Industry Overview

10. INDEPENDENT MARKET RESEARCH REPORT 10. INDEPENDENT MARKET RESEARCH REPORT
(Prepared for inclusion in the Prospectus) Q VITAL FACTOR CONSULTII\lG Vital Factor Consulting Sdn BhdCreating Winning Business Solutions (Company No.: 266797-n 75C & 77C Jalan 5522119 Damansara Jaya 47400 Petaling Jaya 8 JUL 2010 5elangor Darul Ehsan, Malaysia Tel: (603) 7728-0248 The Board of Directors Fax: (603) 7728-7248 SIG Gases Berhad Email: enquires@vitalfactor.com Suite 1301, 13th Floor, City Plaza Website: www.vitalfactor.com Jalan Tebrau 80300 Johor Bahru Johor. Dear Sirs Independent Assessment ofthe Industrial Gas Industry in Malaysia The following is a summary of an Independent Assessment of the Industrial Gas Industry in Malaysia prepared by Vital Factor Consulting Sdn Bhd for inclusion in the prospectus ofSIG Gases Berhad (herein together with its subsidiary companies will be referred to as “SIG Gases Group” or the “Group”) in relation to its proposed listing on the Main Market ofBursa Malaysia Securities Berhad. SIG Gases Group’s principal business activities are in the manufacturing, refilling and distribution of industrial gases. The Group currently produces oxygen, nitrogen, gas mixtures and acetylene, which are captured under the wider umbrella of the Industrial Gas Industry. As a result, SIG Gases Group operates in the Industrial Gas Industry. 1  THE INDUSTRIAL GAS INDUSTRY IN MALAYSIA  1.1  Overview of the Industrial Gas Industry  •  The Industrial categories:  Gas  Industry  in Malaysia may be segmented  into  the  following

 

Carbon Dioxide
OtherNoble ElementalGases Gases Other Argon Compoundo Gases manufactured by GasesSIG Gases Group Gas Mixtures
SIG Gases Berhad 1 Industry Assessment 268 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Industrial gases are manufactured on a commercial scale for use in various
applications. Industrial gases may be produced through the following methods: extraction from atmospheric air through a process of physical separation; extraction from underground reservoirs and further processed; chemical synthesis; extraction ofgas arising from decaying organic matters or biomass.
• Atmospheric gases are primarily produced on an industrial scale through the physical separation the various gases contained in the air. Types of gases most commonly manufactured using atmospheric air are nitrogen, oxygen and argon.
• Hydrocarbon gases are organic compounds that consist entirely of the elements carbon and hydrogen, and are in gaseous state under normal temperature and pressure. Hydrocarbon gases are normally produced by chemical synthesis or through the fractional distillation ofcrude oil and natural gas.
• Acetylene is classified as a hydrocarbon gas. Other examples of hydrocarbon gases include methane, ethane, ethene, propane, propene, butane, butene, hexane and heptane.
• Examples of other industrial gases include: Noble gases such as helium, krypton, neon and xenon; Other elemental gases such as hydrogen, chlorine and fluorine; Compound gases such as ammonia, carbon monoxide, nitrous oxide and sulphur dioxide. Gas mixtures, which are blends of two or more gases mixed in accordance with a user’s specifications.
• There are six naturally occurring noble gases (helium, krypton, neon, xenon, argon and radon). One of the key characteristics of noble gases is that they have low chemical reactivity. They are also commonly referred to as inert gases.
• Elemental gases are gases that exist under normal temperature and pressure in their pure atomic state without combining with other elements. Elemental gases include atmospheric gases (oxygen, nitrogen, argon), halogens (hydrogen, fluorine, chlorine), noble gases (helium, krypton, neon, xenon) and others.
• Compound gases are gases that exist in its gaseous state under normal temperature and pressure comprising more than one chemical element. Carbon dioxide is an example of a compound gas.
• Carbon dioxide is normally produced by the combustion of substances containing carbon such as wood, petroleum or natural gas, as a by-product of fermentation or hydrogen production, or by chemical synthesis.
• Gas mixtures are two or more gases mixed according to specification.
• SIG Gases Group is engaged in the production of nitrogen, oxygen and acetylene. The Group is also a producer of gas mixtures. The Group is also engaged in refilling gas cylinders with argon and carbon dioxide.

