Industry Overview

7. EXECUTIVE SUMMARY OF THE IMR REPORT 7. EXECUTIVE SUMMARY OF THE IMR REPORT
PHOT EG E }.\ S S oc I AT ES SON B H D /(,:’,/(,;·1,. SUITE C· G6~G6, PLAlJ\ 1’v10NT’ KII.\RA ~ JALAN Kf{‘>,l{!\, MONT’ l{iAfif.\ 50Ll,80 l(UALii”. LU[vlPUn, f\’1P,lAYSiA c. EN ~. 603 6/.0″( 93 (l ‘j F f~ X +603 62G1 7 3 0 ,:2 -.’:WW. piot0ge,( 0 III .IY·Y ———————————-“K;’l” l’! D ! rIN f\ N c:; i :vi ‘” fl K r:”f 2 B NOV 2016 The Board of Directors Matang Berhad Suite 90S, 9th Floor City Plaza, Jalan Tebrau 80300 Johor Bahru Johor Darul Takzim Dear Sirs,
Executive Summary of the Strategic Analysis of the Palm Oil Industry Focusing on the Plantation Segment in Malaysia This Executive Summary of the ‘Strategic Analysis of the Palm Oil Industry Focusing on the Plantation Segment in Malaysia’ is prepared by Protege Associates Sdn. Bhd. (“Protege Associates”) dated 28th November 2016 for inclusion in the Prospectus of Matang Berhad (“Matang” or “the Company”) in relation to the proposed listing of and quotation for the entire issued and paid-up share capital of Matang on the ACE Market of Bursa Malaysia Securities Berhad (“Bursa Securities”). 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
URANU I f”iNA.N(l” I MAt-l:KEiT 1 MALAYSIAN ECONOMIC OVERVIEW
The Malaysian economy registered a strong finish in 2014. It expanded at a faster pace of 6.0 percent in 2014 on the back of continued expansion in domestic demand and an improvement in external trade performance. In 2015, the Malaysian economy registered a commendable growth against a backdrop of challenging developments such as a slowing world trade, heightened volatility in the international financial markets and the collapse of energy price. Malaysia’s real gross domestic product (“GOP”) expanded at a slower pace of 5.0 percent in 2015 as compared to 6.0 percent registered in 2014. The growth is mainly driven by the continued expansion in domestic demand. The Malaysian economy is expected to grow by 4.0 percent to 4.5 percent in 2016. The services sector is expected to remain the largest contributor to the economy by accounting for more than half of Malaysia’s real GOP in 2016. 2 INTRODUCTION TO THE PALM OIL INDUSTRY 2.1 INTRODUCTION TO PALM OIL Palm oil is one of the 17 major oils traded in the global edible oils and fats market. Due to its availability and relatively low production cost, it has become a vital component in the increasing intake of oils and fats in the world. Malaysia and Indonesia are the 2 largest producers of crude palm oil (“CPO”) and CPO derivatives in the world. The oil palm has a unique characteristic compared to other oil-bearing crops because it can produce 2 types of oil from its fruit, which are palm oil from the mesocarp and palm kernel oil from the kernel. About 1 metric tonne (“MT”) of palm kernel oil is obtained for every 10 MT of palm oil. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
iJRANO I I’INtlh!(.£ I M~””H)(tr 2.2 INTRODUCTION TO THE PALM OIL INDUSTRY The palm oil industry features a diverse range of value generating activities ranging from plantation to various downstream refining and manufacturing activities. Figure 1: Creating Value in the Palm Oil Industry
Source: Protege Associates 2.2.1 Plantation The plantation segment includes the planning phase, nursery establishment and site preparation for the establishment of new plantations, and the subsequent process on the seed germination, transplanting seed to nursery, planting seedling in palm grove, and lastly, fresh fruit bunches (“FFB”) harvesting and collection. Figure 2: Value Chain of the Plantation Segment 1 I, I I I I I I I
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Note: The planning phase, nursery establishment and site preparation activities are only applicable for new plantations. Source: Protege Associates Planning Phase The establishment of new plantations requires that feasibility studies and environment impact assessment (“EIA”) be conducted for the development of primary and secondary forest areas in excess of 500 hectares (,’ha”). An EIA is also required for the development involving changes in the types of agricultural use of land of over 500 ha.
7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d) ro’t
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fJ«P,Nl~ j I’INANCF I M 1-.. II t< r:r Nursery Establishment The establishment of the nursery begins as soon as the land is found to be suitable and approved for development by the relevant government agencies. A nursery is a small plot of land for the seedlings to develop. Generally, the nursery is established on soil that is rich in nutrients. Growers may also improve the soil structure by sowing green-manure crops and tilting the grown crops into the soil to provide nutrients to seedlings at a later stage. On top of that, soil erosion preventive measures are also essential at this stage. The methods of prevention include mulching, where the ground is covered with herbage or cluster residues.
Site Preparation This stage includes various activities such as land surveys, clearing of existing vegetation, establishment of roads and a field drainage system, soil conservation measures such as terracing, conservation bunds and silt pits; and sowing of leguminous cover crops.
