Industry Overview

PROTEGE ASSOCIATES SON BHO y'”.” SUITE C-06-06, PLAZA MONT’ KIARA 2 JALAN KIARA, MONT’ KIARA 50480 KUALA LUMPUR, MALAYSIA GEN +603 6201 9301 FAX +603 6201 7302 ~~~~~~~-~-~~~~~~~~~~~~~~~~ BRAN0 IfiNAN(E I MA)lKE T The Board of Directors, SCH Group Berhad, Suite 10.03, Level 10, The Gardens South Tower, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia
Date: 20 DEC 2013 Dear Sirs, Executive Summary of the Independent Market Research Report for the Strategic Analysis of the Quarryi n9 Industry focusing on the Quarry Machinery and Equipment in Malavsia This Executive Summary of the Independent Market Research Report for the Strategic Analysis of the Quarrying Industry focusing on Quarry Machinery and Equipment in Malaysia is prepared by Protege Assodates Sdn. Bhd. (‘Protege Assodates”) for inclusion In the Prospectus of SCH Group Berhad C’SCH” or “the Company”) in relation to the proposed listing
of SCH on the ACE Market of Bursa Malaysia Securities Berhad. MALAYSIAN ECONOMIC OVERVIEW The Malaysian economy performed well in 2012 against the backdrop of a challenging international economic environment by recording an annual expansion of 5.6 percent or a real Gross Domestic Product C’GDP”) at 2005 prices of RM751.47 billion. A higher growth in domestic demand has been credited as the main factor driving its growth ascension. Real aggregate domestic demand (excluding stocks) (note: stocks refer to the supply of goods kept in inventories for future use, and hence it is not a direct expenditure today) increased by 10.6 percent in 2012 as compared to 8.2 percent in 2011 spurred by higher investment spending and consumption. 1 120 7. EXECUTIVE SUMMARY (Cont’d)
BRAND ~ FINANC~ 1 MARK~1″ Figure 1: Malaysia’s Real GOP, 2011-2014 5.80 5.6 5.60 -~ 5.40 …… £5 5.20 ~ L. 5.00 ~ iii 4.80 c~ .;f 4.60 4.40 4.20 2011 2012 2013e 2014f
Year ——–‘
Notes:  1)  e denotes estimate; f denotes forecast  2)  Beginning 2012, real GDP has been rebased to 2005prices from 2000 prices previously  Source: IMR Report
The overall labour market condition in Malaysia was stable in 2012. The unemployment rate declined to 3.0 percent of labour force for the year. In addition, the average nominal salary in the private sector rose by 5.0 percent in the same year according to a survey conducted by Bank Negara Malaysia (“BNM”). Headline inflation (as measured by the annual percentage change in the Consumer Price Index (“CPI”)) was lower at 1.6 percent in 2012 as compared to 3.2 percent in 2011 mainly due to better-than-expected domestic food supply conditions and lower-than-expected inflation in the transport category. In terms of growth percentage, the construction sector stood out as a star performer by registering an increase of 18.1 percent in 2012. Growth in the sector was supported by large amount of civil engineering projects in improVing road and rail accessibility, increasing oil and gas output as well as enhancing electridty generation capacity. The services sector was the next best performing sector in terms of growth, expanding by 6.4 percent in 2012. The sector was boosted by strong consumer spending and the higher growth in the finance and insurance sub-sector. The manufacturing sector grew moderately by 4.8 percent in 2012. Better growth in both the export-and domestic-oriented industries helped to drive the expansion in the manufacturing 121
BRAND ~ FINANC~ 1 MARK~1″ sector. The mining and quarrying sector recovered from contraction in 2011 to register a 1.4 percent growth in 2012 on the back of recovery in the production of crude oil and condensates. As for the agriculture, forestry and fishery sector, it expanded by 1.0 percent in 2012 as strong growth in key food commodities such as livestock, paddy and vegetables helped to offset poorer crude palm oil output in the first half of 2012 due to unfavourable weather conditions. Despite the positive results revealed in most of Malaysia’s key economic indicators for 2012, the Malaysian Government is mindful of the challenging external environment that may affect the growth in the local economy. In the near future, the growth in the Malaysian economy is expected to be anchored again by domestic demand. The Malaysian economy expanded by 4.1, 4.4 and 5.0 percent in the first, second and third quarter of 2013 respectively on the back of a robust domestic demand and accommodative monetary policy. The Malaysian economy is estimated to grow 4.5 to 5.0 percent in 2013. In the latest development, the Malaysian Government has reiterated its intention to continue focusing on accelerating the national transformation process and supporting growth while imprOVing public finance and ensuring fiscal sustainability. The Malaysian Government has also allocated RM1.6 billion under Budget 2014 for development in the five regional corridors. The Malaysian economy is expected to grow by between 5.0 to 5.5 percent in 2014 on the back of expected improving external environment and favourable domestic demand. The private sector is expected to drive the growth momentum in domestic demand. All the key economic sectors in Malaysia are projected to continue expanding in 2014. OVERVIEW OF THE CONSTRUCTION INDUSTRY Latest figure from the Department of Statistics, Malaysia C’DOS”) and the Ministry of Finance, Malays”la C’MOF”) indicates impressive growth in 2012 at 18.1 percent, driven by large amount of dvil engineering projects in improving road and rail accessibility, increasing oil and gas output as well as enhancing electricity generation capadty. Moving forward, the industry is expected to grow 10.6 percent this year (2013), supported by various Economic Transformation Programme C’ETP”) projects spedfically the Klang Valley Mass Rail Transit C’MRT”) project and other Entry Point Projects C’EPPs”). The industry is also expected to be boosted by the further developments in Iskandar Malaysia and the Pengerang Integrated Petroleum Complex [‘PIPe”) in Johor. 7. EXECUTIVE SUMMARY (Cont’d)
Figure 2: Construction Industry in Malaysia, 2012-2014
Notes:  1)  % change is based on real GDP at 2005 prices  2)  e denotes esbinate  3)  f denotes forecast  Source: IMR Report
In supporting the industry’s growth, the Government had unleashed a massive roll-out of transportation infrastructure upgrading in line with the Tenth Malaysia Plan ClOMP”). This includes the building of the first Mass Rapid Transit CMRT”) Sungai Buloh -Kajang line, which began in July 2011 and is expected to complete in 2017. On the same note, according to the Land Public Transport Commission CSPAD”), the feasibility studies for two additional lines, namely MRT 2 (Circle Line) and MRT 3 are completed. It is currently awaiting agreement for the execution of the final implementation plan from the relevant stakeholders with the tendering for works being expected to take place in 2014. According to the SPAD, all three MRT lines should be operational by 2020. Within Greater Kuala Lumpur, one the twelve National Key Economic Areas (“NKEAs”), six new highway projects have been proposed in 2012, some of which are still under feasibility studies. These comprise of the West Coast Expressway, the Sungai Besi -Ulu Klang Expressway (“SUKE”), the Damansara -Shah Alam Highway CDASH”), the Kinrara ­Damansara Expressway (“KIDEX”), new interchange at Maju Expressway CMEX”) and the High-Speed Rail linking Kuala Lumpur to Singapore. Under the ETP, a few new projects involving the industry have been announced in 2012, among which include a RM12.5 billion Sepang International City and RM4.1 billion Pengerang Liquefied Natural Gas Terminal Project. Many projects are expected to be approved and commenced under the ETP, boosting the domestic economy amid sluggish global economies. In 2012, construction activities within the residential sub-sector moderated following the completion of several high-end properties, particularly condominiums and apartments. Construction activities in the residential sub-sector increased in completions by 12.0 percent while construction starts and new planned supply increased by 19.8 and 21.2 percent respectively.
