Industry Overview

12. 12.

(Prepared for the inclusiuN in fhis Prospr:cms) Vital Factor Consulting Sdn Bhct o VITAL FACTOR CONSULTING {Company Nc>.. 26137!i7.i”!
CrNlting Winning BU$iness Solutiuns 75C & 77C Jala;; S522/19 Oamansura Jaya 47400 Petaling Jays 28 November 2005 Sef\;VlgOf DaNI Ehstlri, Malaysia Tel: (603) 7728-0248 Fax: (603) 7728·7248 The Board ofDirectors Email: info@vilalfactof.comMMS Ventures Berhad Web$ite: wwwvila~aciorco-rn Unit 41-5-5, 5th Floor, Wjsma Prudential 41, Ja1an Cantonment 10250 Pe-nang Dear Sirs Asstnmcnt of the Machiner~ and Equipment Industry The fullowing is a summary of the Assessment of the Machinery and Equipment industry in Malaysia prepared by Vilal Factor Consulting &In Bhd for inclusion in the Prosp<‘tWS of MMS Ventures Be-rhad (herein together with all its subsidiaries will be referred to as MMS Ventures Group) in relation 10 its proposed listing on the MESDAQ market. t. Objective • Tlie objective of the report is to provide an independent assessment of the Machinery and Equipment Induslry focusing on the Specialised Industrial Machinery and Equipment Sector in Malaysia,
• 1be main business aciivities ofthe M!\t1S Ventures are as follows: Design and Manufa;::ture of industrial Automalion Systems and Machinery; Design flfJ>recision Die Sets, Jigs and Fixtures”

2. Industry Structure • AccOt”ding to the Malaysian Industrial Development Authority, the Machinery and Equipment Industry can be classified into four broad categories as follows: ~, / Machj”ery and ( Equipment Irdustry
Source: Malaysian Industrial Dt/II<?lopmenf Authority figure’ Structure of the Muchinery and Equipment Industry MlvfS Ventures Bcrhad Industry Assessment 142 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ Spedalised Machinery for Spedflc Industries • The Specialised Machinery for Specific Indllstnes sector caters to the needs of spcdfic manufacturing industries and thus most of the machine nnd equipment are ~ustom-made. L(!cal companies that are involved tn this sector at”e able to undertake the full project cycle from engineering and design to fabrication and integration of final system and machinery,
• The major machinery and equipment manufactured under this sector include processing machinery for the Rubber and Palm Oil Industries and automation machinery and equipment for the Electrical and EJectronics Industry.
• In 2004, there were about 20 companies involved in the manufacturing of rubber and

palm oil pml;essing machinery and equipment, which include the following: raw rubber processing ma<;hinery: latex dipped product manufacturing lines; crude palm oil and edible oil processing equipment and machinery. (Source: Ma/t.}’sian Industrial D(!V'(i/opmc1’/t AUfhoril)~ • For the manufacturing of automation machinery and equipment, there were 30 companies involved in such production catering to the Electrical and Electronics Industry” The automation machinery and equipment include: pick and place machines; vision inspet;tion S)”Stemi; integrated circuit (IC) test handlers; tape and reel machines; automatic moulding systems; trim and form machines; laser marking machines; die bonders: automatic dispensing machines”
(Source: ;\fala)’sian industrial Development AJffhOf”iry) • In 2004, a total of39 projet:ts with an investment QfRM205.3 million “,-ere approved within the SpeciaJised Machinery sector, representing.an increase of J:6% compared to 34 pmjcets with an investment ofRM202.1 milHon in 2003,
• Of the overall number of projects approved, 29 projects were new and to other projects were for expansion or diversification,
• Within the Specialised Machinery sector, domes1lc investment constituted 665% or RMJ36.5 million of the overall investment in 2004, The remainder 33,5% or R..,.\’168J” million were contributed by foreign investments,
• Malaysia is a net importer of Speiiialised Machinery, In 2004, the import value of Specialised Machinery reached MHO.S billion whilst export value was: RM4.2 billion.

rSow’Ce: Malayslan Industrial Development Authority), /i.f.l<1S Ven/uTes Berhad Industry Assessment 143

o
3. VITAL FACTOR CONSULTING Creating Winnfng Business Solutions • As MMS Ventures Group is primarily involved in lite manufacture of Specialised Machinery for Specific Industries, the focus of this report will be on the overall Machinery and Equipment Industry, and Specialised Machinery for Specific Industries sector, Metalworking Machinery • For the Metalworking Machinery sector, a total of RMI4-2 million worth of investments were approved in 2004. Domestic investment accounted for 66-2% whilst foreign investment constituted the remainder 338~j… (Source: Malaysian Industrial Development Authority). Gcnerallndustrial Machinery and Equipment • Tn the General Industrial Machinery and Equipment sector, major machinery and equipment produced include: industrial air conditioning plant and equipment; elevators; crane:-s.; pressure vessels; heat exchangers; ultrasonic deaning machines”
• In 2004, a rota! ofRM166.6 mHlion was invested in the sector, of which 75.2% was contributed by domestic investment. The remainder 24.3% was contributed by foreign investment. (Source,’ Malaysian Indus/rial Development Authority)­Vertical Structure of the Machinery and Equipment Industry • The manufacturing of Machinery and Equipment can also be vertically extended to include upstream and do\\nstream activities as follows: c Up~trearn 1l( I De&i~ti and Eq:;inaair19 or , §~~MB(;hifl61)1 arld Equipmem ‘~­Midstream !,Ma1Jtacturlng Qf A,S$eWbl)-<:J MadliMfy and Equipment, MachnelV and E~tlipmem I ,J t Sales and OiWibutionDGwnstr”p;m Figure 2 Vertical Strutiu~ of the Machinery 1md Equipment Industry MlvfS Ventures Bcrhad lndusfry Assessmenr 144 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ Upstream • Upstream activities are primarily involved in the supply of raw materials like iron and steel sheets and plates, and other metal products, and parts and oomponents”
• Locally, the Basic Metal Products Industry includes the following: ferrous metal products, namely iron and steel; non-ferrous metal products, namely aluminium, tin. copper, zinc and lead.

