~S$ lubour intensive and mote dependcut un machinery, emphusis is plucoo on ensuring that the production facility is well maintained and kept in good condition. Apart from just pbin particleboard processing, tbe HeveaBoard plan! also provides value­added services to customers, such as the Short Cycle Press for melamine paper lamination on the standard particleboard, :md also precision panel sizing saw for the cut-ta-size :;,cervices, ii) RTA furniture The RTA furniture mamtfacturing activities of the Group is housed under HPSB, a wholly owned subsiditrry of HeveaBoard Tbe RT A factory is located at a separate site from the HeveaBoard plimt. in the vlcinity of the Sungai f.i:idut Industrial Estate, Seremban, Negerl Sembilal1 Darul Khu~;us. HP$B’s premise oceupi~ 30,364 mi of space And employs Dver %0 employees. The factory (‘omes eqUipped with paper laminating Jines for p,mel wards, precision cutting, drilling machmes, CNC worksrations and packing lines, Bucked by ~trong in-house CAl) Designers and Model Workshop teams, the company is able to develop new furniture design~ nn a regular basis. Additionally, HPSB also readily accepts orders from c1renV> who require specific customised Jesign5. The efficiency of the production process ensures th:rt HPS13 IS able to deliver volume orders of the selected products within a short limeframe. HPSB’s RiA furniture is principally made of particleboard supplied by HeveaBoord. and is mm;s-pn.-xiuced in streamline processes nod packing line.;;, which are governed by strict quality cOntrol procedures at all sta,ge;.;. Hf>Se currently offers over 300 different types of fumituTC models marketed under the brand name of ”The Collection”. The manuhcturing pr(li;~S employed by HPSB ensure.. a high quality, value for money furniture for home and office applicat\(;os. THE REST OF THIS PAGE HAS BEEN INTEN’flONALLY LE.FT BLANK 7. BUSINESS OVERVIEW AND };’1JTURE PROSPECTS OF THE HEVEABOARD GROUP 7.1.4 Production process Since the HevcaBomd Group is involved in the production of partideixXlrd unci the production of RTA furniture, there are tWO Jis.tinCt pruductlon processes withi1l1he Heve?Boanl Group, i) Particleboard prndnctkm prOC-l’SS A diagrammatic illustration of the production of particleboard i;; depicted below: Particleboard Productltm Process
A brief description of the various processes involved in the processing of the partidebo<1rd is as follows: Chipl){ng and Flaking Rubberwood branches kept in the tag yard are rinsed before being: put in a chipper for chipping, The chips are further reduced to fine flakes of the desired thickOC-lis and length by the flakers. This contributes. to the uplimum strength and smooth finishes on the surface of the boards. Drying and Screening The wet flakes are dried in a smoke gas dryer to the required moisture level (usually 3%-5% of moisture remaim). The dried t1akcs are then screened and separated into fine and core particles before being stored in the silo;;,. Glue Mixing and Blending The core and fines panicles are separately mixed in the blenders with glue, resin. wax emulsion and other additives metered ao;;curately to achieve an even mixing. Mat Forming The ‘resinated’ particles :lre spread by air and mechanical formers, incorporating the assistante of tbe Computerised Pwgrammable Logic Control System which ensures consistent f1l3t density nod unifzlfm weight distriburion. Hot Pressing The Hot Press which operates automatically on Programmable Logic Control compresses the mat under high pressure and C(‘ntrdled temperatures to form boards lif precise thickness. =~=-:-;==;:-_­7. BUSINESS OVERVIEW AND FUTURE PROSPECTS OF THE HEVEABOARD GROUP Cooling The tLnished bL’Yln.ls coming out from the Hot Press i” weighed uU!omatic;,lJy 1(, make :-:ure Ihat the determined density h obtained and are then placed on tnt: Slar Cooler to allow glue t<euing. Sizing The master panel hoords are visually checked for bonding conformance .lind thkknc:'<li tolerance before they ilre side trimmed and cut to JCCllrilte dimensions. The panels arc then stacked for conditioning. Sanding After conditioning, the 1’~iW boards are calibrated to ;nxise Illickness and sanded to fjne s.urface finishes beforc being gf<lded, and then paeked for dchvery, Laminating The graded plain boards may also be laminated with melamine impregnated decorative paper by the Short Cycle Press as a secondary process, The boards are then inspected and packed for final storage and delivery, il) Production pro””,, ofRTA !Urnit.” For the prodtKtion of RTA furniture, a Working Standard booklet for every product will be distributed to the various departments.., detailing the required specifications necessary for producing the said i!.ems. These prodllcts are normally produced in large batches for COS! saYings. while tbe excess stocks are kept as it buffer for emergency orders. Since consumers only assemble the products at Ll;e final stage of the distribution cbnnel, J–IT>SB maintains a 2-yenr record for all their designs even though it has Peen phay,;d cut, just in Case any problems or complaints arise later Oll, Since the RTA products undergo rigid quality control lests al every stage of productloll, a Rework Balance station has been de,:>lg.nated to colieet the rejected items to be checked by the R&D department. The productioll prc.’Ces£ of “Ready~To-Assemble” furniture is lHusuatoo below~
AutoCAD Design (R&D} Prl'(\U{~t Development is the primary responsibility of the in-house designers and product devdopmcnt spe,cialist. Emphasis is placed on reducing IVJstHgc and enhancing functionality, to gi vc consumers better v”lue for money. 7. BUSINESS OVERVIEW AND FUTURE PROSPECTS OF THE HEVEABOARlJ f;RQUP Lamination (For Paper & PVC) The board is lam:ioJted with the required type of paper mate·rial or PVC The board has quick drying qualities and is 90% dry after the lamination prOcess. Hot lamination is done with PVAC glue. Panel Sizing Workers input the tedmical specification 3ccoTding to the Werking Standard Book, into the imported machines. The machine will then automatically cut the board to lhe specified size. A Quality Controller will crosscheck the data to ensure accuracy. Side and top pressures <tre applied while cutting to ensure .accurrlte, square cuts_ Grooving/Router Aller grooving, the original panel is l”(ll,lled 10 the designed panel which is round in shape an.d curved. Edge Banding There are two kinds of edge banding ptoce-sses used by HPSB Auto Edge Bander und Semi Au!o Edge Randel. For the AUlo Edge B:mder, the edge is banded with PVC 0.35 to cover up the rough surface. For the Semi-Auto Edge Bander section, skilled workers are needed, There nrc cwreotly 20 lines for this section, The finished items have better quality than the aUlomatic machinery output, making this a time saving process, Horiwutal Drilling The equipment ,r”ed in this process fadlililtes the SUppUlt pr 21 Spiralle drilling heads, pneumatic work piece clamps, panel stops and height adjustment according to [‘Ime! thickness, Vertkal Drilling This Pl{l(1!SS is used for the production of a wide range of furniture components, enabling the processing Df repeatable highly accurate drilltng pattern:>, Packing This is the most !.abour intensive IVlft of the production process Ail the finished parts/panels are prepared .mo arranged in the packing line to fadlitate the packing prOt:css, flat-packed RTA furniture is transferred to the warehouse for storage and shipment. In this regard HPSB is (Jnc of the finri in the industry to w;e the conveyor bell system for packing. 7.2 PRINCIPAL MARKETS HevcaBoard (‘trOUP ~ell& its prc-ducts both locally ilOd Qverseas. The sales volume for particleboard ilud RTA furniture in the local and export market based on management’s reprcscntatiou for the respective FYE and for the six (6) mooths finantial period ended 30 June 2004 are as follows: Market  2001  2{J02  2003  6 moutbs  ended 30 June  ……__… – 2004  %  %  %  %  Local  65.5  41.2  29A  260  Export  34.5  70.6  74,0  100.0  100.0  100.0  100.0