BRAND ~ FINANC~ 1 MARK~1″ Meanwhile, the non-residential sub-sector recorded a mixed performanCE in 2012. Construction activities in purpose-built OffiCES sub-sector were sluggish; registering 21.3 percent decrease in construction completions to 472,785 square metres (‘s.m.”) from 600,975 S.m. in 2011. Construction starts and new planned supply also decreased by 60.7 and 87.2 percent respectively in the same year. Nonetheless, occupancy rate remained high at 82.3 percent, reflecting sustained business sentiment. Construction activities in the shop sub-sector were encouraging. The shop sub-sector recorded an expansion in construction starts and new planned supply by 30.0 and 21.8 percent respectively. Completions were also higher at 7,855 units in the same year (2011: 6,286 units). Meanwhile, the shopping complexes sub-sector saw a 20.2 percent decrease in completions in 2012. 29 shopping complexes were completed in the same year, adding 479,246 s.m. of new retail space into the market. Accordingly, the completion of new shopping complexes has led to the softening of new planned supply to 147,692 s.m. On the other hand, retailers’ confidence remained high as demand for retail space in shopping complexes persisted at around 79.1 percent. The industrial property sub-sector registered higher completions in 2012. Completions in particular increased by 11.2 percent to 714 (2011: 642). In addition, construction starts activities surged by 61.5 percent from 919 to 1,484 units while new planned supply expanded by 40.9 percent. The Malaysian Government has already indicated that there is a possibility that major government projects with low multiplier effect may be rescheduled which can slow construction activities if materialised. Nevertheless, projects with a high positive impact on the citizen and low import value are expected to be implemented. The Malaysian Government has already announced the implementation of various infrastructure projects such as the 316-kilornetre West Coast Expressway from Banting to Taiping, the double-tracking projects from Ipoh to Padang Besar and later, from Gemas to Johor Bahru and the upgrading of airports in Kota Kinabalu, Sandakan, Miri, Sibu and Mukah. RM2.9 billion was allocated under the Budget 2014 to upgrade rail tracks nationwide. The projected upcoming infrastructure projects such as the MRT 2 and MRT 3 projects as well as continuing expansion of the existing light rail transit C’LRT”) line are also expected to be a growth catalyst for the industry. In another development, the Malaysian Government has announced a few measures that can be seen as efforts to curb speculative buying in the property market. These measures include 7. EXECUTIVE SUMMARY (Cont’d)
raising the real property gain tax CRPGT”) to 30 percent for gains on properties disposed of within three years, 20 percent for four years and 15 percent for 5 years, imposing 30 percent RPGT for properties disposed of by non-citizens within five years and 5 percent for disposals after five years, prohibiting the Developer Interest Bearing SCheme CDIBS”) and increasing the minimum price of property that can be purchased by foreigners from RM500,OOO to RMl million. Affordable housing has continued to receive close attention from the Malaysian Government. Measures related to affordable housing announced in the Budget 2014 included the allocation of RMl billion to PR1MA Corporation Malaysia C’PR1MA”) to prOVide 80,000 housing units at 20 percent below market prices as well as the introduction of the Private Affordable Ownership Housing Scheme C’MyHome”).

