Industry Overview

7. INDUSTRY OVERVIEW 7. INDUSTRY OVERVIEW
(Prepared for inclusion in this Prospectus)
Decide with Confidence 08 October 2012 The Board of Directors Hiap Huat Holdings Berhad, No. 46, Jalan E1/2, Taman Ehsan Industrial Park, 52100 Kepong, Selangor Darul Ehsan.
Dear Sirs, EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (“EXECUTIVE SUMMARY”) FOR HIAP HUAT HOLDINGS BERHAO (“HIAP HUAT” OR THE “COMPANY”) This Executive Summary has been prepared for inclusion in the Prospectus to be dated5…NOV..2012..pursuantto the listing of Hiap Huat on the ACE Marketof Bursa Malaysia Securities Bernaa. This research is undertaken with the purpose of providing an overview of the oil recycling market in Malaysia. The research methodology includes both primary research, involving in­depth interviews with pertinent companies, as well as secondary research such as reviewing press articles, periodicals, Government literatures, in-house databases, Internet research and online databases. Dun & Bradstreet (D&B) Malaysia Sdn Bhd (“D&B Malaysia”) has prepared this Executive Summary in an independent and objective manner and has taken all reasonable consideration and care to ensure the accuracy and completeness of the Executive Summary. In addition, D&B Malaysia acknowledges that if there are significant changes affecting the contents of the Executive Summary after the issue of the Prospectus and before the issue of securities, then D&B Malaysia has an on-going obligation to either cause the Executive Summary to be updated for the changes and, where applicable, cause the Company to issue a Supplementary Prospectus, or withdraw our consent to the inclusion of the Executive Summary in the Prospectus. The Executive Summary is highlighted in the following sections. Yours faithfully, for and on behalf of DUN & BRADSTREET (D&B) MALAYSIA SON BHD
AUDREY CHIA CHIEF EXECUTIVE OFFICER 99 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence 1 EXECUTIVE SUMMARY 1.1 BRIEF OVERVIEW OF MALAYSIA’S ECONOMY Since 2002, Malaysia’s economy has seen robust growth in both nominal and real terms, except for the contraction in 2009 due to the 2008 global economic crisis. Total population has been growing at approximately between 1% to 2% per annum and is projected to be 29.3 million by mid 2012. The economy is estimated to have grown 5.1 % in 2010. Gross Domestic Product (“GDP”) per capita has been increasing since 2001, except the decline in 2009. This generally indicates consumers’ increasing purchasing power in Malaysia. In the first two quarters of 2012, further economic recovery has ensued, following stronger domestic demand. Projected growth rates for 2011 and 2012 are estimated at 4.6% and 5.0% respectively. Consumer Price Index (“CPI”) is expected to average at 3.3% in 2012, largely due to rising food prices and transport costs. In the past six years, the manufacturing sector has been contributing 23% to 28% of Malaysia’s GDP. From 2005 to 2008, the sector has seen consistent positive growth, and peaked at RM189.1 billion in 2008. In 2009, the sector experienced a 10.3% contraction due to the 2008 global economic crisis. In 2010 and 2011, this sector generated approximately RM195.3 billion and RM214.6 billion for the respective years, which accounted for 24.4% to 24.6% of GDP. This reflected a year-on-year growth of 15.3% in 2010 and 9.9% in 2011, signifying the sector’s rebound. The manufacturing sector for the first two quarters in 2012 grew as compared to the corresponding quarters in 2011. Petroleum, chemical, rubber and plastic products were reportedly the main catalyst due to the higher production in refined petroleum products. Transport equipment and other manufactures also registered a growth, led by double-digit production of motor vehicles. 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence The manufacturing sector has been one of the key drivers for Malaysia’s economy. However, this growing industry has also led to an increasing volume of wastes. This is in addition to wastes generated by other sectors in the expanding economy. It is essential and challenging for the country to establish systems to efficiently manage the wastes to minimise environmental issues and recover valuable contents, to make up for the depleting resources as a result of industrialisation and economic growth. In 2010, the Malaysian government launched the Economic Transformation Programme (“ETP”), which contains a set of reform and growth measures to boost the country’s gross national income (“GNI”). As of early November 2011, the programme has realised approximately RM10.0 billion worth of investments and RM5.0 billion worth of investments is expected to come on board before the end of 2011. It was further reported that 70 out of the 131 entry point projects have already taken off. These 70 projects are expected to bring in RM106.4 billion in investment, RM153.83 billion in GNI and create 298,865 jobs. (Source: The Oil Recycling Industry 30 September 2012, 0&8, Malaysia) 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence 1.2 OVERVIEW OF THE OIL RECYCLING INDUSTRY IN MALAYSIA In Malaysia, wastes are classified as either solid wastes or hazardous wastes. Hazardous wastes are also known as Scheduled Waste in Malaysia. The management of hazardous wastes is mainly regulated by the Department of Environment (“DOE”), which is under the Ministry of Natural Resources and Environment The DOE has identified 29 generating sources of Scheduled Wastes. In 2011, the top 10 highest quantities of scheduled wastes categories are’: Dross/Slag/Clinker/Ash; Gypsum; Mineral Sludge; Heavy Metal Sludge; E-Waste; Oil & Hydrocarbon; Ciinical/Pharmaceutical; Batteries; Acid & Alkaline; and Used Container/Oil Filter.
The DOE has classified Scheduled Wastes into five broad categories, namely: SW1 -Metal and metal-bearing wastes; SW2 -Wastes containing principally inorganic constituents which may contain metals and organic materials; SW3 -Wastes containing principally organic constituents which may contain metals and inorganic materials; SW4 -Wastes which may contain either inorganic or organic constituents; and SW5 -Other wastes.
