Industry Overview

7. INDUSTRY OVERVIEW 7. INDUSTRY OVERVIEW Vital Factor Consulting Sdn BhdQ VITAL FACTOR CONSULTING (Company No: 266797-T) Creating Winning Business Solutions V Square @ PJ City Centre (VSQ) Block 6 Level 6, Jalan Utara 46200 Petaling Jaya Selangor, Malaysia Tel (603) 7931 3188 15 September 2015 Fax (603) 7931 2188 www.vitalfactor.com The Board of Directors Kim Teck Cheong Consolidated Berhad Lot 73, Jalan Kilang SEDCO Light Industrial Estate Mile 5Y2, Jalan Tuaran 88450 Kota Kinabalu Sabah Dear Sirs and Madam Independent Assessment of the Distribution of Consumer Packaged Goods in Malaysia We have attached a report on the Independent Assessment of the Distribution of Consumer Packaged Goods in Malaysia prepared by us for inclusion in the prospectus of Kim Teck Cheong Consolidated Berhad, together with all its subsidiaries, in relation to its proposed listing on the ACE Market of Bursa Malaysia Securities Berhad. We have prepared this report in an independent and objective manner and had taken all reasonable consideration and care to ensure the accuracy and completeness of the report. It is our opinion that the report represents a true and fair assessment of the industry within the limitations of, among others, secondary statistics and information, and primary market research. Our assessment is for the overall industry and may not necessarily reflect the individual performance of any company. We do not take any responsibilities for the decisions or actions of readers of this document. This report should not be taken as a recommendation to bUy or not to buy the shares of any company. Certain statements, including assessments and OpIniOnS in this report, are forward-looking in nature, and are SUbject to uncertainties and contingencies. While statements made in this report are based on, among others, secondary statistics and information, primary market research, and after careful analysis of data and information, the industry is subjected to various known and unforeseen forces, actions and inactions that may render some of these statements to differ materially from actual future results. In light of these and other uncertainties, the inclusion of forward-looking statements in this report should not be regarded as a representation or warranty that our assessment will be justifiable. Given the risks and uncertainties of future events and conditions, we advise investors not to place undue over-reliance on those statements and, where relevant, seek further independent and expert advice. Yours sincerely
Wong Wai Ling Director Kim Teck Cheong Consolidated Berhad Page 1of45 Independent Industry Assessment 140 7. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions INDEPENDENT ASSESSMENT OF THE DISTRIBUTION OF CONSUMER PACKAGED GOODS IN MALAYSIA 1 BACKGROUND AND INTRODUCTION • Kim Teck Cheong Consolidated Berhad (herein together with all or anyone or more of its subsidiaries will be referred to as KTC Group or the Group) is mainly involved in providing market access and coverage for brand owners of consumer packaged goods (CPG) in East Malaysia.
• Market access and coverage covers a number of activities undertaken on behalf of brand owners of CPG to ensure their products are accessible to as many potential buyers as possible. As such, a company that offers market access and coverage services commonly undertakes the following functions:

negotiate and obtain shelf space in retail outlets for its representative brands of products; purchase products from brand owners for resale; provide warehousing facilities, and in some cases, including chiller and freezer facilities; undertake logistics including pick, pack and deliver to retail outlets, central receiving stations or other buyers on a daily or periodic basis; administer and fulfil daily or periodic reorders from buyers; manage returns of damaged and expired products.
Other supporting services may also include marketing related activities as follows: undertake in-store promotional activities with brand owners; involve in advertising and promotional campaigns with brand owners; increase purchases of stocks to support marketing campaign. • The provision of market access and coverage is also referred to as distribution. As such, this report will use the term distribution to mean providing market access and coverage.
• This report is an industry assessment on the distribution of consumer packaged goods (CPG) in Malaysia. Statistics covered in the assessment refer to the whole of Malaysia unless otherwise mentioned. This report will exclude companies that undertake their own in-house distribution.

2 INDUSTRY OVERVIEW
2.1 Overview of the Consumer Packaged Goods Industry • The broad definition of CPG refers to mass produced consumer goods that are non­durable, relatively low cost and are consumed or used frequently by consumers or households. It is also common for CPG to be referred to as fast moving consumer goods (FMCG), and packaged and branded consumer products. This effectively excludes fresh food and produce without packaging, as well as bulk goods and commodities sold in loose forms. CPG are commonly retailed in modern trade outlets like hypermarkets, supermarkets, minimarkets, convenience stores, departmental stores, specialty stores like community pharmacies, stationery stores, health food stores, and health and beauty stores as well as traditional retail outlets like sundry shops and Chinese medical halls. CPG are also sold through non-store based retailers like direct sales and through the internet. Kim Teck Cheong Consolidated Berhad Page 2of45 Independent Industry Assessment 141 7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • CPG can be segmented as follows:
Food and Household Personal Care OTC and Health OthersBeverages Products Products Supplements Note: OTC =Over-the-Counter Drugs KTC Group is mvolvedm the distribution of all the above main categories of CPG • Food and beverages are edible items. For CPG, they are commonly processed products and branded. Processed food and beverage products are those that have undergone transformation such that its final form is significantly different from its original raw materials or primary food products. In this respect, food that has only been cleaned, cut and/or chilled or frozen (such as chilled or frozen meat, and bagged salad or cut fruits) and beverages that have only been filtered or purified (such as fruit juice that has not been pasteurised, concentrated, flavoured or similarly processed) are usually not regarded as processed food and beverages products. Food and beverages CPG include the following: Dry food and beverages, which include all packaged foods, alcoholic beverages, non-alcoholic beverages and tobacco that can be stored under ambient temperature and generally does not require refrigeration. Packaged foods include snacks, confectionaries, oils and fats, sauces, breads, cereals, powdered and condensed milk, hot drinks, carbonated and non-carbonated drinks, pasta and noodles, sauces and dressing, spices and condiments, and others. Chilled food refers to perishable items that are stored in temperature controlled chiller rooms to preserve the quality of the food for consumption. Examples include dairy products, desserts, prepared meals and ready-to­cook food. Frozen food refers to perishable items that are stored in freezers to prolong storage time and preserve the food quality for later preparation or consumption. Examples include among others, ice-cream, processed food, prepared meals and ready-to-cook food. • Household products are non-durable products primarily used by the whole household comprising products used in the kitchen, laundry, bathroom, toilet, living room, bedroom, garden and other parts of the house. Examples include, among others, cleaning products, laundry detergents, dishwashing detergents, insecticides, air fresheners, and paper products.
• Personal care products cater to the care of the individual consumer and are used primarily for personal hygiene, external protection and care of the body, and for beautification purposes. Examples include, among others, skin care, oral care, body care, hair care, cosmetics and toiletries.

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7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Over-the-counter (OTC) drugs and health supplements are pharmaceutical products, and are defined as follows: OTe drugs refer to medicinal products that are made available to the public without the need for professional supervision or prescription. These drugs are commonly used for self-medication to treat minor ailments and conditions. Examples include among others, analgesics, cough syrups and antihistamines. Health supplements are intended to supplement the diet with one or more dietary substances, or to maintain or improve the health of the human body. They include vitamins, minerals, fibres, amino acids, fatty acids and other extracts from plants or animals. Health supplements are sometimes referred to as dietary supplements, food supplements or nutritional supplements. • Others comprised baby care products such as diapers, car care products and others.
• KTC Group is involved in providing market access and coverage for all the above major categories of CPG.

2.2 Structure of the Distributive Trade Industry • The Distributive Trade Industry are categorised into two major segments: Wholesale trade; Retail trade.
Non-Store Retailer o KTC Group operates in this segment • The Distributive Trade Industry, which includes sub-sectors of the wholesale and retail trade, covers a very wide range of products including CPG as well as non-CPG comprising mainly durable products. However, the focus of this report is on CPG only.
• Wholesale trade refers to the sale of goods in large quantities to retailers for further resale of individual product items to consumers and end-users. In some situations, wholesale trade also involve sales of goods in large quantities to industrial, commercial, institutional and professional users, as well as other wholesalers. Wholesale trade operators of CPG commonly take possession of goods and resell them in its original purchased form to retailers or other buyers.

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7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions In general, there are three types of wholesale trade operators of CPG: Distributors, usually appointed by principals who are commonly brand owners, mayor may not hold the exclusive rights to resell goods of specific brands in designated areas or retail format. Some distributors may also be involved in marketing activities in conjunction with principals whereby they are responsible or assists in advertising and promoting the products. In addition, distributors usually have to meet sales targets that are set by the principals. Other activities that are undertaken by distributors include warehousing for inventory management and control, logistics to manage the movement of goods, and after-sales support services. Distributors normally take ownership of the goods and are considered customers of their respective principals. Wholesalers usually do not hold exclusive rights to resell goods of specific brands. They merely buy products in large quantities and resell them to retailers, food service operators or institutional buyers. They commonly do not represent any principals. Generally, wholesalers do not actively promote or market any particular product or brand. Wholesalers normally take ownership of the goods and are considered customers of their suppliers. Wholesalers take supplies from distributors, agents, principals, manufacturers and other wholesalers. Agents do not take ownership of the goods but secure orders for principals. Agents usually do not hold stocks and commonly work on a commission basis. • KTC Group operates within the wholesale trade subsector as a distributor.
• Retail trade generally refers to the resale of goods to end-consumers or end-users. Customers of retail trade of CPG mainly comprise the general public although some trade and commercial users also purchase CPG at retail level.