THE QUARRYING INDUSTRY IN MALAYSIA Mining and quarrying is classified as one of the major economic sectors in Malaysia. It involves the activities relating to the extraction and processing of metallic and non-metallic minerals. The sector contracted 5.5 percent in 2011. The negative growth was largely attributed to falling output level from mature oil fields, shutdown of several production facilities for maintenance, and new fields production that are lower than forecast level. The performance in the mining and quarrying sector rebounded into positive growth territory in 2012 with a growth of 1.4 percent recorded for 2012 on the back of recovery in crude oil and condensates production. Oil fields located in offshore Peninsular Malaysia and 5abah produced higher level of output in 2012 while several marginal and new oil fields had also began production ill the same year, The sector is expected to expand by 2.2 percent in 2013 and 3.1 percent in 2014, supported by the continued improvement in the oil and gas sector. Figure 3: The Performance of the Mining and Quarrying Sector in Malaysia, 2011-2014
Notes: 1) 2) 3)  % change is based on real GDP at 2005 prices e denotes estimate f denotes forecast  Source:  IMR Report  125  6


OVERVIEW OF QUARRYING IN MALAYSIA Non-metallic minerals, also known as rock materials, extracted by quarrying industry forms the basis of construction materials which are essential to the building of houses, roads, bridges, factories and many others. Imperatively, quarrying industry became an important industry to the construction and development of Malaysia. There are over 300 quarry sites operating in Malaysia with majority of it located in the Peninsula. Figure 4: Number of Quarry Sites in the Various States of Malaysia, 2011

44 18 11 8 17 27 54 2 14 17 43 32 15
302 Source: IMR Report There are different types of rock materials extracted from quarries. Most common types of rock material quarried in Malaysia are limestone and granite, sandstone, day and others. Figure 5 depicts a general overview of selected non-metallic minerals reserves in Malaysia. Figure 6 depicts the annual output of selected minerals in Malaysia from 2006-2011. ICompany No.: 972700-P I 7. EXECUTIVE SUMMARY (Cont’d)
p~q:t;¢ge GRAND I FINANC~ J MA.F<.K~1′ Figure 5: Estimate of the Reserves and Value of Selected Minerals in Various States of Malaysia, 2011
Source: IMR Report 127
Figure 6: Total Output of Non-Metallic Minerals in Million metric Tonnes, 2006-2011
-II-Limestone O.3y  20072005 2008 2009 Year Note: Others include silica sanct kaolin and feldspart IndustlV Value Chain Figure 7: Quarrying Industry Value Chain  2010  2011  Source: IMR Report


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Quarrying Qperations Quarrying methods used for quarrying rock materials vary according to the type of rock and purpose of the rock is being quarried for. Methods employed are highly reliant on the use of machinery and equipment due to the bulk and size of rock materials handled. Figure 8 depicts the flowchart of the quarrying operations. It consists of multistage process categorised into rock extraction and quarrying process whilst highlighting other downstream activities. Figure 8: Quarrying Operations Flowchart
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Source: IMR Report Quarrying operations requires different machineries and eqUipment that are unique to the activities of each process. The machineries and equipment includes drilling machine, jaw crusher, cone crusher, impact crusher, screening equipment amongst others. SCH Group is prindpally involved in the Malaysian quarrying industry as a supplier of quarrying equipment and machineries to Malaysia’s quarry operators. They are an important market player that supplies supporting products and seryices vital for quarrying operations espedally for rock extraction and quarry processes. Quarry Products Malaysia’s industrial non-metallic mineral production includes aggregates, clays, earth materials, feldspar, kaolin, limestone, mica, sand and gravel and silica. However, the quarrying industry is mainly dominated by the quarrying of aggregates, limestone, sand and gravel and clay; therefore, this report will focus on the following major quarry products to reflect the quarrying industry. 7. EXECUTIVE SUMMARY (Cont’d)
Aggregate, is a broad category of rock materials that have been crushed and screened. It is commonly quarried from rocks such as limestone, sandstone, granite and others. It is primarily used for road building and construction. Aggregates derive from three sources namely primary aggregates, secondary aggregates and recycled aggregates. Limestone is generally quarried for use in the manufacture of clinker, production of calcined, road construction, chemicals, dimensional stone and others. Limestone in this subsection consists of raw materials used mainly for cement manufacturing. Sand and gravel are raw materials used in the construction sector. It is sourced as fine aggregate in dry concrete products, cement bricks, road construction and as a filtering material. Clay is commonly used in making bricks, pottery, ceramics and cement while earth materials are used in landfill. ANALYSIS OF THE QUARRY MACHINERY & EQUIPMENT MARKET MARKETS The quarry equipment and machinery market is a support industry to quarry operations; therefore its performance, trends and outlook correlates with that of quarry operations, and the quarrying industry at large. In this case, demand for quarry prodUcts, and increased quarrying activity will likely result in establishment of new quarry sites, expansion of quarry sites or increased quarrying production; all of which would increase the demand of maintenance and repair services, replacement for the wear and tear parts and new or upgraded machineries. As such, Protege Associates’ IMR report will henceforth analyse the quarrying industry in Malaysia, exploring the dynamics ofMalaysia’s quarry operations to providea broadperspectiveofpertinenttrendsaffectingSCH Group, while highlighting the performance and trends of the quarry machinery and equipment market to provide a more detailedlookatthemarketSCHGroup is mostdirectlyinvolved in. 7. EXECUTIVE SUMMARY (Cont’d)
Market Dynamics Scorecard Figure 9: Market Dynamics Scorecard for the Quarrying Industry
Source: IMR Report Historical Market Perfo l1l1ance and Growth Forecast • Quarry Operations The size of the quarry operations industry in Malaysia had expanded to RM3.19 billion and RM3.64 billion in 2011 and 2012 respectively on the back of strong performance in the construction sector particularly with the implementation of mega projects under the 10MP and the ETP. The industry was boosted by the kick-start of mega projects such as the Klang Valley MRT project in 2011 that led to a surge in demand for quarry products. 7. EXECUTIVE SUMMARY (Cont’d)

CAGR (2012 -2017): 12.2 percent Note: All figures are rounded.: the base year is 2012. Source: IMR Report