Waste management activities in Malaysia are categorised based on the tvpe of waste that is involved in the process and composes of the separation, storage, collection, transportation, transfer, processing, recyciing, treatment and disposal of wastes. 1 Department of Environment Malaysia, Environmental Quality Report 2011
Decide with Confidence According to statistics released by the DOE, since 2005, the total amount of Scheduled Wastes that was generated by Malaysia has been on the rise, reaching almost 3.28 million metric tonnes in 2011. Oil and hydro carbon waste has been among Scheduled Waste categories that registered the highest volume. Not inclusive of scheduled waste managed under special management approval stipulated under Regulation 7, Environmental Quality (Scheduled Waste) Regulation, 2005, in 2007, oil and hydrocarbon waste accounted for 7.4% of the total amount of Scheduled Wastes generated in Malaysia, making this category the third highest category in terms of volume. In 2011, the category accounted for 8.2% of the total volume of Scheduled Wastes generated, placing it sixth in terms of volume, after Dross/Slag/Clinker/Ash, Gypsum, Mineral Sludge, Heavy Metal Sludge, and E-Waste .. The volume of oil and hydrocarbon waste has been on the rise, with the exception of 2010. In 2011, the volume, increased 24.6% as compared to 2010. The automotivel workshop industry is amongst the primary sources of waste engine oils in Malaysia. Figure 1.1: Quantity ofScheduled Waste Generated in Malaysia 140 —————-..—-­2007 2008 2009 2010 2011 …Oil and Hydrocarbon Waste –All Scheduled Wastes j’OU1!’e: DepartJ/Jeul q/EIIVfrollnleJI1, ivlimftDI q/1Vamra! NJOUn'(!J and EIIVl1YJJlnmn
The Malaysian government recognises the importance of industrial waste recycling and recovery, and has identified it as an important environmental and economic activity. Waste encompasses ail types of waste materials that may be hazardous or non-hazardous. Used oil is classified as a toxic and hazardous substance that has to be treated and processed under strict guidelines. Various programmes have been 7. INDUSTRY OVERVIEW (Cont’d)

Decide with Confidence initiated to raise awareness about the importance of waste recycling and recovery. Recovery of wastes, particularly industrial wastes, has been identified as an emerging economic activity in the past decade. In line with increasing demand for limited natural resources, waste recovery provides an alternative resource and helps reduce reliance on natural assets. Waste oil is classified as Scheduled Waste under the First Schedule of the Environment Quality (Scheduled Wastes) Regulations 2005. Due to the hazardous nature and toxicity of waste oil, proper disposal and treatment of waste oil is important. In Malaysia, oil recycling is at its infancy stage. Oil recycling activities emerged in the early 1990s, as a result of increased awareness and development in environmental legislation. Malaysia’s legislations on Scheduled Wastes, and particularly waste oil, have been focused more on treating and disposing of wastes than recovering the economic value of wastes. However, there is a need for more sustainable approaches to waste management to be implemented due to known issues such as the increasing cost of pollution control, limited landfills and disposal capacity, or illegal dumping of wastes. Thus, policies have been shifted towards measures and incentives to encourage waste minimisation, reuse and recovery. The Malaysian government has put in efforts to encourage industries to practise the 3Rs (Reduce, Reuse and Recycle) and extend such practices to both solid and hazardous wastes. In line with this, there has been an increased number of licenses being issued by the DOE to Scheduied Waste facilities. In 2008, the number of licensed off-site recovery facilities that handle Scheduled Wastes was 341, of which 29 were involved in waste oil. In 2011, the total number of such facilies increased to 404, with 38 facilities handling waste oil. Although the number of off-site waste oil recovery facilities makes up less than 10% of the total number of recovery facilities in Malaysia, this segment is amongst the top 10 in terms of both facilities and volume of wastes generated. Players in the industry see great opportunities for the industry to grow. In 2011, the oil recycling industry in Malaysia was estimated to be worth approximately RM140 million to RM180 million. The overall outlook of the industry is positive, on the back of favourable economic conditions, improved environmental awareness, more active “green” practices, and support from both the public and private sectors. The industry is projected to grow at a rate of approximately 8% to 15% per annum. (Source: The Oil Recycling Industry 30 September 2012, 0&8, Malaysia) 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence 1.3 DIFFERING SEGMENTS IN THE OIL RECYCLING INDUSTRY The oil recycling industry is divided into two general categories of outputs, namely semi-processed products and end products. The recycling activities of Hiap Huat and its subsidiaries (“the Hiap Huat Group”) encompass the recycling of three categories in the end products segment, namely lubricating oil, grease and fuel oil. The Hiap Huat Group is then able to produce semi-processed and end products from the recycling process implemented. The waste oil sector is divided into the following 11 segments, as defined by the DOE: Figure 1.2: Eleven Segments ofWaste Oil (By Source)
Tar or tarry residues ” from oil refinery or petrochemical plants (SW 315)
Oil or Sludge from Spent Lubricating Oil Oil Refinery or (SW 305) Petrochemical Plant (SW 314) Oil contaminated earth from re-refining of
Spent HydraUlic Oil used lubricating oil (SW 306) (SW 313) Oily Residue from
Waste Oil Automotive Workshop, \—-~ Spent mineral oil· Service Station Oil or
water emulsion Grease Interceptor (SW 307) (SW312) ” Waste Oil Oil Tanker Or Oily Sludges Sludges(SW 311) (SW 308) DIi I ~ Source: Department ofEmlironmwt, Millirt1J’ t!INat#ml Rc,rol/t”CCJ and El1virollt/l(!lt! 7. INDUSTRY OVERVIEW (Cont’d)

Decide with Confidence As per the figure above, the Hiap Huat Group operates within nine out of the 11 segments of waste oil. In addition to the Scheduled Waste codes in Figure 1.2, some of Hiap Huat Group’s activities also invoive the following: SW 303 Adhesive or glue waste containing organic solvents excluding solid polymeric materials SW 315 Tar or tarry residues from oil refinery or petrochemical plant SW 322 Waste of non-halogenated organic solvents; SW 323 Waste of halogenated organic solvents; SW 327 Waste of thermal fluids (heat transfer) such as ethylene glycol SW 409 Disposed containers, bags or ecuipment contaminated with chemicals, pesticides, mineral oil or Scheduled Wastes; SW 410 Rags, plastics, papers or filters contaminated with Scheduled Wastes SW 417 Waste of inks, paints, pigments, lacquer, dye or varnish; and SW 418 Discarded or off-specification inks, paints, pigments, lacquer, dye or varnish products containing organic solvent. SW 429 Chemicals that are discarded or off-specification SW 430 Obsolete laboratory chemicals The output of the process of recovering waste oil can vary, depending on the method/technology used. Base oil, which is of the highest value among all semi-processed materials that are produced by recycling waste oil, is the main material for the production of lUbricating oil. (Source: The ai/ Recycling Industry 30 September 2012, D&8, Ma/aysia) 7. INDUSTRY OVERVIEW (Cont’d)