Midstream • MMS Ventures Group’s business activities are mainly focused on midstream activities.
• Within the manufucturing of Machinery and Equipment, moSi of Malaysia’s machinery and equipment manufacturers produce Specialised Machinery for Specific Industries, Power Generating Machinery and Equipment, and General Industrial Machinery as well as components and parts.
• The machinery and equipment produced are usually f(lf niche market applications, low volume or batch production or made to order, reflecting local manufacturers’ capabilities in engineering design, innovation and research and development (R&D), The average value input for these production range between 4(}’% and 60~'” (Source: MQ}<.ZYsiafl!ndustrial D<.wlopmerJ Authority;).
• The Engineering Supporting Induslry encompasses: moulds; tools and dies; machining; metal stamping; metal surfuce treatmentlfinlshlng: heat treatment; metal castihg.
• Within the Engineering. Supporting lndustry, in 2004, there were 115 projC\:ts approved involVing a total investment of R,\1763,9 Oliman compared with 75 projects involving a tmal investment of only RM777.1 million in 2003 (Source.’ Malaysian industrial Development Authority),

Downstream • Downstream aCtivities involve the services sector, which include sales, distribution and export. /i.f1<1S Ven/uTes Berhad Industry Assessment 145
o VITAL FACTOR CONSULTING Creating Winnfng Business Solutions 4. Industry Life~ycle • The Machinery and Equipment Industry IS in the growtb stages of the industry Ufe ‘l’cle. TIlis is based on the following observations: Local Production Based on late5t available statistics, in 2002, gross output value of manufacture of Special Purpose Machinery (herein referred to in this report as ‘Specialised Industrial Machinery and Equipment’) increased by 261 % to reach approximately ro,.·12.7 billion. Based on latest available statistics-in 2002, gross output value ofmanufacture of Other Special Purpose Machinery (sub-sector of Special Purpose Machinery) increase by 29.2% to reach RM147.5 million. (Source: Department u/Statistks Malaysia) Exports The export vaJue of Machinery Specialised for Partkular Industries increased at an average annual rate of 16.3% between 1999 and 2004; Between 1999 and 2004, the export value of Machines or ~’lechanical Appliances Having Individual Functions, Not EI5e\vhcre Specified, grew at an average annual rate of 16.2%; Bet’WeeU 1999 and 2004, the export value of Other Machines and Mechanieal App1iam:es Having Individual Functions Not Elsewhere Specified (is the su])..settor of Machines or Mechanical Appliances Having Individual Functions, Not Elsewhere Specified) decreased at an average annual rate of 2,3·%; Between 1999 and 2004, the export value of Measuring or Checking Instruments, Appliances and Machines, Not Elsewhere Specified, iocreased at an average annual rate of25.6(‘j,..; Between 1999 and 2004, the export value-of Other Opticallnstrnment, and Appliances for Inspecting Semiconductor Wafers or Devices {)f for fnspecting Photomasks Of Reticles Used In Manufacturing Semiconductor Devices (a sulrsector ofMeasuring or Checking 1nSfnlment5, Appliances and Machines, Not Elsewhere Specified) grew at an a”-erage annual rate of55.7%. (SQurce,’ Department ofStatistics Afalaysia) • The gro\Yth phase o-fthe life-eycle ofMachinery and Equipment Industry will continue to Ix: fuelled by the following trends and factors: The Government has identified the Machinery and Equipment Industry as one of the key areas for growth and development. M/vIS Ventures Berhad industry Assessmenr 146 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ Exports of Machinery and Equipment, whidl iocludes power generating machinery and equipment. m<Whinery specialised for particular industries, metalworking machinery and general industrial ma,hinery and eqllipment and part”, continue to increase, stimulating demand for local manufacture of Machinery and Equipment. The foHowing export perfonnaru:e reaffiw,$ an industry that is s.till in its growth and development phase: Export value of Machinery al~d Equipment experienced an average annual growth rate of 10.2% betv.-een 1999 and 2004, In 2004, export value iMreascd by 28.4% to reach approximately RM15,6 billion. Between 1999 and 20G4, export value ofSpedalised Machinery for Spedt1c Indlli>tries grew at an average annual rate of 16.3%. In 2004, export value increased by 28,9% to reach approximately RM4.2 biliioo. (Source: Malaysian Industf’ial Development Authority) As the MachinCI)’ and Equipment sector serve mao;, user-industry sectors with a proliferation of usage and applications., the growth in the performance of the user industry sectors will continue to generate demand for Machinery and Equipment including automation based proouNs and applications. 5. G~lVefnlnetlt Legislation, Pollci¢s and Incentives • Apart from the honnal manufacturing licence, there are no material government laws, regul<1ttons and policies that may impede on operators’ performance and growth within a free et:lterprise environment.
• Application {)f a maouflKturing licence under ‘the Industrial Coordination Act, 1975 is mandatory for \:omponles with shareholders’ funds of RM2.5 million or above Of engaging 75 or more full¥time employees (Source: Malaysian Industrial Dew:lcpmenl