Seed Germination During the seed germination process, the seeds are kept in a room with high temperature to promote the germination process, typically for 90 to 100 days. Each germinated seed is then planted in a small plastic container. The young seedling stays in the container for 4 to 5 months, and a new leaf grows every month. The seedling is ready to be transplanted into a nursery when a bifid leaf appears. The process of seed germination requires an extensive biological knowledge, as well as deep understanding of the plant species. Generally, nursery operators and oil palm growers may source for young seedlings that have 4 to 5 leaves from local research stations or extension services and transplant these seedlings into their nurseries. Transplanting into Nursery After the seeds have been germinated and seedlings have been produced, they are transplanted into the site that had been prepared as a nursery. The seedling is grown in a nursery for a period of 12 to 18 months before being planted in the palm grove when it has about 15 green leaves. Planting in Palm Grove This stage revolves around the lining, holing and planting of seedlings, typically at a density of 136 to 148 oil palms per ha, depending on the soil type. 4 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
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A’::,’:10Cji;”f[~y fiRP,NI.’i l l’-INANi:t:: I MAtlKI<Y Fertilisers are spread few months after planting near the end of the rainy season. The application of fertilisers can be carried manually using labour, or mechanically using tractor mounted spreader. The seedlings grow into oil palm trees and bear fruits 30 months after planting. This is also the longest period in the entire value chain of the plantation segment. Therefore, proper field maintenance is essential in ensuring an optimal FFB yield. During the growing period, labourers are needed to take care of the plantation, and to perform activities such as the removal of weeds and the cutting away of dry leaves in order for the plant to grow well. Soil fertilisation is another essential aspect in ensuring sufficient minerals for the growth of oil palm. Labourers are also needed in monitoring and making sure the drainage system works efficiently. Labourers are also needed in monitoring and making sure the drainage system works efficiently. Integrated pest management involving a mix of cultural, physical, chemical and biological control approaches to minimise crop losses to pests is commonly adopted in plantations. Environmentally friendly pesticides can also be used, usually in the event of an outbreak situation, when the above method of introducing a natural enemy or predator is not sufficient to control the pests. The pesticides spraying are conducted mechanically. Oil palm trees bear fruit 30 months upon planting, and have an economic life of 20 to 30 years. The yield of a normal plantation is approximately 19 MT of FFB per ha per year. A mature tree produces 10 to 15 FFB yearly. Each FFB weighs about 10 to 20 kilogrammes (“kg”) and has between 1,000 and 3,000 fruitlets. Each 109 fruitlet has a kernel which is the source of palm kernel oil. When pressed, the fruitlets give palm oil with an oil extraction rate (“OER”) of about 20.0 percent. FFB Harvesting and Collection A cluster is ripe for harvesting when the fruits begin to turn red, and when 5 or 6 fruits drop to the ground. Harvesting is done manually, using a chisel in young palms or a sickle mounted on a bamboo or aluminium pole in taller palms. lV1echanised approaches are also adopted to replace labour during the harvesting due to an increasing shortage of available labour, and to increase productivity. Harvesting occurs all the year round which produces an uninterrupted supply of oil. The resulting FFB are processed Within 24 to 48 hours to prevent a rapid rise in free fatty acids (“FFA”), which could affect the quality of the CPO. Thus, palm oil mills are usually located in 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
!!tf(l.NCI I f’INANC:i: I MARK~r close proximity to the plantations to facilitate timely transportation and effective processing of FFB. 2.2.2 Milling At the mill, the fruits are sterilised, stripped off the bunches and crushed to extract the CPO. The CPO collected in a tank contains impurities such as fruit fibres, free moisture and nut shells, which are later removed through a purification process. In the meantime, the nut shells are further processed to separate the kernels from the shells. At the end of the milling process, CPO and palm kernels are produced. CPO is then sent to the refineries for further processing while the palm kernels are sent to the crushers for the palm kernel oil to be extracted. 2.2.3 Refining CPO is processed by either physical or chemical refining to produce refined, bleached and deodorised (“RBD”) palm oil or neutralised, bleached and deodorised (“NBD”) palm oil. Physical refining is the preferred method used by the refineries as it is simpler, less capital intensive, more efficient and produces a lower effluent load compared to chemical refining. 2.2.4 Crushing Palm kernels are processed in another plant known as crushers, to obtain crude palm kernel oil (“CPKO”) and a by-product, palm kernel cake which is used as an animal feed. 2.2.5 Downstream Processing Downstream processing results in various palm oil derivatives that can be utilised for food and non-food applications. This is further elaborated in the next section. 2.3 PALM OIL APPLICATIONS AND DERIVATIVES Palm oil is consumed worldwide in more than 100 countries. l”lost of the world’s palm oil is consumed in the form of food such as cooking oil, cookies, margarine, and chocolate amongst others. In addition, palm oil is an ingredient found in a host of non-food household and industrial products such as soaps, detergents, cosmetics, and pharmaceuticals. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
Food Applications Usage of palm oil as food dates back over 5,000 years and approximately 80.0 percent of palm oil is used in food applications today. Figure 3: Food Uses of Palm Oil and its Downstream Products
Notes: • Highly suitable o Suitable * Minor applications only IV = Iodine Value Source: Protege Associates 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
H t< P.N n ,/ J’ I N A Ill’ 1..:; I< IMAnKl;ir Non-Food Applications About 20.0 percent of all oil palm products are utilised in non-food applications. Oleochemicals are chemicals derived from oils and fats; they are analogous to petrochemicals which are chemicals derived from petroleum. Figure 4: Basic Oleochemicals and their Applications “m~ge  ‘  Agplication  • Medium chain triglycerides for use in the flavour and fragrance industries  Fatty acids  • Processing aids for rubber products, for softening and plasticising effect • Production of candles  • Production of soaps  • Production of cosmetic products

• Wide range of applications such as a solvent for pharmaceutical products, humectants in cosmetics and tobacco, stabilisers, lubricants, antifreeze, etc Source: Protege Associates Glycerine [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