Decide with Confidence 1.4 INDUSTRY VALUE CHAIN The oil recycling industry in Malaysia comprises of three main components, namely the waste generators, the waste management contractors and the treated wastes. The waste generators are either industries or households who generate wastes. Waste management contractors are contractors that are licensed by the DOE to transport, store or treat waste oil. Treated wastes are wastes that are either treated to recover its economic value or sent to licensed facilities for final disposal. The main product from waste oil recycling is recycled base oil. Recycled base oil can be blended with additives to produce recycled lubricating oil that can be used for engines. Other than semi-processed products, the Hlap Huat Group also produces end products, which may be used directly by its customers. Most other players in the industry focus on producing semi-processed products, which are required to be further processed by their customers before they can be used. The Hiap Huat Group is one of the few producers in Malaysia that are engaged in the production of end products. (Source: The Oil Recycling Industry 30 September 2012, 0&8, Malaysia)
1.5 RESTRAINTS AND CHALLENGES The main challenge for the industry is the current low awareness in the community and among companies about waste oil recycling. Very few are aware of the hazardous impacts of waste oil or the possibility of waste oil recovery. This has led to unnecessary amounts of waste oil being improperly handled or illegally disposed of. Thus, it is challenging for waste oil recyclers to source for input materials for their production. The limited volume of waste all suitable for recycling also put a restraint on the growth potential of the industry. In Malaysia, more attention is paid to solid waste management than Scheduled Waste management. Within the Scheduled Waste management sector, e-waste has received more focus than waste oil, which is a relatively young industry. Although the Malaysian government recognises the importance of recovery and recycling, the current legislation centers more on constraining the negative impacts of hazardous wastes on the environment than promoting waste recycling activities. Waste oil generators are required by law to monitor the flow of waste oil as well as to ensure the oil is properly stored or disposed of. 107 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence However, there is limited legislation pertaining to the responsibility of manufacturers/ producers to conduct recycling activities. There has been discussion on the possibility to impose Extended Producer Responsibilty on manufacturers/ producers, or to introduce a take-back system, but relevant regulations to implement these in Malaysia have not yet been formulated. Recently, more efforts have been put into raising awareness in the community about waste management in general and Scheduled Waste management in particular. Starting 2008, the DOE has developed and implemented the Environmentally Hazardous Substance Notification and Registration Scheme (“EHSNR”). This scheme encourages manufacturers and importers to be engaged in the monitoring of the flow of hazardous wastes and chemicals in Malaysia. The scheme started and is still carried out on a voluntary basis. It is expected to be made mandatory once relevant legislation is gazetted. (Source: The Oil Recycling Industry 30 September 2012, 0&8, Malaysia) 1.6 COMPETITIVE LANDSCAPE The oil recycling industry is a regulated sector in Malaysia and requires good know-how and technical expertise in the chemical process. As such, there are a limited number of players involved in waste oil recycling. Size and Capabilities of Most DOE-Licensed Waste Oil Players Majority of licence-holders for activities related to waste oil in Malaysia mainly comprise small-to-medium companies. Most players are involved in the collection, storage, disposal of Scheduled Waste, and processing of waste oil into semi-processed products or lower-value end products. For most, the process often stops at turning waste oil into raw materials for the production of other oil products. Only a few players have the capability to treat waste oil and transform it into finished end products of higher value. In addition, few players have implemented packaging and branding for their products. In this regard, the Hiap Huat Group has the competitive advantage, since it produces end-products that are ready for use by consumers. The Real Competition Competition in the oil recycling industry in Malaysia primarily pertains to securing input materials for production, that is, waste oil, instead of efforts to increase sales. Normally, players have established long­term rapports with their suppliers for the acquisition of their waste oil. However, it continues to be 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence challenging for players to secure stable supplies of good quality waste oil for their recycling activities. Industry players also face competition that arises from the waste collection and recovery activities by unlicensed players. Number of DOE-Licensed Waste Oil Players Industry players differ in staff size, business scale, recovery/ recycling activities, technology used and output types, to name a few. As at 2 August 2012, there are 40 contractors in Malaysia that are licensed by the DOE as local off-site recovery facilities for oil/ mineral sludge/ spent coolant. Out of these, our interviews revealed that 28 are currently actively engaged in activities related to waste oii recycling in Malaysia. Only eight are licensed to collect waste oil from vessels. Majority of these players are small-to-medium companies. Their staff size of companies can be as small as comprising only three employees. Bigger players can have a staff size of over 100 employees. While several established players have been actively involved in the industry for over 20 years, a number of companies, especially the smaller ones, have only been in the industry for five to less than 10 years. Figure 1,3: Segmentation ofIndustry Players by Type of Sale of Output Only for internal lise 11% No production of recycled producls 111%
Interviews revealed that a minority (approximately 25%) of these active players do not produce output for sales. Instead, they treat waste oil as a waste management service for their customers, or process waste oil into other re-usable products for their internal use. The remaining 75% of these players have the 7. INDUSTRY OVERVIEW (Cont’d)

 