All1fu:m”ty). Goyernment Incentives ,. As part of the Malaysian -Govenunent’s intention to nurture the growth and development of the Machinery and Equipment Industry, there are incentives provided for companies in the munufacture of machinery and machinery components under the Promotion of Investments Act 1986. The inceniives include: Pioneer Status; Investment Tax Allowance; Reinvestment Allowance.
(Source: Malaysian Industrial Do’eJopment Authority) /i.f.l<1S Ven/uTes Berhad Industry Assessment 147
INDEPENDENT MARKET RESEARCH REl’ORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winnfng Business Solutions • The promoted activities and products dassifled under the manufacture of machinery and machinery components, among others, include the development and production of the following: industrial machinery and e.qulpmem; agricultmal machinery and equipment; mining or mineral processing machinery or equipment;
power generating machinery or equipment; construction machinery or equipment; material handling machinery/equipment; machme tools, hand tools or power tools, • There are also incentives provided for high technology companies in the automation and flexible manufacturing systems under the Promotion of Investments Act 19150. According to the Malaysian Industrial Development Auth(lnty, high t~hnology companies an: referred to companies engaged in promoted activities or in the production ofpromotedproducts in areasofnewand emergingtechnologies.
• The promoted activities and products classified under the automation and flexible
manufacturing systems include the development and productio-n of the fullowing: computer process c-Ontrol systems/equipment; process instrumentation; robotic equipment; computer numerical control (CNe) machine tools,
• Eligibility for either the Pioncer Status Qr Investment Tax Allowance will be determined aocording to the priorities tcnned as “promote-d activities’ or “promoted products”. 10 addition, the level of value-added, technology and indu’>trial linkages will also be taken into c(lnsideration.
• The M1v1S Ventures Group subsidiary, Micro Modular System Sdn Bl1d was granted Pione-er Status for the manufacture of “Automated Equipment f(lr the Semiconductor Indmtry” on 5 Ma.y 199K The pioneer status was valid from I July 1999 and expired on 30 June 2004,
• As part of the Malaysian Government’s incentives to promote the manufacmring industry, Licensed Manufacturing Wareholi.Se (LMW} companies are entitled to the I;xemption of imported raw materials, component parts, machinery and equipment, which are required dire{:tly in the manufacturing process (Source: Malaysian Industrial Development Authority).
• Generally, manufacturers ‘who are approved fQr LMW are those that have the

following; entire production or nOt less than 80″/,., of lhe prodtretion are meant for export; raw malerialsJcomponents are mainly hnponed. (Source.” l>4alaysial11ndusrrial Development Authority) • MMS Ventures Group is currently enjoying Licensed Manufacturing Ware-house (LMW) facilities. MlvfS Ventures Bcrhad indusfry Assessmenr 148 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ 6. Environmental Regulations • In the proCilss of manufacturing machinery and equipment, the main waste material generally produced by the Machinery and Equipment Industry is waste oit
• The waste oj} is created during the following, production process: change ofmachine lubricating oil; change (Ifdegreaser during degreesing.
• However, waste oil generated by the Machinery and Equipment Industry is relatively low as they are not operating machinery and equipment for long term, but rather using it fOr development and testing purposes,
• The disposal of waste oil is. regulated under ‘spent oll or grease used for lubricating industrial machines’ of scheduled wastes from non specific sources in Environmental Quality Act 1914 and Environmental Quality (Scheduled Wastes) Regulati<:lt1S 1989

(Source: Environmental g-,wlity Act and Regula/ians). “‘1, Labour Usage • Usage of labour in the manufacture of Specialised Purpose Machinery ilnd Equipment is higher compared with the Manufacturing Industry, In 2003, labour cost per employee within the Manufacture of Specialised Purpose Machinery and Equipment was 22.6% higher compared to Overall Manufoctuting Industry. (Source: ,AlaUona! Productivity Corporation) • This is b«”au$¢ the industry depends on highly skilled lalx>UT to produce customised machinery and equipment. Machinery and equipment are high value-added products and are manufactured in low volumes. 8. Supply and Supply Dependencie$ Supply • Based on latest available statistics, in 2002, the gross output value ofthe manufacture of Lifting and Handling Equipment declined marginally by 0.5% amounte{l to RM29·t I million. ‘” Based on latest available statistics, in 2002, gross output value of manufacture of Special Purpose Machinery (herein referred to in this report as ‘Specialised Industrial Machinery and Equipment’) Increased by 26.1% to reach approximately RM2.7 billioR • Based onlatestavailablestatistic.:;, in2002,grossoutput valueofmanufactureofOther Special Purpose Machinery (sub-sector of Spe<:ial Purpose Machinery) rncrea.o:eo by 29,2% Ut reach RM247.5 million /i.f.l>1S Ven/uTes Berhad Industry Assessment 149 12, _ IND:…::.E=I’::.END=.,RESEA:…::._RCH__….d!….::.::.ENT:…::..:.MARKE’f::.::.::.::.=…..__REl’OR_T(_Con_”…._ o VITAL FACTOR CONSULTING Creating Winnfng Business Solutions • The import value of Md(hmery Specialised for Particular Industries im:reased at an average annual rare of 7.3% between 1999 and 2004. In 2004, the import value of Machinery Specialised for Partkular Industries Increased by 30,5% to RMIOA billino.
• Between 1999 and 2004, the import value of Machines or Mechanical Appliances Having Individual Functions. Not Elsewhere Specified grew at an average annual rate of 3,7’%, In 2004, the import value increased by 372% to reach approximately Rl’M.O billion.
• Between 1999 and 2004, the import value of Other Machmes or Mechanical Appliances Having Individual Functions, Not Elsewhere Specified (sub-category of “Machines. or Mechanical Appliances Having lndividual Functions, Not Elsewhere Specified “) grew at an average annual rate of I.(VIA. In 2004, the import value of this products increased by 12,5il;d to approximarely R\12″2 billion.
• Behveen 1999 and 2004, the import value of Measuring or Checking Instruments, Appliances and Machines, not elsewhere specified grew at an average annual rate of 4.9%. In 2004, the import value of this category increased by 49.3%, which amounted to approximately RM2.7 billion.
• Between 1999 and 2004, the import value ofOther Opticat Instruments and Appliances for Inspecting Semiconductor Wafers or Devices o-r for Inspecting Photomasks or Reticles Used in Manufacturing Semiconductor Devices grew at an average annual rate of 15.6%. In 2004, the import value of this eategQl)’ increased by 267,7’% to RM3Hs.8 million.

Note: “Other Optical instrwuenls and Appliances for ifljpecting Semicunductor Wafers or Dcvic(!s or/or Inspecting Photom4sks or Retides Used in Manufacturing Semiconductor Devices·j is a sub-sector q( ;’Measuring or Checking Instrum,mts, Appliances and Machines, no! elsewhere speci/ied”, (Source.” Department ofStalislics Malaysia) Supply Dt-pendencies • Generally, there are many dltferent types of raw materials required for the manufacturing of Machinery and Equipment
• However some of the major raw materials required fur the manufacturing of Machinery and Equipment focusing on Specialised Industrial r,.4achinery and Equipment include:
Other Fabricated Metal Products. not elsewhere classified; Non-EIC{:trie Engines ,md Motor, and Parts, not elsewhere specified; Parts for Machines and Meehanical Appliances; Electric Motors and GeneratQrs.