Operators involved in the retail trade sector can be segmented into two categories: Store based retailers, commonly refer to operators carrying out retail trade from a store in a fixed location with personnel manning the store. CPG store based retailers include among others, hypermarkets, supermarkets, minimarkets, departmental stores, convenience stores, sundry shops, stationery shops, newspaper and magazine outlets, community pharmacies, Chinese medical halls, health food stores, and health and beauty stores, Non-store retailers, commonly refer to operators that carry out retail trade independent of a fixed enclosed structure, including instances where the customers do not have direct contact with the retailers. Examples of non­store retail trade include e-commerce, direct selling, telemarketing, distance selling and sales through vending machines. • KTC Group’s customers are largely store-based retailers. Kim Teck Cheong Consolidated Berhad Page 50f45 Independent Industry Assessment 144
7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 2.3 Supply Chain for Distribution of CPG • Generally, the key participants in the supply chain for the distribution of CPG include the following: Principals: They are mostly brand owners and are responsible for the exclusive supply of products under their brand names. Principals may either manufacture their own goods, appoint contract manufacturers to undertake manufacturing of their products or buy finished products which are packed under their brand names. Intermediaries: They are operators that provide linkages between principals and end-consumers/users. Intermediaries in the CPG supply chain include distributors, wholesalers, agents and retailers. • Ultimately, products distributed by the distributive trade sector which includes wholesale and retail trade, are consumed or used directly, or subjected to further processing or combined to produce different end-products for either consumption or usage. End-consumers/users include individuals, households as well as industrial, commercial, institutional and professional consumers/users. For food products, end­users also include food service operators for example restaurants, cafes, canteens, hotels and caterers. 3 MACROECONOMIC AND SOCIOECONOMIC INDICATORS • Demand for CPG is generally influenced by a country’s economic and social conditions, which are reflected by the performance of macroeconomic indicators such as Gross Domestic Product (GOP), GOP per capita and social indicators like population size and growth, inflation rate and consumption expenditure. This section discusses the socio-economic performance of Malaysia as well as contrasting its performance against other economies. As Malaysia undertakes significant trade and commerce with other countries including, among many others, the United States (US), European Union (EU) and Asia, their economic performance also have an impact on Malaysia’s economic well-being.
3.1 Gross Domestic Product of Selected Country and Regions • GDP is a measure of the gross value added in the output of goods and services in a country during a specified period of time, and as a result, it is an indicator of the overall size of a country’s economy. GOP growth is commonly measured by comparing a particular year or quarter’s GOP with that of the preceding year or quarter, and is commonly expressed as a percentage, which may be positive (indicating that the value of GOP grew over time) or negative (indicating that the value of GOP declined over time).
• Real GOP is a method of measuring GOP that takes into account the effect of changes in the prices of goods and services over time (i.e. for the effects of inflation or deflation). Real GOP generally provides a more meaningful measure of “real” changes in output as any changes from period to period are due to changes in the quantity of goods and services produced, and not due to changes in their prices.
• GOP can also be measured in “nominal” terms, where no adjustments are made to take into account the effects of inflation or deflation. Nominal GOP is also known as GOP measured at current prices.

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7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Real GOP Growth Rates 9.6%10% 7.7%7,5% 7.0% 6.8% .c: 5%l 0… C> n. C C> ~ Q.l 0% 0:: -5% -4.3% 2009 2010 2011 2012 !\\!IUS EilEuropean Union 1m Emerging and Developing Asia EilASEAN-5
2013 2014p p =preliminary ASEAN-5 =Comprises Indonesia, Malaysia, the Philippines, Thailand and Vietnam Emerging and Developing Asia = Comprises 29 countries, namely Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Fiji, India, Indonesia, Kiribati, Laos, Malaysia, Maldives, Marshall Islands, Micronesia, Mongolia, Myanmar, Nepal, Palau, Papua New Guinea, the Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Democratic Republic of Timor-Leste, Tonga, Tuvalu, Vanuatu and Vietnam EU =Comprises 28 countries, namely Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and United Kingdom (Source: Vital Factor Consulting analysis) • The Global Financial Crisis (GFC) is widely regarded to have begun in the middle of 2007 with the sUbprime mortgage crisis in the US, before spreading to a number of other countries through a combination of direct exposure to subprime mortgages, loss of confidence in other financial assets, and a slowdown in financing between financial institutions.
• The GFC had a negative effect on the economies of many countries, particularly the US and EU. The real GOP of the US contracted by 2.8% in 2009. The US began to recover from the GFC in 2010, with real GOP growth rate of 2.5% in that year. The US economy continued to grow between 2011 and 2014, with real GOP growth rates ranging from 1.6% to 2.4% during this period.
• The real GOP of the EU contracted by 4.3% in 2009. The Eurozone crisis, which was widely regarded to have started in early 2009, contributed towards the decline in the real GOP of the EU in 2009, and continued to dampen economic growth in that region. The real GOP of the EU grew by 2.0% in 2010 and 1.8% in 2011, before contracting by 0.4% in 2012. The real GOP of the EU expanded marginally by 0.1% in 2013, and grew further by 1.4% in 2014.

Kim Teck Cheong Consolidated Berhad Page 7 of 45 Independent Industry Assessment 146 7. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • The Emerging and Developing Asia countries were less negatively affected by the GFC, with real GOP growing by more than 7.0% in 2008 and 2009. The ASEAN-5 countries recorded relatively healthy real GOP growth rate of 4.9%, although growth moderated to 2.1 % in 2009. Emerging and Developing Asia and ASEAN-5 recovered strongly from the GFC, with real GOP growth rates of 9.6% and 6.9% respectively in 2010. Between 2011 and 2013, Emerging and Developing Asia and ASEAN-5 continued to experience comparatively strong real GOP growth. Real GOP growth between 2011 and 2014 ranged from 6.8% and 7.7% for Emerging and Developing Asia, and 4.6% and 6.1 % for ASEAN-5. In 2014, China made the largest contribution towards real GOP growth of Emerging and Developing Asia. This was due to its own relatively strong real GOP growth of 7.4% in 2014, and its position as the largest economy among the Emerging and Developing Asia countries.
• All of the ASEAN-5 countries recorded positive real GOP growth in 2014. Apart from Thailand, which recorded real GOP growth of 0.7%, the other ASEAN-5 countries recorded relatively healthy real GOP growth rates between 5.0% and 6.1%.
• Positive real GOP growth provides a more favourable platform for increased demand for goods and services, including CPG.

 

 

3.2 Malaysia’s Gross Domestic Product Malaysia’s Real GOP Growth 8% 7.4% 6% J: ~ <D 0. 4% c <D ~ 0:: 2% 0%
p =preliminary; f =forecast (Source: Bank Negara Malaysia)  •  Malaysia’s real GOP grew at an average annual growth rate (AAGR) of 5.4% between 2010 and 2014 with growth recorded every year during this period.  •  The Malaysian economy grew by 4.7% in 2013, contributed by continuing growth in private sector investment and consumption, and external demand. Private consumption was supported mainly by favourable employment conditions and wage growth while private investment was supported by capital spending in the mining, services and manufacturing sectors.
Kim Teck Cheong Consolidated Berhad Page 80f45 Independent Industry Assessment 147 7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • During the first quarter of 2014, the Malaysian economy grew by 6.3% where growth was fuelled by stronger expansion in domestic demand as well as turnaround in net exports. Net exports recorded growth as exports of goods and services outpaced the growth of imports. In the second quarter of 2014, the Malaysian economy registered a stronger growth of 6.5% supported by higher exports and continued strength in private domestic demand. Real exports of goods and services grew at a faster pace while growth of real imports of goods and services moderated, resulting in a significant improvement in net exports. Furthermore, positive growth from construction, manufacturing, services, agricultural and mining sectors attributed to the growth in the second quarter of 2014. In the third quarter of 2014, the Malaysian economy expanded by 5.6% mainly supported by growth in domestic demand from private sector consumption and investment, and continued positive growth in net exports of goods and services. Despite the fall in crude oil prices, the Malaysian economy continued to grow by 5.7% during the fourth quarter of 2014 and this was mainly driven by domestic demand and private sector investments.
• During the first quarter of 2015, the Malaysian economy grew by 5.6% where growth was contributed by strong domestic demand primarily from the private sector. The strong domestic demand was partially offset by the negative contribution from net exports during the first quarter amidst a decline in commodity and resource-based manufactured exports. In the second quarter of 2015, Malaysian economy expanded at a moderate pace with growth of 4.9%, mainly underpinned by domestic demand from the private sector. However, the slower growth was attributed to a decline of 8.0% in public investment mainly due to the near completion of several public sector projects.
• The Malaysian economy was projected to register a steady growth of 4.5% to 5.5% for 2015.

(Source: Bank Negara Malaysia; Economic Planning Unit, Prime Minister’s Department) Real GOP Growth of Selected States in Malaysia 15% 13.2%
.c l10% C!) 0­o C!) ~&5% 0% 2011 2012 2013 .Sabah E1Sarawak
p = preliminary; f= forecast (Source: Economic Planning Unit, Prime Ministers Department)
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7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Sabah, Sarawak and Labuan registered positive real GOP growth rates between 2011 and 2014, which was in line with the overall Malaysian economy. As for 2015, real GOP in Sabah, Sarawak and Labuan were forecasted to grow by 3%, 3.5% and 5.0% respectively.

 

3.3 Performance of the Services Sector in Malaysia • The services sector is one of the key economic indicators of the Malaysian economy. In 2014, the services sector contributed 52.9% to Malaysia’s overall GOP based on current prices (Source: Bank Negara Malaysia).
• The Distributive Trade Industry falls within the services sector of the economy. In 2014, the Distributive Trade Industry contributed 24.9% and 13.1 % to Malaysia’s services sector and overall GOP based on current prices (Source: Bank Negara Malaysia).

Real GDP Growth of the Services Sector 8% 7.4%
p = preliminary; f= forecast (Source: Bank Negara Malaysia; Economic Planning Unit, Prime Minister’s Department) • The real GOP growth of the services sector in Malaysia grew at an AAGR of 6.5% between 2010 and 2014. In 2010, real GOP of the services sector recorded a growth of 7.4%. The growth was attributed to improvements in domestic and external demand. The expansion in domestic consumption activity contributed to the growth in related sub-sectors, particularly wholesale and retail trade, as well as communications sub-sector.
• Real GOP of the services sector for 2011 grew by 7.0%. Some of the services sub-sectors, namely the wholesale and retail trade, accommodation and restaurant performed steadily supported by an expansion in private consumption.
• The services sector recorded real GOP growth of 6.5% in 2012. Growth of the services sector during the year was supported by domestic demand and a gradual improvement in external environment, although growth in the wholesale and retail trade sub-sector moderated.

Kim Teck Cheong Consolidated Berhad Page 10 of45 Independent Industry Assessment 149 7. INDUSTRY OVERVIEW (Cont’d) Q
3.4 VITAL FACTOR CONSULTING Creating Winning Business Solutions • In 2013, real GOP of the services sector registered a positive growth of 6.0%. The growth in the services sector was largely underpinned by consumer-related services sub-sectors such as wholesale and retail trade, communication, and transport and storage sub-sectors.
• During the first quarter of 2014, the services sector grew by 6.7%, supported by an improvement in the finance and insurance, wholesale and retail trade, and communication sub-sectors. The services sector continued growing with a growth of 6.4% in the second quarter of 2014. The growth was mainly driven by the robust growth of the communications, and wholesale and retail trade sub-sectors, which registered growth rates of 9.5% and 9.3% respectively during the second quarter of 2014. In the third and fourth quarter of 2014, the services sector grew further by 6.5% and 6.6%. The growth was mainly attributed to continued expansion in household spending and strong demand for data communication services.
• The services sector grew by 6.4% in the first quarter of 2015, driven by the higher growth in domestic demand. Prior to the implementation of Goods and Services Tax (GST) in the second quarter of 2015, the wholesale and retail trade sub-sector registered a strong growth of 9.8%, due to higher household spending.
• In the second quarter of 2015, the services sector registered a lower growth of 5.0%. The lower growth in the services sector was partially attributed to the moderation in the manufacturing sector. In addition, expansion in the wholesale and retail trade sub-sector was moderated following the implementation of GST.
• The services sector was forecasted to grow by 5.7% in 2015, supported by expansion across all subsectors including wholesale and retail trade sub-sector.