Decide with Confidence capabilities to process waste oil into semi-processed or end products for sale to external customers. Fuel oil comprises the bulk of end-products for sale by these players. It is estimated that only eight players are capable of producing recycled lubricating oil or finished end products. One of these companies is Hiap Huat Chemicals Sdn Bhd. In addition to recycling activities and product types. industry players differ in their business scale, the technology involved in their operations, as well as the area that they have presence in. Smaller players are mainly engaged in the collection/transportation of waste oil, and less technically advanced treatment of waste oil to recover fuel oil. Bigger players can afford to invest in equipment for better filtering of waste oil to produce base oil and/or blending base oil with additive(s) to produce lubricating oil. These players may have more than one premise for their recycling activities, and presence in different states in Malaysia. The Hiap Huat Group is one of these companies with such wide outreach. It currently has two production facilities that are spread out to serve the Central and Northern regions of Malaysia. Several smaller players have opined their interest in possible investment in systems that allow them to produce higher-value products from oil recycling. Most players have established long-time customers who purchase their recycled products. Due to a number of reasons, including their limited capacity and the maximum handling quantity that they are allowed as per licences granted by the DOE, smaller players are often engaged in contracts with a small number of regular customers/ purchasers, and are not able to service new customers unless their capacity can be increased. (Source: The Oil Recycling Industry 30 September 2012, 0&8, Ma/aysia) 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence
1.7 BARRIERS TO ENTRY High Start-up Costs The business of oil recycling often requires large investment in land, building, machineries, vehicles and utilities, amongst others. These costs vary, depending on the business scale and operations. In order to recover the maximum usable substances from waste oil, a recycler may need to utilise more than one recycling process. This is because waste oil can be treated through several stages, with the waste from one stage being the feedstock for the next stage, to produce different outputs. Thus, a new player may need to face high outlay investments in multipie waste recycling systems. In addition, industry players are also faced with the cost of purchasing, licensing and operating transportation for their collection of waste oils. Strict Regulations and Compliance Existing regulations in Malaysia require industry players that are engaged in oil recycling services to obtain several written approvals and licences before they can operate. Time and resources are also needed for the renewal of licences, as well as application for increases in handling capacity or additional types of Scheduled Wastes to be managed by a company! business. In addition, safety requirements during the normal course of business in the oil recycling industry are usually more stringent than a number of other industries. Skilled and Loyal Workers It is challenging for industry players to attract and retain employees, especially skilled and loyal ones, due to the less appealing nature of the industry and the increased job opportunities in other industries. This translates into possibly higher costs of recruitment and training, amongst others. Recycling of Scheduled Wastes such as waste oil requires certain skills and expertise that can only be obtained after a process of training. This, however, requires companies! businesses to have already established know-how, or have in-house experts! professionals, or outsource training programmes from third parties. Supply of Raw Materials Securing stable sources of raw materials for oii recycling has become more challenging, due to reasons such as low awareness of proper waste management which causes illegal dumping or inappropriate disposals of waste oils, increased number of industry players, and higher costs of raw materials and securing suppiies or raw materials, amongst others. Some waste generators have also started treating their own wastes to save costs, as they can take advantage of incentives offered by the government for 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence environment conservation, thus potentially decreasing the supply of raw materials for waste recyclers. In addition, the costs of retrieving and transporting raw materials to treatment facilities have also been driven upward. (Source: The 011 Recycling Industry 30 September 2012, D&8, Malaysia)
1.8 LEGISLATIONS, INCENTIVES AND POLICIES National Policy on the Environment (“NPE”) Introduced in 2002, the NPE was formulated to facilitate environmentally sound and sustainable development, encompassing all three economic, social and environmental aspects in line with the goal of developing Malaysia into a high-income status nation, as envisaged in its Vision 2020. The NPE sets forth seven key areas under Malaysia’s green strategies. The NPE plays an important role in guiding policy makers and other parties to ensure their activfties are in the interest of the nation’s sustainable development. The Environmental Quality Act 1974 (“EQA”) Scheduled Wastes and recycling activities of these wastes are under the purview of the DOE. The function of the DOE is to administer and enforce the EQA, and Section IV of the Economic Exclusive Zone Act 1984. EQA sets forth regulations on the prevention, abatement, control of pollution, and enhancement of the environment in Malaysia. This act is the main legislation on environmental activities in Malaysia. The Director General of Environmental Quality (“Director General”) has been appointed to administer EQA and any regulations and orders made thereunder. Under EQA and its subsidiary legislations, prescribed activities, including activities related to waste oil, are required to obtain certain approvals and licences prior to their implementation. Contravention of EQA can lead to imprisonment for a period not exceeding five years, and a fine not exceeding RM500,000. Companies are also subject to compounds or fines for failing to comply with conditions set out in their operating licences. Licences are generally valid for one year, unless otherwise specified, and require renewals within a certain time frame. Licences for recovery activities dictate the maximum amount of wastes that the licence holder is allowed to handle, based on the capacity, the technology used, and the site of their project, amongst other factors. 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence Subsidiary Legislation on Scheduled Wastes Management The main regulations that govern any facility that generates, stores, transports, treats or disposes Scheduled Waste are as follows: i) Environmental Quality (Scheduled Wastes) Regulations 2005; ii) Environmental Quality (Prescribed Conveyance)(Scheduled Wastes) Order 2005; iii) Environmental Quality (Prescribed Premises) (Scheduled Wastes Treatment and Disposal
Facilities) Order 1989; iv) Environmental Quality (Prescribed Premises) (Scheduled Waste Treatment and Disposal Facilities) Regulations 1989; v) Customs (Prohibition of Export) Order 2008, and; vi) Customs (Prohibition of Import) Order 2008.