• The manufacture of Other Fabricat<:d Metal Products, not elsewhere clasSified includes general purpose parts for machinery and specialised parts of machinery and equipment.

M/vIS Ventures Bcrhad industry Assessmenr 150 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ • Malaysia is a producer of Other Fabricated Metal Products In 2004, the sales value of the manufac:rure of Other Fabricated Meml Products, not elsewhere classified, amounted to RM4.2 billion, representing a growtb of ]7.9% over the previous year (Source: Department o/Statistics). • Malaysia has an engineering supporting industry, which encompasses moulds, tools and dies, machining, metal stamping, metal surface treatme-Iit!fmishing, heat treatment and metal casting. This is supported by the following number of companies in the engineering :mpporttng industl)'” in Malaysia: there are approximately 350 mould, tool and die companies In uperation; there are approximately ISO macbining companies in operation; there are approximately 300 metal stamping companies; there are approximately 35 metal surface treatment.’tlnishing companies in operation; there arc approximately 70 foundry companies in opcratlolt; there are approximately 60 die-casting companies in operation.
(Source: Malaysian Industrial Development Authority) 9. Demand and Demand Dependencies • Demulld for Machinery and Equipment is dependent on the following markcu: Local market demand; Overseas in terms ofexport market demand,
• The export value of Machinery Specialised for Particular Industries increased at an average annual rate of 16J% between 1999 and 2004, In 2004, the export value of Machinery Specialised for Particular Industries Increased by 30.3% to ID.14.2 billion over the previous year.
• Between ,999 and 2004, the export value of Machines or Mechanical Appliances Having Individual Functions. Not Elsewhere Speclfied, grew at an average anllual rate of 16.2%. In 2004, the export value increased by 41.5% to R..\11./ billion.
• Between 1999 and 2004, the export value of Other Machines and Mechanic.al Appliances Having Individual Functions Not Elsewhere Specified (s:ub~sector of “Machines and MecbanH:aJ Appliances Having Individual Functions Not Elsewhere Specified”) decreased at an average annual rate of 2.3%. In 2004, lhe export value decreased by 34.3% to reach approximately R..\I!342J million.
• Between 1999 and 2004, the export value tlf Measuring or Checking Instruments, Appliances and Machines, Not Elsewbere Specified, increased at an average annual rate of 25,6%. In 2004, the export value increased by I8.g;’A to a value of RM904.1 million.

(Source; Department a/Statistics lvfalaysia) /i.fl<1S Vr:nturcs Berhad Industry Assessment 151 12, _ IND:…::.E=I’::.END=.,RESEA:…::._RCH__….d!….::.::.ENT:…::..:.MARKE’f::.::.::.::.=…..__REl’OR_T(_Con_”…._ o VITAL FACTOR CONSULTING Creating Winnfng Business Solutions 10. Competitive Nature and Intensity • Operators in the Machinery and Equipment Industry face normal competition conditions.
• Competition exists in two areas: Local market; Global market.

• At the local level, manufacturers within the Machinery and Equipment Industry compete with other Malaysian manufacturers as well as with imports.
• At the global level, Malaysian manufacturers of Machinery and Equipment Industry compete against foreign manufacturers as well as other Malaysian export-oriented manufacturers.
• The nature of competition in the global arena is also segmented based on market perception:

Countries commonly associated with producing high quality, complex and robust machinery and equipment are Germany and Japan. Machinery and equipment from these countries are usually more expensive. Countries commonly associated with producing less robust and lower quality machinery and equipment are Taiwan and China. Machinery and equipment from these countries are usually priced significantly lower. • As with most free enterprise environments, competition is based on a number of factors,
including: Quality of products and services; Manufacturing capabilities and capacities; Prompt delivery schedules; Established track record; Cost competitiveness; Market reputation.
• Competition among operators in the Machinery and Equipment Industry focusing on the manufacturing of Automation Machinery and Equipment for the Electrical and Electronics Industry is moderate.

Factors that Moderates Competitive Intensity • In 2004, there were 30 companies involved in the manufacturing of Automation Machinery and Equipment catering to the Electrical and Electronics Industry in Malaysia (Source: Malaysian Industrial Development Authority). This represents a relatively small number of operators in an industry that gross exports RM257.1 billion worth of Electrical and Electronics products in 2004 (Source: Bank Negara Malaysia) MlvfS Ventures Bcrhad indusfry Assessmenr 152 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ • Requirements of the Electrical and Electronics Industry are more stringent compared to other industries, for example the Metalworking Machinery sector. The Electrical and Electronics Industry are typified by machinery and equipment that are required to meet some of the following operating conditions: high speed based on number of units done per hour precise with tolerance as low as 1 to 3 microns handling small parts and components dealing with highly sensitive components and finished products clean as most of these machines are used in air-conditioned and relatively clean environment (not necessary Clean Room conditions). As such, there are typically fewer manufacturers able to meet such stringent requirements, which moderate the intensity of competition. • Specialised Automation Machinery and Equipment are customised machinery, which cater to the needs of specific manufacturing environment. Hence, manufacturers are in a competitive position if they can meet the following:
confonn to international quality standards including ISO accreditation and compliance; meet the requirements and specifications of customers; ability to integrate machinery and systems in achieving greater functional flexibility, reliability, efficiency and speed; capability to undertake in-house research and development, engineering design and testing in order to customise and modifY machinery and equipment based on varying end-users’ requirement.

• Thus, with different degrees of accreditations, specialisations and capabilities, competition is moderated as not all manufacturers have the same skill sets and capabilities.