7, BUSINESS OVIiRVlEW AND FUTURE PROSPECTS OF THE HEVEABOARO GROUP Hcye;:,Bo:ml ventured into Th.e export market in the tate-90’s to reduce its dependence on the lecal market and t() diversify its customer base. Currently, the Group exportS its products to approximately 16 different countries world wide. As shown in the table above, s.,les to the expert market has increased significantly from FYE 2001 to the six (6) month” financial period ended 3G June 2004. This is mainly due to the incrclk”.e in turnover contrihuted by HPSB. for which t.ie bulk of its sales is derived from the over<eas markets. Exporl market revenues brbed on management”s representation of the Group for the FYE 31 December 2003 and for the six (6) mOnths tinanci”l period ended 30 June 2004 totaled approximately RM7:5-) million ;md RM52.0 million respectIvely. A bteakdmvn of the top five (5) export countries are shown below:
_=~__~~~~m_ FYE 31 6 months financial period December 2003 ended .30 June 2004 …..~_.._.. ~~~——“-% % USA 27.1 19.8 UK 206 ltL2 Chir,a 14-3 1:)8 France 61 9 1 Austrnlia 53) 6.7 Others ____c’263 31.4 100.0 100.0
7.3 MAJOR CUSTOMERS The following is a list of the top ten (iO) major customers for the HeveaBoard Group and their respective contribution to sales based On the audited figures for L’Je six (6} months financial period ended 30 June 2004; l\.’lajor Customers (‘~tegory % of total Lengttt of {Overseas & Local} Croup’s Sales RetatifJnshlp {yt:urs} ?­General World Sdn Bhd (K·1vlartJ. USA RTA 20.8 -, Nitori, Japan RTA 13.4 1 HAS Heritage Services, Australia RTA 6.0 3 Dongguan Gial\t Star Furniture P;’lrtic1eOOat’d 6.0 5.5
,Littlewoods Retail Limited, UK RTA 5J ” R.G Sdn Bhd (Toshiba). UK RTA 4.9 1.5 Hautecoeur Paris, France RTA 3.6 2.5 Fuji Boeki Co, Ltd. Japan RTA 3.6 2.5 MOlJntrose Limited, UK RTA 3.5 3 Akateak Particleboard 2.7 6
69.6 ……_­A~ “hown ubove, the HcveilBoard Group bas n var!ety of dients both locally and ove.rSeli$ which ‘K’a..-‘unts for approximately 69,6% of its total turnover llnd have been with the Group for an average of approximately three (3) years. HeveaBoard does not depend on any single customer tOr their business it is the intenthm of the Heve”Bo:lfc Group to furlher divc:sify its customer base by engaging marketing personnel anti developing new products to ~uit the ehanging demands of the market. 7. BUSINESS OVERVIEW AND FlJTURE PROSPECTS OF THE HEVEABQARD GROUP 7,4 MAJOR. SUPPLIERS Wood waste w\,:h as timber off-cuts, rubberwtl<xl residues, tree trunks and broken wooden pallets constitute the prinulry raw materials used in the particleboard industry. Otber raw material includes resin and glue that are obtained from both the local and overseas suppliers. The table below lists the top ten (0) major suppliers of the HeveaBoard (“”ruup based on the audited figures for the six (6) months finaocial period ended 30 Jur.e 2004. Supplier Raw mal~rial % ortotal L-ength of supplied Group’s Relationship Purchases (years) Nor:>.etnem Resins Sdn Bhd Resin
9 Thai Chi Enlerprise Co. Laminated papers 1 Eca Wood Sdn Bhd Particleboard Merbok :MDF Sdn Bhd Particleboard 9.5 Dynea Malaysia Sdn Bhd Resin 9.0 7 Ccmmerdal Edge Trading Rubberwood 6.4 Sdn Bhd Takeuchi Sdn Shd MDFBoard 5.5 CDG Plastics Sdn Bhd Pole 4.1 1 The Great Wall Pole 3.8-2 i’Vlanufacturing &in BhU YapChengHua Rubberwood 3.5 8 79.4 The HeveaBoard Group are of the view that they are not dependent on al’Y single supplier as the Group cun easily source their supplies of raw materjai from its existing pool of approximately 1t4 .suppliers as at j 5 November 2004.
7.5 AVAILABILITY OF RAW MATERIAL The supply of rubberwL>od branches whi.::h is !.he primary raw material IillCd in particleboard productiun comes from the estates within the vicinity of the plant These neighbouring estates belong to FELDA and a variety of privale small holders. Typically, HeveaBoard pUKhases the taw material froUl replanting contractors who are employed by the land owners to dear the old rubber tr'”…es and In (\.\-oplant new ones, Although these replanting: sub-contractors do not have official slIpply contracts with Heveal3oard. the plant has not experienced any difficulty thus far in obtaining the rubberwood brath:hcs on 11 regular basis. Since there is litlle economic­value for the rubberwood branches apart from being used as firewOI..-xI.. the management docs I)ot foresee many problems in terUlS of obtaining the <.:ontinuous supply of runbetwood branches. Other wood material sucb ilS slabs and off-cuts may also be used as substitutes for particleboard processing should tbe need arise. It is estimated that the total volume of rubberwood available within the radius or 50km of Gemas is about 1,620,OOOm’ per yeur while the vllIume of logs mitHbJe for Silwmill and !!lyw()od productiotl is about 540,OOOtlr> per year. TOI;; is in compar:SGn to HeveaBoard manufacturing facility whicb bas ali ::lttl’lual production cnput:lty of 120,000m”” 7, BUSINESS OVERVIE\\’ AND FUTURE PROSPECTS OF THE HEVEABOARD GROUP
The primary enncern facing the rubberw00d based industry is the future shortage of rubberwood as a result of the depletion of natural resources” Although wch is the case, there is strong governmental support to ensure that an ll.deqtlate area of rubber trees that are high in latex and limber yields are replanted annually. As P<“lrt of the Government’s effort to stimulate domestir:>tlriven economic activities, the pkmting of 25.QOO hectares of rubber per year for the next 15 years will be undertaken to promote the rubber·bnsed furniture industry. For this purpose, the Government has established a Rubber Forest Plantation Fund with an initial allocaiion of RM200 million in the form of soft loans under the Package of New Strategies introduced in March 2C-)3. Apart from rubberwood, the other impurt!U1t raw material for the production of the particleboard is glne and resin. The supply (If glue for the J:irvdm:tiun of the particleboard is frOm Norsechem Resin Sdn EM and Dynea (M) Sdo Bhd_ There is no contract signed for the supply of glue from these two suppliers. However, HeveaBoard has been constantly buying iL’> supply of glue from Nor.sochem Resin Sdn Bhd since commencement of operations in 1996 and fr(lm Dynea (M) StIn Bhd from 1999 onwards.