(Source: Bank Negara Malaysia; Ministry of Finance Malaysia) Consumer Confidence in Malaysia • The level of consumer confidence would also impact on consumer spending patterns. An increase in the level of consumer confidence is likely to lead to an increase in consumer spending, which will benefit operators in the CPG industry overall and also the distribution of CPG.
• Consumer confidence is commonly based on a monthly or quarterly survey of a broad spectrum of consumers to capture their perception of the current and the next six months state of the economy, personal financial situation, employment conditions, and likely purchasing patterns of major household items. It is commonly represented as an index to facilitate calculating changes from one period to another. Thus, an increase in the consumer confidence index would commonly mean consumers are generally optimistic about their current and future (next six months) financial situation. A high consumer confidence index is commonly interpreted as an expectation that consumers will increase their purchases of consumer goods and services. A high consumer confidence index will augur well for operators in the consumer industry inclUding those in the distribution of CPG.

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7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Consumer Sentiment Index 150
30% 3.4% -2.1% -1.2%
0%-12.5% 100 -15.3% -30% -60% 50 -90% -120% o -150% 2Qtr14 3Qlr14 4Qtr14 1Qtr15 2Qtr15 -CSI –Growth Rate (Source: Malaysian Institute of Economic Research) • The CSI fell below the 100-point confidence threshold in the third quarter of 2014 to 98.0 points. This was contributed by cautious sentiment on current and expected finances, flat employment outlook and worries over rising prices by middle-income households. In the fourth quarter of 2014, the CSI declined further due to the growth in concerns over financing and hiring, as well as forecasted uptrend in prices.
• The CSI continued to plunge to 72.6 points in the first quarter of 2015, the lowest in six years. This was attributed to growing concerns relating to the diminishing of income, inflation coupled with the weak outlook on consumer spending, possibly due to the implementation of GST. In the second quarter of 2015, the CSI declined further to 71.7 points due to the weak prospects in household income and employment, as well as inflationary concerns.

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7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 3.5  Malaysia Compared to Asian Regions  •  The following comparison charts are macroeconomic indicators of Asian regions.  3.5.1  Real GDP Growth  Real GDP Growth

• Malaysia 58 ASEAN-5 GB Emerging and Developing Asia p =preliminary (Source: Bank Negara Malaysia; Ministry of Finance Malaysia; Vital Factor Consulting analysis) • In general, growth in GDP would provide a favourable platform for increasing demand for products and services, including CPG.
• Malaysia, ASEAN-5, and Emerging and Developing Asian countries have experienced robust growth in their average real GDP growth between 2010 and 2014. In 2014, Malaysia’s real GDP was higher compared to ASEAN-5 countries at 4.6%, but lower compared to Emerging and Developing Asia at 6.8%.

3.5.2 Growth in GDP per Capita based on Purchasing Power Parity • GDP per capita is the total GDP at current prices divided by the population. The Purchasing Power Parity (PPP) uses a theoretical exchange rate that expresses the rate at which the currency of one country would have to be exchanged into another to buy the same basket of goods and services in both countries. The PPP method takes into consideration the domestic purchasing power of a country’s currency relative to other currencies.
• A country’s GDP per capita based on PPP provides a measure of the output of each member of the country’s population that is adjusted for the domestic purchasing power of that country’s currency. It provides a measure of the population’s general economic wellbeing. GDP per capita is calculated by dividing a country’s GDP by its population, and adjusting the value by the PPP exchange rate. Growth in GDP per capita based on PPP is commonly measured by comparing its value in a particular year with that of the preceding year, and is commonly expressed as a percentage.

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7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Positive GOP per capita based on PPP growth generally indicates that, on average, each person in the country generated more compared to the previous year. This suggests that the average person has more resources available for consumption of goods and services, including CPG. Sustained positive growth in GOP per capita based on PPP is generally regarded as an indicator of increasing affluence of a country’s population.
• Negative growth in GOP per capita based on PPP generally indicates that output per person declined compared to the previous year, and suggests that the average person has fewer resources available for consumption of goods and services, including CPG.

GDP per Capita Growth Based on Purchasing Power Parity (PPP) &12% Cl. c: 9.8%o

 

“0ill 9% III CO _ 6%~oC> ~ 0.. ~ 3% … 8:-Cl. QC> 0% 2011 2012 2013 2014p • Malaysia ff:1ASEAN-5 fi!l Emerging and Developing Asia
p = preliminary (Source: Vital Factor Consulting analysis)
• From 2010 to 2014, Malaysia’s GOP per capita based on PPP grew positively in line with ASEAN-5 and Asia. In 2014, Malaysia’s GOP per capita growth of 6.5% was higher compared to 4.7% in ASEAN-5 countries. The growth indicates an increase in purchasing power of consumers which would positively impact on the CPG industry, including the distribution of CPG. 3.5.3 Inflation Rate • Inflation is a measure of the increase or decrease in the general price level of goods and services in a country over time. The rate of inflation rate is usually assessed on a yearly basis, and expressed as a percentage change compared to the preceding year. A period of high inflation generally has a dampening effect on consumption, including consumption of CPG, as it indicates that a smaller quantity of goods can be purchased with a given amount of money. This is especially true if wages fail to keep pace with inflation. Kim Teck Cheong Consolidated Berhad Page 140(45 Independent Industry Assessment 153
7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • A negative inflation rate indicates a decline in the general price level of goods and services, and is commonly known as “deflation”. This is not always desirable, especially if consumers defer current consumption in the expectation that prices will fall further in the future. Companies operating in a deflationary environment may experience a fall in revenue. Inflation Rates 8%  6%  c:  o  ~ 4%  Ii:  .5  2%  0%  2010  2011  2012  2013  2014p  • Malaysia  ill ASEAN-5  WI Emerging and Developing Asia
p = preliminary (Source: Ministry ofFinance Malaysia; Vital Factor Consulting analysis)
• Between 2010 and 2014, Malaysia’s inflation rate registered lower growth rates compared ASEAN-5, and Emerging and Developing Asian countries.
• Inflation in Malaysia is mainly affected by energy and commodity price fluctuations including fuel and food prices. Between 2010 and 2013, inflation was mainly affected by price increases in food items. Inflation rate averaged at 3.2% in 2014, mainly due to domestic cost factors, which included the recent price adjustments arising from subsidy rationalisation and the spillover effects of these adjustments onto the prices of other goods and services.
• In the first quarter of 2015, inflation in Malaysia averaged at 0.7%, which was primarily contributed by the downward revision of petrol prices in January and February, amidst the lower global oil prices. Malaysia implemented the managed float pricing mechanism for fuel since December 2014, where domestic petrol prices will be governed by global oil prices. During the second quarter of 2015, the implementation of GST in April 2015 caused the inflation rate to average at 2.2%.
• For the whole of 2015, the inflation rate is expected to average between 2% and 3%. Through the managed float pricing mechanism, the decline in global oil prices would lead to a decrease in domestic petrol prices. In addition, the implementation of GST and the depreciation in the local currency will also have an impact on the inflation rate.

(Source: Bank Negara Malaysia; Ministry of Finance) Kim Teck Cheong Consolidated Berhad Page 15 of 45 Independent Industry Assessment 154
7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 3.5.4 Household Consumption Expenditure • Household consumption expenditure measures the value of specified goods and services purchased by the households in a country. Examples of the goods involved include non-durable items such as food, beverages and clothing, durable goods such as cars and household appliances, and services such as education, healthcare, rental and utilities.
• Change, measured as positive or negative growth rate, indicates the year-to-year changes in spending on these goods and services by all of the households in a country. Thus, a country with positive growth rate indicates that on average, households in the country are buying more goods and services as compared to the previous year. As such, generally businesses that sell products and services, which include CPG, to the population or consumers would experience overall higher sales compared to the previous year.

Household Consumption Expenditure ~ 10% 9,3%E 2009 2010 2011 2012 2013 • Malaysia 81 ASEAN-5 Developing Asia
Note: Latest available data for ASEAN-5, and Emerging and Developing Asia were only up to 2013. As such, the chart above provides a comparison with Malaysia from 2009 to 2013. (Source: Vital Factor Consulting analysis)
• Overall, Malaysia experienced a growth in household consumption expenditure between 2009 and 2013. The growth in household consumption expenditure would continue to drive demand for goods and services, including CPG.
• Malaysia’s household consumption expenditure between 2010 and 2013 grew more than ASEAN-5 countries.

Kim Teck Cheong Consolidated Berhad Page 16 of45 Independent Industry Assessment 155 7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 4 DEMAND CONDITIONS • KTC Group is primarily involved in the distribution of the following types of CPG: Food and beverages including dry food and beverages, chilled foods and frozen foods; Household products including air fresheners, detergents and kitchenware; Personal care products such as skin care, oral care, hair care, body care, sanitary care and cosmetics; OTC drugs and health supplements; Others such as baby care products.
• As such, sales value of the wholesale trade for the related CPG is used as a proxy to assess the demand conditions. However, it must be noted that the overall wholesale trade comprises many products that are not distributed by KTC.

 

4.1 Wholesale Trade Sector • Performance of the wholesale trade sector would provide some indication of demand. 600 450 C ~ iii 300 :lE et:: 150 0 Sales Value of the Wholesale Trade Sector AAGR:8.6% 21.4% 30% 10.3% 6.1%4.0% 3.7%
0% -30% ·60% -90% -120% -150% 2010 2011 2012 2013 2014 _Sales Value ….Growth Rate Notes: All units in RM billion except percentages; Sales values are for all types ofproducts including CPG as well as non-CPG. (Source: Department of Statistics)
• The wholesale trade sector in Malaysia registered an AAGR of 8.6% between 2010 and 2014. During the first and second quarter of 2015, the wholesale trade in Malaysia grew by 4.8% and 4.0% respectively, compared to the corresponding quarters in 2014. Overall for the first half of 2015, the sales value of the wholesale trade sector grew by 4.4% to RM243.2 million, as compared to RM233.0 million in the corresponding period in 2014 (Source: Department of Statistics). The growth in the wholesale trade sector indicates a growing demand for the distribution of goods, including CPG. Kim Teck Cheong Consolidated Berhad Page 17 of45 Independent Industry Assessment 156