Factors that Increase Competitive Intensity • As Malaysia is still a net importer, in value teOlls, of machinery and equipment, Malaysia faces significant competition from imported machinery and equipment particularly from Japan, Taiwan, Gennany and China. Overseas competition increases the competitive intensity for operators in the industry.
• In 2004, the imports of Machinery and Equipment amounted to approximately RM32.9 billion whilst export value was approximately RM15.6 billion (Source: Malaysian Industrial Development Authority).
• In 2004, the import value of Machinery Specialised for Particular Industries increased by 30.5% to RMIO.4 billion. (Source: Department afStatistics).

/i.f.l<1S Ven/uTeS Berhad Industry Assessment 153
INDEPENDENT MARKET RESEARCH REl’ORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winnfng Business Solutions • Although the requirements for the Electrical and Electronics Industry is stringent for Automation Systems and Machinery, there are “back-yarders” that are not registered with the Malaysian Industrial Development Authority and are able to meet some etfthe requirements of !he Electrical and Electronics Industry Must of these will be f;;lr !he loW”tnd and relatively simpler OpemtiM$ and functions. However, their relatively lower cost would place competitive pressure, especially to manufacturers that are focussed at the low-end ofthe requirements. II. Manufacturers in tbe Industry • Some of !he players in the Machinery and Equipment Industry focusing on Automation Machinery and Equipment are as follows: MMS Ve-ntures Berhad \through subsidiary, Micro Modular System Sdn IlM) AT Systematization Bemad Pentamaster Corporation Bernad (thmugh subsidiary, Pentamaster Teclmology (M) Sdn Bhd) LKT industrial Berhad (through subsidiary, LKT Automation Sdn Bhd} KQ”bay Technology Berhad {through subsidiary, PolytooJ Automation Sdn Ilhd) NEe Machinery (M) Sdn Bhd Tateyama Auto Machines Co. (M) Sdn Bhd ASM Techno-Jogy Sdn Bhd Auroveyor (M) Sdn Bhd Cosmo lndustriaJ AutomatiM 8dn BM Cosmo Engineering 3d» Bhd Ever Technologies Sdn Bhd Grcalcch (M) SOO Bhd Matromatic Handling Systems (r.4) Sdn 13M MuJtimatic Systems Sdn Bhd Tf.rwam san Bhd Navelasill Sdn Bhd Ohnishi Electronics (M) $dn Bhd So-ritsu Technology Malaysia &in EM Elemac Precisian Engineering Sdn Bhd ADA Precision Manufacturing Sdn Bhd Heidelberg Graphic Sdn Bhd (Source: Malaysian Industrial Development Authnrity and Primary Morket Research undertaken by Vital Factor Consulring) 12. Barriers to Entry • Generally, barriers to entry into the Machinery and Equipment Industry are moderate to bigh. This is mainly substantiated hy the followmg-MlvfS Ventures Bcrhad Indusfry Assessmenf 154 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ Within the manufacturing of Specialised Machinery for Specific Industries, there are about 20 eompanies specialising in the manufacturirtg of rubber and palm oil processing machinery aod equipment, whilst there are about 30 companies involved in the produclioo of automation madJinery and equipment for the Blectronics and Electrical Industry. Within the manufacturing of Pmver Generation Machinery, there are approximately 10 active manufacturers of industrial broilers in Malaysia. Within the manufacturing of Metulworking Machinery, there are 6 companies involved in the manufacturing of machine tools. For Genera! Industrial Machinery and Equipment, there are 1 manufacturers nf industrial ait conditioning plant and equipment, 5 companies producing eleY’ators, 85 companies producing pressure vessels and heal exchangers, 6 companies producing tower cranes, port cranes, overhead travelling cranes -and other lifting equipment. (Source: Malaysian Industrial Developmrmr Authorityj Capital and Set-up Costs • 110e barriers to -entry based on capital requirements (excluding land and building) for the Machinery and Equipment Industry are low. The capital investment required to start up a smarl sized manufacturing facility would cost a.pproximately RM500,OOO (exduding land and building). Revenue would depend significantly on ability to win sales as the other pruduction constrains are people related which could be hired if there is a business case to do so, With such capital set-up “,ost, it is possible for the smal1 sized manufacturing set~up to generate revenue ofRM2 million to RM4 million per year (,$ource: Primary Market Research undertaken by Vital Factor Consulting) • Capital costs start to eSC4lnte fur larger operations within the manufacturing of Machinery and Equipment Industry. ., Ho…..-ever, smaller sized operators will face difficulties in -competing with larger operators that have the advantage of economies of Scale, This is in consideration of the diverse end-user industries and export markets served by larg.er operators that have the capital resources and capability to innovate, design, engineer as well as manufacture different types of machinery and equipment based on a few standard manufacmling piatfonns, Technical Skills • Generally, the skiJllcve! of labour used in the Machinery and Equipment Industry is high. Some aCthe key perwnnel required include the following: /i.f1<1S Vr:nturcs Berhad Industry Assessment 155 12, _ IND:…::.E=I’::.END=.,RESEA:…::._RCH__….d!….::.::.ENT:…::..:.MARKE’f::.::.::.::.=…..__REl’OR_T(_Con_”…._ o VITAL FACTOR CONSULTING Creating Winnfng Business Solutions PrQressional engineers and tecbnkal personnel with engineering background, experienced in mechanical engineering, exposure to <:omputer sutl:ware development and tecl:uwlogy, as well as mechatronics engineering. Lafge~pool of semi-skilled and general labour, usually recruited from vocational schools. At this level of skitl, workers would bave undergone extensive training and have experience in welding and metalwork. • Skilled labour with extensive experience are essential in various aspect of machinery and equipment manufllcturing operations as eadt production line caters to customised manufacturing and requires significant engineering skills and technical KnQwledge to produce machinery and equipment.
• Experienced and trained workers are also requlred in the operation of macbinery and lXtuipment to conduct machinery and equipment testing and optimise the level of producti’lit)’,
• Thus, having access 10 a pool of skjJJed labour that is experienced would pose some barriers of entry for new entrants.
• In addiiion, the abllity to develop and build machinery and equipment based on various end-user requirements: would enable manufacturers to maintain their competitive edge by keeping abreast with changing trends and needs of industrial users.
Tf1l(‘k Record and Quality Assurance Program
• As Illilchinery and equipment pankuJarly are tools for the production of various efld~ products, quality assurance is an important iactor. As such, nultlufacturers that have stringent quality assurance programmes in place including ISO a<:creditation and compliance ill standards are important factors in securing sales.
• In addition, opcraturs that have a strong track record wouid have a significant advantage in winning sales oompared to new entrants.