Under these regulations, specific licences and permits are required for the implementation of any activity pertaining to Scheduled Waste management. Accordingly, the disposal of Scheduled Wastes should only be carried out at prescribed premises. The treatment and recovery of Scheduled Wastes are only allowed at prescribed premises or on-site treatment facilities, and the residuals from these processes should be treated or disposed at prescribed premises. Vehicles that are used to coliecU transport Scheduled Wastes are required to be licensed. Guidelines are also provided by the DOE on the labelling of containers that are used to store Scheduled Wastes. Operators of vehicles that are used to transport Scheduled Wastes are required to attend training programmes. Import or export of waste oil requires written approval issued by or on behalf of the Director General. The importation! exportation of Scheduled Wastes are also regulated under subsidiary legislations pursuant to the Customs Act 1967, as follows: Export of hazardous wastes for final disposal is not allowed if the hazardous wastes could be treated at local facilities; Export of hazardous wastes for recovery is SUbject to the export guidelines on minimum percentage for recoverables; Import of hazardous wastes for final disposal from non Organisation for Economic Co-operation Development (“DECD”) countries requires special permission and total prohibition for hazardous wastes from OECD; and Import of hazardous wastes for recovery requires written approval. 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence Incentives The Malaysia government has put in efforts to encourage activities in environmental protection, conservation, and improvement. Various policies and measures have been formulated to promote waste recycling and management. Several incentives for activities related to Scheduled Waste management are as follows: Pioneer Status; Investment Tax Allowance; Accelerated capital allowance; and Other tariff-related incentives and allowance for the utilisation of environmental-protection equipment. These incentives are under the discretion of the Maiaysian Industrial Development Authority (“MIDA”) and the Inland Revenue Soard Malaysia (“IRS”). The pioneer status of companies directly involved in the storage, treatment and disposal of toxic and hazardous wastes offers income tax exemption of 70%, or 100% for promoted areas, of the statutory income for a period of five years, amongst others. The Investment Tax Allowance allows for the allowance of 60%, or 100% for promoted areas, on the qualifying capital expenditure incurred within a period of five years and can be offset against 70%, or 100% for promoted areas, of the statutory income in each year of assessment. The Accelerated Capital Allowance allows companies that undertake waste recycling activities an initial 40% allowance and an annual 20% allowance on the qualifying capital expenditure for the use of environmental protection equipment. Additionally, there are also tariff related incentives, such as possible zero import duty or full exemption of import duty and sales taxes on machinery and equipment that is used directly in the manufacturing process, and not produced locally. An initial allowance of 40% and an annual allowance of 20% on the capital expenditure incurred on environmental-protection equipment are available for companies using such equipment. (Source: The Oil Recycling Industry 30 September 2012, 0&8, Malaysia) 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence 1.9 DEMAND AND SUPPLY CONDITIONS OF THE OIL RECYCLING SERVICE INDUSTRY 1.9.1 Demand Demand for Base Oils Industrialisation and development in both the domestic market and overseas, especially in developing countries, are normally associated with investment in machinery and equipment. This will have an impact on demand for base oils and lubricating oils that are produced in Malaysia. As long as recycled oil products meet the desired specifications set by purchasers, there is always demand for services and products of oil recyclers as base oils are one of the key end products of waste oil recycling and are used for the production of lubricating oils. Higher Spending Power The population of people with middle-to-high income in Malaysia is on the rise as a result of the country’s robust economic growth and further recovery from the recent global crisis. Consumption and manufacture of items such as cars and other motor vehicles will see increases, affecting the demand for lubricants and consequently, base oils and recycling services. Development in Other Industries Growth and trends in other industries, such as automobile manufacturing, construction and quarry, will have an impact on the demand for oil recycling services. First, the increase in volume of industrial wastes being generated calls for proper management of these wastes. Second, the fast-growing automotive industry will boost demand for both engine oil and management services of waste engine oil. Environmental Regulations and Awareness At present, motor oils are changed more frequently than in the past, due to different recommendations by manufacturers to ensure compliance with the increasingly stringent emission standards. Recycling services are needed to handle this bigger volume of used oil. Recycled oil products may gain appeal to end-consumers in the future, in view of environmental concerns and given better education and promotion of “green” concepts and practices. In addition, through the EQA, the Malaysian government is constantly keeping abreast of the needs for proper management of Scheduled Waste. After the EQA was introduced in 1974, more specific legislation on industrial and hazardous wastes was introduced, for example, the Environmental Quality (Prescribed 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence Premises) (Crude Palm Oil) Order 1977, the Environmental Quality (Prescribed Premises) (Raw Natural Rubber) Order 1978 and the Environmental Quality (Sewage and Industrial Effluents) Regulations 1979. Amendments to the relevant legislation and other initiatives have been effected by the Malaysian government in view of every-increasing needs for proper waste oil management. Oil Prices Oil prices have been on the rise due to the depleting stock worldwide. This leads to the search for alternatives for oil and oil products, of which recycled oil is one. Price-wise, recycled oil is generally cheaper than new oil. Used oil can be recycled indefinitely, which makes recycled oil a stable source. Thus, the demand for oil recycling services can be considered to be positively correlated to oil prices. Increases in oil prices will likely boost demand for substitutable oil products (i.e. recycled oil), thus, increasing the demand for oil recycling services, and vice versa.