 

10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Industry Supply and Value Chain 1.2 On-site Plant • Producers of industrial gases normally uses three methods to supply gases to its
customers: bulk liquid; gas cylinder; pipeline.

• Industrial gas producers may supply directly to end-users or to intermediaries like refillers and dealers.
• If a major end-user is located close to an industrial gas producer, a pipeline may be used to provide gases directly to the end-user.
• Industrial gas producers normally supply end-users and intermediaries that consume a large quantity of industrial gases in bulk liquid form. Bulk liquid gases are stored and transported in specialised cryogenic storage vessels and tankers. Liquid gases are either used directly or vaporisers are used to convert them into gas form.
• Industrial gas producers normally supply end-users and intermediaries that consume smaller quantities of industrial gases using refillable gas cylinders.
• Due to the highly flammable and unstable nature of acetylene, acetylene is not commonly transported or stored in bulk liquid form, and is not delivered to customers via direct pipeline. Acetylene is delivered to customers in refillable gas cylinders.
• In general, it is not common for industrial gas refilJers to be engaged in refilling gas cylinders with acetylene, as acetylene is not commonly delivered in bulk liquid form. Acetylene producers may supply acetylene in gas cylinders to dealers.
• Some end-users utilise an on-site plant to produce industrial gases for their own consumption. The on-site plant may be owned and operated by the user, or by a third-party.

10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTII\lG Creating Winning Business Solutions • SIG Gases Group is an industrial gas producer that operates its own Air Separation Unit (ASU), which is located at the Group’s production facility in Senai, Johor. The Group currently uses its ASU to produce liquid nitrogen and liquid oxygen.
• The Group currently supplies nitrogen, oxygen, argon and carbon dioxide to users in bulk liquid form and in gas cylinders. The Group supplies directly to end-users as well as intermediaries like dealers and refillers.

2 THREAT OF SUBSTITUTE SERVICES • In general, there are no practical substitutes for most types of industrial gases in most oftheir current applications. In many instances, a specific gas is required as part ofa process or reaction, for which no other substance may be used as a substitute.
• Argon and nitrogen may be used as substitutes for one another in some applications,
including: Applications where an inert gas is required, such as in creating an inert environment to protect substances from coming into contact with oxygen and moisture in the chemical, pharmaceutical and food industry; In cooling and freezing applications.
• There are currently a number of practical substitutes for metal cutting and welding using a flame produced by the combustion of acetylene and another gas (commonly oxygen). Alternative metal cutting methods include plasma cutting, laser beam cutting, and mechanical cutting. Alternative metal welding techniques include electric arc welding, resistance welding, and welding with flames produced by the combustion of other gases such as oxygen-hydrogen welding.
• However, metal cutting and welding using a flame produced by the combustion of acetylene and another gas are widely used by users in man)’ industries, and is well established and understood. There are also a large number of welders who are trained in and familiar with the process. As a result, it is not likely that the method will be completely replaced by any of its current substitutes.