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A IC) <:-; 0C J fA, r r: ‘C) fJ’P-ANn I f’INAl’Jj~'” j M…”HIir:.,. 3 OVERVIEW OF THE PALM OIL INDUSTRY IN MALAYSIA Plantation The plantation segment involves the cultivation of oil palm fruit to produce FFB that are subsequently harvested to produce CPO. According to the Malaysian Palm Oil Board (“MPOB”), the total oil palm planted area stood at 5.39 million ha in 2014, an increase of 3.1 percent of the 5.23 million ha from the previous year. As at December 2014, 87.0 percent of the oil palm planted area in l”lalaysia is mature, while the remaining is immature. Slightly more than half (51.5 percent) of the plantation area is concentrated in East Malaysia with the rest in Peninsular Malaysia. In 2015, the total oil palm planted area stood at 5.64 million ha, an increase of 4.6 percent from 5.39 million ha in 2014. This is mainly due to the increase in planted areas in Sarawak, which expanded by 13.9 percent from 1.26 million ha in 2014 to around 1.44 million ha in 2015. As at December 2015, 86.1 percent of the oil palm planted area in Malaysia is mature, while the remaining is immature. 52.9 percent of the plantation area is concentrated in East Malaysia with the rest in Peninsular Malaysia. Johor has the third largest oil palm planted area in l”1alaysia after Sabah and Sarawak. In Johor, the total oil palm planted area stood at 733,467 ha in 2014, an increase of 0.4 percent of the 730,694 ha from the previous year. In 2015, Johor’s total oil palm planted area increased by 0.8 percent from the previous year to 739,583 ha. As at December 2014, 88.8 percent of the oil palm planted area in Johor is mature, while the remaining is immature. And as at December 2015, 90.0 percent of the oil palm planted area in Johor is mature, while the remaining is immature. In 2015, private estates owned around 61.0 percent of the planted area in Malaysia, while the remaining ownership belonged to the following respective groups. Firstly, government and state agencies took up about 6.0 percent. This was followed by the Federal Land Development Authority (“Felda”), the Federal Land Consolidation and Rehabilitation Authority (“FELCRA”), and the Rubber Industry Smallholders Development Authority (“RISDA”), with approximately 13.0 percent, 3.0 percent and 1.0 percent ownership respectively. Small holders within the Malaysian oil palm industry made up the rest. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
Germinated seeds are produced from various research stations in Malaysia. Based on the latest Directory of Oil Palm Seed Producers and l’Jursery Operators from fVIPOB, there are 24 seed producers in the country. These producers supplied about 50.0 million seeds at about RM2-RM3 each to local market in 2013. There are also 571 nursery operators in Malaysia based on the latest Directory of Oil Palm Seed Producers and Nursery Operators from MPOB that procure and grow the geminated seeds into seedlings, and sell these onwards to growers to plant. Out of the 571 nursery operators in Malaysia, 96 of them are located in Johor. In Malaysia, FFB are harvested and sold to local mills through 2 channels; i.e. direct supply from the plantation or through FFB dealers for processing. Based on the latest Directory of Malaysian Oil Palm FFB Dealers from MPOB, there were 2,229 FFB dealers in Malaysia, of which 647 of them were located in Johor. In terms of production, FFB yield in Malaysia slipped to 18.63 MT per ha in 2014 from 19.02 MT per ha recorded in 2013, according to the II.1POB. The decrease in yield was mainly attributed to lower yield in Peninsular Malaysia and Sarawak. During the year, FFB yield for Peninsular Malaysia declined by 5.3 percent to 18.2 MT per ha while Sarawak declined by 0.6 percent to 16.1 MT per ha. Nonetheless, the OER improved marginally from 20.3 percent in 2013 to 20.6 percent in 2014. For the first half of 2015, FFB yield stood at 8.35 MT per hal lower as compared to 8.5 MT per ha recorded in the corresponding period in 2014 due to lower yield recorded in several states, namely Kelantan, Pahang, Terengganu, Sabah and Sarawak. As for the calendar year 2015, FFB yield in Malaysia was lower to 18.48 MT per ha as compared to 18.63 MT per ha in 2014. The decrease in yield was mainly attributed to lower yield in Sabah which declined by 6.3 percent to around 20.0 MT per ha. For the same period, OER declined by 0.8 percent to approximately 20.5 percent due to low quality of FFB processed by mills. For the first half of 2016, FFB yield stood at 7.00 MT per hal lower as compared to the 8.5 MT per ha and 8.35 MT per ha recorded in the corresponding period in 2014 and 2015 respectively as all states recorded lower FFB yield due to EI Nino drought that affected the production of FFB. Despite an expansion in its planted area from 730,649 ha in 2013 to 733,467 ha in 2014, FFB yield in Johor recorded growth from 19.49 MT per ha to 19.50 MT per ha during the same period. And for the first half of 2015, FFB yield in Johor stood at 9.29 MT per ha. As for the calendar year 2015, FFB yield in Johor improved to 20.0 MT per ha as compared to the 10 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
preceding year. For the first half of 2016, FFB yield in Johor dropped to 7.43 MT per ha due to EI Nino drought that affected the production of FFB. The palm oil processing segment, including the milling, refining and crushing activities, uses the FFB for CPO extraction and refining as well as CPKO production using palm kernel. As such, the performance and capacity of the palm oil processing segment is essential in supporting the demand and growth of the plantation segment. The following section details the performance of each palm oil processing segment within the palm oil industry in Malaysia. The performance of the downstream processing segment is also detailed in the subsequent section. Milling According to the MPOB, there were 439 mills in Malaysia with a total capacity of 105.8 million MT of FFB per year in 2014. Collectively, they processed a total of 95.4 million MT of FFB to produce 19.7 million MT of CPO. The OER was stronger in 2014. In 2014, OER of CPO in Malaysia increased to 20.6 percent as opposed to 20.3 percent in 2013, with improvement on OER across the states in IVlalaysia. In 2015, there were 445 mills in Malaysia with a total capacity of 108.4 million MT of FFB per year. Collectively, they processed a total of 97.6 million MT of FFB to produce close to 20.0 million MT of CPO. Despite an increase in FFB processed by mill, OER of CPO in Malaysia decreased to around 20.5 percent as opposed to 20.6 percent in 2014, mainly due to lower quality of FFB processed by mills. Johor ranked third in terms of total FFB processed in 2014 and 2015. In 2014, Johor processed 15.1 million MT or 15.8 percent of total FFB processed in Malaysia to produce 3.0 million MT of CPO. In the same year, Johor’s OER expanded to 20.2 percent from 19.8 percent in 2013. Moving to 2015, Johor processed 15.4 million MT or 15.8 percent of total FFB processed in Malaysia to produce 3.1 million MT of CPO. Johor’s OER stood at 20.2 percent in 2015. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