1.9.2 Supply Oil Prices Prices of waste oils (which are the raw materials for oil recycling activities) are dependent upon fluctuations in prices of original oil products, which, in turn, are affected by world oil prices. As such, the supply of oil recycling services will be subject to changes accordingly. Competition and Insufficient Raw Materials Due to the rising awareness on environment conservation as well as the huge potential for investment in the recycling industry in Malaysia, there have been more participants in the sector, which translates into tougher competition. Meanwhile, a number of waste generators have started to treat their own wastes, instead of engaging a third party to treat or dispose the wastes. Under the current legislation, provided specific conditions are met, waste generators are not required to obtain a licence for on-site treatment of their own wastes. The Malaysian government has also put in place incentives for companies! businesses that initiate green practices. As such, It has become increasingly difficult for waste recyciers to secure quality raw materiais (i.e. waste oil). The competition that comes from unlicensed waste collectors causes reduction in the supply of raw materials for licensed players, The insufficient supply of raw materials will put a constraint on the supply of oil recycling services, 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence Regulations The oil recycling industry is under strict regulations, including various requirements on licences, permits, and safety guidelines and practices. In addition, the activities of recyclers are limited by the quantity of wastes that they are licensed by DOE to handle. The possible future adoption of new regulations may deter players from being involved in the industry, therefore, affecting the supply of oil recycling services. Development in the Automotive Industry Under Malaysia’s Economic Transformation Programme (“ETP”), the automotive industry can expect to witness a lot of development and changes, as one of the key economic areas under the ETP involves car workshops. This, in turn, will affect the supply of raw materials to oil recyclers. The stability of supply might be improved, creating more incentives for oil recyclers to expand their business activities. Development in the Shipping Industry Development in the shipping industry will also affect the supply of waste oil, specifically marine waste oil. An increase in port and shipping activity will imply a larger supply. In 2011, activity at major ports in Malaysia was robust. From 2007 to 2011, ship calls to selected ports in Peninsular Malaysia grew by a Compounded Annual Growth Rate (“CAGR”) of 2.3% and 1.6% at selected ports in Sabah and Labuan. (Source: The Oil Recycling Industry 30 September 2012. 0&8, Malaysia) 1.10 INDUSTRY RELIANCE ON, AND THE VULNERABILITY TO IMPORTS Under Malaysia’s current legislation framework, importation of Scheduled Wastes into the country is restricted. Written approval is required for such importation, subject to the economic value or recoverable economic value of the Scheduled Wastes to be imported as well as the purpose for which the wastes are imported. Other countries may also have in place restrictions on exporting Scheduled Wastes to Malaysia. As such, the influence of imports on the supply of raw materials (waste oils) for oil recycling in Malaysia is insignificant. Players in the industry do not perceive imports as one significant factor that affects their businesses. With regard to the semi-processed and end-product of waste oil recycling (mainly base oil and lubricating oil), the industry may be subject to some impacts from the importation of substitutable oil products. In 2011, Malaysia imported approximately RM70.0 billion worth of mineral fuels and lubricants. However, the country’s exports of mineral fuels and lubricants for the same year amounted to a much higher value of t9 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence approximately RM127.8 billion. This can be attributed to Malaysia being an oil exporting country, the appreciation of its currency and the increasing oil prices worldwide. The importation of additives, which are essential in the production of recycled lubricating oil from recycled base oil, can also have an impact on the domestic oil recycling industry. Different grades or types of lubricating oil can be produced by blending different additives or combination of additives to the recycled base oils. The stronger Malaysian Ringgit may be favourable for companies importing additives, as the prices of imports become relatively cheaper. (Source: The Oif Recycling Industry 30 September 2012, D&8, Malaysia) 1.11 SUBSTITUTE PRODUCTS Recycled lubricating oil, which is the main end product output of the Hiap Huat Group, is commonly viewed as substitutes of original lubricants. Generally, original lubricants are preferred over recycled ones due to quality differences. This is especially for engine oils as car manufacturers often provide their recommendations on specific engine oil specifications that are suitable for their manufactured cars. However, recycled lubricants are increasingly gaining favour due to their competitive pricing. Industry sources opined that their recycled products are mainly catered to the industrial sector. Most of the recycled products available in Malaysja are of medium-to-Iow quality, as compared to original products. These recycled products can be used to substitute energy fuels in industrial burners and factories. As world oil prices continue to increase, recycled products become more attractive mainly due to their lower price range. (Source: The Oif Recycling Industry 30 September 2012, D&8, Malaysia) 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence 1.12 INDUSTRY PLAYERS, COMPETITION AND POSITIONING The industry mainly comprises small-to-medium players. Some players focus their activities within a specific area, while bigger players may have presence nationwide. Players in the industry primarily cater to customers in Malaysia. Players in the industry also differ by recovery! recycling activity, technical capability and product type. Some players are mainly involved in the collection and trading of waste oil, or treatment of waste oil for disposal. Others are offering waste management services, or are engaged in the recovery and treatment of recycled oil products. The types of recycled oil products that players are capable of producing depend significantly on their technical capability. While over 80% of active players are capable of processing waste oil into re-usable products, these mainly comprise fuel oil, which is of lower value among recycled oil products. Only a few players have in place recycling systems that allow them to move up the value chain and produce higher-value outputs, such as grease, base oil or lubricants, amongst others. Industry research revealed that there are approximately eight waste oil players that are able to produce finished end waste oil products -one of which is the Hiap Huat Group. Table 1.1: Active Players in the Oil Recycling Services Industry in Malaysia