3 GOVERNMENT LEGISLATION, POLICIES AND INCENTIVES 3.1 Government Laws and Regulations Manufacturing Licence • Application of a manufacturing licence under the Industrial Coordination Act, 1975 is required for companies with shareholders’ funds of RM2.5 million or above or engaging 75 or more full-time employees (Source: Malaysian Industrial Development Authority). SIG Gases Berhad 4 Industry Assessment 271
10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Southern Industrial Gas has obtained manufacturing licenses for the following products and activities: Products!Activities  Start ))ate  Location  Carbon dioxide, acetylene, oxygen, argon and nitrogen  4 December 1996  PLO 137, Kawasan Perindustrial Senai III, 81400 Senai, Johor  Mixed gas  12 June 2001  Liquid oxygen and liquid nitrogen  11 December 2003  Mixed gas  26 August 2000  No. 17, Jalan BP 4/1, Bandar Bukit Puchong, 47100 Puchong, Selangor  Refilling of industrial gases such as oxygen, nitrogen, carbon dioxide and argon  31 October 2006  Refilling of industrial gases such as oxygen, nitrogen, carbon dioxide and argon  31 October 2006  PT 1984 & 1985, Krubong Industrial Park, 75250 Krubong, Malacca  Refilling of industrial gases such as oxygen, nitrogen, carbon dioxide and argon  31 October 2006  No.1, Jalan 1M 14!8, Bandar Indera Mahkota, 25200 Kuantan  Refilling of industrial gases such as oxygen, nitrogen, carbon dioxide, argon and acetylene  4 July 2008  Lot 114 HS(D) 110941, PT 16767, Arab-Malaysian Industrial Park Nilai, Negeri Sembilan Refilling of fuming gas  17 March 2009  Refilling of industrial gases such as oxygen, nitrogen, carbon dioxide and argon  14 July 2008  PLO 235, Jalan Perindustrian Bukit Minyak 7, Kawasan Perindustrian Bukit Minyak 13, Seberang Prai, Pulau Pinang
Wholesaler’s Poison Licence • An organisation that is involved in importation, possession, manufacture, compounding, storage, transport, sale and use of poisons, is subjected to The Poisons Act 1952. The licence is granted to an individual person, and not to a company with a business address.
• The following persons employed by Southern Industrial Gas hold the following Wholesaler’s Poison Licence (Type B License):

Item  Information  Address  PLO 137, Kawasan Perindustrial Senai III, 81400 Senai  License holder  Chong Joon Kiong  Licensing Officer  Director of Health, Johor  Valid Period  1 January 201 0 to 31 December 2010  Approved Poison List  Ammonia
SIG Gases Berhad 5 Industry Assessment 272 10. INDEPENDENT MARKET RESEARCH REPORT (Conf’dj Q VITAL FACTOR CONSULTII\lG Creating Winning Business Solutions Item.  .·Inforinalion  Address  17, Jalan BP 4/1, Bandar Bukit Puchong, 47100 Puchong  License holder  Foo Peng Boon  Licensing Officer  Director of Health, Selangor  Valid Period  I January 2010 to 31 December 2010  Approved Poison List  Ammonia
3.2  Government Incentives  •  The major government incentives for companies engaged in the manufacturing sector include: Pioneer Status; Investment Tax Allowance Reinvestment Allowance Tax Exemption on the Value of Increased Exports.  •  Southern Industrial Gas is eligible for Reinvestment Allowance benefits, and is currently enjoying the inventive for a period of 15 years (from 2001 to 2015).  4  ENVIRONMENTAL REGULAnONS  4.1  Scheduled Waste  •  During the normal course of its business operations at its Senai plant, SIG Gases Group generates the following waste that is classified as a Scheduled Waste under the Environmental Quality (Scheduled Waste) Regulations 2005:  SW 427, “Mineral sludge including calcium hydroxide sludge, phosphating sludge, calcium sulphite sludge and carbonates sludge”.  •  Southern Industrial Gas has appointed Premier Bleaching Earth Sdn Bhd, a company licensed by the Department of Environment under Section II of the Environmental Quality Act, 1974, to collect and transport the scheduled waste from its premises.  5  PAST PERFORMANCE, PROSPECTS AND OUTLOOK OF THE INDUSTRIAL GAS INDUSTRY IN MALAYSIA  5.1  Supply ­Local Production  •  This section shall discuss the performance of the industrial gas industry as a whole in Malaysia, and shall focus on the production of oxygen, nitrogen and acetylene, which constitute the main types of industrial gases currently produced by SIG Gases Group.
SIG Gases Berhad 6 Industry Assessment 273 10. INDEPENDENT MARKET RESEARCH REPORT (Conf’dj Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • This section shall also discuss the production of argon and carbon dioxide, which are the main types of industrial gases sold by the Group as part of its industrial gas refilling business. Manufacture of Industrial Gases, Whether Compressed, Liquefied or in Solid State • Between 2005 and 2009, the sales value of the manufacture of industrial gases, whether compressed, liquefied or in solid state increased at an average annual rate of 0.7%. In 2009, the sales value of the manufacture of industrial gases, whether compressed, liquefied or in solid state declined by 27.7% to R..\13.3 billion.
• However, the sales value of the manufacture of industrial gases, whether compressed, liquefied or in solid state recorded quarter-on-quarter growth during most of 2009. Sales value for the second quarter of 2009 was 24.9% higher compared to the first quarter of 2009, and sales value for the third quarter of 2009 was 34.1% higher compared to the second quarter of 2009. However, in the fourth quarter of 2009, the sales value of the manufacture of industrial gases, whether compressed, liquefied or in solid state declined slightly by 2.4% compared to the third quarter of2009.