7.6 PRODUCT QUALITY AND ACCREDITATION RECEIVED To maintain the quality of the-products of the HevcaBQard Group and the efficiency of the production process. Hevcal30ard emphasizes, amongst other things. human resource development. Pbnt maintenance and process contrel which includes quality control, are two key ureas where regular training is conducted. In addition, HeveaBoard bas designated supervisors at certain production Mages to monitor the process to ensure produd quality is maintained. Realtime dahl on the manufacturing process is available on the computerised information system and is monitored at various control lnoms, HeveaBoard stresses on stringent cbe.::ks to ensure dun the bonding strength, bending strength. board demity and Strew holding capabilities meet the requirements of intematiQual standards. HevcaBoard has alw employed consuhanl~to look ink’) further areas for process improvement such as reducing machine downtime to increase production capacity. In August 2000, HeveaBoard was awarded the MS ISO 9002 certification (Quality SYfi-lemS ­Model for Quality Assurance itl Production, Instalbtion and Servicing) by SIRIM QAS covering the manufiJC1Ure of plain and It1minated partidelxmrd. This internationally recognized award is acaedited by the United Kingdom AccredilltHon Service {“GRAS”} and reflects HeveaB,,’ard L<ftnmitment towards producmg products of the highest quality. HeveaBo,m;!. subsequently obtainoo au upgraded certification, lS09QOi:l000 in August 2003. Apart from being certified for obtaining a level of compliance with quality systems, HeveaB03.rd als.) places importance in safely stanllatd:;, p<trticularly in the manufacturing plant. It has received the necessary approvals from the Department of Occupalional Safety and Health. Department of Environment and other regulatory bodies. The local fire brigade also provides regular training and conducts periodic checks on the fire protection systems at HeveaBoard premises.
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:=::-:-:=-= -~ -,..,….,-==7. BUSINESS OVERvIEW AND FTJTURE PROSPE(‘1TS O}’THE HEVEABOARD GROUP 7.7 lHARKETING AND DISTRIBUTION STRATEGY There are three 13) ways in which lhe products of the HeveaBnard Group arc marketed and distributed: (j) Dl:wn stream m..nufacturing As the Group is integrating its upstream operations ,>vith its dowr.gtream m.anufacturing activities, apprm:.imatdy 30% of particleboard produced by Heve.aBoard is diKl.ributed to its subsidiary, HPSE for further processing and value-added services before being sold to customers both l.x:ally and abroad. Approximately 70% of HPSB RTA furniture i~ exported directly to various hypermarket chains in the USA, Japan, UK, Austratia and other markets in Eumpe and the Middle_ East. The remaining 3-0% of its RTA furniture sales are made 10 various hypermarkeu. and furniture retailers in the domestic market through BWSB, a wholly owned subsidiary of HeveaBoard. The local market for RTA furniture is served via tne G::’Imp;my’t; distribution system that employs its own modem vehide nee! to distribute finished products throughollt Peninsular Malaysia. \ii) Direct to Ctlstoll1erF. (jusHn-time delivery) The \.JfOUp also utilizes a direct distribution strategy through its own imernal sales und marketing force. It enables the [‘;roup tl) work closely with iH customers to CH’:iite strong business relationship and ensure customer loyalty. (iii) Authorised distributors and agents As authorized distributors and agents are generally aware of !be dynamics and latest development within the wood producli indusny and have thdr respective established distribution rn:twmks, the Group is able .0 capitalize 00 their knowledge and leverage on their existing connections to distribute and pmmote its products in the markets where the Ilgents are located. The HeveaBcard GI\lUP is committed to [he timely delivery of produ;.;ts to customer” irregard!e.\s of the method of distribution. Additionally, packaging: whid. comply with international packaging standftrdi; are used to reduce the ,lccurrence of cargo damage whilst products are in transit. All these arc cruci-ill to enhance the HeveaBoard Group’s image as a reliable supplier to its customers. 7,8 RESEARCH A~-n DEVELOPMENT In order to maintain its status as one of the leading particleboard manHfa(~turers in Malaysia, HeveaBoard invests much effort and cnmmitment wwards R&D, Although the HeveaBo&rd Group does not have a formal R&D department, all departmeGt~ in the organisation are strongly encouraged to identify new product concept.,> and develop solutions to improve plant efficiency and reduce costs. The Group also works closely with suppliers of their high~ technology machinery to ke-ep updated on the developments of new machinery Ihat will shorten the production process or increase the yield from each unit of raw materiaL Other modes ofR&D include: i) Research on the latest developments in othel limber producing countries for new product ranges and new technologies; ii! Research on relaled industries such as the COJlstrUC!ioo industry around the region to identify ureas that requite 1he supply, the form and the quantity of timber-based products required; aod iii) Research on the latest bonditlg J glueing produets available, to be applied in the development of particleboord with enhanced propertiel;. 7. BUSINESS OVERVIEW AND FUTURE PROSPECTS OJT THE HEVEABOARD.cG”R”-O=-U,,TPC-. _ The R&D efforts of Heve”Board arc primarily geared towards: i, Enhancing the existing pmducts and diversifying the product range; ii) Increasing the efficiency nf the production process by shortening the production cycle or lowering production & operational cost and using new, innovative te.chniques and supporting machinery; iii} })roviding customer satisfaction through the promotion of the quality and reliability of its procucts; and iv) Ensuring. helter and more ;;on:,istent raw material supplies to ensure the consistent quality of final prudw.1S. The annual expenditure of HevclIBoard in R&D for the past three (3) FYE 31 December lind for the six (6) months financial period ended 30 June 2004 are as tabulated below: 2001  2002  2003  6 months ended  RM  RM  RM  30 June_ 2004.., RM  R&D expenditure R&D expenditure as a percentage of turnover  116,000 0.22%  623,000 0.78%  2,324,697 2.19%  1,845,631 2,63%