5E Resources Sdn Bhd SW206, SW305, SW306 & SW307, SW312, SW322, 1 SW323, SW409, SW410, SW416, SW417 & SW418 KB Enviro Sdn Bhd (Kotor Bina Sdn SW 309, SW 308 2 Bhd) 3 OLST Petroleum (M) Sdn Bhd. SW306, SW305, SW307 4 Perniagaan Saudara Baru SW305, SW306, SW307, SW410 5 Rengkas Maju Sdn Bhd SW306, SW305, SW307 6 Techno lndah Sdn Bhd SW308, SW309, SW310 Yozai (M) Sdn Bhd
SW323, SW322, SW418, SW305, SW306, SW307, 7 SW312, SW314, SW315, SW327, SW409, SW410, SW416, SW417 Kualiti Kitar Alam Sdn Bhd SW322, SW323, SW417, SW418, SW206, SW423, 8 SW305, SW306, SW307, SW314, SW401, SW104, SVV325, SVV110,SVV204, SVV409 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence _;r;;;x;;,;;;W;’;J,i;: nn,y:gg;~’~j,:·.·;’.”rf”j….r·.·n:: .• ·•·•• ··:.{;~f;;r;20·f0.f;.;:·
Hiap Huat Chemicals Sdn Bhd  SW322,  SW323,  SW327,  SW303,  SW305,  SW306,  9  SW307, SW 308,  SW 309,  SW310,  SW312, SW314,  SW315,  SW417,  SW418;  SW409;  SW410,  SW429,  SW430  Urban Environmental Industries Sdn  SW305, SW306, SW307, SW309, SW312, SW409,  10  Bhd  SW410, SW322, SW323, SW418, SW429  11  Aliran Segar SIB  SW305, SW306, SW307  12  Primochem Sdn. Bhd  SW305, SW306, SW307, SW323, SW322  13  Sl Recycling (M) Sdn Bhd  SW305, SW306, SW312  14  SPM Oil & Gas Sdn Bhd  SW305, SW306, SW307, SW309,SW311, SW312  15  Transada Chemicals SIB  SW305, SW306, SW307, SW323, SW322  16  ClM Conservation (PG) Sdn Bhd  SW204, SW206, SW307, SW322, SW323, SW409,  SW410  17  Five Good Recycling (M) Sdn Bhd  SW305, SW306, SW307  18  Nasdeem Ventures Sdn Bhd  SW305, SW306, SW307  19  Syntax System Solutions Sdn Bhd  SW305, SW306, SVV307, SW410  20  A & C Technology Waste Oil Sdn  SW305, SW306  Bhd  21  Alivirgo Sdn Bhd  SW305, SW306  22  Chem Specialties Sdn Bhd  SW314, SW305, SW306; SW307, SW323, SW322,  SW417, SW410, SW409  23  lOT Petroleum Sdn Bhd  SW305, SW306  24  Malik Family Resources Technology  SW305, SW306, SW307, SW312  Sdn Bhd.  25  Riyaland Sdn Bhd  SW305, SW306, SW307, SW323, SW322, SW417  Tensidchem Sdn Bhd  SW323, SW322, SW418, SW305, SW306, SW307,  SW409, Used cloth, plastic, paper or filters contaminated  26  with oil or organic solvents from motor vehicle assembly  plants, metal working, electronics and semiconductor  plants and packaging plants, SW314  27  NRS Waste Management Sdn Bhd  SW305, SW308, SW309, SW310, SW311, SW313,  SW314, SW315,SW408  28  Sin Chan Hoo Sdn Bhd  SW305, SW306, SW308, SW312
7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence Note: • The list of the active players featured in the table above was extracted on 2 August 2012 from “List of Scheduled Waste Contractors in Malaysia” which falls under the category of Oil/Mineral, Sludge/Spent Coolant.
• The “List of Scheduled Waste Contractors in Malaysia” under the said category, extracted on 2 August 2012, contains 40 Scheduled Waste contractors.
• Primary research was conducted to verify the principal activities of the listed Scheduled Waste contractors. Note that only those who are actively involved in waste oil recycling. and are contactable at the time of this research. are included in the table of active players in waste oil recycling.

Source: Department of Environment, Ministry ofNatural Resources and Environment; D&B As at 2 August 2012, there are 28 players that are active in the industry. Please refer to the table below for a summary of financial information and business activities of major companies that are involved in oil recycling services in Malaysia. According to these financial data, Hiap Huat Chemicals Sdn Bhd, the main operating entity of the Hiap Huat Group, is among the top three major players in the oil recycling industry in Malaysia. In 2009, HHC recorded RM24,347,729 in sales. This figure increased to RM30,162,818 in 2010 and RM36,437,607 in 2011. Based on Hiap Huat Chemicals Sdn Bhd’s revenue in 2011, Hiap Huat Group’s market share in the waste oil recycling industry in Malaysia is estimated to be approximately 20% to 26%. Table 1.2: Latest Financial Data of Players in the Oil Recycling Services Industry in Malaysia
Bhd 2 lOT Petroleum Sdn Bhd 30-Sep-10 36,385,083 2,357,473 collection, treatment, and manufacturing of end waste oil products. Distributor of gas and gasoline, agent of lubricants, petroleum, diesel and kerosene
7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence
3 4 5 6 7 8 9 10 11 12 Kualiti Kitar Alam Sdn Bhd 5E Resources Sdn Bhd Rengkas Maju (M) Sdn Bhd
SL Recycling
(M) Sdn Bhd OLST Petroleum (M) Sdn Bhd Urban Environmental Industries Sdn Bhd Malik Family Resources Technology Sdn Bhd Riyaland Sdn Bhd Techno Indah Sdn Bhd

SPM Oil & Gas Sdn Bhd 31-Dec-11 31-Dec-10 31-Dec-10 31-Dec-10 31-May-09 31-Dec-10 31-Mar-11 31-Dec-10 31-Mar-11 31-Dec-10 18 13,784,359  (260,214)  Provision of waste recycling and recovery services  8,303,826  1,354,568  Collection, treatment, recovery and recycling of waste oil and chemical products.  8,039,646  673,005  Providing transportation services and trading in motor oil  6,740,731  241,014  Waste oil recycling  5,126,274  366,791  Transportation, waste oil collection and oil spill cleaning  4,153,318  (1,397,315)  Processing and manufacturing  4,006,463  6,776  Waste oil recycling  3,366,700  780,297  Waste oil recycling  2,497,861  737,057  Sludge disposal management  2,431,136  132,910  Waste oil recycling
7.  INDUSTRY OVERVIEW (Cont’d)  Decide with Confidence  13  ClM  31-Mar-11  2,363,648  415,482  Treatment solvent recovery and  Conservation  its related services.  (PG) Sdn Bhd  14  Five Good  31-0ec-10  2,125,021  42,052  Waste Oil Recycler  Recycling (M)  Sdn Bhd  15  Sin Chan Hoo  31-0ec-10  2,052,298  15,304  Waste oil recycling and dealing  Sdn Bhd  in lubricants and fuel  16  Aliran Segar  31-0ec-10  2,025,386  97,112  Waste oil recycling  Sdn Bhd  17  Syntax System  30-Apr-10  1,952,298  908,993  Collection, treatment, recovery  Solutions Sdn  and recycling of industrial waste  Bhd  and sale of recycled products
19 20 21 22 23 Yozai (M) Sdn Bhd A&C Technology Waste Oil Sdn Bhd Primochem Sdn Bhd KB Enviro Sdn Bhd Transada Chemicals Sdn Bhd Nasdeem Ventures Sdn 31-0ec-10 31-Dec-09 31-Jul-11 31-0ec-10 31-0ec-11 30-Jun-10 1,949,966 1,529,811 815,058 409,662 55,080 12,852 (66,334) 19,775 (475,195) (649,496) (104,314) (1,079,908) Treatment, recovery and recycling of industrial Scheduled Waste Waste oil recycling Recycling engine oil and lubricants Waste oil recycling Recovery and recycling of petroleum-based products Recycling of spent oil 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence
Note: • This lable excludes companies whose latest financial records available are prior to 2009, and those that are reported to have ceased operations.