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Sales value of the wholesale trade sector had experienced positive growth since 2010. This augurs well for operators in the wholesale trade sectors including distributors of CPG. 4.2 Wholesale Trade Categories • As the business activities of distributors are classified under wholesale trade, the following are some indications of the performance of selected products under this sector. Sales Value of Categories of Wholesale Trade 100 89.2
2010 2011 2012 2013 2014 lIFood, Beverages and Tobacco (AAGR: 10.2%) iBlHousehold Goods* (AAGR: 12.8%) Notes: All units in RM billion except percentages; Sales values are for CPG as well as non-CPG; • Include, among others, textiles, clothes, footwear, pharmaceutical products, toiletries, household care products, sports goods, toys, kitchenware and stationery. (Source: Department of Statistics) • Between 2010 and 2014, the wholesale trade of food, beverages and tobacco products, and household goods recorded an AAGR of 10.2% and 12.8% respectively. In 2014, the wholesale trade of food, beverages and tobacco products, and household goods amounted to RM79.9 billion and RM89.2 billion respectively. In the first half of 2015, the wholesale trade of food, beverages and tobacco, and household goods increased by 6.4% and 8.9% respectively, compared to the corresponding period in 2014 (Source: Deparlment of Statistics). The continuing growth in the wholesale trade of food, beverages and tobacco products, and household goods indicates continuing demand for the distribution of the said products. Kim Teck Cheong Consolidated Berhad Page 18 of45 Independent Industry Assessment 157 7. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 5 SUPPLY AND SUPPLY DEPENDENCIES • Generally, the supply of CPG for distribution comes from both local production and imports.
• As KTC Group is mainly a distributor of CPG, its supply is sourced directly from the local representative offices of the respective principals. The Group sources only a small amount of food and beverages and personal care products directly from imports.
• The following are some of the statistics available on local production and imports of CPG that are relevant to KTC Group’s business operations to provide an indication on supply dependencies:

5.1 Local Production of Selected CPG • The sales value of the manufacture of selected CPG provides an indication of the supply of the said products. The following CPG were selected based on similar products or categories of products distributed by KTC Group: Sales Value of the Manufacture of Selected CPG Condensed, Powdered and Evaporated Milk ………………………… Biscuits and Cookies …………………. Bread, Cakes and Other Bakery Products ………………………………….. Chocolate Products and Sugar Confectionery……………………………. Sauces and Condiments …………….. Snacks …………………………………….. Soft Drinks ” ……………………………… Household and Personal Hygiene Paper ………………………………………. Soap, Detergents, Cleaning and Polishing Preparations, Perfumes and Other Toiletries …………………… 2010  2011  2012  2013  2014  AAGR 2010-14 %  3,183.0 1,102.0  3,183.8 1,058.4  4,180.7 1,041.2  5,009.6 1,084.8  6,107.7 1,100.9  17.7 #  498.2  1,408.6  1,687.2  1,834.8  1,963.1  40.9  771.7 790.3 535.9 1,578.3  868.4 884.6 673.0 1,567.8  946.3 966.1 809.0 1,705.5  1,209.8 1,030.8 1,078.4 1,828.7  1,161.2 1,100.1 895.9 1,745.3  10.8 8.6 13.7 2.5  560.0  610.9  857.7  1,214.5  1,717.1  32.3  1,521.3  1,549.9  1,630.5  1,783.7  1,798.6  4.3
Notes: # insignificant growth; all units in RM million except percentages. (Source: Department of Statistics) • The sales value of the manufacture of all the selected CPG above experienced growth between 2010 and 2014. The growth in sales value of the above selected CPG indicates a continuing demand for such products, which will in turn drive the demand for the distribution of these said products. All the above CPG categories are distributed by KTC Group. Kim Teck Cheong Consolidated Berhad Page 19 of45 Independent Industry Assessment 158 7. INDUSTRY OVERVIEW (Cont’d) Q
5.2 6 VITAL FACTOR CONSULTING Creating Winning Business Solutions • The highest growth among the selected manufactured products were bread, cakes and other bakery products, which experienced an AAGR of 40.9% between 2010 and 2014. This is pertinent as KTC Group had recently ventured into the manufacturing of bakery products, although it currently represents a small proportion of its overall revenue. Imports of Selected CPG Import Values of Selected CPG AAGR 2010·2014 2010 2011 2012 2013 2014 % 183 238 199 206 276 10.8 198 203 237 261 309 11.7 177 204 232 215 222 5.9 160 173 177 177 192 4.7 300 376 399 439 511 14.3 783 794 648 661 921 4.1 27293234 51 17.4 133 192 257 329 337 26.1 3,652 4,144 4,654 5,008 5,602 11.3 3,610 3,973 4,098 4,226 4,428 5.2 Butter and Other Fats and Oils Derived from Milk ………………………….. Cheese and Curd ………………………….. Fruit Juices ………………………………….. Sugar Confectionery ……………………… Chocolate and Other Food Preparations Containing Cocoa ………. Spices …………………………………………. Margarine and Shortening ……………… Non-alcoholic Beverages ……………….. Medicinal and Pharmaceutical Products ………………………………….. Essential Oils, Resinoids, Perfume Materials, Toiletries, Polishing and Cleansing Preparations ……………… Note: All units in RM million except percentages. (Source: Department of Statistics) • Between 2010 and 2014, the import values of all selected CPG into Malaysia generally registered positive growth. Growth in imports of these CPG items signifies an increase in demand for the said products, which will in turn benefit distributors of CPG. • All the above CPG categories are distributed by KTC Group. DEMAND DEPENDENCIES • The distribution of CPG in Malaysia is ultimately dependent on end-consumers and users, which are represented by several factors including population growth, per capita income, household expenditure, and performance of the retail and food service sectors. These factors are further discussed in Section 12 of this document. Kim Teck Cheong Consolidated Berhad Page 20 of45 Independent Industry Assessment 159 7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 7 COMPETITIVE ANALYSIS
7.1 Nature of Competition in the Industry • In general, distributors of CPG in Malaysia face normal competitive conditions,
which is similar to a free enterprise environment characterised by the following: There are no undue Government regulations or licensing requirements that sUbstantially prevent enterprises to enter or leave the industry; The industry is not dominated by a single operator having more than 60% of market share, or one or more enterprises that possess such significant power in the market to adjust prices or outputs or trading terms, without effective constrain from competitors or potential competitors; Operators may enter and leave the industry freely; Processed or manufactured products commonly have practical substitutes or alternatives.
• One consideration is that most brand owners commonly engage distributors for specific brands or products in defined geographical areas for a period of time, which is renewable subject to conditions being met. As such, once a distributor has been engaged, no other operators may distribute the brands and products in the same geographical areas until such time the distribution agreement is terminated or not renewed.
• Despite such conditions, the industry still operates generally under normal competitive conditions because there are many practical substitute products or alternatives with a myriad of brands. In addition, it is common for brand owners to carve out a number of geographical areas for distribution by various operators depending on the strengths of their respective distribution network. Distribution agreements periodically come up for renewal and it is not uncommon for brand owners to consider other distributors, especially if it is perceived that other distributors would better represent its brands and products to maximise on its earnings. New products and brands regUlarly enter the market requiring distributors.
• In such an environment, the industry is subjected to normal supply and demand conditions moderated by the price mechanism. Operators in the industry, including KTC Group, compete on service differentiations, and other factors of competition. Some of these factors of competition or service differentiation include the following:

Extensiveness of distribution network: As the primary function of a distributor of CPG is to create and maintain market access and coverage for its brands and products, invariably one key consideration in selecting a distributor is the extensiveness of its distribution network. This would mean the number of retail outlets or other sales and distribution points that the distributor covers within its geographic area. Retail outlets would also include the types of retail format inclUding hypermarkets, supermarkets, minimarkets, departmental stores, convenience stores, sundry shops, community pharmacies, health and beauty stores and many others. As such, a distributor with an extensive distribution network would be in an advantageous position to represent brand owners. Kim Teck Cheong Consolidated Berhad Page 21 of45 Independent Industry Assessment 160

 

7. INDUSTRY OVERVIEW (Cont’d) Q
7.2 VITAL FACTOR CONSULTING Creating Winning Business Solutions Reputation based on brands being represented: The reputation of a distributor, especially the perception that it is able to do a good job is commonly tied to the reputation of the brands that the distributor represents. Thus, a distributor that represents popular or high profile brands would provide the perception that the service quality offered by the distributor is at least within the expectation of such brand owners. In this respect, a distributor that has popular or high profile brands within its product portfolio would be in an advantageous position to represent other brand owners. Availability and adequacy of logistics facilities: While virtually all distributors would have some form of logistics facilities to distribute dry goods, many would not have facilities for chilled or frozen goods. Thus, distributors without chilled or frozen storage and transportation facilities would not be able to provide the distribution of chilled or frozen products. Size of warehouses to facilitate adequate storage and number of distribution centres for prompt delivery are also considerations when selecting and retaining distributors. As such, a distributor that has the required and adequate logistics facilities would be in an advantageous position to represent brand owners. Track record based on number of years in operation: Many brand owners would prefer a distributor that has a track record of many years of operation in the distribution of CPG. This is because selling its products to retailers and other sales and distribution points would, among others, be dependent on the distributor and its relationships with its customers. As such, a distributor with many years track record is likely to have built­up substantial commercial relationships with retailers and other sales and distribution points, to provide ease of market access and coverage for new brand owners. Operators in the Industry • Distributors of CPG commonly consider the types of retail format and products they distribute, and the geographic areas covered. Larger distributors may distribute to all types of retail format covering all product types, while some distributors would specialise or would not handle certain product types. Retail format are commonly segmented as follows: modern trade, including hypermarkets, supermarkets, convenience stores and departmental stores traditional trade, including sundry shops, Chinese medical halls and stalls; specialty stores, including community pharmacies, stationery stores, health food stores, and health and beauty stores. Kim Teck Cheong Consolidated Berhad Page 22 of45 Independent Industry Assessment 161
7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Product types are commonly segmented as follows: chilled and frozen food: Distributors of chilled and frozen food must invest in suitable cold-chain logistics including warehousing and trucks with chiller or freezer facilities. Not all distributors of food are willing to invest in such facilities due to cost considerations, which meant that they are excluded from distributing such products. beverages: Distributors of beverages, including alcoholic and non-alcoholic beverages usually require an extensive distribution network covering food services outlets including, among others, coffee shops, cafes, food stalls, restaurants, pubs and canteens, in addition to retailing outlets. Some distributors do not have the network or the resources to cover the food services sector adequately as food services outlets are widely spread out covering urban and rural areas. pharmaceutical products: Distributors covering OTC drugs and health supplements would require market access and coverage of community pharmacies and Chinese medical halls. other dry goods. Geographical areas: Some distributors have limited geographical coverage including selected towns in a state, or one or more states, while others can service ‘East Malaysia only, West Malaysia only or throughout Malaysia. Some may not cover rural areas or small towns. • Some of the distributors of CPG in Malaysia include the following (listed in alphabetical order): CK Alliance Sdn Bhd; DKSH Holdings (Malaysia) Berhad; GBA Corporation Sdn Bhd; Golden HP Agency Sdn Bhd; Harrisons Holdings (Malaysia) Bhd; KTC Group; Lein Hing Group(1); Li & Fung Grou~(2); Merison Group( J; Socma Trading (M) Sdn Bhd; Teik Senn (M) Sdn Bhd; Vee Lee Marketing Sdn Bhd. Notes: This is not an exhaustive list. The above list of companies has been selected based on the distribution of third party CPG as their main business activity. It excludes those companies that undertake their own in-house distribution. (1) Lein Hing Group above comprised L H Marketing Sdn Bhd, L H Sales & Marketing Sdn Bhd and Lein Hing Enterprise Sdn Bhd;
(2) Comprised LF Asia (Malaysia) Sdn Bhd, LF Asia Sebor (Sabah) Sdn Bhd and LF Asia Sebor (Sarawak) Sdn Bhd, which are part ofLi & Fung Limited);
(3) Comprised Merison Marketing Sdn Bhd, Merison (M) Sdn Bhd and Fimmex