The quarry operations industry is characterised by high entry barriers; it is highly controlled by both the federal and state government. It is difficult for new entrants to penetrate the industry as large capital is required for initial start-up as well as to maintain quarry operations. Hence, the number of quarry operators in Malaysia is moderate in numbers. Quarry operators can be divided into two tiers namely Tier-l and lier-2 market players. Tier-l market players consist of quarry operators that are already well-capitalised with one or more quarry sites. They are generally a corporation which are involved in quarrying business and have also ventured into downstream activities such as manufacturing of bUilding materials or construction through its subsidiaries. Quarry products are mainly supplied as raw materials to the group’s in-house business and the rest sold to other customers. Examples of Tier-l market player are YTL Cement Bhd, Hanson Malaysia, Hap Seng Consolidated Bhd, Lafarge Malayan Cement Bhd, Sunway Holdings Bhd, Bina Puri Holdings Bhd and Rock Chemical Industries (M) Bhd. lier-2 market players consist of quarry operators that are smaller in size in terms of number of quarry sites, workforce and capital resources. The quarry prodUcts are generally supplied to their associated companies involVing in downstream activities or to other manufacturers of non-metallic mineral products. Unlike Tier-l market players, lier­2 market players have less diversified activities comparatively with quarry operations being their core business. Examples of lier-2 are Thang Kiang Nam Group of Companies, Kajang Rocks Group of Companies, Holly Stone Quarry Sdn Bhd and Chua Teong Chai & Sons Quarry Sdn Bhd. 10 7. EXECUTIVE SUMMARY (Cont’d)
• Quarry Machinery and Equipment Market The size of the quarry machinery and equipment market stood at RM27S.7 million in 2011. Demand for quarry products increased significantly in the year due to the recovery of the economy, various development projects implemented by the government and sizeable export growth of quarry prodUcts. One of the most notable efforts of the government in 2011 was to kick-start the construction of the estimated RM40 billion Klang Valley MRT project. This led to the increase in the opening of new quarries and refurbishment of machineries. In tandem with the on-going government-led development projects, the quarry machinery and equipment market continued its expansion in 2012 with an estimated growth of 9.4 percent for the year. On another note, the increase in the prices of steel products in 2011 and 2012 had also led to higher prices for quarry machinery and equipment. Figure 11: Market Size and Growth Forecast for the Quarry Machinery and Equipment Market in Malaysia, 2011-2017
2011  275.7  2012  301.6  2013  331.0  2014  360.9  2015  392.6  2016  428.2  2017  467.0
9.4 9.8 9.0 8.8 9.1 9.1 CAGR (2012 -2017): 9.1 percent Note: All figures are rounded; the base year is 2012. Source: IMR Report Competitive Analysis of the Quarry Machinery & Equipment Market Suppliers of quarry machinery and equipment consist of manufacturers, distributors, engineering service provider and other suppliers of quarry related machinery, equipment and vehicles. They are market players who supplies products and supporting services to the quarry operations industry. There are a small number of active players (10-15) in the quarry machinery and eqUipment market. The quarry machinery and eqUipment market players can be segmented into two main categories according to the nature of their business. The first is the suppliers of quarry machinery and equipment. These players focus mainly on the trading of heavy-duty 7. EXECUTIVE SUMMARY (Cont’d)
machinery, trading and/or manufacturing of spare parts and quarry related equipment for the quarry operators. The second category is the engineering service provider. These players are mainly involved in the activities of consultancy, designing, manufacturing and installing of quarry plants. Other supporting services include maintenance and repair. It is a market norm for suppliers of quarry machinery and equipment and engineering service providers to establish ad hoc partnerships in order to deliver a more comprehensive value proposition for the customers. However, there is also an increasing trend towards diversification of activities among these two types of market player-types; a number of these market players are diversifying their product! service offering in order to become fully capable of providing end-to-end machinery and equipment supply and engineering services. These market players are typically eqUipment machinery manufacturers/ distributors who have matured and developed engineering expertise to proVide value added engineering and technical services, or engineering service providers who have vital access to machinery and equipment supply networks, or tie-ups with certain equipment suppliers. The result is a competitive landscape where there is an increasing overlap between the functions of market players and the rise of capable end-to-end providers capable of fulfilling all quarry operator’s machinery and eqUipment needs.
YY Engineering Sdn Bhd (‘YY Engineering”)  Master Rock Sdn Bhd (‘Master Rock’~  Globeford Sdn Bhd (‘Globeford’~
Notes: ././ Denotes flagship Product! Service ./ Denotes Secondary or Value-Added Product/5elYice Source: IMR Report Figure 13: Key Quarry Machinery &. Equipment Market Players
Machinery Suppliers SCH Group Jaques (International) Sdn Bhd (“Jaques International”) Sunway Enterprise (1988) Sdn Bhd (“Sunway Enterprise”) • SCH was incorporated in Malaysia as a holding company, whilst its subsidiaries are SCH Corporation, Italiaworld, SCHWM and SCHME.
• SCH Group supplies quarry industrial products, quarry machinery, quarry equipment and reconditioned quarry machinery as well as spare parts for quarry machinery, quarry equipment and reconditioned quarry machinery to the quarry industry in Malaysia and South East Asia.
• SCH Group is also involved in the manufacturing of quarry grills for the quarrying industry.
• Has begun involvement in the acquisition and reconditioning of used quarry machinery and equipment for resale in 2010.
• Revenue for its financial year ended 31 August 2012 was RM54.2 million, of which RM51.8 was generated from the Malaysian, market
• Recorded a profit after tax (‘PAT’~ of RM7.5 million for the same financial year.
• Jaques International was registered on 19 February 1975.
• It is involved in the selling of heavy industrial machinery, construction of rock crushing plants, fabrication of spare parts for eXisting line and manufacturing and trading of wire mesh.
• For its financial year ended 31 December 2012, its revenue was RM119.4 million.
• Sunway Enterprise (formerly known as Sungei Way Enterprise (1988) Sdn Bhd) was registered on 25 September 1980.
• It is involved in the trading and hiring of heavy machinery and spares.