1.ll”{f’,.ND I “lt~4N(;l: I MAtlt<lti Refining According to the MPOB, there were 54 refineries in operation with total processing capacity of 26.1 million MT of CPO per year in 2014. In 2015, there were 52 refineries in operation with total processing capacity of 25.3 million MT of CPO per year. Peninsular Malaysia has 35 refineries while Sabah and Sarawak has 12 and 5 refineries respectively. A majority of the operating refineries are associated with the oil palm plantation and milling sectors, or both. Some of the refineries are also manufacturers of specialty products and oleochemicals or have joint ventures with such manufacturers. Malaysia processed a total of 15.3 million MT of CPO in 2014, down from approximately 16.0 million MT of CPO processed in 2013. In 2015, CPO processed by refinery continued on its downward trend to around 14.6 million MT in tandem with a decreased capacity in operation. Johor processed close to 3.6 million MT of CPO in 2014, the second largest amount after Sabah. However, the amount contracted by 0.8 percent compared to 2013. In 2015, Johor processed around 3.5 million MT of CPO, representing 1.1 percent of contraction from the preceding year. Crushing According to the MPOB, there were 44 crushers in l”lalaysia with a total capacity of close to 6.9 million I”lT of palm kernel a year in 2014. The total production of CPKO and palm kernel cake stood at approximately 2.3 million MT and 2.5 million MT respectively. However in Johor, production of CPKO and palm kernel cake slipped marginally. In 2015, the total production of CPKO and palm kernel cake stood at close to 2.3 million MT and 2.5 million MT respectively. Johor’s production of both CPKO and palm kernel cake improved from the previous year. Downstream Processing According to the MPOB, exports of oleochemicals improved from 2.7 million MT in 2013 to 2.8 million MT in 2014, which led to an increase in export revenue from RM9.3 billion to RM11.3 billion during the same period. On the contrary, export of biodiesel contracted from 175,032 MT in 2013 to 87,356 MT in 2014. The contraction was mainly attributed to falling crude oil prices thus resulting in weaker demand for biofuel which is used as an alternative to petrol and fuel. 12 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
kf”lf\.’oJU l T’INAHt.E 1 MAl-tl{r;~ In 2015, volume of oleochemicals export increased marginally but revenue contracted amid lower CPO prices which affected the prices of its derivatives. However, export of biodiesel registered an encouraging performance by increasing over one fold in volume while revenue increased by 87.9 percent. Moving forward, local consumption of biodiesel remained supportive in relation with the government’s support. In Malaysia, the government has introduced the use of B5 biodiesel in 2011 in the Central region comprising Putrajaya, Melaka, Negeri Sembilan, Kuala Lumpur and Selangor. B5 biodiesel is a type of biofuel blended with 5.0 percent of palm oil biodiesel and 95.0 percent of petroleum diesel. B5 biodiesel is typically suitable to be used in diesel engines; The B5 programme was expanded to the Southern region encompassing Pahang, Terengganu and Kelantan in 2012. In December 2014, the Malaysian government introduced the replacement of B5 biodiesel with B7 biodiesel, which involves the blending of 7.0 percent of palm oil with 93.0 percent of petroleum diesel in Peninsular Malaysia. The B7 biodiesel programme was later implemented in East Malaysia in January 2015. The implementation of biodiesel programme is set to increase the domestic demand for palm oil moving forward. 3.1 HISTORICAL PERFORMANCE OF THE PALM OIL INDUSTRY IN MALAYSIA In 2014, CPO production and prices saw improved performance against the prior year, while export and import volumes declined during the year. The CPO was traded at a higher price during the first half of 2014 at an average of RIVl2,605 per IVlT. Moving into the second half of 2014, CPO prices trended downwards and closed at an average of RM2,183 per MT. This was attributed to a weaker price of soybean oil (which can be used as a substitute of palm oil) and slumping crude oil prices, which affected the demand for biofuel. CPO production grew from 19.2 million IVlT in 2013 to 19.7 million MT in 2014. The growth in CPO production was driven by a higher OER from 20.3 percent in 2013 to 20.6 percent in 2014, coupled with an expansion in harvested area from 4.53 million ha to 4.69 million ha during the same period. However, total export volume of all palm oil products decreased by 2.7 percent to 25.0 million MT in 2014 from 25.7 million MT in 2013, mainly attributed to the lower export volume of 13 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
a tI ANI:’ I r-INA !’~ t {; 1M.”” II kr “; palm oil which fell 4.8 percent from 18.1 million MT in 2013 to 17.3 million MT in 2014. On top of that, total import of palm oil decreased by 12.6 percent from 555,776 MT in 2013 to 485,567 MT in 2014. In 2015, CPO production improved against the prior year, while prices declined during the year. CPO was traded at an average of RM2,219 in the first half of 2015 and trended downwards during the second half of 2015. The declining trend was attributed to weaker prices of soybean and rapeseed oil (which can be used as a substitute of palm oil), a weaker demand from China, and the continued weak crude oil prices that affected the demand for biofuel. The average CPO price in 2015 stood at RM2,153 per MT. CPO production grew from 19.7 million MT in 2014 to close to 20.0 million MT in 2015. The growth in CPO production was driven by a higher FFB processed as new mature areas coming in production. In 2015, palm oil mills in Malaysia processed a total of 97.6 million MT of FFB, representing 2.3 percent increase from 95.4 million MT of FFB processed in 2014. Total export volume of all palm oil products increased marginally by 1.0 percent to 25.3 million MT in 2015 from 25.1 million MT in 2014, mainly attributed to the higher export volume of palm oil and biodiesel. Export of palm oil increased by 0.8 percent to 17.4 million MT while export of biodiesel expanded over one fold to 178,942 MT in 2015. On top of that, total import of palm oil increased by 111.5 percent from 485,567 I\IIT in 2014 to 1.0 million I\IIT in 2015. The palm oil industry is still very much driven by its upstream business which accounted for 79.3 percent, 70.0 percent and 76.9 percent of export value in 2013, 2014 and 2015 respectively. In addition, while Malaysia produces about 20.0 percent of world’s basic oleochemicals (intermediate products), further downstream activities involVing the manufacture of high-value end products remain limited and insignificant in the country. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d) rot #ge1\~j”‘OC1AYE,S 4 STRATEGIC ANALYSIS OF THE PALM OIL INDUSTRY FOCUSING ON THE PLANTATION SEGMENT IN MALAYSIA 4.1 MARKET DYNAMICS SCORECARD Figure 5: Market Dynamics Scorecard for the Palm Oil Industry Focusing on the Plantation Segment in Malaysia
* Marketsize oftheplantationsegmentismeasuredin terms oftotalFFBsaleatmillgate Source: Protege Associates 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
ttt<ANO I F)HfI.~J(E 1 Mn.HKJfJ 4.2 HISTORICAL MARKET PERFORMANCE AND GROWTH FORECAST In 2014, the palm oil industry focusing on the plantation segment in Malaysia stood at RM46.33 billion, representing a 9.0 percent growth from RM42.52 billion in 2013. The growth was mainly attributed to a higher FFB price that improved from RM485 per MT in 2013 to RM519 per MT in 2014, coupled with an expansion of mature area from 4.53 million ha to 4.69 million ha during the said period that contributed to the growth in FFB production. In 2015, the palm oil industry focusing on the plantation segment in Malaysia exhibited a contraction in growth in tandem with a lower FFB price that dropped to RM459 per MT as compared to RM519 per MT in the previous year, coupled with a declined FFB yield to 18.48 MT per ha as compared to 18.63 MT per ha in 2014. The palm oil industry focusing on the plantation segment in Malaysia contracted by 9.0 percent to RM42.19 billion in 2015. Figure 6: Market Size and Growth Forecast for the Palm Oil Industry Focusing on the Plantation Segment in Malaysia, 2013-2020