Trading Sdn Bhd. (Source: Vital Factor ConSUlting analysis) Kim Teck Cheong Consolidated Berhad Page 23 of45 Independent Industry Assessment 162
7. INDUSTRY OVERVIEW (Cont’d) Q
8 8.1 VITAL FACTOR CONSULTING Creating Winning Business Solutions • Some of the distributors of CPG in East Malaysia include the following (listed in alphabetical order): Austar Marketing Sdn Bhd; Choon Hua Trading Corporation Sdn Bhd; DKSH Holdings (Malaysia) Berhad; Harrisons Holdings (Malaysia) Bhd; KTC Group; Li & Fung Group(1);
Moh Heng Company Sdn Bhd; Syarikat Lui Kim Chock Sdn Bhd; TLS Marketing Sdn Bhd.
Notes: This is not an exhaustive list. The above list of companies has been selected based on the distn”bution of third party CPG as their main business activity. It excludes those companies that undertake their own in-house distribution.
(1) Comprised LF Asia (Malaysia) Sdn Bhd, LF Asia Sebor (Sabah) Sdn Bhd and LF Asia Sebor (Sarawak) Sdn Bhd, which are part ofLi & Fung Limited. (Source: Vital Factor Consulting analysis) MARKET SIZE, SHARE AND POSITIONING Overview • KTC Group’s market access and coverage activities are mainly focused in Sabah where its revenue for financial year ended 30 June 2015 derived from Sabah amounted to 90.80% of total Group revenue. As such, the focus on market size, share and positioning is on Sabah.
• KTC Group is also making headways in Sarawak where revenue for financial year ended 30 June 2015 derived from Sarawak amounted to 4.51% of total Group revenue. As such, market size information on Sarawak is also provided to indicate the size of the growth opportunities for KTC Group.
• Market size information for Peninsular Malaysia is also provided to serve as a com parison to the market sizes of Sabah and Sarawak.
• Market size information covers the full spectrum of CPG purchased by the individual and household consumers or end-users. While some of the categories of CPG may be distributed by KTC Group, a large proportion is not covered by KTC Group. This is because CPG covers a very wide range of products. Market size for CPG here covers the total spectrum of CPG and includes the following categories:
food; beverages (alcoholic and non-alcoholic); tobacco; pharmaceutical products; non-durable household products; personal care products.

• In determining the market share and positioning of KTC Group, its financial results for the financial year ended 30 June 2015 were used as proxies for the full calendar year 2014 to facilitate comparison with market size information for calendar year 2014.

Kim Teck Cheong Consolidated Berhad Page 24 of45 Independent Industry Assessment 163
7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 8.2 Market Size • In 2014, the market size for the distribution of CPG in Malaysia was estimated at RM38.0 billion and this is segmented as follows:
Peninsular Malaysia RM31.2 billion 82%
(Source: Vital Factor Consulting analysis)
8.3 Market Share • In 2014, KTC Group had a market share of approximately 10% of the distribution of CPG in Sabah and Labuan.
• In 2014, KTC Group had a market share of less than 1% of the distribution of CPG in Sarawak.
• In 2014, KTC Group had a market share of less than 1% of the distribution of CPG in Malaysia.

(Source: Vital Factor Consulting analysis) 8.4 Market Position 1st• In Sabah, tier distributors with revenue exceeding RM200 million are as
follows (listed in alphabetical order): DKSH Holdings (Malaysia) Berhad; Harrisons Holdings (Malaysia) Berhad; KTC Group.

• In Malaysia, 1st tier distributors with revenue exceeding RM1 billion are as follows

(listed in alphabetical order): DKSH Holdings (Malaysia) Berhad; Harrisons Holdings (Malaysia) Berhad.
(Source: Vital Factor Consulting analysis) Kim Teck Cheong Consolidated Berhad Page 25 0(45 Independent Industry Assessment 164

 

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 8.5 Market Size in Brunei • Part of KTC Group’s future plans involves the distribution of CPG in Brunei. As such, the market size for Brunei is provided below as an indication of the growth opportunities for KTC Group.
• In 2014, the market size for the distribution of CPG in Brunei was estimated at BND210 million (equivalent to RM542million*).

Note: ‘Based on Bank Negara Malaysia, the average exchange rate used for 2014 was BND1.00 “” RM2.5827 (Source: Vital Factor Consulting analysis) 9 GOVERNMENT REGULATIONS AND LICENCES • The following are some of the licences, registrations and regulations relating to the distribution of CPG.
9.1 Wholesaler’s Licence for Registered Drugs • Pharmaceutical products (inclusive of scheduled drugs, OTC drugs, health supplements and traditional medicines), are referred to as drugs under the Drug Control Authority (DCA) and these must be registered with the National Pharmaceutical Control Bureau (NPCB).
• Under the Control of Drugs and Cosmetics Regulations 1984, operators involved in the wholesale of registered drugs are required to obtain a wholesaler’s licence issued by the Director of Pharmaceutical Services.

(Source: National Pharmaceutical Control Bureau)
9.2 Licence to Sell or Store Pesticides • Under the Pesticides Act 1974, any person who intends to sell or store for sale a pesticide must obtain a licence from the Pesticides Board. (Source: Pesticides Act 1974)
9.3 Registration of Cold Room Storage Facility in Sabah • Operators are required to register their cold room storage facility with the Department of Veterinary Services and Animal Industry Sabah as one of the conditions to obtain import licences for meat and meat products. This registration requirement is applicable to Sabah only. (Source: Department of Veterinary Services and Animal Industry Sabah) Kim Teck Cheong Consolidated Berhad Page 26 of45 Independent Industry Assessment 165

 

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 9.4 Veterinary Licence to Import Meat and Animal Products into Sabah and Sarawak • According to the Animals Ordinance 1962 for the state of Sabah and Veterinary Public Health Ordinance 1999 for the state of Sarawak, importation of meat and animal products from other states in Malaysia and overseas countries into Sabah and Sarawak, requires a veterinary licence to import meat and animal products. (Source: Animals Ordinance 1962, Department of Veterinary Services and Animal Industry Sabah, Veterinary Public Health Ordinance 1999)
9.5 Trademarks • In Malaysia, trademarks are governed by the Trade Marks Act 1976 and Trade Marks Regulations 1997. Trademark registration provides trademark owners with exclusive rights to use their marks. The Registrar of Trade Marks is the authority for the registration of trademarks in Malaysia. Registration of trademarks shall be valid for a period of ten years and may be renewed every ten years. (Source: Intellectual Property Corporation of Malaysia)
9.6 Government Regulations, Licences and Incentives in Brunei • As KTC Group intends to widen its market coverage by venturing into Brunei, the following are some of the licences, registrations and regulation relating to the distribution of CPG in Brunei. 9.6.1 Product Registration and Wholesaler’s Licence for Medicinal Products • According to the Medicines Order 2007, all medicinal products must be registered with the Drug Registration Unit of the Ministry of Health before being manufactured, sold, supplied or imported into Brunei. In addition, operators in Brunei involved in the import or wholesale of registered medicinal products are required to obtain an importlwholesaler’s licence issued by the Brunei Medicines Control Authority. (Sou~e:DepartmentofPharmaceuljca/Servkes, Bruneij
9.6.2 Licence to Import or Sell Pesticides • Under the Poisons Act, any person who intends to import, store and sell any substances included in the Poisons List must obtain a licence issued by the Department of Medical Services of the Ministry of Health. Pesticides are included in the Poisons List. (Source: Poisons Act, Brunei)
9.6.3 Import Licence for Halal Meat Products • According to the Halal Meat Act, halal meat products shall only be imported by a person holding a Halal Import Licence issued by the Ministry of Religious Affairs. (Source: Halal Meat Act, Brunei) Kim Teck Cheong Consolidated Berhad Page 27 of45 Independent Industry Assessment 166 7. INDUSTRY OVERVIEW (Cont’d)

 

Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 9.6.4 Trademarks • Trademarks are governed by the Trade Marks Act (Chapter 98) and Trade Marks Rules. Trademark registration provides trademark owners with exclusive rights to use their marks. Registration of trademarks shall be valid for a period of ten years and may be renewed every ten years. (Source: Intellectual Property Office, Brunei)
9.6.5 Warehousing and Service Incentives • Incentives are offered to companies intending to incur fixed capital expenditure of at least BND2 million for the establishment or improvement of warehousing facilities for storage and distribution, or manufacture of goods to be sold and exported by the company. These companies are exempted from income tax up to 11 years from the commencement date of the fixed capital expenditure. (Source: The Brunei Economic Development Board, Prime Minister’s Office) 10 THREATS OF SUBSTITUTES • Principals of CPG may use their own in-house resources to distribute their products directly instead of using distributors, wholesalers or agents. However, it is more common for principals to appoint distributors. This is because there are many types of retailers covering rural and urban areas in peninsular and East Malaysia and it is not cost effective to have a comprehensive coverage especially for only one or a small number of products.
• Third party distributors of CPG have the advantage of economies of scale to defray operating costs across a wide range of products.

11 RELIANCE ON AND VULNERABILITY TO IMPORTS • The distribution of CPG includes a significant proportion of imported products. Import values of selected CPG are presented in Subsection 5.2 of this document. As such, there is a reliance on imports for distributors of CPG.
• While there is a reliance on imported CPG, the range of CPG is so wide and easily available across many different countries to the extent that distributors of CPG are not overly vulnerable to imports.
• Nevertheless, imported products are vulnerable to foreign exchange fluctuations that result in higher imported prices. A relatively weak Malaysian Ringgit would normally cause the cost of imported products to increase and may consequently depress demand.