13. Barriers To Exit • Barners to exit for the manufacturing of Machinery and Equipment are low.
• This is due to the fact that there are numerous operators within each sector of the Machinery and Equipment IndtlStfy,
• Manufacturers of Machinery and Equipmf’nt can sell their entire produetion line 10 mber manufacturers within the Industry. It would not be expensive or difficult for the purchaser to convert or modify tools and equipment to be used In rhe manufacture of other “,pes ofmacbinery and eqtlipment catering for specific applications.

MlvfS Ventures Bcrhad indusfry Assessmenr 156 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ 14. Industr)’ Outlook • The outlook of the Spedalised Industrial Machinery and Equipment Industry in Malaysia is favourable.
• The Specialised lndustrial Machinery and Equipment is fore<:as,ted to grow at approximately 5°/,.. to 8% per annum for the next five years.
• This is mainly SUbstantiated by the following analysis and observations:

Local Production Based on latest available mrtistks. in 2002, gross output value of manufacture of Special Purpose Machinery (herein referred to in this report as ‘Specialised Industrial Mflchinery and Equipment’) increased by 26.1% to reach approximately RM2,7 billion. Based on latest available statistics, in 2002, gross output value of manufucrure of Otner Special Purpose Machinery (sub-sector of Special Purpose Machinery) increa5>Zd by 292% to reach RM247.5 million. Based on iatest availahle statistics, in 2002. the gross output val~le of tfle manufacture of Lifting and Handling Equipment declined marginally by Q,5% amounted to RM294.1 million. iNOIl!’ The Mamqa,-‘fflrt’ ofLifting Gnd Handling Equipmt’nt and the Manufacture oj Othu Sped9! Purpose Afadlinery Nfl! Elsewhere Classified comtifute part of thit (()/a! Spectalt’sed Industrial Machinery and EqUipment Industry) (Smm:4 !Jfpart1/!<!/II qlSta1istics .v”I<U’Slil.l Exports The export vatue of Machinery Specialised for Particular Industries increased at an average annual me of 16.3% betweeii 1999 and 2004. In 2004, the export value increased by 30.3% to RM4.2 billion over the previQus year, Benveen 1999 and 2004, me export vllluc of Machines or Mechanical Appllauees Having Individual Functions, Not Elsewhere Specified, grew at an average annual rate of 16.2%. In :2004, the export value increased by 41.5% to RMI ,7 billion. Between Im and 2004. the exptJrt value of Other Machines and Mechanical Appliances Having Individual Functions Not Elsewhere Classified (3 sub~ sectOf of Machines or Mechanical Appliances Having Individual functinns, Not Elsewhere Specified) decreased at an average annual rate of 2.3%, In 2004, the export value decreased by 343% to reach RM342.l million, Bem.-een 1999 and 2004, the export value (If Measuring or Checking Instruments, Appliances and Machines, Not Elsewhere Specified, increased at an average annual rate of 25.6% In 2004, the export value increased by 18,9% to a value ofRi\i904.f million. /i.f.l<1S Ven/uTes Berhad Industry Assessment 157 12, _ IND:…::.E=I’::.END=.,RESEA:…::._RCH__….d!….::.::.ENT:…::..:.MARKE’f::.::.::.::.=…..__REl’OR_T(_Con_”…._ o VITAL FACTOR CONSULTING Creating Winnfng Business Solutions Belween 1999 and 2004, the e”‘l’0rt value of Other Optical Instruments and Appliances fo.r Inspecting Semiconductor Wafers or Devices or for Inspecting Photomasks ar Reticles Used in Manufacturing Semiconductor Devices (a sutJ.-sector of Measuring, or Checking Instruments, Appliances and Machil)es, No! E1sewnere Specified} grew at an average annual rate of 55.7″A:. In 2004, the export value decreased by 21.9%1 to reach approximately R~”r22.5 million. (Source Department o/Statistics Malayfiia) Imports Malaysia is still a net importer, in value tenns, of Machinery and Equipment. In 2004, the imports (If Macllinery and Equipment amounted to approximately Rlv132.9 billion. Malaysia cootinues to impmt machinery and equipment to meet industrial as well as high teclmology industries’ needs. In 2(104, impmt value of Machinery and Equipment iocreased by 3VI%. Between 1999 and 2004, import value of Machinery and Equipment grew at an average annual rate of6.6%. (Source. Malaysian Industrial Developm’!n( Authority) The import value of Machinery SpeCialised for Particular Indus[ries increased at an average annual rate 003% between 1999 and 2004. In 2004, the import value of Machiuery Specialised for Particular Industries nreased by 30.5% to RMlOA billion over t:he previous year. Bet’Nwn 1999 and 2004, the import value of Machines or ~tlechanical Appliances Haviug Individual Functions, No! Elsewlwre Specified grew at an average annual rate of 3″7%. In 2004, the import value increased by 37.2% to reach approximately RM4(} biUion. Between 1999 and 2004, the import value of Other Machines or Mechanical Appliances Having l:ndividual Functions, Not EIse>Yhere Specified (sub­sector of Machines or Mechanical Appliances Having: Individual Functions, Not Else-where Specified) increased at an average annual rate of 1.0%. If! 2004, the import value of this categoty intreased by 12.5% to approximately R.M2.2 billion. Between 1999 .and 2004. the import value of Measuring or Checking Instruments, Appliances and Machines, not elsewhere specified increased al an average an.”Illill rate of 4.9%.. In 2004, the import value of this. category increased by 49.3%, which amounted to approximately R.\.12.7 billion, MlvfS Ventures Bcrhad industry Assessmenr 158 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ Betv.”een 1999 and 2004, the import value of O1her Optj~l Instruments and Appliances for inspectlng Semiconductor Wafers or Devices or for Inspecting Pnowmasks or Reticles Use£! in Mamlfncturillg Semiconduetor Devices (a sub~seetor of Measuring or Checking Instruments, Appliances and Machines, not elsewhere spe;;:ified) increased at an average annual rate of 15.6%, In 2004, the import value of this category grew b)’ 267.7% to RM318,S million. (Source: Department ofStatistics Malaysia) End~User Industry Sectors • TIle performances (ifsome ofthe end-user industries for Machinery and Equipment are as fullows: Between 1999 and 2Q04, the production index of IheElectrical and Electronic Products grew at an average-annual rate of 10,5%. In 2004, the production index recorded growth of 17.7% (Source: Bank Negara ,Valaysia); Between 1m and 2004, the output of Electronics Industry recorded an average annual growth rate of 6.4%, In 2004, the output of the Electronics Industry increased by 17S% to reach RMI72.9 billioo;(Source: Malays!’all Industrial Deve!opme!1t Authority) Between 1999 and 2004, tbe sales value of manufacture of Semicondl,lctors and Oilier Electronic Components and Communication Equipment and Apparatus grew at an average annual rate of 5.4%. In 2004, the sales. value increased by 9.6% to approximately RMIIOO billion over the previous year; Between J999 and 2004, sale:; value of the manufacture of mobile telephonesrecordedarobustaverageannualgrowthrate of35.1%. In2004, sales value of the manufacture of mobile telephone:; increased by 52,2% to reach RMJU billion; Between ]999 and 2004, sales value of tbe manufacture of offi~, computing and accounting machinery grew at an average annual rate of 16.7%:>, In 2004, sales value of manufacture of office, computing and accounting machinery increas¢d by 112.0% to reach RM33.7 billion. (Source: Department a/Statistics Malaysia) /i.f.l<1S Ventures Berhad Industry Assessment 159
o VITAL FACTOR CONSULTING Creating Winnfng Business Solutions 15, Thr”au: and Risk Analysis Areas of threats and risks for operators within the Machinery and Equipment Industry in general and the Specialised Industrial Machinery and Equipment Industry in particular are as follows: 15.1 Lack of Engineering Supporting and Ancillary Activities • Engineering supporting and ancillary activities induding foundries, forging, hea”y and precise machining, heat treatment electroplating as well as moulds and die making are critical in supporting the gmwth of the Machinery and Equipment Industry.
• The Engineering Supporting an.d Ancillary lnd.ml)’ are weak and fragmentoo. Such a situation bas the potential of shrinking existing market and deterring any development ofthe Machinery and Equipment Industry,