The R&D activitie£ carried out by HeveaBoJrd £lnce the year 2000 :lce detailed below: 2000~ 2002 Research and development of t.1e flaking technology and resin recipe for the production of Lami-OSB (Patent Application NQ: PI9804735). i) HeveaBoJrd, FRI~’1 and l)PM formed The Malaysia Institute of Lami~ aSB Technologies (MILOn on 4 April 1998 to develop and disseminate irrformatiol1 for the future development of the Lami~OSB industry io the country, as well as. to encourage the enhancement of R&D through the clooperatiQn between government agencies,and the private sedor. ii) Some of the a(~{ivities cunently being. carried out by MILOT are the application of the patent for the Lami·OSB product, the tl?plication Ilf the Indu”tdal (‘ffant Scheme (“lOS'”) and the holding of seminep; on OSH. 2000 ~ 2001 The development of EO particleboard with Mitsui Chemical, a Japanese chenncal supplier, by incorporating MOl -.;hemicals to the process system, 2002 -2003 DeveJopme-nt of Super EO and EO particleboard with Dynea Singapore and Bayer AG by incorporating PMDl chemicals to the_ process system. jj MDUPMDI chemicals help to enhance the properties of finish products while at the same time helps tD increases tbe efficiency of the manufacturing pnx:ess by reducing pressmg time. Since 2000, Hevt-:’lBollrd has been consulting Mitsui Chemical Asitt LImited’s Tedmica,1 Center on the trial production ()f EO particleboard using MDI. Hev{‘..aBDard also consults Bayer and Dyn/’;3 on PMDI production on a regular basis. ill To date, with over two years of eXperience io R&D to produce EO grade particleboard using MDl and PMDI rc”ins. the company is one of the fir.;;t srnx:essful commercial manufacturers in StlUtn East Asia. 2003 ~ 2004 Establishment of optimum blending and manufacturing prncess for Super EO aod EO partidebt.latd with FRIM (Proposed R&D). Uel/caBoard. in collaboration with FRIM, carries Qut R&D on the productiDn Df partidelJOaTd using hybrid urea formaldehyde (UF) ­polymethylbentene diisocynn:ne (P1IDl) resins. This includes pilot N::lIle prodoction, bboratOfy testing on the quality of panicleboilrd produced as well as supervision on the modifications necessary to improve the properties of the particleboard. ~_.==-: ==;;-:-:;===; _-.=====~7, BUSINESS OVERVlE\V AND FUTURE PROSPECTS OF THE HEVEABOARD GROUP At the HPSB level, R&D is primarily geared towards the dcvclupment and design of new RTA furniture. For this purpose:.. HPSB employs a dedicated in,house team nf six (ti) experienced cesigrn:rs and product development specialists, who are provided with the latest AutoCAD computer wftware for new prC<111ct development. Further, a team of d(‘~~jgners employed by the marketing partner, General World in USA, provides HPSB with the latest and most sought after designs in the growing American market segment 7.9 COMPETITlVEADVANTAGE Set out below are S,1me of the areas of strength that the HeveaBoord Group possesse…; i) Long lerm relationship with customer\! and suppliers The HevenBoord Group dee:> not depend on any single sl,lpplier or cuswmer for its supply of raw rt:mterinls or G<lles, and fins nQt committed tn any long-term contracts with either party. H~v<:aBoard strong relatioJllibip with its cllslOmers and S\lppliers coupled with its strong finilllclil! position and reputation has enabled the HeveaBoard Group to enjoy competitive market prices for the purchase of raw material and sale of partideboard product;. ii) Availabili:y chaw material HeveaBoard production facility is surroundd by rubb<.–r estates witbin a 50km radius of its production plant in Gemaii. The artundance of suelt IllW material supply and the ease in which it can 00 obtained ensUres that it has a strategic advantage over its competit0rs in terms of logistics and the sustained supply of nlbberwo..’Xi mtuenal. iii) R&D efforts The Gruup’s commitment and proven track record in R&D has allowed the Grol,lP to divcrsify it.s product range, while at the same time incrca”e pr0duct quality and improve the eJficicrlcy of the production process, Over the years, HeveaBourd ha.-<. been able to develop ‘higher grade’ particleboard products with improved properties and which conform to new standards of formaldehyde emission EXOImp[e:; include the EO and Super EO particleboard as well as Lami-OSB for which MILOT. the society in which HeveaBouro is one of the fOl.lfxling members, is in the midst of obtaining a patenc iv) High barriers to enrry! Economies of scale In the early 1990s, the particleboard industry was overwhelmed by surplUS demand over supply, which attracted a number of players into the indl,lstry. As competition incre!iGed, manufacturers had to invest in higher capacity and modern plants in order to achieve economies of scale and focus on pricing its products competitively. This led to much consolidation within the industry, where approximately two (2) out of three {3} particleboard manufacturing plants were forced to shut down. This was primarily due (0 the utilisation of second hand ma.chinery, low output capacity and the lack of financial resomed!. The particleboard industry is currently dominated by a few major players with sound fimtn-eial Slfcngths such as HevenBoord, who have the ability to invest, upgrade and improve {)1! new :llld existing technology” The extremely high ~tart up cost (approximately RM200 millk111 tn $(‘t.!,lP a produ.ction facility with a capacity of 800m) pcr day) and the necessary technical krl()w”how in the production proc:>;;, will act as a barrier for potential new enlrimts to the markel, and at tbe same time act as a deterrent for smaller players to expand and Compete effectively. 7. BUSINESS OVERVIEW AND FUTURE PROSPECTS OF TilE IIEVEABOARD GR”O”L,,’P _ v) Energy Efficiency Project On 7 April 2003_ the Company signed a Master Energy Scrviccy Agreement with Mensilin H(Mings Sdn Bhd in relation to the implementation of an energy efficiency project. Under the Malaysian Industrial Energy Efficiency Improvement Projett C”‘MlEEIP”). which. is funded by the United Nations Development Plan (“UNDP’~J. the Global Environment Facility (””GEF’) and the Government of Malaysia. the current oil fired drying system used by HeveaBoard will be replaced by a wood waste fired drying system. The implementation of this project will give the Company significant savings in terms of energy cost while at the same time address the environmental issue associated with the management of ‘”vond waste. vi) Threat of substitule products Furniture and panel products manufactured from other material such as timber logs, metal, glasi’, plastic and rattan arc the jX.Y1ential substitutes for rubberwood particleboard However. rub!::crw()od ma.nufactured particleboard is well-received as it is recognised to be an enviroomenlally friendly product It is also generally cheaper, bas It naturallonk and possesses certain qualities. which is difficult to be replaced or replicated by furniture, or products derived from ffi-::tal, glass, plasti<: or rattan. 7.10 EMPLOYEES The majority of HeveaBoilrd Group’s employees constitute gefier;;.! workers along the pH)(luction process and packing lines for both panicleboard production and the manufacture of RTA furniture. A:5 at 15 November 1004, tlte employees of the GIOUp may be calegorised as follows; < ~~_••_——_. Mlllay!ill»t citlzalS …..——-> Category of Average entplo~e Humiputcra Chinese Inmau Otbers Fori<ignt!rs Total number of yellrs in service Managerial and JO 4 to 5 rr()fes~iunal ” Technical anu 37 79 24 2 142 ~llpervi~ory Clerical and rd:ded 13 16 2 31 3:04 occupalJOn~ Oenerdl employee 182 351 , 3to53″‘9″ 243 134 387 379 1,143 Nole: The above tolal m</Ilber of employees does Iwt inc!l.,de [he 3&8 con[racl worker.1 dlJp[oycd by lJPSfl us at 15 Nowmbl!f 2004 The employees of HeveuBoi’lfC Group are not members of any trade unions and as such have not experienced any industrial/labour dispules in the past Thf’~ HeveaBoard Group recognises the importance of the coniribulion of aU levels of employees and enjoys a cordial relationship with il$ wnrkfcrce. In order to enhance the knowledge and skills of its employees. the HevcaB\.1ard Group had provided the following training and development programs in the pas!: • Production & Operations M,magement (January~Murch 2003)
• Effective Leadership & Communication (April 2003)
• Effective Implementation ISO 9001 : 2COO C>\.pdl 20(3)

7. BUSINESS OVERVIEW AND FUTURE PROSPECTS OF THE HEVEABOARD GROU,,’P,-__ • Effective Human Resoun:e Management (November 2002)
• Principle of Effective Purchasing (November 20()2)