Kim Teck Cheong Consolidated Berhad Page 28 0(45 Independent Industry Assessment 167 7. INDUSTRY OVERVIEW (Cont’d)

Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 12 INDUSTRY PROSPECTS AND OUTLOOK • KTC is a distributor of CPG. As such, the prospects of KTC Group are affected by the prospects and outlook of the CPG industry. 12.1 Immediate Term Prospects • The CPG Industry is a broad-base industry where consumers and users are the general population comprising individuals and households. As such, factors that would impact on the economic well-being and the confidence level of the local population would have major bearings on the CPG Industry. As at end of August 2015, some of the main negative sentiments in consumers’ minds include the following: fall in crude oil prices which has impacted on the overall economy with a spill over effect on the economic well-being of individuals and households; weakening of the Ringgit relative to many other currencies including the US Dollar has increased the cost of imported raw materials and products, servicing of offshore loans and purchases of overseas services. • Since the end of June 2014, crude oil prices had started to decline. As at end of August 2015 the price of crude oil was approximately USD48 per barrel for Brent Crude Oil. As Malaysia is a net exporter of oil and gas, the continuing decline in crude oil prices would have an impact on the economy. A slowdown in the Malaysian economy would create apprehension of job security, increase in unemployment among recent school leavers and graduates, wage cuts or slowdown in wage increases, as well as impact on the sustainability and growth of businesses. All these negative factors are likely to affect the sentiments of the general population, and its propensity to spend on CPG.
• If the weakening of the Ringgit against many overseas currencies is sustained, then prices of imported goods and services would increase. This would mean imported CPG or CPG requiring imported ingredients, raw materials and semi-finished products would be more costly and may contribute to a slowdown in the purchases of such CPG. This would affect the entire value-chain of the CPG sector. This situation will be accentuated if wages do not increase correspondingly and inflation starts increasing.

 

12.2 Mid-term Prospects and Outlook • The mid-term prospects and outlook of the CPG Industry including the distribution of CPG is favourable based of the following considerations: Many CPG are regarded as essential products in a modern society like Malaysia. As such, demand for CPG would always exist, providing opportunities to the entire value chain of the CPG industry including its distribution. The market size of CPG is relatively large compared to many other industries in Malaysia. In 2014, the CPG industry is estimated at RM38.0 billion (Source: Vital Factor Consulting analysis). The large market size would help sustain operators in the industry as well as providing growth opportunities. Kim Teck Cheong Consolidated Berhad Page 29 of45 Independent Industry Assessment 168

 

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions For Malaysia, the drivers of growth for the industry would include an increase in population size, increasing urbanisation, and continuing growth of the economy. • Other contributing factors to the prospects and outlook of the CPG industry would include the following: socio-economic factors would drive local consumption where a growing economy provides the impetus for spending which would have a positive flow-on effect on the CPG sector; performance of user-industries to sustain demand where growth in the retail sector of CPG and food services sector would also contribute to the demand for CPG, including products distributed by KTC Group; and Government initiatives will spur the growth of the demand for CPG, for example, the wholesale and retail sector covered by the NKEA initiatives are expected to contribute RM107.8 billion in terms of GNI and create 595,400 jobs by 2020. In addition, the NKEA initiatives which would include increasing the number of retail outlets such as hypermarkets, superstores and departmental stores, would drive the wholesale and retail sector including stimulating consumption expenditure. All these would benefit distributors of CPG including KTC Group. 12.2.1 Socio-Economic Factors • A growing economy provides the impetus for spending, which would have a positive flow-on effect on the CPG industry. As such, Malaysia’s socio-economic factors would have an impact on the prospects of the demand for CPG. In addition, as KTC Group operates in Sabah, Sarawak and Labuan, some data and information on these states and territory are also provided. 12.2.1.1 Real GOP Growth Forecast Real GDP Growth 8% .,–.,.-….,–….——-FOi:eCciSt——­Actual 2014p 2015f 2016f 2017f 2018f • Malaysia IBASEAN-5 IilI Emerging and Developing Asia
p = preliminary; f= forecast; (Source: Bank Negara Malaysia; Vital Factor Consulting analysis)
Kim Teck Cheong Consolidated Berhad Page 30 of45 Independent Industry Assessment 169

 

 

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Growth in real GOP will stimulate consumer spending, including spending on CPG. Real GOP of Malaysia, ASEAN-5, and Emerging and Developing Asian countries are forecasted to experience positive growth rates in the next few years. The real GOP growth is expected to contribute favourably towards the prospects of the CPG industry. 12.2.1.2Inflation Rates Forecast Inflation Rates 6% 1 …..————F;;,;;;;-;;t——­’ …. Actual 4.7% 4%
c: o i ;;:c:: 2% 0% 2015f 2016f 2017f 2018f rcJASEAN-5 lil Emerging and Developing Asia 2014p • Malaysia p =preliminary; f =forecast; (Source: Bank Negara Malaysia; Vital Factor Consulting analysis)
• A high inflation rate will weaken the purchasing power of consumers in a country, particularly when increment of income is growing at a lower rate as compared to the inflation rate. Between 2014 and 2018, Malaysia’s inflation rate is expected to register lower growth rates as compared to ASEAN-5, and Emerging and Developing Asian countries. This augurs well for distributors of CPG in Malaysia. 12.2.1.3Population and Urbanisation in Malaysia • Population size is an important consideration for consumer-focused products and services, such as CPG that are targeted at the general population. Population growth helps to support growth in demand for CPG as the number of potential customers would increase over time.
• A country that is highly urbanised would pose to be a more attractive market for consumer-based goods compared to a country with a largely rural population. This is because residents of urban areas are generally more affluent compared to residents in the rural areas. As such, urban consumers are likely to comprise the higher income group with the propensity to spend on necessity as well as discretional items including CPG. In addition, urban areas are typically more densely populated with better transportation and other infrastructure compared to rural areas, making it easier to distribute consumer-based products to a larger number of customers. In this respect, increasing urbanisation would also drive the demand for CPG.

Kim Teck Cheong Consolidated Berhad Page 31 of45 Independent Industry Assessment 170
7. INDUSTRY OVERVIEW (Cont’d) f =forecast (Source: Department of Statistics; Vital Factor Consulting analysis) • The growth in Malaysia’s mid-year population would provide a bigger base of consumers that will drive the demand for CPG products. The mid-year population of Malaysia grew at an AAGR of 1.6% between 2011 and 2015 with an estimated mid­year population of 31.0 million in 2015. The population in Malaysia is expected to grow at an AAGR of 1.5% between 2015 and 2019.
• The urbanisation rate in Malaysia increased by 8.9% between 2000 and 2010 and is expected to grow by 6.8% up to 2020. Increasing urbanisation will create a larger pool of consumers with higher disposable income, which will in turn increase the demand for goods including CPG.

Mid-Year Population in East Malaysia 4,000 3,7363.6743,6123,4333.346 3,000
~ 2,000 o l!.! l. 1,000 o
2011 2012 2013 2014 2015 .Sabah (AAGR: 2.8%) oSarawak (AAGR: 1.7″10) fliLabuan (AAGR: 1.4%) (Source: Department of Statistics) • Between 2011 and 2015, Sabah’s mid-year population registered a higher AAGR of 2.8% as compared to the AAGR of Malaysia’s mid-year population at 1.6%. Q
40 30
10 o VITAL FACTOR CONSULTING Creating Winning Business Solutions Mid-Year Population Urbanisation 100% Actual Forecast 777% 29 75% 50% 25% 0% 2011 2012 2013 2014 2015 2016f 2017f 2018f 2019f 2000 2005 2010 2015f 2020f
Kim Teck Cheong Consolidated Berhad Page 32 of45 Independent Industry Assessment 171 50,000  AAGR (2010-2014)::: 6.1%  20%  i’40,000 ~  3.7%  7.2% __—–..~  0%  ell g30,000 () .5  -20%  ~ 20,000 III (.) … ClI a.. 10,000  -40%  o  2010  2011  2012  2013  2014p  2015f  -60%
7. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 12.2.1.4Per Capita Income and Household Income in Malaysia • An increase in the average affluence of the Malaysian population, represented by per capita income and household income, will generally indicate greater affordability and higher spending on consumer goods including CPG. Malaysia’s Per Capita Income (Current Prices) p=preliminary; f=forecast (Source: Bank Negara Malaysia)
• Per capita income is commonly used to measure the standard of living of the general population. Between 2010 and 2014, Malaysia’s per capita income grew at an AAGR of 6.1%. Malaysia’s per capita income was estimated at RM34,123 in 2014 with a forecast growth of 4.2% with a per capita income of RM35,572 by 2015. The continuing growth of Malaysia’s per capita income signifies growth and the well-being of the population. Mean Monthly Household Income AAGR 2009 2012 2014 2009-14 (%) Malaysia …………………. 4,025 5,000 6,141 8.8
-Sabah …………………. 3,102 4,013 4,879 9.5
-Sarawak………………. 3,581 4,293 4,934 6.6
-Labuan ………………… 4,407 6,317 7,591 11.5
Note: All units in RM except percentages. (Source: Department of Statistics) • The mean monthly household income of the total population in Malaysia grew at an AAGR of 8.8% between 2009 and 2014. In contrast, the mean monthly household income in Sabah and Labuan grew at an AAGR of 9.5% and 11.5% respectively during the same period, exceeding that of overall Malaysia. The strong growth in mean monthly household income in Sabah and Labuan augurs well for distributors of CPG in the said states. Kim Teck Cheong Consolidated Berhad Page 330f45 Independent Industry Assessment 172 7. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 12.2.1.5Final Consumption Expenditure and Monthly Household Expenditure • Increase in the final consumption expenditure and monthly household expenditure in Malaysia may result in higher consumer spending in general, including spending on CPG. Private Final Consumption Expenditure in Malaysia on Selected CPG 2010  2011  2012  2013″  2014P  AAGR 2010-14 %  __g~~!_?JLE)_f]_?LgQ!]_~!:I_r1]P_!t()E1J~~R~!]~!!_~!..~_~ccc,,  ~_~_~c~  ~_~!c~  ~_??_c~  !g!cZ  ?I~c~_  _  tQJ  _  Food and Non-Alcoholic Beverages  86.6  95.0102.8114.4  126.1  9.9
e =estimate; p =preliminary Notes: All units in RM billion except percentages; 1\ Includes CPG and non-CPG; based on the latest published data. (Source: Department of Statistics)
• Between 2010 and 2014, preliminary figures indicated that the overall private final consumption expenditure in Malaysia increased at an AAGR of 10.1 %. Average Monthly Expenditure per Household in Malaysia on Selected Products AAGR 2004/05 to 2004/05 2009/10 2009/10 (%)
Food and Non-Alcoholic Beverages ………… 393 444 2.5
Non-Durable Household Goods* …………….. 17 22 4.9
Pharmaceutical Products……………………….. 12 14 2.8 Personal Care Appliances, Articles and Products ……………………………………………… 38 56 7.9 Notes: All units in RM except percentages; based on the latest published data; 1\ Includes expenditure on CPG and non-CPG; * Include cleaning and maintenance products, articles for cleaning, paper products and other non-durable household articles. (Source: Department of Statistics) • Overall, the average monthly household expenditure in Malaysia increased from RM1,953.02 in 2004/05 to RM2,190.37 in 2009/10. This reflects an AAGR of 2.3% during the period under review. The average monthly household expenditure in Malaysia on all selected CPG registered positive growth rates during the same period. The continuing growth in Malaysia’s average monthly household expenditure would contribute favourably to the prospects of the CPG industry. Kim Teck Cheong Consolidated Berhad Page 34 of45 Independent Industry Assessment 173 7. INDUSTRY OVERVIEW (Cont’d)
Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Average Monthly Expenditure per Household in Sabah (Including Labuan) and Sarawak on Selected Products
__ gy.~!_?JLTy.LC?_f.l_t~_Iy_J~~P-~!!~!!~!_~ __’=~!__1:::!2~_~~bgl~_~_c::c:,,  L??..1.  Mj_~  ~_cQ __  Food and Non-Alcoholic Beverages  366  400  1.8  Non-Durable Household Goods…………………  13  19  7.6  Phannaceutical Products  .  6  8  6.0  Personal Care Appliances, Articles and  Products  .  23  49  16.0