Manufacture of Oxygen • Between2005and2009,thesalesvalue ofthemanufacture ofoxygenincreasedatan average annual rate of 0.8%. In 2009, the sales value of the manufacture of oxygen declined by 37.1 % to RM76.4 million. Manufacture of Nitrogen • Between 2005 and 2009, the sales value of the manufacture of nitrogen declined slightly at an average annual rate of 0.1%. In 2009, the sales value of the manufacture of nitrogen declined by 32.1 % to RM 156.1 million. Manufacture of Argon • Between 2005 and 2009, the sales value of the manufacture of argon declined at an average annual rate of 4.3%. In 2009, the sales value of the manufacture of argon declined by 32.2% to RM25.4 million. Manufacture of Carbon Dioxide • Between 2005 and 2009, the sales value of the manufacture of carbon dioxide declined at an average annual rate of 31.6%. In 2009, the sales value of the manufacture of carbon dioxide declined by 66.3% to RM5.0 million. Manufacture of Acetylene • Between 2004 and 2008, the sales value of the manufacture of acetylene increased at an average annual rate of 4.5%. In 2008, the sales value of the manufacture of acetylene increased by 14.8% to reach RM42.6 million. 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • According to the Department of Statistics, data on the sales value ofthe manufacture of acetylene in 2009 is not directly comparable with the sales value of the manufacture of acetylene in 2008 due to changes in sampling methodology. For 2009, the Department of Statistics covered only companies with 200 workers or more, whereas in previous years all companies were covered. -As a result, many of the companies that were covered in 2008 were not covered in 2009. In 2009, the sales value of the manufacture of acetylene was RM17.1 miilion. 5.2 Supply -Imports • With the exception of carbon dioxide, most of the industrial gases currently used in Malaysia are produced locally. As the table in Section 6.2 indicates, the sales value of domestically produced oxygen, nitrogen, argon and acetylene greatly exceed the import value ofthe corresponding industrial gas. Imports of Carbon Dioxide • Between 2005 and 2009, the import value of carbon dioxide increased at an average annual rate of 59.8% (albeit from a relatively low base ofRM2.1 million in 2005). In 2009, the import value ofcarbon dioxide declined by 31.2% to RM13.7 million.
• In 2009, Thailand was the largest source of imports for carbon dioxide, accounting for 78.2% of total imports by value. Singapore and Germany were the second and third largest sources of imports, accounting for 13.0% and 4.0% of imports by value respectively. The other sources of imports for carbon dioxide in 2009 included Japan, Australia, Taiwan and other countries.