• For its financial year ended 31 December 2012, its revenue was

RM88.5 million. • Sandvik Malaysia • Sdn Bhd (“Sandvik Malaysia”) • Sandvik Malaysia was registered on 24 September 1966. It is involved in the trading of stainless and special steels, cemented carbide tools for metal working, wood working and other mechanical tools for the engineering and electronics industries. For its financial year ended 31 December 2012, its revenue was RM15.5 million. Peripheral Equipment & Spare Part Suppliers SLS Bearings. SLS Bearings (formerly known as SLS (Malaysia) Sdn Bhd) was (Malaysia) Sdn registered on 20 November 1970. Bhd • It is an importer, exporter, retailer and wholesaler of balss and (“SIS Bearings”) roller bearings and bearing casings. • For its financial year ended 31 December 2012, its revenue was RM107.0 million. UMS Holdings. Bhd (“UMS”) • • Jururaya Sdn. Bhd (“Jururaya’1 • • UMS is currently listed on the Main Market of Bursa Malaysia securities Bhd. Through its subsidiaries, UMS is engaged in the distribution of mechanical power transmission and material handling products and systems and industrial spare parts. For its financial year ended 30 September 2012, its revenue was RM81.8 million. Jururaya was registered on 4 January 1979. It is involved in the trading of mechanical, electrical and industrial products. For its financial year ended 31 December 2012, its revenue was RMlO.5 million. Engineering Service Providers • • VY Engineering • Sdn Bhd (“VY Engi neering”) • Master Rock Sdn • Bhd (“Master. Rock”) YY Engineering was registered on 26 May 1987. Its nature of business include being a contractor in civil, mechanical and electrical engineering works, engineering services and general trading. For its financial year ended 30 June 2012, its revenue was RM9.7 million. Master Rock was registered on 7 May 1981. It is involved in mechanical and engineering works. For its financial year ended 31 May 2012 its revenue was RM6.0 million. Globeford Bhd (“Globeford”) Sdn • • Globeford was registered on 15 September 1994. It is involved in quarry engineering works, sale of quarry machine , s ares and the rovision of services related to the

industry. • For its financial year ended 31 August 2011, its revenue was RM3.4 million. Source: IMR Report SCH Group’s Market Share Analysis SCH Group is principally involved as a supplier and integrator of quarry equipment and machinery for quarry operators in Malaysia. As a Group, SCH Group is able to proVide quarry operators with full quarry equipment and machinery supply, ranging from the procurement and supply of various machines to maintenance/ replacement works. For FYE 2012, SCH Group generated revenues of RM51.8 million from the Malaysian market eqUivalent to an estimate of 17.2 percent share of the quarry equipment and machinery market during the year. This is based on SCH Group’s revenue of RM51.8 million against forecast market size of RM301.6 million in 2012. Figure 14: SCH Group’s Estimated Share within the Quarry Equipment and Machinery Market, 2012
Note: Based on estimated market size for 2012 and SCH historical finandal results for the same year. The estimated market sizing consists of revenues generated from the supply of quarry machinery, peripheral equipment and spare parts. Source: IMR Report 7. EXECUTIVE SUMMARY (Cont’d)
Demand and Supply Conditions Figure 15: Demand and Supply Conditions Affecting the Quarrying Industry in Malaysia, 2012 ___’_~I’!”_t,~-;r.:!”‘W””,~_,~,_{‘._, __ ~~, !W~ !. ,~r>n:_~_”” ~__ ,_I_, ,_
I”rnl<‘~ cn~~ 1M Skihd Wo:l<l!.”” \I Supply Conditions Source: IMR Report Demand Conditions The following factors represent key trends, developments and events influencing market demand:­1) Government Infrastructure Development Activities The 10MP (2011-2015) is one of the many government initiatives highlighted by major projects with total investments estimated at approximately RM62 billion. ThiS budgeted amount is aimed at boosting the nation’s economy through its various initiatives such as the ETP. The ETP was officially launched on 26 October 2010 in an effort to propel Malaysia towards becoming a high-income developed nation with an output of RM1.7 trillion in Gross National Income (“GNI”) by 2020. Under the 10MP and ETP, the many projects especially the construction and infrastructure activities are expected to greatly enhance the demand for quarry products and accordingly expand the quarry industry in the near future. In tandem with that, the Government’s annual budget released in the past few years have been focusing on a number of major property developments and infrastructure projects that support the growth of the economy and indirectly, the quarrying industry too. 7. EXECUTIVE SUMMARY (Cont’d)
2) Expanding Construction Industry In 2012, the construction industry in Malaysia was worth apprOXimately RM26.53 billion. The construction sector is vital to the quarrying industry as it is highly dependent on the building materials such as aggregates, asphalts, bricks and sands produced by the industry. At present, the construction sector is expected to be on a steady rise resulting in possible growth of demand for bUilding materials from the quarrying industry. With the government development plans under the 10MP and ETP, the support for the construction industry will have a spill over effect for the quarrying industry and is deemed positive in the near future. As an essential proVider of building materials, the quarrying industry is expected to garner better results with an expected increase in construction activities. 3) Sustained Export Performance Malaysia has richer source of natural resources as compare to its neighbouring countries like Singapore, Indonesia and Brunei and therefore exports primary products such as quarry products to these countries as construction materials. Malaysia’s export of quarry products has experienced significant growth in recent years save for 2012. In 2012, Malaysia’s export of quarry products decreased 2.4 percent due to weaker demand from Singapore. Since 2007, Singapore has been the major importer of Malaysia’s quarry products; they take up more than 90 percent of Malaysia’S total export. Despite a minor shortfall in overall export and to Singapore in 2012, it is expected that Singapore will remain the main importer of quarry products from Malaysia in medium and long term. The Building & Construction Authority of Singapore projected that average construction demand for 2014 and 2015 will range between SGD22 billion and SGD30 billion per annum and these could continue to support the export of Malaysia’S quarry products. 7. EXECUTIVE SUMMARY (Cont’d)
BRAND ~ FINANC~ 1 MARK~1″ Figure 16: Malaysia’s Export Value of Quarry Products/ 2008-2012 140 I  ~  80%  c: ~ ::::E Q In 🙂 c: Cl1 :::I  120 I 100 I 80 60  -Other Countries Ii1IIiBllISingapore _Growth %  l70% I I ~ 60% Ir 50% 140% 130%  ~ …. 0 Cl. ><w  40 20  r 20% ~ 10% I 2.4d-o 0%  o -l  -10%  2008  2009  2010  2011  2012  Year
Note: Quarry produds only indude pebbles-gravel, broken and crushed stone for aggregates Source: IMR Report Supply Conditions The following factors represent key trends, developments and events influencing market supply:­1) Improving Quarrying Technology and Practices Technology advancement is continuously improving the quarrying practices in terms of the machineries employed. Due to the intensity and bulk of the rock materials handled, the use of machineries is vital to the quarrying industry. The advancement of technology has enabled the refinement of quarrying machineries to process greater quantity of rock materials and garner greater and better quality output at a faster speed and/or low operating costs. Despite needing high capital, replacement and maintenance costs in machineries, many quarrying operators are constantly upgrading the machineries, systems and relevant equipment to maintain its competitiveness within the industry. In addition, government agency like MGDM has been encouraging research and development in quarrying practices to ensure the mineral resources in the country is developed in an optimal, efficient and sustainable way with minimal impacts to the environment and to assist in the diversification of local mineral usage.