___Qy.~C~!L¥.2!!!!!!Y._EJ!£~’!.~H~y.~~.E~~_!22Y.~~t!2!~~_cccc: J.f!.Q? ~!_J.~~ .?:_~ __ Food and Non-Alcoholic Beverages 442 570 Non-Durable Household Goods………………… 19 31 10.3
Phannaceutical Products …………………………. 11 14 4.8
Personal Care Appliances, Articles and Products………………………………………………… 34 62 12.6 Notes: All units in RM except percentages; based on the latest published data; /\ Includes expenditure on CPG and non-CPG. (Source: Department of Statistics) • Apart from the Sabah’s average monthly household expenditure on food and non­alcoholic beverages, the average monthly household expenditure on all other selected products in Sabah and Sarawak also registered higher AAGR, as compared to the national average. 12.2.2 Performance of User-Industries • Growth in the performance of the user-industries namely retail trade sector and food services sector would also have a direct and positive flow-on effect on demand for CPG. Kim Teck Cheong Consolidated Berhad Page 35 of 45 Independent Industl}’ Assessment 174

 

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 12.2.2.1 Retail Trade Sector • Retailers are the main customers of distributors. As such, prospects of distributors of CPG products are dependent on the performance of the retail sector. Sales Value of the Retail Trade Sector AAGR: 9.5%450 20% 10.4% 10.6~.~O/o 8.9% ~1% 344
0% .-300 c: ~ -20%i[ :iE ” 150 -40% o -60% 2010 2011 2012 2013 2014 -Sales Value -Growth Rate Notes: All units in RM billion except percentages; Sales values are for all types ofproducts including CPG as well as non-CPG. (Source: Department of Statistics)
• The sales value of retail trade sector grew at an AAGR of 9.5% between 2010 and 2014. During the first and second quarter of 2015, the retail trade sector grew by 11.4% and 7.2% respectively, compared to the corresponding quarters in 2014. The lower growth rate in the second quarter of 2015 was attributed to the implementation of GST in April 2015. Overall for the first half of 2015, the retail trade sector grew by 9.3% to RM182.5 million, compared to RM167.0 million during the first half of 2014 (Source: Department of Statistics). Growth in the sales value of retail trade sector will have a positive impact on the performance of distribution of consumer goods including CPG. 12.2.2.2Food Services Sector • Distributors also sell their products to the food services sector. As such, the performance of the food services sector would have some direct implication to distributors of CPG.
• The food services sector comprises enterprises involved in the provision of ready to consume food and beverages away from home. Food service enterprises include, among others, restaurants, hawker stalls, cafes, pubs, canteens and catering services.
• The food services sector is a user industry of CPG as well as fresh produce. The key characteristic of the food services sector is that each food service enterprise would buy in large quantity compared to purchases from individual households.

Kim Teck Cheong Consolidated Berhad Page 36 of45 Independent Industry Assessment 175 40  3  34.6  30.7  3.6  3.9  o  2010  2012  o  mFood services (AAGR: 6.1 %)  2010  2012  iTI Event Catering Services (AAGR: 2.3%) III Beverage Services (AAGR: 42%)  mSebeh (AAGR: 4.5%)  BSerawak (AAGR: 6.3%)  III Labuen (MGR:

 

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • The following is an assessment of the performance of the food service sector in Malaysia: Gross Output Value for Food Services Gross Output Value for Food Services of by Activity Type Selected States Note: Based on the latest published data. (Source: Deparlment ofStatistics)
• Between 2010 and 2012, the overall food service sector (inclUding food, beverage and event catering services) experienced growth, which was represented by an AAGR of 5.5% based on gross output value. The strong growth in the food service sector in Malaysia would also contribute to the demand for CPG. 12.2.3 Government Initiatives • Various initiatives undertaken by the Government would benefit distributors of CPG, either directly or indirectly resulting from growth opportunities provided to consumer and user industries.
11 th
• Government initiatives such as the Malaysia Plan and Economic Transformation Programme (ETP) have been introduced on a nationwide scale, which also encompasses the state of Sabah. As such, the introduction of these initiatives in Sabah would provide growth opportunities to distributors in Sabah.

11 h Malaysia Plan • The 11 1h Malaysia Plan is a framework that lists various targets and plans by the Government for the sole purpose of economic development to be executed from 2016 to 2020. The wholesale and retail industry is expected to register an AAGR of 5.8% during the plan period, supported by strategies to modernise the subsector as well as enhance the efficiency and effectiveness of the supply chain. (Source: 11h Malaysia Plan) Kim Teck Cheong Consolidated Berhad Page 37 of 45 Independent Industry Assessment 176

 

7. INDUSTRY OVERVIEW (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 10th Malaysia Plan • The 10th Malaysia Plan is a framework that lists various targets and plans by the Government for the sole purpose of economic development to be executed from 2011 to 2015. The Government has identified new sources of economic growth, termed as National Key Economic Areas (NKEA), in line with its plans to shift the economy towards higher value-added activities. The wholesale and retail sectors have been identified as a NKEA sector where specifically relevant is in encouraging modern retail formats such as hypermarkets, supermarkets, convenience and specialty stores to stimulate investment and accelerate the progression towards modernisation. This is expected to benefit distributors of CPG. (Source: 10th Malaysia Plan)
Economic Transformation Programme • The Economic Transformation Programme (ETP) is a progressive framework identifying various economic sectors and strategies in transforming Malaysia into a high-income and developed nation by 2020.
• Twelve drivers of economic growth, termed as National Key Economic Areas (NKEA), are expected to contribute to Malaysia’s transformation target, of which one of the sectors is in the wholesale and retail industry.
• Various entry point projects (EPP) have been identified under the wholesale and
retail banner. Some of the aims of these EPP are as follows: Increasing the number of large format stores such as hypermarkets, superstores and departmental stores; Modernising and enhancing the competitiveness of small traditional retail stores via the Small Retailer Transformation Programme (TUKAR); Intensifying the transformation of Kuala Lumpur International Airport (KLlA) into a retail hub; Developing big box boulevards, which refer to the concentration of integrated large-scale retailers and factory outlets within a single location; Developing food bazaars.
• The wholesale and retail trade industry is expected to contribute RM165.0 billion of gross national income (GNI) by 2020 from RM57.2 billion in 2009.

(Source: Economic Transformation Programme) 12.3 Prospects and Outlook of the CPG Industry in Brunei • As part of KTC Group’s future plan is to distribute and to establish a new distribution centre in Brunei, the prospect of the CPG industry in Brunei would have some impact on KTC Group’s operation in Brunei.
• Generally, Brunei’s economy is reliant on the oil and gas industry, which represents the largest contribution and approximately half of the GOP of Brunei. As SUCh, the performance of the oil and gas industry globally and locally will have an impact on Brunei’s overall economic performance. The average prices of Brent Crude Oil have fallen by approximately 58% from approximately USD112 per barrel for the month of June 2014 to approximately USD47 per barrel for the month of August 2015. Sustained depressed crude oil price will have a major negative impact on the economy of Brunei, and consequently affect the CPG industry in Brunei. Nevertheless in the longer term, it is envisaged that crude oil prices will increase and stabilise to a more sustainable level.

Kim Teck Cheong Consolidated Berhad Page 38of45 Independent Industry Assessment 177

 

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • The CPG industry in Brunei provides more attractive opportunities compared to Malaysia, and Sabah and Labuan from the following perspective: Brunei  Sabah and Labuan  Malaysia  A. Population (million)  0.41  3.77  30.60  B. CPG market size (RM billion)  0.54*  2.9  38.0  C. CPG expenditure per capita (B/A) (RM per person)  1,317  776  1,242  D. Monthly household income (RM per household)  14,644″#  4,967″  6,141″
Notes: ‘Based on Bank Negara Malaysia, the average exchange rate for 2014 was BND1.00 ‘” RM2.5827; #Based on 201012011 figures; “Based on average monthly household income 2014 figures (based on the latest available comparable data) (Source: Department of Statistics; Department of Economic Planning and Development, Prime Ministers Office, Brunei; Vital Factor Consulting analysis)
• The higher CPG expenditure per capita and household income in Brunei prOVide comparatively better opportunities for operators in the CPG Industry in Brunei compared to Malaysia, as well as Sabah and Labuan.
• The prospects and outlook of the CPG Industry in Brunei will also depend on other factors as indicated below.

12.3.1 Real GOP Growth Brunei’s Real GDP Growth 6% 3.7% -3% -2.3% 2010 2011 2012 2013 2014e 2015f e = estimate; f = forecast; (Source: Department of Economic Planning and Development, Prime Ministers Office, Brunei; Vital Factor Consulting analysis) Kim Teck Cheong Consolidated Berhad Page 39 of45 Independent Industry Assessment 178

 

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • In 2010, Brunei’s economy began to recover with a GOP growth of 2.6%. As the performance of the oil and gas industry in Brunei was rather stable, Brunei’s economy registered growth of 3.7% and 0.9% in 2011 and 2012 respectively. However, a decline in the production of oil and gas in 2013 resulted in the contraction of Brunei’s economy by 2.1 %. In 2014, Brunei’s economy contracted further by 2.3%, mainly attributed to the slowdown in the oil and gas sector due to the decline in crude oil prices. 12.3.2 Inflation Rates Brunei’s Inflation Rates

 

 

0.6% 1——————–­Actual I ForecastI I I I0.4% I 0.4% I I I I 0.2% II 0.2% Il: 0.2% o I I I I ~ .5 2014: #0.0% :2015f 2016f 2017f 2018f
I I ,I-0.2% I -0.2%: I I -0.4% I f=forecast; # insignificant growth (Source: Department of Economic Planning and Development, Prime Minister’s Office, Brunei; Vital Factor Consulting analysis) • A high inflation has a dampening effect on spending, including spending on CPG as it weakens the purchasing power of consumers in a country. Between 2010 and 2013, inflation rate in Brunei were less than 1%.
• In 2014, Brunei registered a negative inflation rate of 0.2%. The decline was mainly due to the decrease in prices of products and services under the clothing and footwear, as well as furnishings, household equipment and routine household maintenance sub-categories.
• Between 2015 and 2017, Brunei’s inflation rates are expected to register growth rates at less than 1%. The generally low inflation rate will benefit distributors of CPG in Brunei as consumer goods prices will not raise due to inflationary pressures, thus contributing positively to the affordability of consumer goods.