 

5.3 Demand -Exports • With the exception of argon and carbon dioxide, a large proportion of the industrial gases currently produced in use in Malaysia are used locally. In many cases, the export value of these industrial gases represents only a small percentage of the sales value of domestic production for the corresponding industrial gas. Exports of Argon • Between 2005 and 2009, the export value of argon increased at an average annual rate of 21.1 %. In 2009, the export value of argon declined by 30.6% to RMI1.6 million.
• In 2009, Thailand was the largest export destination for argon, representing 50.3% of total exports by value. Singapore and Brunei were the second and third largest export destinations, accounting for 23.2% and 12.7% of exports by value respectively. The other export markets for argon in 2009 included Indonesia, Pakistan, Bangladesh, New Zealand, Australia and other countries.

SIG Gases Berhad 8 Industry Assessment 275 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTII\lG Creating Winning Business Solutions Exports of Carbon Dioxide • Between 2005 and 2009, the export value of carbon dioxide increased at an average annual rate of 24.5%. In 2009, the export value of carbon dioxide declined by 47.4% to RM13.2 million.
• In 2009,. Singapore was the largest export destination for carbon dioxide, representing 98.5% of total exports by value. Brunei and Indonesia were the second and third largest export destinations, accounting for 1,1% and 0.4% of exports by value respectively.

5.4 Supply Dependencies • The main inputs used by SIG Gases Group in producing industrial gases are calcium carbide and electricity. The Group uses calcium carbide as a raw material to produce acetylene, while electricity is primarily used to operate the Group’s Air Separation Unit to produce liquid nitrogen and liquid oxygen. Manufacture of Calcium Carbide • Most of the calcium carbide used in Malaysia is produced locally, and Malaysia is a net exporter of calcium carbide. In 2009, the import value of calcium carbide was only RM1.6 million, which is considerable smaller than the export value, which was RM40.5 million (Source: Department ofStatistics).
Electricity Consumption
• Electricity consumption in Malaysia is summarized in the following table:

Consumption by Units  Consumption by Value  Units (‘OOOGWh)  Growth Rate (%)  Value (RM Million)  Growth Rate (%)  2004  78.8  18,112  2005  83.2  5.6  19,087  5.4  2006  86.6  4.1  20,941  9.7  2007  91.6  5.8  23,277  11.2  2008  95.2  3.9  26,216  12.6  IS! half 2009  45.0  13,877
(Source: Ministry ofFinance) • Between 2004 and 2008, electricity consumption in Malaysia increased at an average annual rate of 4.8%. In 2008, electricity consumption grew by 3.9% in terms of units to reach 95,200 Gigawatt hours (GWh). During the first half of 2009, the electricity consumption in Malaysia amounted to 45,000 GWh. 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Between 2004 and 2008, the value of electricity consumption in Malaysia increased at an average annual rate of 9.7%. In 2008, the value of electricity consumption grew by 12.6% to reach RM26.2 billion. During the first half of 2009, the electricity consumption in Malaysia by value amounted to RM13.9 billion. Installed Capacity and Peak Demand for Electricity • Installed generating capacity and peak demand for electricity In Malaysia are summarized in the following table:
* Peak demand is the maximum power demand registered by the system in a stated period oftime. Note: Theaboveareaccumulatedinstalledcapacityandpeakdemand ofelectricity from Tenaga Nasional Berhad, Sabah Electricity Sdn Bhd and Syarikat SESCO Berhad. (Source: Ninth Malaysia Plan)

• Between 2000 and 2005, installed electricity generating capacity grew by 34.5% to reach 19,217 Megawatts (MW). In 20I0, installed electricity generating capacity is expected to increase to 25,258 MW, which is 31.4% higher compared to 2005. This is equivalent to an average annual growth rate of7.1%.
• Between 2000 and 2005, peak demand for electricity increased by 29.3% to reach 13,779 MW. In 2010, peak demand for electricity expected to increase by 45.8% compared to 2005 to reach 20,087 MW. This is equivalent to an average annual growth rate of 9.9%.
• Although peak demand for electricity is expected to grow at a slightly higher rate compared to installed electricity generating capacity, there is still a healthy cushion between planned installed capacity and expected peak demand. In 2010, installed electricity generating capacity is expected to be 25.7% higher than peak demand for electricity.