Mitigating Factors • Recognising the current situation of the Engineering Supporting and Ancillary lndustry, some major developments of the industry have taken place, These include: The establishment of the Rasah Machinery and Equipment Technology Centre (RAf\.fET) under SIRJM Berhad has been earmarked not nn1y for developing hlIftlal1 resources within the cngineermg sedor but more so on providing standards testing facilities and promoting cluster development through the grouping of SlTu.ll, medium and big foundry, operarors of machining, forging, heat treatment, tool, die making and welding. RAMET was established in 2003, The Mould and Die Design Centre approved under the Eighth Malaysia Plan is in its rrrst phase of implementation and is providing Computer-Aided-Design (CAD) system services to 16 Small Medium Enterprises. the centre is in the progress of renovation, Upon completion in 20Q-.5, the centre “,ill promote the usage of the-CAD systems by 5MB. These developments are in tandem with the throst of the Government and aimed towards strengthening the foundation of Tocal Engineering Supporting and Anclllary Industry in Sllpport offurtber growth within the Machinery and Equipment Industry.
15.2 Competitive Pressul’e from Overseas Players • Malaysia is still a ne-t importer, in value tenus, of Machinery and Equipment. Tn 2004, the imports of mochinery and equipment amounted to approximately R;\1″32.9 biliioo whilst export value was only approximately RM15,6 billion. Malaysia continues w import machinery and equipment to meet industrial as well as high technology industries’ needs (Source,· Malaysu;mlndustrial Development AlithOYiry). MlvfS Ventures Berhad lndusfry Assessmenr 160 ————~ INDEPENDENT MARKET RESEARCH REPORT ‘Cont’d’ .-~========—_.:..’_..:’–­o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ • Major import threats of Machinery and Equipment are from Japan, Taiwan, China and Gennany. Mitigating Factors • Despite Malaysia’s current position as a net importer of Machinery and Equipment, the Government has identified the Machinery and Equipment Industry, a high value­added and high technology product sector, as one of the key areas for growth and development.
• In recognition of the growth opportunities, various incentives have been introduced to
high technology companies including: Pioneer Status Investment Tax Allowance Tax-related incentives within the Machinery and Equipment Industry based on the level of value-added input.
• In addition to the Government incentives, operators that are able to provide high value adding, undertake research and development, customise engineering design and services, would be in a better position to sustain business and minimise competitive threats.

15.3 Availability of Skilled Manpower • There is a shortage of skilled technical workers within the Machinery and Equipment Industry in Malaysia (Suurce: Malaysian Industrial Development Authority). The shortage of technical professionals is a concern to the operations of the Machinery and Equipment Industry. The shortage of skilled and experienced labour may hamper the growth of the industry in general. Mitigating Factors • In ensuring long-tenn and sufficient supply of skilled technical professionals, technical institutions and centres namely the RAMET and the Mould and Die Design Centre are in a position to provide technical training and assistance to fortify the engineering base in the country.
• In addition, it is estimated that 64,516 students will be enrolled in Engineering course, representing 98.9% of overall technicaJ courses enrolment in local public higher education institutions (Source: Mid-Term Review ofthe Eighth Malaysia Plan 2001­2005, Economic Planning Unit, Prime Minister Departmen~).
• With the high and preferred Engineering courses, enrolment and graduation as well as the Government support in developing the technical skill base in Malaysia, the industry is anticipated to have a pool of skilled resources to sustain growth.