BRAND ~ FINANC~ 1 MARK~1″ 2) Increasing demand for Skilled Workers The quarrying is an industry that deals with specific quarrying activities and machineries; therefore, the industry demands that workers are trained in the knOWledge and skill of quarrying such as drilling, blasting, explosive handling, machine maintenance and so forth. There is an increasing demand for skilled workers in the mining and quarrying sector as shown in Figure 17. The number of employment and vacandes within the sector grew around 33 percent in 2011. The number of people employed increased at a slower pace of 6.05 percent in 2012. This shows that the industry is experiencing a lack of competent workers to satisfy its growing industry. This market restraint is projected to remain high in the near future and medium throughout the rest of the forecast period. The industry would need to constantly nurture new personnel as well as upgrade existing workforce with cutting-edge knowledge to stay competitive and efficient in the industry. Figure 17: labour Market in Mining and Quarrying Sector, 2010-2012 85,000 2,180 4,Ijs::. ill0 3,369 4,Ij80,000-<» D1-Q. c 75,000 ~ 0 70,000’D In
Ii’ll Vacandes -0 Q.65,000
.. Employment 0 2,517″­Go’ 60,000 .0 IIIE :::I’ 55,000 2: 50,000 2010 2011 2012
Year Notes: 1) Vacancies figures reported by employers through the JobsMalaysia portal (formerly known as Electronic Labour Exchange, ELX) 2) Employmentfiguresareestimates byEconomicPlanningUnit andMinistryofHumanResource 3) Beginning 2010, empfoyment data was based on new population estimates and cannot be directly compared to previous years’data Source: IMR Report 7. EXECUTIVE SUMMARY (Cont’d)
3) Depleting Supply of Natural Resources The ever increasing demand for building materials churned out by the quarrying industry has resulted in quarry operators seeking new sources of non-metallic minerals. Alongside the continuous extraction of finite resources is a depletion of natural resources of the country. In view of this, the government is emphasising on the preservation of the environment, implementing policies that ensures mineral resources development activities are undertaken in a sustainable manner as well as encouraging the industry to concentrate on recycling aggregates. Substitute Products or Services • Quarry Operations Industry There are no substitution for the quarry operations industry; the extraction and processing of rock materials into usable materials for the manufacturing and construction industry are activities unique only the quarry operators. • Quarry Machinery & Equipment Market There are no substitution for the product and services offered by the quarry machinery and equipment market. The market plays a supporting role to the quarry operations industry; they function as the supplier for all machinery and equipment and services pertaining to quarrying activities. Reliance and Vulnerabilities to Imports • Quarry Operations Industry Malaysia has very low level of import for quarry products because firstly its rich natural resources of non-metallic minerals and accompanying quarrying operations have the ability to support national demand of quarry products as well as export some. Secondly, it is not viable for the country to rely on the import stone, aggregate and related building materials as it incurs high cost and lengthy time for import logistics. As a result, quarrying industry in Malaysia does not have reliance or vulnerability to imports. • Quarry Machinery & Equipment Market The quarry machinery and equipment market is fairly dependent on imports for high quality heavy-duty machinery and equipment. Heavy-dUty machineries such as crushers and drillers are mainly imported from countries such as Japan, Korea, USA and Australia. It is highly 7. EXECUTIVE SUMMARY (Cont’d)
common for heavy-duty machineries to be imported from overseas due to the advanced cutting edge technology lacking in Malaysia. Howevert most supporting equipment and spare parts can be source locally. Raw materials for steel structures are sourced and integrated locally for Malaysian quarry sites. It is less costly when equipment such as feeders, wire mesh, conveyor belts and other spare parts are manufactured and sourced locally. Nevertheless, some quarry operators may have leaning preference for imported equipment due to its perceived higher quality. Barriers to EntIV Quarry Operations Industry The quarry operations industry has very high entry barriers. These entry barriers include: • Limited Access to Land Concessions -Quarrying activities can only be conducted on specially designated areas, with the proper concessions. As a primary resource, quarried minerals are finite and non-renewable, and concessions for quarries are thus also limited. Additionally, quarrying activities are strictly controlled by the government as a means to preserve national primary resource reserves, as well as to prevent over-mining from imposing negative externalities such as pollution to neighbouring parties. The finite nature of quarried minerals, and the scarcity of new quarry concessions forms the foremost entry barrier for new quarry operations in the country
• High capital Investment -Starting costs for quarries are very high, due to necessary capital investments in highly specialised and expensive quarrying equipment, as well as other industrial machinery, logistical equipment, vehicles and manpower necessary. This forms a strong deterrent for new market players hoping to enter the industry, especially those without existing deep financial pockets.

Quarry Machinery & Equipment Market The quarry machinery and equipment trading market has relatively medium entry barriers, compared to both quarry machinery manufacturing, and quarry operations. Barriers to entry include: 1. Established Market Player Reputation -Quarry equipment are highly specialised and expensive equipment. With the risk of machinery/ equipment failure likely to pose significant financial losses to operators, quarry operators often retain reputable suppliers, and engage only market-renowned suppliers of machineries, equipment and related spare parts. The expensive cost of high-end equipment and spare parts also lend to the wariness of operators in SWitching to new machinery brands, or suppliers.
2. Strong Relationships between Operators and Existing Suppliers -Given the specialised nature of equipmentl switching costs are quite high for operators. Therefore, unless operators have good reason to sever existing relationships with machinery suppliers (e.g. long standing unsatisfactory service, costly errors), operators seldom change machinery/ spare part suppliers. They are often wary about the risk of getting less-than-satisfactory service levels from new suppliers.