Accumulated Installed CaDacitv  Peak Demand*  (MeJ!Qwatt)  Growth Rate (%)  (MeJ!awatt)  Growth Rate (%)  2000  14,291  10,657  2005  19,217  34.5  13,779  29.3  2010  25,258  31.4  20,087  45.8
5.5 Demand Dependencies • As industrial gases are widely used in various manufacturing processes, the following section will also cover the performance of the overall manufacturing industry to provide an overall indication of demand for the Industrial Gas Industry.
• Some of the main user industries in Malaysia for the products supplied by the

Industrial Gas Industry includes: Shipbuilding industry;
SIG Gases Berhad 10 Industry Assessment 277 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’dj Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Iron and steel industry; Machinery and equipment industry, comprising the manufacture of general purpose machinery and special purpose machinery; Construction industry.
• As industrial gases are also widely used in various manufacturing processes, the following section will also cover the performance of the overall manufacturing industry to provide an overall indication of the growth in this sector. The Overan Manufacturing Sector • Between 2005 and 2009, the sales value of the overall manufacturing sector grew at an average annual rate of 0.3%. In 2009, the sales value of the overall manufacturing sector declined by 19.0% to RM469.5 billion.
• However, the overall manufacturing sector recorded quarter-on-quarter growth in sales value during the whole of 2009. The sales value of output for the second quarter of 2009 was 7.2% higher than the sales value of output for the first quarter of 2009, while the sales value of output for the third quarter of 2009 was 10.6% higher than the second quarter of 2009. The sales value of output for the fourth quarter of 2009 was 4.1% higher than the third quarter of2009.

Building and Repairing of Ships • Between 2003 and 2007 (the most recent year for which data is available), the value of gross output for the building and repairing of ships increased at an average annual rate of 12.4%. In 2007, the value of gross output for the building and repairing of ships increased by 37.2% to RM4.7 billion (based on 141 establishments). Manufacture of Basic Iron and Steel Products • Between 2005 and 2009, the sales value of the manufacture of basic iron and steel products declined at an average annual rate of 3.0%. In 2009, the sales value of manufacture of basic iron and steel products declined by 42.3% to RM16.4 billion. Manufacture of General Purpose Machinery • Between 2003 and 2007 (the most recent year for which data is available), the value of gross output for the manufacture of general purpose machinery increased at an average annual rate of 17.5%.
• In 2007, the value of gross output for the manufacture of general purpose machinery declined by 10.4% to RM11.9 billion (based on 492 establishments).

Manufacture of Special Purpose Machinery • Between 2003 and 2007 (the most recent year for which data is available), the value of gross output for the manufacture of special purpose machinery increased at an average annual rate of 15.8%. SIG Gases Berhad II Industry Assessment 278 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • In 2007, the value of gross output for the manufacture of special purpose machinery increased by 22.9% to reach RM5.0 billion (based on 731 establishments). GDP Contribution of the Construction Sector • Between 2005 and 2009, the Gross Domestic Product (GDP) contribution of the construction sector (at current prices) grew at an average annual rate of7.8%.
• In 2009, the GDP contribution of the construction sector (at current prices) increased by