/i.f.l<1S Ventures Berhad Industry Assessment 161
INDEPENDENT MARKET RESEARCH REl’ORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winnfng Business Solutions
15.4 Movement of MNC in Eledrical and Electronic Industries to China • China is becoming a major attraction for Foreign Direct Investment (FOI) particularly in the electrical and electronics manufacturing industry. Over the years, there has been a movement of Multinational Corporations (MNC) into China, This trend is predicated by the following: According to the Ministry of Commerce in China, FOI into China recorded a grO’.vth of 1.4%, which amolUlted to USD53.5 billion in 2003. Of this, the manufacturing sector contributed 70% of the total FOI, including electronics, telecollUTIlUlications equipment, chemicals and others. In contrast, FOI in the Electrical and Electronics Industry in Malaysia declined over the last five years. In 2003, FOI in the Electrical and Electronic Industries dropped by 9.4% amoWlting to RM3.6 billion. Between 1999 and 2003, FOI in these industries decreased at an average annual rate of 11.6%. (Source: Various Issues ofEconomic Reports, Ministry ofFinance) • The increasing movement of MNC to China may impact on the manufacturers of Machinery and Equipment Industry who are servicing this group of customers. Mitigating Factors • According to Malaysian Industrial Development Authority, the trade Iiberalisation under Asean Free Trade Area (AFTA) has opened up new export market opportunities for the industry. In 2004, Malaysia’s exports of Machinery and Equipment to Asean totalled RM6.4 billion, with Singapore, Thailand, Indonesia, Philippines and Brunei being the top five destinations (Source: Malaysian Industrial Development Authority).
• In addition, operators with the fmancial stability are in a stronger position to expand its business operations overseas and follow the customers by setting-up operations in China.

 

15.5 Trade Liberalisation -Asean Free Trade Area (AFTA) • Under the AFTA agreement initiated by the ASEAN countries, a comprehensive programme of regional tariff reduction has been laid out.
• The COllUTIon Effective Preferential Tariff (CEPT) has been proposed for goods traded within the ASEAN region. Tariffs on such goods which meet a 40% ASEAN content requirement, will be reduced to between 0% and 5% from 2003 onwards. Such tariffs will be reduced for Vietnam and Myanmar in 2006 and 2008 respectively.
• The implementation of AFTA has meant that intensity of competition from imports has increased for certain types of Machinery and Equipment due to the reduction in import tariff.

MlvfS Ventures Bcrhad Indusfry Assessmenr 162 ~————~ 12. INDEPENDENT MARKET RESEARCH REPORT (CQnt’d) ———-~-~­o VITAL FACTOR CONSULTING Creating Winning Business $olulioo$ Mitigating Factor • By the same token. the gradual reduction oftariffs will: also g.enerate opportuniiies for the export of Machinery and Equipment for operators to create their own market niches and compete successfully within the ASEAN region. Hi. Market Size and Share • In 2004, the estimated market silR of the Specialised Industrial Machinery and E-quipment Industry focusing on Electronics and Electrical sector. based on production OUtptll was approximately RM856 million in Malaysia. (Source” Primary MWKet Research undertaken by Vital FuCIQr Consulting Sdn 8hd)
• in 2004, the estimated market share of MMS Ventures Group within the Specialised industrial Machinery and Equipmenf Industry based on production output was approximately 2.5% in Malaysia,

Vital Faclor Consulting Sdn ana has prepared this report in an independent and objeetive manner and has taken all reasonabie consideration and care (.0 ensure the accuracy and completeness of the report. It L” 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 assessmeot is for the overall industry and may not necessarily reflect the individual perfonnance of any company, We do not take any responsIbilities for the decisions or aetions of readers of this document This report should not be taken as a recommendation to buy or not w buy the shares of any t’ompany Yours sincrrely
Wooi Tan Managing Director Vital Faaill'” Comulting Sdn BM /i.f.l<1S Ven/uTes Berhad Industry Assessment 163 JJ. DIRECTORS’ REPORT

 

MMS Ventures Berhad (647125-P) aAA linlong Boyon Lepos 9. Ba,on lepo, Indu1t’;ol Pork, Pllo,e 4, 11900 Penong, Molaysio_ Pbo…, {6041646 0888 fa., (6041646 7516 (Preparedfor the inclusion in this Prospechls) Registered Office: Unit41-5-5, 5th Floor Wisma Prudential 41 lalan Cantonment 10250 Penang The Shareholders 5 December 2005 MMS Ventures Berhad Dear SirlMadam On behalf of Ihe Board of Directors of MMS Venlurcs Berhad (“MMSV” or “Company”), I report after due enquiry, that during the period from 30 June 2005 (being Ihe dale 10 which lhe lasl audited accounts of the Company and its subsidiary companies have been made up) 10 5 December 2005 (being a date not earlier than fourteen days before the issue ofthis Prospectus): (a) the business of the Company and its subsidiary companies has, in the opinion of the Directors, been satisfactorily maintained;
(b) in the opinion of the Directors, no circumstances have arisen subsequent to the last audited accounts ofthe Company and its subsidiary companies which have adversely affected the trading or the value of the assets of the Company and its subsidiary companies;
(c) the current assets of the Company and its subsidiary companies appear in the books at the value which are believed to be realisable in the ordinary course of business;
(d) there are no contingent liabilities which have arisen by reason of any guarantees or indemnities given by the Company or ils subsidiary companies; and
(e) there have been no default or any known event that could give rise 10 a d~fault siluation, in respect of
payments of either interest and/or principal sums in relation to any borrOWings in which Ihey are aware of; 0′
(f) save as disclosed in this Prospectus, lhere have been 110 malerial cllanges ill Ihe published reserves nor any unusual factors affecling the profits of the Company and its subsidiary compnnies since Ihe 13S1 audited accounts of lhe Company and its subsidiary companies.

Yours faithfully On behalfofthe Board ofDirCC10rsof M. S Ventures Bemad
Si Teik Keat M aging Director
WWW.mmSIS.com 164

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