CAGR (2015-2020): 6.6 percent Notes: 1) All figures are rounded; the base year is 2015; 2) Market size and growth forecast of the plantation segment is measured in terms of total FFB sale at mill gate; 3) Market size and its corresponding growth rate from 2016 to 2020 are forecast. Source: MPOB and Protege Associates The palm oil industry focusing on the plantation segment in Malaysia is forecast to undergo cyclical movements from 2016 to 2020. This cyclical movement is mainly caused by the demand for FFB and its prices in relation to CPO moving forward. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
“RANt> I l”>/rJANcf:’ I MlJ..U}(J;:J’ The general trend from 2016 to 2020 is likely to show an upward movement over the period due to increasing global population and rising incomes, which will increase the demand for palm oil and accordingly, improve the demand for FFB from the processing segment. The growth of the market is also impacted in a positive way by the growing environmental concerns over climate change, resulting in more vegetable oils such as palm oil being used as fuel to replace fossil fuel. A higher demand for palm oil for biofuel is likely to spur the demand for FFB, the feedstock for palm oil production. In addition, the palm oil industry and its plantation segment have the full support of the Malaysian government, which has called out palm oil as one of the main sectors to help Malaysia achieve developed nation status by the year 2020. Protege Associates estimates that Malaysia’s plantation segment was valued at RM46.33 billion in 2014. Of this, 14.4 percent or RM6.67 billion was contributed by Johor. In 2015, the Malaysia’s plantation segment was valued at RM42.19 billion. Of this, 14.8 percent or RM6.25 billion was contributed by Johor. l”loving forward, the plantation segment within the palm oil industry in Malaysia is projected to grow at a CAGR of 6.6 percent during the forecast period from 2015 to 2020 to value at RM58.12 billion in 2020. Figure 7: Johor’s Share in the Palm Oil Industry Focusing on the Plantation Segment in Malaysia, 2014
Source: Protege Associates 7, EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
Figure 8: Johor’s Share in the Palm Oil Industry Focusing on the Plantation Segment in Malaysia, 2015
Source: Protege Associates 4.3 COMPE1’ITIVE ANALYSIS Generally, market participants in the palm oil industry can be segregated into 2 tiers as detailed below. First Tier Market participants within the first tier comprise mostly large private sector companies that participate at multiple points across the value chain in the palm oil industry, from having large plantations to manufacturing facilities in the oleochemical and biofuels industries. lV1any of the first tier companies also have plantation estates in Indonesia, as well as refineries and downstream manufacturing facilities overseas, such as in China and Europe. Among the companies in the first tier are Felda Global, Sime Darby Berhad (“Sime Darby”), 101 Corporation Berhad (“101”), Kuala Lumpur Kepong Berhad (“KLK”), United Plantations Berhad (“United Plantations”), Kulim (lV1alaysia) Berhad (“Kulim”) and Wilmar International Limited (“Wilmar”). Second Tier Market participants within the second tier have a high level of fragmentation, with a variety of market players that typically only participate in 1 or 2 segments in the value chain. These market players include small to medium sized local plantation companies that are also participants of the plantation segment, independent palm oil millers, individual small holders and small government schemes such as FELCRA and RISDA. Independent palm oil millers 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
generally link with small to medium sized local plantation companies in close proximity to process the FFB after harvest. Some of the private companies in the second tier include Inno-Wangsa Oils & Fats Sdn Bhd in Johor, Lee Oilmills Sdn Bhd in Selangor and Matang and its subsidiaries (“Matang Group”). 4.3.1 Selected Second Tier Market Players Matang Group participates in the palm oil industry in Malaysia as a second tier market player that is principally involved in oil palm plantation, with its revenue generated primarily from the sale of FFB. In 2016, Matang Group owned 1,082.1 ha of oil palm plantation in Johor. Based on publicly available information, Protege Associates has identified the following market participants in the second tier that are comparable to Matang Group based on the following selection criteria: i. Involved in the plantation segment of the palm oil industry in Malaysia; ii. Strong business focus on the plantation segment with more than 50.0 percent of the total revenue generated from plantation segment These comparable market players are Astral Asia Berhad (“Astral Asia”), Dutaland Berhad (“Dutaland”), Gopeng Berhad (“Gopeng”) and Riverview Rubber Estates Berhad (“Riverview Rubber Estates”). These market participants can be further segregated into 3 groups based on their FFB production. Group 1 comprises market participant with FFB production of over 80,000 MT, namely Dutaland. Group 2 market participants have a FFB production of over 40,000 MT but less than 80,000 MT, namely Astral Asia and Riverview Rubber Estates. Group 3 market participants recorded FFB production of less than 40,000 MT, namely Gopeng and Matang Group. [company No.: 1142377-XI 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’dj
Figure 9: Comparison between Matang Group with Selected Market Players  it&\ \~ \’\-‘” , st ” ;,;~ompany :/f.., w,~  “, ,  \ \  \~ \ \ •Astral ASia  ” \  9utalan(l  ,\  Gopeng  ”  Matang Group  ” ~ x” ~\ Riverview Ru6fJer ‘ Estates’ , ~ “­” ”  Principal Activities  Operations of oil pam estates and the provision of estates management, and property development and construction activities  Oil palm cultivation and sales of oil palm fruits, and development of residential and commercial properties  Cultivation of oil palm  Management of plantation estate, sale of FFB and property investment holding  Oil palm cultivation, and development and renting of properties

109 Icompany No.: 1142377-xl 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
Notes: 1. Thelistofmarketplayersisalphabeticallyarranged anddoesnotconstituteasaranking;
2. NA denotes the information is notpublicly available;
3. % contribution ofoilpalmplantation to netprofitisnotpubliclyavailable;
4. Netasset ofMatangGroupisbasedonproformagroup’s netassetafterpublicissue, indicative IPO priceofMatangGroup ofRMO.13, andtheenlargedsharecapital of 1,810,000,256 shares upon listing;
5. Gearingratio ofMatangGroup andRiverviewRubberEstatesare notapplicableasnoborrowingswerereported;
6. At the time ofpublication, the latest plantation results available for Dutaland is for financial year ended 30 June 2015, while the latest plantation results available for Gopeng is for financial year ended 31 December 2014;and

110 Icompany No.: 1142377-xl 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
7. (1) Total plantation area: (i) Thematureandimmatureareas ofcomparablecompaniesareextractedfromtheirrespectiveannualreports;
(ii) Thematurearea ofMatangGroupisbasedon totalmatureandoldareawhiletheimmatureareaisbasedon totalimmatureandreplantingarea;

(2) FFBproductionofDutalandforfinancialyearended30June 2016;
(3) On30May2016,AstralAsiacompletedabonusissuance of539,986,500newordinaryshares ofRM0.20each thatwerecredited asfullypaid-up;
(4) Market capitalisation ofeach market player, except for Matang Group, based on closing price on 28 November 2016 and authorised, issued and paid-up capital from the reported date for shareholding;
(5) MatangGroup’s marketcapitalisationbasedon indicativeIPOprice ofRMO.13andtheenlargedsharecapital of1,810,000,256sharesuponlisting.