Effeetive Supervision (October 2002)
• Effective Middle Management (October 2002)
• Creative Thinking & Problem Solving (October 2002;
• Total Prodm:tive Maintenunce (September 2(02)
• Basic PLC 2 ex -Programmer (August :z002)
• Fitst Aid(~r COilfse (July 2002)
• ISO 9000 ; 2000 Transition Auditoring (April 2002)
• Effective Store & Warehouse Nlanagement (March 2002i

Hfeelive FiLing & Records. Management (Fehruary 2(02) 7.11 INTERRUPTIONS TO BUSINESS DURING THE PAST 12 MONTHS There has not been any material interruption to the businesses of the HeveaBourd Group in the twelve (12) months preceding the date of this Prospectus. 7.12 ENVIRONMENTAL CONCERNS Unlike typicul timber-processing bUi;inessr:-s where logging, often occurs, particlehoard, which is derived frOln rubherwood branches and wood residues, uses sustainable and environmentally,ffie-ndly raw material;; from nearby rubber plantations. HeveaBoard is lllw a strong advocate (If environmentally friendly managemeot praGtiU:’~ as it is in its intere5t to re:;:ycJe product inputs and increase mnterial savings, thereby keeping (::();;t of production In the minimum, Additionnlly, the HeveaBoard Group is committed to the .;onstant monitoring and checking of its manufacturing facilities to CJlliUfe Z’ompli:mce with the relevant environmental laws” 7.13 RISK MANAGEMENT PLANS The GrOtlP adoplti a risk management appmllch which evaluate.., and manages its financllu risks and other emergency risks “””,,,fll,;ialea with fire and lX)wer disruption which may adversely affeet the operations of the Group. The Group’s risk managemem policy seeks 10 ensure that adequate financial resources are available for the development of the Group’s businesses whilst managing its interesc rate. foreign exchange, liquidity and credit risks. In addition, the Group’s risk management framework indude.~ the internal audit function which facilitates operational reviews and provides a basi!> for business improvement strategies and developing cost effective contrul strategies. In relation to risks which are insurable, management has taken the necessary steps to emure that these risks are adequfltely insured, including undertaking periodi<; reviews of the net worth of ihe Group’s net assets ihat are insured to ensure that the said assets are adequately insured at all times, panicularly in relation to risks ass.ociated with fire, power and other emergency ris.ks whicr. may adversely affect the nperalions of the Group 8. INDUSTRY OVERVIEW AND OUTLOOK _
8.1 OVERVIEW AND OUTLOOK OF THE MALA YSlAN ECONOMY The Malaysian ecmcmy strengthened further, with growth ill real GDP increasing at a faster pace uf 8% in the second quarter of 2004. from 7.6% in the first quarter. Private sector aggregate demand was more robust and reinforced by buoyallt growth in external demand. Stronger domestic demand emanated largely from stronger honsehold consumption and the strengthening of privHte investment activities., as the public sector continued to consolidate, The private seemr continued to be the main growth driveL contributing significantly to re.l1 anp growth. Growth continued to be broad based, led by the manufacturIng :md services sec:crs. The streng growth in the manufacturing ~ctor was slliuined at r:U% (tirst quarter 2004: 12.7%1. Both the eXjX1fl and domestic oriented industries registered strong expansion of 18.)(?(. and 8% respectively. In the export oriented industries. higher growth was recorded in the electronics. chemical products and rubber products industries. Strong e-xpaosion was seen in the electronics industry, particuLarLy from high demand for consumer electro-nics and i..-‘Ommunication devices. Thi” Iwd posilive spillover effects on growth ill the chemical products industry, particularly re;;:ins: and plastic products, which supply inputs to the electronics industry Meanwhile, sustained external demand for gluves continued 10 support the expansion in the rJbber ptodu,;;ts industry. In the dumestic oriented indm,tries, robust gW’i’.’th in domestic demand underpinned the expansion in the f….”lOd products, bbritatOO metal products, und lrull and steel as well as transport equipment industries, Despite the ongoing fiscal coosoLidation, domestic demand growth strengthened further in the second quarter of 2004, with further expansion of pdvllte stXtor activities_ Growth in private consumption expanded strongly by llA% (firs.t qUiirter 2004: 8-4%), 1;upponed by higher di”posable income, improved consumer ;.;onfidence, low inflation and inttrClit rates. as well as stable employment cl’ndi!ions, [0 line with the government’;; corum-ilmen: to fh<:al consolidation, public consump’lon im:retlsed moderatdy, while public inve~antent continut’d to be pared down. Gross: fixed capital formation cominued to register a strong growth of 3.5% (filst quarter 2004: 3.5(,’f,), underpinned enhrely by stronger private-investment activities ft.’> federal governments Je”‘e]opment expenditure contrl1ued to dedine. Global economic conditions have become more challenging with higher energy prices, rising interest HItes ;:lnd some slow down in the major economies, The lmpact of these risks on global growth in 2004 is expected to be mtxJest \Vhile oil prkes are expected to remain high due to concern& on supply disruptiuns, the global economy has a greater capacity to manage high energy cost in view of better economic conditions, higher incomes, improvements in job prospects and more-efficient use of energy. Gradual illle-rest rate increase>; towards a more neutral stance would ensure growth is s-u”la:ncd in the United SWtes_ Current indications of a soft tanding to he achieved in China and SU5.tained domestic demand m regional economies wilt be posilive for Malaysia. Ovecall, the balance of risks indi<;ates sustainable growth prospects going forw:~td. The underlying fundamentals {If the Malaysian economy eontinuo to remain strong with low inflation, stable labour market conditions, sound and strong banking system and rising external reserves. Expanding capacity and increasing competitiveness of the domestit: ~onomy will contain pri,’e pressures iu the strong growth environment MOUfJary policy will, therefore, remain accommodative” The supportive external environment and te’Ondtli.:ive: domestic conditions ensure that growth is likely to remain strong in the second half of the yt’JIL Following the: strong grvwth performance ()f 7.8% for the first ha.lf-year, growth for the year as a wbole is expected to :mtpa.->s earlier estimates, (Source: Bank Negam r.1alaysia -Econonric nnd Financial D,;;vetopmems in the Second QI~(lrter of2004) 8. INDUSTRY OVERVIEW AND OUTLOOK 8,2 OVERVIEW AND OUTLOOK OF THE MALAYSIAN TIMBER INDUSTRY The Malaysian timber industry plays a major role in Malaysia’s economy, providilig employment to some 340,000 workers and contributing approximately 5% to the country·s. toul emnings. Tbe timber industry is primarily export oriented and comprises 1l wide range of ilc:t!vitie~ cl1vering both upstream and downstream manufacturing activities, Some of the major products of this industry indude timber logs, sawn timber, pand products, mouldings & joinery and furniture. The percentage cDntribution from ertch sub<,;ector for 2:003 is :t’I follows:­;;. 29% Fumiturc{2001-28%) }> 25% Plywood (2002-25%) r 14% SaVin Timb{‘.( (2002-15%) y 11% Timber Logs (2002·12%) ? 6′;} MDF (2002-6%) P 2% Veneer (2002-3%)