• Financials for Perniagaan Saudara Baru, Alivirgo Sdn Bhd, Tensidchem Sdn Bhd, Chem Specialities Sdn Bhd and NRS Management Sdn Bhd were not available at the lime of this research.
• Cents have been rounded up for consistency.

Source: Companies Commission of Malaysia, Interviews, HH Group (Source: The Oil Recycling Industry 30 September 2012, D&8, Malaysia) 1.13 INDUSTRY PROSPECTS AND OUTLOOK The outlook of the oil recycling industry in Malaysia remains positive and is expected to grow at approximately 8% to 15% per annum, on the back of the following factors: Solid Economic Performance, Stronger Demand and Supply The performance of Malaysia’s economy will be an important determinant in spurring the growth across industries in the country. Malaysia’s economy has shown strong signs of rebound from the 2008 global economic crisis, resuming its double-digit GDP growth in 2010. Recovery has continued in 2011 and the first two quarters of 2012, albeit at a slower pace. Budget 2012 hadfurther propelled the development of Malaysia’s economy. Under the budget, RM232.8 bullion was allocated for government plans. This included RM184.6 billion for management and RM51.2 billion for development. It was further reported that RM29.38 billion has been allocated for investments in infrastructure, industrial and rural development and another RM13.6 billion has been allocated for the social sector, encompassing education and training, welfare, housing and community development. 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence Improved economic conditions will lead to better consumer confidence and higher willingness to spend, as chances of employment and salary increments are higher. Demand for various items, including automobiles, is expected to increase, giving rise to the need of both waste oil recycling services and recycled products. On the other hand, further expansion in several industries within the manufacturing sector is probable. in response to the economy’s performance and the government’s development policies. Many of industries generate waste oil, while many have started to adopt the use of recycled oil products. As such, the waste oil recycling industry can anticipate further growth. Promotion of Green Initiatives and Adoption of Green Practices Malaysia has seen higher awareness on environmental issues, due to efforts by its government to educate the people. The environment has remained one of the focused areas of the Malaysian government under its Ninth and Tenth Malaysia Plans. Attractive incentives and allowances are offered to parties who employ practices or technologies that contribute to environment conservation. Within industry clusters, there has been higher demand for waste management services. The use of recycled oil products has also increased and is expected to expand. This is due to not only the increased awareness among industry clusters, but also their recognition of the cost effectiveness of recycled products. In view of the increases in oil prices worldwide, alternative energy sources, including fuel oil, are gaining more demand. In the industrial sector in Malaysia, industry players foresee larger purchase volumes of recycled fuel oil. Recycled lubricating oil products have also become more popular. The use of recycled oil products is expected to extend to the consumer sector, when higher-quality recycled products are made available to end-consumers. A Young Industry Set for Growth The infancy state of the waste oil industry signifies a lot of untapped growth potential and opportunities. There are currently less than licensed 30 players serving the whole country. While several established players have been actively involved in the industry for over 20 years, a number of companies, especially the smaller ones, have only been in the industry for five to less than 10 years. Demand for their products and services are increasing and come from both the local market and overseas, while larger volumes of properly managed waste oil are anticipated as are result of better education and improved awareness. The industry is set for growth, in view of favourable demand and supply factors. 7. INDUSTRY OVERVIEW (Cont’d)
Decide with Confidence Overall, the outlook of the oil recycling industry in Malaysia remains positive. The rebound in the economy after the 2008 crisis is slowly gaining consumer confidence. A growing Malaysian population, with increased income levels and better education, results in growth in the middle and upper middle class segment. This segment offers a large market potential for the automotive industry and, in turn, boosts demand for oil products, both original and recycled ones. The continued support from the Malaysian government in promoting green initiatives as well as the ongoing and forward-looking expansion of players in the industry will open more avenues for the industry to continue to grow. Increasing proactive activities to raise awareness on environmental issues and environment conservation by the public and private sectors will create favourable conditions for the industry, as consumers become more willing to accept, purchase and use recycled products. Meanwhile, the industrial and commercial sectors, upon acknowledging the benefits and cost effectiveness of oil recycling, will likely see increased recycling activities. These dynamics are present at both the national and global levels. As such, the demand for oil recycling services and products in Malaysia remains healthy, and comes from both the local market as well as overseas. The domestic market is generally perceived by industry players as having potentials for expansion, despite challenges in securing stable supplies of raw materials. Further expansion will be seen in terms of both larger business size and scale, and more products moving up the value chain, as an increased number of players will adopt new technology for their production. As this industry is still considered to be at its infancy stage, it is expected to grow at a faster rate than saturatedl saturating industries. (Source: The Oil Recycling Industry 30 September 2012, 0&8, Malaysia)

 

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