Source:AnnualreportsofAstralAsia,Dutaland, Gopeng,RiverviewRubberEstates aswellasMatangGroup,BursaSecurities andProtegeAssociates [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 111 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
IftlAiIlV 1 fIUA.NC”= i MA-I(l<irT 4.3.2 Market Share Analysis For the financial year ended 30 June 2014, Matang Group’s total revenue was RM9,4 million. This is equivalent to 0.1 percent share of the palm oil industry focusing on the plantation segment in Johor during the year. This is based on Matang Group’s revenue of RM9,4 million against Johor’s plantation market size of RIV16.67 billion in 2014. For the financial year ended 30 June 2015, Matang Group’s total revenue was RM7,4 million. This is equivalent to 0.1 percent share of the palm oil industry focusing on the plantation segment in Johor during the year. This is based on Matang Group’s revenue of RM7,4 million against Johor’s plantation market size of RM6.25 billion in 2015. 4.4 DEMAND AND SUPPLY CONDITIONS 4.4.1 Demand Conditions The demand conditions of the palm oil industry focusing on the plantation segment are highly dependent on the demand conditions of its derivatives. A higher demand for derivatives is likely to spur the growth within the processing segment in order to meet the demand and accordingly, catalyse growth in FFB demand as the raw materials for the processing segment. Increase in Global Population, Income and Per Capita Consumption Palm oil will see a growth in demand over the long term considering the increase in population, income as well as per capita consumption. The United Nations Food and Agricultural Organisation (“FAD”) projected that the world population will grow to 9.73 billion by 2050 (from 7.35 billion as at 2015) with the majority of growth occurring in Asia. In the developing countries, it is estimated that oils and fats consumption per year will increase from 10 to 15 kg per capita to 25 kg per capita within 20 years. Another important factor is income. A strong economic growth will lead to a rise in income through such factors as greater economic activities and better employment opportunities taking place and ultimately drive higher consumption and demand. China and India are taking the lead in terms of economic growth. Both countries are already the world’s largest 3 consumers of vegetable oils together with the European Union (“EU”). 23 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d) ./ ./rot’egeA~,SOCIArF:S ri~(\.Nf) I FINi\tll.t.f’ I MJ\ftKIOl Increasina Demand for Biofuel The growing concern on climate change and the over reliance on crude mineral oil as a source of fuel has created a growing demand for all vegetable oils including palm oil to be used as fuel. The EU, being the major user of biofuels, targets for the use of biofuel to reach 5.0 percent of total transport fuel demand by 2020, according to European Commission. In Malaysia, the government has introduced the use of B5 biodiesel in 2011 in the Central region comprising Putrajaya, Melaka, Negeri Sembilan, Kuala Lumpur and Selangor. B5 biodiesel is a type of biofuel blended with 5.0 percent of palm oil biodiesel and 95.0 percent of petroleum diesel. B5 biodiesel is typically suitable to be used in diesel engines. The B5 programme was expanded to the Southern region encompassing Pahang, Terengganu and Kelantan in 2012. In December 2014, the Malaysian government introduced the replacement of B5 biodiesel with B7 biodiesel, which involves the blending of 7.0 percent of palm oil with 93.0 percent of petroleum diesel in Peninsular Malaysia. The B7 biodiesel programme was later implemented in East Malaysia in January 2015. The implementation of biodiesel programme is set to further increase the domestic demand for FFB and CPO moving forward. Low Price of Palm Oil Compared to Other Major Oil and Fats According to the MPOB, price of palm oil in global market is still the lowest in comparison with other vegetable oils such as soybean oil, sunflower oil and rapeseed oil. In tandem with the decrease in vegetable oil prices in 2014, price of CPO was USD821 per MT compared to soybean oil’s price of USD909 per MT, the most expensive oil among the 4 compared. Prices of sunflower oil and rapeseed oil in 2014 were USD909 per MT and USD907 per MT respectively. In 2015, price of CPO was USD623 per MT, the lowest among the 4 compared. Prices of soybean oil, sunflower oil and rapeseed oil in 2015 were USD757 per MT, USD847 per MT and USD776 per MT respectively. The relatively low price of palm oil is expected to drive its demand over the long term. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Conrd) I~{()
l M/. Ii ~( n T 4.4.2 Supply Conditions Long Economic Lifespan of the Oil Palm Tree and Expansion in Planted Area The long natural economic lifespan of the oil palm tree of approximately 25 years, and the ability to harvest the fruit all year round ensures a consistent supply of FFB to meet demand from the processing segment. On average, one ha of oil palm plantation produces 19 MT of FFB per year. In 2014, there was an expansion in the oil palm planted area in Malaysia that reached a total of 5.39 million ha as compared to 5.23 million ha in 2013. The oil palm planted area in Malaysia continued to expand in 2015 to 5.64 million ha. The continued expansion in planted area ensures a sustained harvest of oil palm fruit and a consistent supply of FFB in the long term. This supply condition is expected to have high impact on the plantation segment from 2015 to 2020. Palm Oil as One of the 12 National Key Economic Areas The palm oil industry is currently the fourth largest contributor to the national economy and accounts for RM53 billion in Gross National Income (“GNI”). Under the government’s Economic Transformation Programme (“ETpll), palm oil is one of the 12 I\lational Key Economic Areas (“NKEAs”) and is projected to generate an additional RM125 billion to GNI to reach RM178 billion by 2020. Among the entry point projects (“EPPs”) outlined under the palm oil NKEA that may improve the FFB supply include the following -accelerating replanting, improving FFB yield and improving workers’ productivity. These EPPs are likely to increase the supply of FFB in the long term. Dependency on Natural Elements in the Plantation Segment The plantation segment within the palm oil industry is highly reliant on the natural conditions in the production of FFB. Some of the notable conditions that impact the plantation segment include weather conditions, as well as pests and crop disease as detailed below. Weather Condition The climatic condition is a critical factor in oil palm cultivation that would impact the FFB yield, which in turn has a significant influence over the pricing trend of FFB and CPO. Production can be adversely affected if rainfall does not meet the water demand for the growth of oil palm trees, for example during EI Nino phenomenon where dry conditions last from 8 to 16 weeks. Prolonged dry conditions may result in low soil moisture for the growth of oil palm trees and adversely affect the FFB production. 25 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
IfltlAtJU j “JNI\N~f:’ MAkK&-r Conversely, excessive rainfall conditions such as the monsoons, or the La Nina phenomenon that follow after drier weather brought by EI Nino phenomenon, may also disrupt the harvesting and logistics within the plantations segment. Prolonged exposure to excessive water levels may result in moisture stress in oil palms; affecting the grading of palm oil and eventually forcing the plantation player to sell the palm oil at discount. Pests and Crop Diseases Pests and crop diseases impact the amount of harvestable FFB to a significant extent. Common pests that infest oil palm plantations include rats, bagworms, nettle caterpillars, rhinoceros beetles, bunch moths and termites. In addition, oil palm crops are also affected by common soil borne fungus, such as the Ganoderma, one of the more prominent diseases affecting oil palm trees. The Ganoderma is a genus of wood-decaying fungi that affect all types of woody trees, including oil palm trees. The Ganoderma infections result in a disease called basal stem rot that is lethal, with the fungus gradually overwhelming the lower trunk of the oil palm tree, rotting it from the inside. Infected oil palm trees often exhibit wilting or desiccated leaves and eventually these trees experience a severe decline in the production of FFB. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