8.1 % to reach RM21.2 billion. 6 VULNERABILITY TO AND RELIANCE ON IMPORTS 6.1 Reliance on Imports • In general, the Industrial Gas Industry is not reliant on imports for the supply ofthe main inputs used to produce industrial gases. The electricity used to operate Air Separation Units is generated locally, while most of the calcium carbide used to produce acetylene is produced locally. 6.2 Vulnerability to Imports • In general, the Industrial Gas Industry is not vulnerable to competition from imports. With the exception of carbon dioxide, most of the industrial gases currently used in Malaysia are produced locally. As the table below indicates, in many cases the sales value of domestically produced industrial gas greatly exceeds the import value of the corresponding industrial gas in 2009. Industrial Gas  Sales Value of Domestic Production (RM’OOOJ  Import Value (RM’OOO)  Import Value as a Percentage of the Sales Value of Domestic Production (%)  Oxygen  76,373  6,002  7.9  Nitrogen  156,145  24,771  15.9  Argon  25,412  4,434  17.4  Carbon Dioxide  5,036  13,730  272.6  . Acetylene  17,068 *  348  2.0
Note: *According to the Department ofStatistics, the sampling methodology used to calculate sales value ofdomestic production in 2009 changed. For 2009, the Department of Statistics covered only companies with 200 workers or more, whereas in previous years all companies were covered. As a result, many ofthe companies that were covered in 2008 were not covered in 2009. (Source: Department ofStatistics) SIG Gases Berhad 12 Industry Assessment 279 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • Although the import value of carbon dioxide in 2009 exceeded the sales value of domestic production, the industry is generally not vulnerable to imports, as a relatively large quantity of carbon dioxide is exported from Malaysia. In 2009, the export value of carbon dioxide was RM13.2 million, which was close to the value of both locally produced and imported carbon dioxide. 7 COMPETITNE ANALYSIS 7.1 Nature of Competition in the Industry • In general, operators in the Industrial Gas Industry face nonnal competitive conditions, which is similar to a free enterprise environment characterised by the following:
There are no undue government regulations or licensing requirements; There are a relatively large number of operators; Operators may enter and leave the industry with relative ease; No individual operator is large enough to dictate pricing.

• In such an environment, the industry is subjected to nonnal supply and demand conditions moderated by the price mechanism. Operators compete on product and service differentiations, and other factors of competition.

 

7.2 Factors of Competition • As with most free enterprise environments, competition amongst operators in the Industrial Gas Industry is based on a number of factors, including: In-house industrial gas production; Product quality; Established reputation and track record; Network of gas refilling facilities.
7.3 Impact of Factors of Competition on SIG Gases Group In-house Industrial Gas Production • The capability to produce industrial gases in-house is a key factor of competition. Operators with in-house gas production facilities can exercise a high degree of control over the quality of the industrial gases that they produce. The operator is also likely to enjoy more flexibility in tenns of pricing as they are less dependent on industrial gases purchased from third parties.
• SIG Gases Group operates an Air Separation Unit to produce liquid nitrogen and liquid oxygen at its main manufacturing facility in Senai, Johor. The Group also produces acetylene at the same facility.

10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Product Quality • Product quality is an important factor of competition in the Industrial Gas Industry as industrial gases are commonly used in industrial processes. As a result, users normally do not tolerate the presence of impurities and deviations from their specifications.
• The Group has the capability to produce high-purity liquid nitrogen and liquid
oxygen: The Group normally produces liquid nitrogen that is 99.999% pure. The Group normally produces liquid oxygen that is 99.6% pure, and can produce liquid oxygen that is 99.9% pure to meet more stringent customer specifications.
• SIG Gases Group’s subsidiary, Southern Industrial Gas, obtained ISO 9001 :2000 quality management system certification in the scope of “Production of liquid nitrogen and oxygen” and “Trading of liquid nitrogen, oxygen and argon for applications in steel, electronics, medical, construction, shipbuilding and food processing” from SIRIM QAS International Sdn Bhd in 2004. In 2009, this was updated to ISO 900 I :2008 quality management system certification for the same scope of work.

Established Reputation and Track Record • Users are more likely to purchase industrial gases from operators that have an established reputation and track record of supplying high quality industrial gases.
• SIG Gases Group has an established reputation and track record that dates back to 1997. When it was first established, the Group was initially engaged in producing acetylene and refilling industrial gas cylinders. The Group began producing liquid oxygen and liquid nitrogen in 2003.