3. Timely and Efficient Delivery to Operators -Quarrying activities involve the operations of highly specialised machinery and equipment that are carefully integrated into a single system. Any malfunction in the quarrying machinery/ equipment could potentially disrupt the entire quarrying operation. Therefore, operators would often engaged suppliers who are able to deliver product and services in a timely and efficient manner. The ability to deliver such services would require suppliers to possess wide networks preferably located at the vicinity of quarries.

Key Issues and Trends Government Regulatory Agency 1) Mining and quarrying activities comes under the purview of the Ministry of Natural Resources and Environment (‘MNRE”); industry players need to adhere to the strict standards of environmental performance set by the government and its planning services. 2) Minerals and Geosdence Department Malaysia (‘MGDM”) is a government agency established under the MNRE. Its role is to provide latest information and expertise to meet the national needs in the field of mineral and geoscience of which includes the quarrying industry. 7. EXECUTIVE SUMMARY (Cont’d)
3) The Mine & Quarry Development Unit tMQDU’) was set up to oversee the mining, quarrying and other mineral related activities as well as safeguard the workers’ safety, property and the wellbeing of the environment Policy and Legislation 1) The National Mineral Policy 2 was revised with a second version and launched in January 2009. The policy aims to enhance the contribution of the mineral sector to the sodo­economic development of the nation through the efficient, responsible and sustainable development as well as the optimum utilisation of mineral resources. 2) The Mineral Development Act 1994 defines the power of the Federal Government for the inspection and regulation of the exploration and mining of minerals and mineral ores and for other matters connected therewith. 3) The State Mining and Mineral Enactment provides the Sates with the powers and rights to issue mineral prospecting and exploration licenses and mining leases and other related matters; it is adopted by the respective State Government at various stages. All States, except Perlis and sabah, have adopted the State Mineral Enactment. States that adopted the Enactment also developed their own State Mineral Regulations to set out detailed guidelines for mineral exploration and mining operations. 4) State Quarry Rules comes under Section 14 of the National Land Code 1965 which only governs activities relating to rock mineral in Peninsular Malaysia. The states of Kelantan, Pahang, Perak, Sabah, Selangor, Negeri Sembilan and Terengganu have adopted and implemented the State Quarry Rules. 5) Explosives Act 1957relates to the manufacture, use, sale, storage, transport, import and export of explosives, inclUding those used for rock extraction. Taxation Quarry operators are required to pay corporate tax to the Federal Government as well as value-based royalties to the State where the quarry operation is located. Royalty rates are dependent on the mineral commodity and on the assessment of each of the individual States. Safety and Health Issues The Department of Occupational safety and Health CDOSH”) comes under the purview of the Ministry of Human Resources. This government agency is responsible for the administration and enforcement of legislations related to oocupational safety and health. 7. EXECUTIVE SUMMARY (Cont’d)
The Occupational Safety And Health Act 1994 make further provisions for securing the safety, health and welfare of persons at work, for protecting others against risks to safety or health in connection with activities of persons at work, to establish the National Council for Occupational safety and Health, and for matters connected therewith. This Act covers the mining and quarrying sector. Environmental Concerns The activities involving the extractions of rocks from the earth have brought about concerns about the impacts on the environment. The common areas of concerns are visual intrusion, damage to landscape, noise, dust, loss of land and pollution ci water courses. Therefore, under the National Mineral Policy (“NMP’~, mining lease application must include an environmental protection plan approved by the Department of Environment of the MNRE. Environmental Quality Act 1974 is an act relating to the prevention, abatement, control of pollution and enhancement of the environment, and for purposes connected therewith. Outlook of the Quarry Machineries and Equipment Market Malaysia’s quarrying industry faces a positive outlook throughout the forecast period. Growth in the said industry is likely to be mainly underpinned by the government’s initiatives such as lOMP and the ETP which feature a number ci major property development and infrastructure projects which would give rise to the construction industry. Projects such as the RM40 billion Klang Valley MRT projects, RM26 billion Tun Razak Exchange (formerly known as Kuala Lumpur International Financial District) development, RMS billion l1S-storey Warisan Merdeka tower, government initiated affordable housing projects, construction of new highways and other infrastructures are expected to boost the demand for quarry products which bodes well for the quarry operator industry. These trends have a flow over effect on the quarry machinery and equipment market. As more quarrying activities would be needed to meet the higher demand of quarry products; the supporting products and services of the quarry machinery and equipment market would also be in higher demand. Engineering service providers would be engaged to help set up new quarry sites while more production activities would encourage frequent wear and tears, hence, an increase market for equipment and spare parts. On the supply side, technology advancement is expected to enhance quarrying operations and production. MGDM is consistently encouraging continuous research and development in quarrying practices so that the depleting mineral resources of the country are developed in as optimal, efficient and sustainable way. Furthermore, quarry operators see the value of 7. EXECUTIVE SUMMARY (Cont’d)
upgrading technology as it helps to garner greater output and/or lessen operating costs. In view of this, the quarry machinery and equipment market has an important role to play by introducing enhanced products. Despite the industry’s obvious potential growth, there is a major trend that could limit this development -a shortage of available workers for the industry. The industry would need to constantly nurture new personnel as well as upgrade existing workforce with cutting-edge knowledge to ensure supply of competent workers for the industry. The quarrying industry is highly controlled by the Malaysian government as it involves the extraction of the country’s natural resources. Government agencies are formed to oversee the activities involving in the quarry industry, various policy and legislations outlines strict guidelines pertaining to the quarrying operations that industry players need to adhere to. One of the key concerns of the government is the environmental impact arising from quarrying activities such as noise, air and sound pollution. Hence, government are taking steps to protect and sustain the environment; industry players are also expected to conduct self­regulatory management measure. The quarrying operations industry in Malaysia was valued at RM3.64 billion in 2012 and is expected to grow at a CAGR of 12.2 percent for the 2012-2017 period to RM6.47 billion in 2017. The quarry machinery and equipment market in Malaysia was valued at RM301.6 million in 2012 and is expected to grow at a CAGR of 9.1 percent for the 2012-2017 period to RM467.0 million in 2017. 7. EXECUTIVE SUMMARY (Cont’d)