);;> 4% M(”1Jldings (2002·4%} In 1980, the entire timber indu:str), contribul.ed approximately RM4.4 billion in export revenue to the MalaYl’ian economy, A decade later, Ihis amount grew to RM8.9 billion, rising again to RMli19 billion in 1997 and RM17,7 billion in year 200CL Tbis phenomenal growth in revenue throughout the 80$ -,llla 90s is aOtibuted to the construction and property boom in Japan, Europe And the United Stales (of which the timber industry is heavily reliant). It was also during this period that there was a.1’l abundance of raw material supply, as forcstl:tnd was being cut down and converte-d into agricultural and residential properties. However, tbe threat of the global e:onomic slowdown, dampening demand for exports and increa:;.ed competition, caused revenue to dip 19,2% to Rl-H4 billion in 2001. Additionally. it was also during this period tllat the Malaysian government implemented several sustainable forest manrtgemenl pOlicies, which placed limitations on logging Dcti”ity, and adversel)’ affected the operlltions of local limber players in the industry. These policies were in traction to the environmental effects of nver-Iogging and concerns over the sustainabihty of timber supplies and wood-related products in the long run Despite all these uncertainties, hopes are high that the mdustry will pick up again owing to Malaysia’s resilient domestie economy and its ability to adapt and withstand the changes in the economic environment such as the slowing. of exports and foreign uapita! OUt110W5. The challenges posed by a constantly evolving global and domestic market will compel the timber industry to further conM,lidate and continm:’llsly improve/upgrade”, tf) enhance competitiveness. In addition. the Malay&ian government bl:ls been suc..”essfully implementing policies aimed at el1courugtug the development of downstream manufacturing activities: such as the secondary and tertiary wood proce..’i.sing industries in whicb HeveaBoard has a strong presence” The diagram below provide.s an overview of some Df the major activitiC$ that oc.cur within the tim.ber industry .and it:> applicability to HeveaB.)ard.
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Timber lndustry Adivities and Applicability to HeveaBoard

8.3 OVERVIEW AND OUTLOOK OF THE WOOD·BASED MAi\i1JFACTURING INDUSTRY The wood·based manufacturing industry, for which the major bulk of HeveaBoard busine.~” is categorised, represents a sub-sector of the timber industry. and involves the manufacturing of higher value<!dded wooden prmlHcrs. It is typicaily dominated by a few medium to big scale enterprise.,;. and until recently, has become more technologically advanced and research oriented, The wood,based industry is highly dependent on global economies as appmximately 70% of production is exported abroad. The wood-based industry has been growing at an average rate of 10.2% for the last 20 years up to 1999, The period of most impressive growth was between [987 and 1996, with the highest gnJwlh recorded in 1993 of 42.9%. However, post I9$’7 when the Asian ecOllomk crisis hit ASEAN countries, grnwth in the wood-based industry slowed to an average of 5% (i997 -2000) The chart on the next page pmvide.;; an indication of the growth trends of the wood-based industry, (SOUTce: L14I? Report} THE REST Of!’ THIS PAGE HAS lJEEN INTENTIONALLY LEFT BLANK 8. INDUSTRY OVERVIEW AND OUTLOOK _ ,._-_-_-_-_,-.~-;’;_”_,;’ ,~—1 , , ‘<0 +-~~.’7—~ ==J , ~.. ,, ‘. ~~ /II • •i 10 –~,…..~.~.e__.c-.o ——-._…..e_,—–i ,.. ,•,,I ‘ , lSi? ;lI” is¥’ ;cn OJ( j-_ “” “t—————­
Wood~Blised Industry Output Growth inmds The mid”90s witne_ssed much consolidation in the wood·based industry. This period was characterized by “tmng competition from reglotwl producers of timber products while the sustainable foresl management policy adopted by Malays.ia resulted in heavy restrictions and regulations on logging, (lnd the freczing of manufacturin.g licenses. Conseqeently, produc,ion of sawn timbe, and plywood which depended more on the tnwitional logging activities started to decline, but at the “,arne lime~ higher v4lue-addcd wooden. products like panel w()()(! ~md furniture gained in prominence. Clln-ently, the panel product category, which mainly consist$ of particleboard and fitrreboard, remain the largest sector of the wQod·based industry in production output and in value terms, It is followf”-fi closely by s;,\wn timber wilh the fastest growing category being furnilure·manufacturing. The average growth from 1990 -1999 for the panel produc!\ category is 16_8%0 which is SOCQod 10 that of the furniture sector vihich grew al 23.9%. In lerms of the last ten (to) ye<:rrs average market share, the share fill sawn timber pn:xlucb is 32% This share has bEen significanrly eroded over the years by the panel products (average of 35%) and the furniture sector {avenge of 17%). This trend is expected 10 -continue in the foreseeable future. A review of the latest manufacturing :;tatistics also-reveal a similar trend for the expl-Y, contributiOni;-, with the panet products sector feading at 42%, followed do..~ly by the furniture sector at 32% in 2002. 1n terms of average export growlh (1990 2002}, the fumlture sector is the fastest growing, With 28%, followed by the panel products at 17%. Sawn timber has been experiencing negative growth at ~2%, mainly due t{) the decrease in the supply of log:), and as the C’l’Overnment hIkes steps to promote more value-added manufirl.’1:uring activities. It can be seen that over the past decade, the industry has progressed from being an exporter of logs and a primary processor of sawntirnber and plywood, to become a s-xoudary and tertiary industry tbat prodm:es joinery, 13mimued and engineered wood produds and furniture fO! expocL To continue encouraging such downstream processing and further value adding whieh utilises particles derived from branches and wood residues like Heve3Bonrd, current lncenti”<;”_,, are being continually ,eviewerl to meet with the chrmging industry nreds. The industry v,’-jJ] also foeu:;; 00 effor;,: to improve management, production and logistics efficiency of the sector, such as the swi:ch to more precision ma,;hinery, reduction of waste, just·in·time manufa<;turing and the use of the latest in information technology. (S(I:($((:(‘; lAfR Report} 8. INDUSTR\’ OVERVlEW AND OUTLOOK The world·ba,;ed industry, comprising tv.Jl:b downstream and Ilpstream activities, expanded significantly by 17.4% in the firsl half of 2004 (first half of 2003: LS’!iJ), Growth was driven by production of plywood, hardOOard and particleboard, which increased by 20.9%, largely on account of expan”ion in e.xports to major rnilrkets sLich as the US, UK a.nd Japan. With increasing competition from low-cost producers. it is imperative for MaLay”ia to continuously improve its competitivene,,>;. T’lwards this end. meamres were taken to improve product quality through R&D, intr(mucll new design product’; as well as enhance production proccs,;es with new technologies aod greate-r automation. (Source,’ Ec()!wmic Report 200412005 -MiniM!)’ of Finan,:e.! 8.4 OVERVIEW AND OUTLOOK OF THE PARTICLEBOARD INDUSTRY The particleboard industry in Malflysia only became popular in tbe 1970~, although th<: product has been widdy used in the manufActure of fumiture and otber related applications for mI.