4.5 MARKET CHALLENGES Shortage of Labour The lack of participation among Malaysians in the plantation sector had caused an acute labour shortage resulting in a heavy dependence on foreign workers. Shortage of labour (fruit harvesters) in the oil palm estates has caused losses in palm oil crops as uncollected FFB are left rotting in the fields. According to Performance Management and Delivery Unit (“PEMANDU”) in the ETP, foreign workers in Malaysian oil palm plantations are estimated to comprise 80.0 percent of total industry workforce. Aging Profile of Oil Palm Plantations Oil palm is a perennial crop with a maturity period of 25 years. According to the Malaysian government, Malaysia has a backlog of 365,414 ha of palm oil trees aged above 25 years. These trees typically have lower yield due to the reluctance of smallholders to replant to avoid losses of income during the 3-year replanting and maturity period. If replanting is not accelerated, there would be potential decline in FFB output in long run. Pressure from Anti-Palm Oil Lobbyists and Environmental NGOs from the West Scare-mongering and smear campaigns against palm oil have been rife. Many parties including the EU have alleged that palm oil production in Malaysia is environmentally unsustainable as the expansion of oil palm plantation brings about widespread deforestation and resulted in the destruction of orang utans and loss of biodiversity. The EU also pointed that the palm oil in Malaysia does not meet its environmental sustainability standard of 35.0 percent greenhouse gas emissions savings, and as such, is not entitled to incentives, thereby reducing its competitiveness. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
4.6 PRICING TREND The palm oil industry is capital intensive and operating margins in this industry have been volatile. Margins are sensitive to supply and demand of the global market for edible oil and the demand for CPO which is generally linked to the level of global consumption of edible oil. Other factor that could impact the demand for CPO includes the demand for biofuel which is generally linked to the prices of crude oil. Any fluctuation in CPO price would impact the prices of FFB in tandem with the changes in demand for the derived oil palm products. Therefore, palm oil including FFB and CPO are subject to price fluctuations based on supply of, and demand for FFB and CPO, weather conditions, as well as availability and pricing of substitute products (e.g. other vegetable oils) and other factors. As a feedstock for CPO production, demand for FFB is reliant on the production of CPO in Malaysia. Production of CPO is affected by factors noted above, notably demand for CPO in the global market for edible oil in relation to the level of global consumption of edible oil as well as the prices and availability of substitute products (i.e. other vegetable oils). Other factor that may affect the demand for FFB in relation to demand for CPO is the pricing trend of crude oil that may impact the demand for biofuel. Changes in demand for FFB are set to influence all market participants within the plantation segment of the palm oil industry, including l”1atang Group. As the fruits are required to be processed within 24 to 48 hours to prevent a rapid rise in free fatty acids which could affect the quality of the CPO, lower demand for FFB from the milling segment result in excessive FFB production and eventually forcing the plantation players to sell the FFB at discount. Conversely, higher demand, if not met by higher production, is set to spur growth in the pricing trend of FFB and CPO. Moving forward, the palm oil industry focusing on the plantation segment is projected to undergo cyclical movements in relation to the demand for FFB and its prices in relation to CPO. Nonetheless, the plantation segment within the palm oil industry in Malaysia is projected to grow at a CAGR of 6.6 percent during the forecast period from 2015 to 2020 to value at RM58.12 billion in 2020. Such development is expected to augur well for the development of plantation segment within the palm oil industry in Malaysia. The average prices for CPO and FFB for the calendar years 2009 to 2017 and the CPO closing stock from 2009 to 2016 are set out below. 28 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d) ro ge A “, S. () C 1 Ii, T [ “, Figure 10: Annual Average Prices of Oil Palm Products and CPO Closing Stock, 2009-2017
CPO Closing Stock (million MT)  1.2  0.7  1.1  1.6  1.0  1.0  1.6
Notes: 1) *Prices oflocal delivered CPO; 2) (1) Average closingstock ofCPOforthe first 10monthsof2016; 3) f denotes forecast Source: MPOB and Protege Associates In 2012/ the average price of FFB as the feedstock for CPO production trended downward to RM615 per MT in tandem with a lower CPO price that declined to RM2/764 per MT. The downward trend in CPO price was attributed to a higher stock level of CPO and a lower demand for CPO in the global market. The 1.1 million MT of CPO stock that was carried forward from 2011 increased the supply of CPO. However, CPO demand from the export market was lower in the second half of the year due to the Euro-zone financial crisis that led to a lower demand for oils and fats. Higher imports of palm oil in Malaysia further increased the CPO stock, and weighed on its pricing. As a result, CPO price decreased to RM2,764 per MT in 2012/ alongside a reduced price of FFB as the feedstock for CPO production at RM615 per MT during the same period. CPO closing stocks increased by 47.7 percent to 1.6 million MT in 2012. In 2013/ the average CPO price dropped further to an average of RM2/371 per MT and the price of FFB as its feedstock decreased to RM485 per MT. The decline in CPO price mainly attributed to high CPO stock levels particularly during first quarter of 2013 due to the 1.6 million IYlT of CPO stock that was carried forward from 2012. In addition, the CPO demand from export market was lower during second quarter of 2013. Nonetheless, the price of CPO increased towards end of the year to close at RM2/575 per MT on the back of lower CPO stock levels. Notwithstanding the upward trend towards end of the year, the price of FFB as the feedstock for CPO production dropped to RM485 per MT in 2013 in tandem with a lower CPO prices. 29 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
In 2014, FFB price was higher at an average of RM519 per MT, moving upwards alongside the increase in CPO prices. CPO was traded at a higher price during the first half of 2014 at an average of RM2,605 per MT. Moving into the second half of 2014, CPO prices trended downwards and closed at an average of RM2,183 per MT. This was attributed to a lower price of soybean oil (which can be used as a substitute of palm oil) and slumping crude oil prices which affected the demand for biofuel. However, the average price of CPO was higher by a marginal 0.5 percent to RM2,383 per IVlT in 2014. Despite the fluctuation in CPO prices throughout the year, the average price of FFB as the feedstock for CPO production increased to RM519 per MT in 2014 as the average CPO price escalated. In 2015, FFB price was lower at an average of RM459 per MT amid lower CPO prices. CPO was traded at an average of RM2,219 per MT in the first half of 2015 and trended downwards during the second half of 2015. The declining trend was attributed to weaker prices of soybean and rapeseed oil (which can be used as a substitute of palm oil), a weaker demand from China, and the continued weak crude oil prices that affected the demand for biofuel. The average CPO price in 2015 stood at RM2,153 per MT. Nonetheless, CPO prices began to exhibit signs of recovery as the prices increased from RM2,251 per MT in January to approximately RM2,720 per MT in October 2016 amid prolonged impact from the EI Nino drought and its subsequent lagged impact that affected the FFB yield thus resulting in lower feedstock for CPO production. CPO supply declined in tandem with lower production, thus augurs well for the growth of CPO and FFB prices. However, weak crude oil prices may continue to have an impact on the demand for biofuel, which is used as an alternative to petrol and fuel. Crude oil prices have seen a sharp decrease since the second half of 2014. The downward pricing trend persisted in 2015 and PETRONAS expects oil prices to remain low in 2016. As crude oil prices become more affordable, demand for energy products will likely be even more focused on crude oil, and will increasingly move away from alternative energy sources such as biofuel. As the decline in oil prices prolongs, demand for biofuels may be negatively influenced and this will weigh on the demand and prices of palm oil. However, the impact of decreasing crude oil prices on palm oil is anticipated to be minimal given that only 16.0 percent of global CPO production is for biofuel in 2014, according to the Malaysian Biodiesel Association. 