OVERVIEW OF THE IRON ORE INDUSTRY IN MALAYSIA Iron ore is one of the metallic minerals found and mined Malaysia. As a foundation to an advanced and industrialised economy, iron ore is an important raw material to many sectors of the ernnomy such as the construction industry, electrical and electronic industry, automotive industry, furniture industry, machinery industry and engineering fabrication industry. Figure 18 depicts the estimated iron ore reserve and its value in various states in Malaysia. Figure 18: Estimated Reserves and Value of Iron Ore in Selected States of Malaysia, 2011
Pahang Terengganu Kelantan Perak Johor Total 23.8 8.0 7.3 6.0 5.0 50.1 1,166 392 355 294 245 2,452 Source: IMR Report The Malaysian iron ore industry has been performing well with production reaching record levels during the past five-years. Despite the global crisis in 2008 that affected the national economy alongside many other sectors, the iron ore production remained robust. During the recession’s peak in 2009, the industry crossed the one million mt threshold and recorded iron ore production of 1.5 million mt, a growth of 49.7 percent from 2008. The production level increased in 2010 where 142.0 percent of growth was recorded due to increasing demand of iron ore from China. The strong growth continued in the following year, leading to a 116.6 percent growth in production level where 7.7 million mt of iron ore production were produced. The figure below depicts the production levels of iron ore in Malaysia. Figure 19: Production of Iron Ore in Malaysia in Metric Tonnes, 2007-2011
Source: IMR Report Nevertheless, the iron ore industry is still considered a small sub-segment of the mining and quarrying sector which is dominated by major minerals such as oil and gas and quarried rocks. Most of the iron ore mines in Malaysia are concentrated on small reserves that produce low graded iron ore; produce is mainly consumed as raw materials by the local cement and iron and steel plants. As an essential raw material to the production of steel, iron ore is most notably sourced by the steel industry. Steel is a type of basic metal alloy that is primarily made up of iron along with the presence of small amounts of carbon and other alloying materials. It is relatively harder and stronger than iron making steel a more preferred material over iron. Despite the presence of local mines, Malaysia’S iron ore production is considerably low and unable to meet the domestic demand of iron ore, especially by the steel industry. This resulted in high import of iron ore mainly from Brazil, Chile and Bahrain. Year-on-year, Malaysian iron ore production has exhibited exponential growth. In tandem, there were also apparent increases in iron ore exports with more than 300 percent and 157 percent growth in export value recorded in 2010 and 2011 respectively. The export value increased by more than half in 2012 to USD350.52 million. ApprOXimately 99 percent of iron ore exports from 2007 to 2012 were destined for China. The figure hereafter depicts the value of Malaysian import and export of iron ore from 2006 to 2012. Figure 20: Value of Iron Ore’s Import and Export, 2006-2012 f(l) 600  $621  591.40  .. $00 i¢ .~ ..00 i Q 300\A ~ 200 100  317-7 I~. }<‘S .2 I”  11 ~ ~  is<! S I~  4D7.8 90$ II  }SQ$2  • tm;JO~ ·lI(~.wt

2006 2:007 LifJS 2CQ9 .WW iCu l{)ll Yur 149 7. EXECUTIVE SUMMARY (Cont’d)
Note: Only includes iron ores and concentrates, roasted iron pyrites Source: IMR Report The iron ore industry is expected to grow in the near future underpinned by a continuous demand for iron ore by various growing sectors especially the steel industry. Government initiatives through the 10MP and ETPr which boast of several construction and infrastructure developmentsr will most likely result in higher demand for construction materials -hence a spillover effect to the iron ore industry. With continuous miningr the iron ore industry will be challenged by the inevitable -depleting ore resources. Neverthelessr this risk of depleting natural resources is expected to have minimal effects on the supply of iron ore in the short term as ore resource is not expected to run out overnight but take effect gradually. Meanwhiler iron ore production is still expected to grow in tandem with the recent award of iron ore mine concessions at Bukit Besir Terengganu to Eastern Steel Sdn Bhd and Perwaja Holding Bhd in 2012 by the Terengganu state government. These developments are expected to boost the Malaysian iron ore production in the near future. On the forefront of industry newsr Brazil’s Vale International \,Valer’)r one of the largest mining companies in the worldr is investing in an iron ore distribution centre in Malaysia. Vale is planning to build a jetty and an iron ore processing plant on a 450-acre site in Teluk Rubiahr Perak which aims to shorten distribution distance between core iron ore mines in Brazil and the growing demand for iron ore in Asia. The jetty is expected to dock Vale’s ships carrying iron ore from Brazil while the iron ore plant is expected to be operational by 2015. The plant is expected to be able to process blended iron ore and pellets which are then distributed to steel manufacturers around the Asia-Pacific region. Howeverr The Coalition of Concerned Citizens of Perak is strongly protesting against this development and is urging the state government to review its agreements with the Brazilian company. Vale will need to sort out on-going protestations before their plan can fully commence. The operations of iron ore mining and stone quarrying are relatively similar to each other. Raw iron ores are extracted using similar drilling equipmentr then transported to the pulverising plant consisting of various crushers to reduce the iron ore into smaller sizesr vibrating screens to distribute iron ores into different piles according to its size range and conveyor belts to transport iron ore through different processes. The similarities between iron ore mining and stone quarrying enable the same suppliers of machinery and equipment to provide supporting products and services to both the mining and quarrying sector. 7. EXECUTIVE SUMMARY (Cont’d)
Due to the hardness of iron, wear and tear of equipment and machinery used for iron mining would occur at a much higher rate than in quarry operations. This results in greater replacement demand for machinery and equipment parts over the long run. Due to the above developments and potential growth in the iron ore mining industry, the SCH Group has begun marketing its quarry-based products to companies in the iron ore mining industry in Malaysia. 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 SENG Managing Director Protege Associates Sdn Bhd


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