-lIe than 60 years in Europe. the US and Canada. Curren(]y, mbstantial quantities of reconstituted panel products such as panideboard and fiberboard are now being produced in several tropical ~,ountries ttt Asia and Latin Arneric1 to meet the expected st1rge in demand for such produL1s. The dem:md for particleboard is expeeted to become increasingly impartant as limit’, on the grov,tth of plywood production are rc,adted (scMcity of n£\lUral timber and log supplies), and as more countries move furl’1er into d()wnstre·am processing whiht attempting to utilise available resources more efficiently. These panels will act :IS a substitute for plywood and sawnwoo-d in many uses, resulting jn a decreasing or ~Iower growth in production of tradition.al tropical timbel products in many (‘mmrrjes, The growth in the particleboard induslry is; supported by impr¢:ibive figures. Despite the recent e;;’)flomic slowdoWIJ, lotal export earnings (,f particleboard from Peninsular Malaysia amoun~ed to RM70_28 million in the year 2002. This represents atl<)ut 61% of the total export value of particleboard by Mulaysia. Peninsular Malaysia’s export earning of particlcbnard increased fUl’ther to RM86.J2 million in year 2003, representing 81.8% of the total expott value of panicleboard by Malaysia. In most instances, particleboard is the preferred alternative to orher wcx.xJen products due to lower cost good bending strength aod durability, The unique characteristics of particleboard allows it to be .adaptable and highly suited to a variety of application stich as the mltoufacture of cabinets, furniture, speaker boxes, wall paneling, stair treads, doors:, mof sheathing and flooring. Going fonvard, the proouction of particleboard is. expected to grow at the rate of 75% per year and is expected to reach L29 million meltk cubes in 2017, (SourCe’: IMR Riporf) 8.5 FUTURE PROSPECTS OF THE PARTICLEBOARD INDUSTRY Currently, Ute imporl.tliion of particleooard in Malaysia is fairly low, as the local particleboard industry is prolecteJ by import duties and CEPT levied on imported tx<ards at 20% and 15% respectively. unless e:<eOlptitlll is granted, However, with the lnitiation of AnA, approximately 98% of tariffs on goods traded within the region have been reduced 10 0%·5’1, by year 2003. Product!’. affected rue defined under the CEPT as, mtlnufu-:tured and agrlculturoJ products with a IOCiil content of at least 40%. In view of this. particlebo<m:l, which is mainly produced from wood w.ilste derived from the local timber industry, may be affected by AFTA. Should \ariffs on imports be reduced, the loca! marb:t for panjcletx”\ifJ would be very competitive. However, opportunities in the export market will increase particularly for low cost particleboard producers such a~ HeveaBoard. 8. INDUSTRY OVERVIEW AND OUTLOOK Since particleboard i.~ mainly applied in the manufacture of furniture. in prospects can be very much correlated to the prospects of the wooden furniture (ndustry, Global furniture exports stood :l\ RM85 billion in 1998, of which Malaysia’s market share was 3%. In 2003, the Malaysian furniture export market stood at RM5.78 billion and is e:’lpected to increase further to RM6.0 billion and RM7.0 billion in 2004 n002005 respectively. In VIew of the incrC::lsing expoct value of wooden furnitW’e and strong government support in the Malaysian furniture industry, the future prospects of the particleboard industry remains promising, Apart from the furniture industry, the demand for wood and timber products is also invariably dependent on Ihe prospects of lhe building and construction SecIOr. Consequently. Ihe expected growth in GDP and the increased government spending to stimulate economic activity is expected to net as a catalysl for further growth in the particleboard manufacturing sector. On the export front, {he prospects seem optimistic as well. The average growth for the likes of China. India, Hong Kong. PhiIi pines. Japan and Vietnam for 2004 have been forecasted 10 grow by 8.5%. 6.8%. 5.5%. 4.5%. 3.4% and 7.0% respectively. This. coupled with the growing scarcilY of timber supplies in the Asia Pacific region is el<pe<:’ted to boost the growth in the local particleboard industry. ln fact. the world consumption M particleboard and MDF is anticipated to grow at 8.3% yearly at the expense of wood products derived from traditional timber lOgs. During times of global economic slowdown. furlhc;’:f analysis will reveal that major impacted goods and services will be the IUl<ury items. leisure, 3nd exher non·nece.”sily goods Ihal 3re highly priced. However. timber based products are termed as necessities in today”s modern society as it serves as input for major industries like ccmMruction and furniture manut’:lcluring. The Group has in the past weathered the worst recessions based on the quality and pricing of their products ns well as good customer service. (Source: IMR Repon, 8,6 GOVERMENT LEGISLATION, POLICIES AND INCENTIVES 8.6.1 Government legislation and policies Apart from the MITI manufacturing license, the timber industry is governed by laws lind policies sel by the government and various regulatOf’y bodies such as MTIB. MTC ,md FR1M. which are aimed at developing the wood-based products industry in Malaysia whilst at the same time promoting sustainable forest management. Over Ihe years, the Malaysian timber industry has successfully developed and diversified into downstream a.:tivities with strong support from Ihe government, and the implementalion of the First and Second Industrial Master Plans (1986-1995 & 1996-2(05). The stralegies and policies implemenled are designed to promote inveslment in higher value “‘dded and differentiated products, as well as to encourage the better utilisation of resources. 8.6.2 Other government incentives In terms of incentives, HeveaBoard qualifies to oblain incenlives from MITl, MJDA and MATRADE. MATRADE provides incentives for export and promotion. while MJDA provides tax incentives for export. Among the incentives provided by MATRADE :Ire as follows: a) Exemption of SI31Utory income equivalent 10 I()l,’f, of the value of increased eXpOrts. if the goods exporled :Ulain :It least a 30% value-added increase; and b) Exemption of statutory income equivalent to 15% of the value of increased exports, if the glxxls exported attain at least a 50% value-added increase i 8. INDUSTRY OVERVIEW AND OUTLOOK There are three (3) major incentives available 10 companies in Ihe manufacluring seclor -Pioneer Slaws, (nveslmenl Tax Allowance and Reinveslment Allowance. In the case of the HeveaBoard Group, Ihe following apply: I, Pioneer Status -Companies granted Pioneer Status would generally be entil1ed to income tax eliemption of 70% of its statutory income for five (5) years from the production date. Generally, applications for pioneer statu!> on or after 1 November 1991 do not qualify for extension of the pioneer period. However. exceptions may be granted to manufacturing activity that are of national interest. Please refer to Section 5.6. for details on the status of HeveaBturd Group’s pioneer status. 2. Investment Tax AJlowance (“ITA”) -Companies granled ITA. an ahernative 10 pioneer status. would be enlilled to an allowarlCe of 60% of qualifying capital expendilUre incurred within 5 years from the date of approval of Ihe incentive. The allow:mce can be sec-off against 10% of Ihe statutocy income in the year of assessment. Any unutilised allowance can be carried forward to subsequent years. Other conditions opply. and East Malaysian companies have higher percentages to be offset.