30 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d) “. “.ro egeAS~jnC!Ar[~~ The situation surrounding the movement of FFB prices that fluctuate in tandem with CPO prices remains volatile moving forward. Protege Associates estimates that CPO and FFB prices are expected to value at an average of between RM2,200 to RM2,900 per MT and between RM480 to RM600 per MT respectively for the period of 2016 and 2017, along with an anticipation for fluctuations in the short term (2016 to 2017), as demand and supply conditions of the CPO remain unstable. The average closing stock of CPO for the first 10 months of 2016 stood at around 1.0 million MT, lower as compared to the 1.2 million MT recorded in the corresponding period in 2015 in line with a lower CPO production. The production of CPO was lower by 15.6 percent at around 14.3 million MT for the first 10 months of 2016 as compared to 16.9 million MT in the corresponding period in 2015 amid prolonged EI Nino drought and its subsequent lagged impact that resulted in lower FFB yield, thus impacting feedstock supply for CPO production. Nonetheless, FFB yield and CPO production are expected to improve as the impact from EI Nino drought fades. CPO export in the first 10 months of 2016 was slightly lower at 3.4 million IVlT as compared to 4.2 million MT in the corresponding period in 2015. However, Malaysia’s CPO export is anticipated to improve in the long term in line with the expected increase in Indonesia’s domestic demand for its biofuel production. The Indonesian government aims to promote biodiesel usage with the introduction of mandatory 15 percent blend of biodiesel in diesel products in 2015 and 20 percent blend in 2016, and is targeting to increase the mandated bio content to 30 percent in 2020. Henceforth, Indonesia’s CPO export is expected to reduce as its domestic demand increases, and such development augurs well for Malaysia’s export to fulfil the global CPO demand. As CPO exports are traded in U5D, a weaker Ringgit would result in higher translated local CPO prices, resulting in increased FFB prices in relation to CPO prices. Domestically, the demand for FFB in relation to CPO increase in tandem with the demand for biofuel followed the introduction of B7 biodiesel programme that was introduced in December 2014 in Peninsular Malaysia, and in January 2015 in East Malaysia. The implementation of biodiesel programme is set to further increase the domestic demand for FFB in relation to CPO and accordingly, spur the growth of the FFB and CPO prices. 31 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d) ro A<:”::UCIAr[~<ge 4.7 RELIANCE AND VULNERABILITY TO IMPORT The plantation segment within the palm oil industry in Malaysia is not vulnerable to the import of FFB due to the vast number of oil palm plantations in the country. In 2014, the total oil palm planted area in Malaysia stood at 5.39 million ha with FFB yield of 18.63 MT per ha. And in 2015, the total oil palm planted area in Malaysia stood at 5.64 million ha with FFB yield of 18.48 MT per ha. In terms of resources for plantation activities, the plantation segment within the palm oil industry in Malaysia is not dependent on import for the oil palm seeds. The oil palm plantation segment is also not dependent on the import for pesticides and other agrochemical products due to the availability of local production. Meanwhile, the plantation segment is fairly reliant on and vulnerable to imports of fertilisers as some key constituents of fertilisers such as phosphate and potash are not available in Malaysia. The government also promotes the recycling and use agricultural waste, such as empty oil palm fruit bunches produced after FFB milling, as organic fertilisers for the plantation activities. 4.8 SU BSTITUTE PRODUCTS Palm oil is seen largely as general purpose oil; hence it can be substituted with other oils, particularly soybean, rapeseed (also known as canola) and sunflower. Due to this reason, these 4 oils are mutual competitors, although palm oil is the strongest contender in the market in terms of production. In 2015, close to 176.1 million MT of vegetable oils were produced globally. Palm oil and palm kernel oil combined was the largest contributor to the world supply of vegetable oils with a total of 39.0 percent. Soybean oil, rapeseed oil, and sunflower oil accounted for 27.8 percent, 15.4 percent and 8.4 percent respectively. These 4 oils contributed 90.6 percent to the world production of vegetable oils. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d) ro A~,(,OC:1ArE “,ge 4.9 GOVERNMENT POLICIES AND REGULATIONS The following is a list of Malaysian laws regulation its palm oil industry while highlighting selected pertaining to the practices of palm oil production: • Malaysian Palm Oil Board (Licensing) Regulations, 2005 in exercise of the powers conferred by the Malaysian Palm Oil Board Act, 1998 • Land Acquisition Act 1960 • Land Conservation Act, 1960, revised 1989 • National Land Code 1965 • Protection of Wildlife Act 1972 • Environmental Quality Act 1974 (Prescribed Premises) (Crude Palm Oil) Regulations, 1977 in exercise of the powers conferred by the Environmental Quality Act, 1974 • Workers Minimum Standard of Housing & Amenities Act 1990 • Occupational Safety & Health Act, 1994 • Pesticide Act 1974 (pesticide registration) Rules, 2005 • Pesticide (Licensing for sale and storage for sale) Rules, 2007 • Pesticide (labelling) Regulations, 1984 • Factories & Machinery Act, 1967 • Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order, 1987 in exercise of the powers conferred by the Environmental Quality Act, 1974 • The National Parks Act, 1980 • Sabah Wildlife Conservation Enactment, 1997 • Sabah Water Resource Enactment, 1998 • Sabah Biodiversity Enactment, 2000 • National Forestry Act, 1984 • Aboriginal People Act, 1954 • Sarawak Land Code, Chapter 81, revised 1985 • Sarawak Native Code, 1992 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
• Sarawak Biodiversity Centre Ordinance, 1997
• Sarawak Wildlife Protection Ordinance, 1998

4.10 OUTLOOK OF THE PALM OIL INDUSTRY FOCUSING ON THE PLANTATION SEGMENT IN MALAYSIA Malaysia’s palm oil industry and its plantation segment face a bright outlook from 2015 to 2020. Growth in the plantation segment is highly dependent on the demand conditions of FFB derivatives; a higher demand for derivatives is likely to spur the growth within the processing segment in order to meet the demand and accordingly, catalyse growth in FFB demand as the raw materials for the processing segment. Protege Associates anticipates that the growth within the palm oil industry and its plantation segment are likely to be driven by an increasing global population, rise in incomes and per capita consumption throughout the period from 2016 to 2020. Other factors driving market growth are the increasing use of palm oil in biofuels and the lower price of palm oil, as compared to other major vegetable oils, which is a crucial and acts as a deciding factor in promoting a higher consumption of palm oil. Supporting the supply for Malaysia’s palm oil industry and its plantation segment are the long economic lifespan of the oil palm trees and the expansion in planted area. Both of these factors ensure a continued cultivation of oil palm fruit and consistent supply of FFB. The support from the Malaysian government also acts as a positive supply condition. The palm oil industry has been identified as one of the 12 NKEAs. To enhance the development of the palm oil industry, various initiatives under the ETP have been developed as a means to boost the industry’s activities. Among the EPPs that have been identified to improve FFB production include those that aim to accelerate replanting, improve FFB yield and improve workers’ productivity. These EPPs are likely to increase the supply of FFB in the long term. The palm oil industry focusing on the plantation segment in Malaysia is valued at RM42.19 billion in 2015 and is expected to grow at a CAGR of 6.6 percent during the forecast period from 2015 to 2020 to value at RM58.12 billion in 2020. 7. EXECUTIVE SUMMARY OF THE IMR REPORT (Cont’d)
IsI:l:ANv! f’-lhIANCf; I M~lilk”’l Protege Associates has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the boundaries and limitations of secondary statistics, primary research and continued industry movements. Our research has been conducted to present a view of the overall industry and may not necessarily reflect the performance of individual companies in this industry. We are not responsible for the decisions and/ or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies. Thank you. Yours Sincerely,
SEOW CHEOW SEI\lG Managing Director Protege Associates Sdn Bhd

 

 

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