Kim Teck Cheong Consolidated Berhad Page 40 of45 Independent Industry Assessment 179 7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 12.3.3 Population and Urbanisation Brunei’s Population 600 Actual ForecastI———-·i—…..::..:…:…:;.:..::.:;…-­AAGR (2010-2014)  =1.6%  :  AAGR (2014-2018) =1.7%  I  J  I  426419  433  440  400  387  393  400 406  412:  I I

Brunei’s Urbanisation Rate 100% 80% 60% 40% 20% 0% 2000 2005 2010 2015f 2020f
~ ! i!! ~

8’. 200 o I I I I I I I I I I I I I I I I I I I I 2010 2011 2012 2013 2014 2015f 2016f 20171 2018f f= forecast (Source: Deparlment of Economic Planning and Development, Prime Minister’s Office, Brunei; Vital Factor Consulting analysis) • Brunei’s population registered an AAGR of 1.6% between 2010 and 2014, with approximately 411,900 persons in 2014. As the population are the end-consumers of CPG, an increase in population would drive the demand for CPG products. Brunei’s population is forecasted to grow further at an AAGR of 1.7% between 2014 and 2018.
• An increasing urbanisation rate would continue to drive the demand for goods and services including CPG as urban population would spend more on CPG. The urbanisation rate in Brunei increased by 4.3% between 2000 and 2010, and is expected to grow by 3.1% between 2010 and 2020. A higher urbanisation rate would contribute to increase in the market size for CPG, thus providing opportunities for distributors of CPG who are servicing the Brunei market.

12.3.4 Per Capita Income and Household Income • The level of consumer affluence will affect the demand for CPG. As such, the average monthly income in Brunei is used to ascertain consumer affluence. Average Monthly Income in Brunei 2005 2010/11 Household Income . 4,661 5,670 Per Capita Income . 807 895
AAGR 2005-10/11 % 4.0 2.1 Note: All units in BND except percentages; based on the latest published data. (Source: Department of Economic Planning and Development, Prime Minister’s Office, Brunei)
Kim Teck Cheong Consolidated Berhad Page 41 of45 Independent Industry Assessment 180

7. INDUSTRY OVERVIEW (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Between 2005 and 2010/11, the average monthly household income and per capita income in Brunei increased at an AAGR of 4.0% and 2.1 % respectively. The growth in average monthly income in Brunei would contribute favourably to the prospects of the CPG industry as consumers have higher income to purchase CPG, especially combined with a low inflation rate regime. 12.3.5 Monthly Household Expenditure • An increase in the monthly household expenditure in Brunei indicates higher consumer spending, inclUding spending on CPG. Average Monthly Expenditure per Household in Brunei AAGR  2005 to  2005  2010/11  2010/11 (%)  –g~~~~_~__~g_~_!~~y__§~e~~~!!~~~£~! __fj~_LJ_~~_~_<?J_~_~  ?_c!~~  ~,_~_~_?__  _  ~_:~  _  Food and Non-Alcoholic Beverages  383  387  0.2  Non-Durable Household Goods……………….  na  27  Pharmaceutical Products  .  na  12  Personal Care Appliances, Articles and  Products  .  na  40
na = not available; Notes: All units in BND except percentages; based on the latest published data; Alncludes expenditure on CPG and non-CPG (Source: Department of Economic Planning and Development, Prime Minister’s Office, Brunei)
• Overall, the average monthly expenditure per household increased from BND2,735 in 2005 to BND2,895 in 2010/11, which reflects an AAGR of 1.1 %. Food and non­alcoholic beverages represented 13.4% of the overall monthly expenditure per household in 2010/11.
12.3.6 Performance of User-Industries • The performance of the user-industries namely the retail trade sector and food services sector provides an indication on the demand for CPG. Number of Enterprises within the User-Industries in Brunei 2010 Wholesale and Retail Trade . 1,881 Accommodation and Food Service Activities . 531 Note: Based on the latest published data. (Source: Department of Economic Planning and Development, Prime Minister’s Office, Brunei)
• In 2010, being the latest available statistics, the wholesale and retail trade sector was the largest type of economic activity in Brunei, which represented 34.3% of the total active enterprises in Brunei (Source: Department of Economic Planning and Development, Prime Minister’s Office, Brunei). The wholesale and retail trade, and accommodation and food services sectors were dominated by small size enterprises. Kim Teck Cheong Consolidated Berhad Page 42 of45 Independent Industry Assessment 181 7. INDUSTRY OVERVIEW (Cont’d) Q
13 13.1 13.2 VITAL FACTOR CONSULTING Creating Winning Business Solutions Revenue from the User-Industries in Brunei Growth Rate 2010 2011e % Wholesale and Retail Trade . 4,408 4,564 3.5 Accommodation and Food Service Activities . 276 297 7.6 e=estimate Note: All units in BND million except percentages; based on the latest published data. (Source: Department of Economic Planning and Development, Prime Minister’s Office, Brunei)
• In 2011, the revenue from wholesale and retail trade, as well as accommodation and food service activities registered positive growth rates. Growth in the revenue of these sectors would contribute to the increase demand for CPG. THREATS AND RISKS ANALYSIS Economic Slowdown • Any prolonged and/or widespread economic slowdown would affect consumer confidence and spending. The increasing uncertainty over the global and local economies may cause consumers to adopt a cautious position in their spending, which may in turn lower consumer spending on CPG. This may have a negative impact on distributors of CPG in Malaysia. Mitigating Factors • Some of the CPG, especially food and household items are non-discretionary. As such, these items would continue to be purchased although consumers may switch to lower priced items during an economic slowdown.
• Distributors of CPG that have a wide product portfolio would also have a good spread of economical and premium priced goods to mitigate against any changes in consumer spending and preferences. Therefore, switching to lower priced items would not have a major impact on such distributors.
• In addition, initiatives introduced by the Malaysian Government in the 11 th Malaysia Plan will continue to provide opportunities for operators in the distributive trade sector where one of the initiatives include encouraging the increase in modern retail formats such as hypermarkets, supermarkets, convenience and specialty stores to stimulate investment and accelerate the progression towards modernisation.

Depreciation in Value of the Ringgit • The CPG industry in Malaysia imports a large proportion of its products from overseas. As such, a weak Ringgit relative to other overseas countries, especially exporting countries, has resulted in an increase in the prices of imported CPG. This may reduce the propensity for consumers to buy imported products, thus negatively affecting the entire value chain including distributors of CPG. Kim Teck Cheong Consolidated Berhad Page 43 of45 Independent Industry Assessment 182 7. INDUSTRY OVERVIEW (Cont’d)

 

Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Similarly, if local products source a certain proportion of their ingredients or raw materials from overseas, then such products may also factor in these price increases at the retail sector. Thus, a weak Ringgit may also have consequential effect of increasing the prices of local products.
• At the end of August 2015, the exchange rate of the Ringgit to USD was RM4.20 to USD1.00, compared to RM3.15 to USD1.00 at the corresponding period in 2014. (Source: Bank Negara Malaysia) This represented a decline of approximately 25% in the value of the Ringgit relative to the USD. There is a risk that a sustained weak Ringgit would reduce the demand for CPG, thus negatively affecting, among others, distributors of CPG.

Mitigating Factors • There is a wide range of choices of CPG in the markets where consumers may select different products to fit their budgetary requirements. These choices include, among others, switching to lower priced brands, buying a smaller quantity and/or switching to locally made products. In addition, many of the CPG products are deemed as necessities in a modern society like Malaysia. As such, while purchases of CPG may be lowered, consumers will always require CPG for their everyday use and consumption. 13.3 Direct Sourcing from Principals • Modern retail trade particularly chain hypermarkets, supermarkets and convenience stores have greater purchasing power where they are able to directly source CPG from principals, also known as brand owners in place of distributors.
• In some situations, these large retail chains have started their own in-house brands and obtained supplies directly from their contract manufacturers. The shift towards direct sourcing by larger retail chains may have a negative impact on distributors of CPG.

 

Mitigating Factors • Despite the shift towards direct sourcing by larger retail chains, these represent a smaller proportion of the market and there are still a large proportion of other retailers spread across urban and rural areas in Malaysia that would require the services of distributors. While it may be possible to directly source some products from the brand owners or principals, it is not possible to source all the CPG items in the hypermarket or supermarket and deal directly with the respective brand owners locally as well as overseas.
• Therefore distributors would continue to play a role in the provIsion of market access and coverage of CPG. Brand owners that sell directly to larger retail chains would also need to ensure the availability of stocks and deliveries on a regular basis as well as provide administrative and promotional support services. In situations like these, brand owners may find it more effective and efficient to appoint distributors to undertake all these activities.

Kim Teck Cheong Consolidated Berhad Page 44 of45 Independent Industry Assessment 183

 

7. INDUSTRY OVERVIEW (Cont’d) Q
13.4 13.5 VITAL FACTOR CONSULTING Creating Winning Business Solutions Increase in Buying Power of Hypermarkets and Other Chain Retailers • Distributors of CPG may be subjected to various terms and conditions and costs associated with distributing CPG to major retail outlets that commands high volume sales. This is attributed to the increase in the buying power of hypermarkets and other chain retailers such as convenience stores and pharmacies.
• As such, this may impact on the overall margins of distributors of CPG where they are subjected to various terms and fees including, among others, longer payment terms, shelf space display fees, contribution to advertising and promotional fees.

Mitigating Factor • The reduction in overall margin for any distributors of CPG is sometimes compensated with volume sales from these hypermarkets and chain retailers. However, all distributors that served these retail outlets are equally affected.
• In some situations, distributors that represent internationally renowned or highly visible brands of CPG would have stronger bargaining power against these retail outlets and therefore may pay lower shelf space display fee.

Low Capital Set-up Cost • The barriers to entry into the distribution of CPG based on capital requirements are low to moderate. This is because capital cost will mainly include warehousing and logistics. However, warehouse facilities and logistics may be outsourced to a third party, and in this situation, the entry costs would be even lower. As such, the low capital set-up costs may encourage the entry of smaller distributors into the market. Mitigating Factor • Small distributors may face difficulties in competing against larger establishments that are equipped to distribute a wider range of products, represent major brands and having wider distribution networks. These smaller distributors, who would usually represent lesser known and limited number of brands, would find it difficult to obtain shelf space with hypermarkets and other chain retailers compared to the larger distributors.
• A larger distributor would be in better position to benefit from economies of scale by driving down operational cost and obtaining better commercial terms from suppliers and customers.

Kim Teck Cheong Consolidated Berhad Page 45 0(45 Independent Industry Assessment 184

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