3. Incentives for Reinvestment -Reinvc$t1nent Allowance (“RA”). which allows companies that have at least 12 months of operational history to claim deductions on expenditure used for Ihe expansion of proouction capadty. modernisation and upgrading of production facilities. dil’t’:rsification into related prooucts and automation of production facilitie…. Applications will be reviewed and approved by the Inland Revenue Board (“IRB”‘).
4. Incentives for Exports -Double deduction for promotion of exporls. Companies thai exporl manufacturt’:d products are eligible 10 claim double deduction for the following expenses ­overseas advertising, supply of free sltmples abroad, export market research. preparalion of tenders for supply of goods overse:lS, approved MlTllrade exhibitions. overseas travd fares I accommodation, cost of maintaining a sales office abroad and professionol fees incurred in packaging design for exports.
5. Industri;:ll Building Allowance Incentive. which provides an allowance of 10% of tht’: qualifying expenditure, related to buildings used as warehouses for storing goods for export and re-export.
6. Training Incentives in the form of tax deductions for boIh pre·employmenl training and Human Resources Development Fund (“HRDF’) approved training.
7. R&D incentives Double Deduclion on Export Credit Insurance Premiums -premium paymenls on eXpDri credit insurance are eligible for double deduction.
8. Industrial Building Allowance -an allowance of 10% of qualifying expenditure is granted in respect of buildings used as warehouses for storing goods for export and re-exports.
9. Incentives for R&D -Under the guidance of the Promotion of Investments Act 1986. companies are eligible to apply for Investment Tax Allowance (“ITA”) of 50% of the qualifying capi!al expenditure incurred within 10 years and the ITA can be utilised 10 offsel against 10% of the statutory income in the year of :.lssessmenl.
10. Exemptions from import duties for direcl raw malerials used in Ihe manufacture of products for both the expon and domestic marker are also provided for by MIDA, subject to cerTain conditions being mel,

ll. Exemptions from lmport Duties and Sales Tax for Machinery and equipment are also availllble from MIDA. i 8. INDUSTRY OVERVIEW AND OUTLOOK 12. Other incentives -Incentives for the use of IT equipmenl and environmenlal proteclion equipment is also awarded. 8.7 FUTURE PLANS AND STRATEGIES OF THE HEVEABOARD GROUP ln reviewing the plans of HeveaBoard for the future and their current business strategies, the Company envisages strong growth and profitability in the near to medium term given the strong growth prospects of the industry and the high demand for particleboard worldwide. The Group has embarked on an expansion plan involving the establishment of a second manufacturing line to be located adjacent to its current existing pUrlicleboard plant. The second manufacturing line entails a lotal invesllnent cost of approximately RM225.0 million (eXcluding working capital and cOl1lingencies). which is to be funded by proceeds from lhe Public Issue. external borrowings (which will form the bulk of Ihe funding). internally generated funds as well as proceeds from the sub~uent exercise of the W:lrrnnts. The second m:mufacturing line is expected to be completed in IWO (2) years time. Following its completion, the annual production capacity of the Group is expected (0 increase by an additional 405.000m3 per annum or L350m3 a dilY, l:Ompared to its current capacity of 120,OOOm3 per annum or 400m3 a day. The Group is confident that once fuUy operational, the application of the advanced technology will ensure HeveaBoard of quality competency and a competitive advantage in terms of production efficiency and economies·of-scale. Further, with the coming on-stream of the second manufacturing line, HeveaBoard will also be better equipped to meet the growing demand from its customers. both locally and abroad. Pan of the Group’s future strategy also entnils moving into more value·added product offerings. Currelllly. up to 30% of HeveaBoard production is earmarked fot EO and Super EO products. These highly specialized products h:lve been developed to cilier for customers requiring more stringelll environmental requirements and higher-grade products. It is lhe intention of the m:magement to dedicate more of its resources towards the production of these highly specialized products when the second manufacturing line becomes fully operational. The Group will continue its efforts in exp3nding HPSB’s RTA furniture manufacturing activities in line with its policy of moving further downstream into value-added product segments. Since HPSB’s inception in year 2000. it has grown rapidly in securing major market share. particularly in the overseas RTA furnilure markets. Moving forward, the management expects HPSB to continue playing a significant role in terms of its conlribution 10 the fUlure growth and profitability of the Group. In addition. the Group’s commitment 10 R&D will help the more efficient utilisation of raw material and rubber wood waste while at the same time improve the wood processing technology and increase lhe quality of the particlebOltrd. The HeveaBoard Group contends that in the long run. their R&D will bring about beller cost savings which will be p:lssed on to the Group’s customers in terms of cheaper particleboard products. which in turn will result in a larger market share for the HeveaBoard Group. Overall. it will be the Group’s focus in expanding its production cap:lcity and downsu-eam aClivities. as well as the Company’s strong commitment towards innovation and R&D. Ihal will provide the Comp:lOy with a strong financial footing in facing the challenges that lie allead. ITHE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK

 

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