Network of Gas Refilling Facilities • It is normally uneconomical to ship large numbers of filled gas cylinders over long distances, and to collect the empty gas cylinders for refilling.
• As a result, operators who wish to cover a wide geographic market will need to establish a network of gas refilling facilities. With a gas refilling facility, an operator will be able to transport large quantities of industrial gases in bulk liquid form to the facility, where the gases are converted into gas form and used to refill gas cylinders.
• SIG Gases Group operates a network of gas refilling facilities distributed throughout Peninsular Malaysia. The Group’s gas refilling facilities are at positioned at the following strategic locations close to major industrial centres.

7.4 Competitive Intensity • The overall level of competition among operators in the Industrial Gas Industry in Malaysia is moderate. SIG Gases Berhad 14 Industry Assessment 281 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’dj Q VITAL FACTOR CONSULTING Creating Winning Business Solutions • In general, operators in the Industrial Gas Industry that have the capability to produce industrial gases in-house, such as SIG Gases Group, compete primarily with the relatively small number of operators that also have the capability to produce industrial gases in-house.
• As at May 2010, there were nine industrial gas producers in Malaysia (including SIG Gases Group) that operate Air Separation Units and produce atmospheric gases such as nitrogen and oxygen.
• Competition from industrial gas refillers and industrial gas dealers is moderated by the fact that these operators have to purchase their industrial gases from Malaysian producers or have to import their industrial gases, and are therefore at a disadvantage, particularly in terms of pricing.

8 OPERATORS IN THE INDUSTRIAL GAS INDUSTRY • Listed below are all of the industrial gas producers in Malaysia that operate Air Separation Units and produce atmospheric gases such as nitrogen and oxygen (listed in alphabetical order): Air Products Malaysia Sdn Bhd;
B.I.G. Industries Berhad; Eastern Oxygen Industries Sdn Bhd; Gas Pantai Timur Sdn Bhd; Malaysian Oxygen (MOX) Group; Piasau Gas Sdn Bhd; Sabah Oxygen Sdn Bhd; Secomex Manufacturing (M) Sdn Bhd; SIG Gases Group.
(Source: Primary Market Research undertaken by Vital Factor Consulting Sdn Bhd) • Listed below are some of the major producers of Acetylene in Malaysia (listed in alphabetical order): Air Products Malaysia Sdn Bhd; Bee Hua Industrial Gases Sdn Bhd;
B.I.G. Industries Sdn Bhd; Eastern Oxygen Industries Sdn Bhd; Gas Pantai Timur Sdn Bhd; Magnalium Sdn Bhd; MCB Industries Sdn Bhd; Malaysian Oxygen (MOX) group; Piasau Gas Sdn Bhd; Polygas Sdn Bhd; Sabah Oxygen Sdn Bhd; SIG Gases Group.
Note: The list above is not an exhaustive list of the producers of acetylene in Malaysia. (Source: Primary Market Research undertaken by Vital Factor Consulting Sdn Bhd)
10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions BARRIERS TO ENTRY9 • The barriers to entry faced by a new entrant wishing to produce liquid oxygen and liquid nitrogen are high. 9.1 Capital and Set-up Costs • The capital and set-up costs associated with establishing a new industrial gas production plant equipped with an Air Separation Unit will constitute a high barrier to entry for a new entrant.
• The capital and set-up cost to establish an entry-level industrial gas production plant equipped with an Air Separation Unit is estimated at RM40 million. This will comprise the following:
Air Separation Unit; Cryogenic storage tanks; 4 Cryogenic tankers for transportation; Gas cylinder refilling station; 20,000 gas cylinders

• In addition, it is estimated that working capital of RMIO million is required to finance day-to-day operations, trade debtors, gas cylinders in transit and for other miscellaneous expenses.
• It is estimated that this entry-level industrial gas producer will be able to generate revenue of approximately RM20 million per year.

 

9.2 Establishing a Distribution Network • The requirement to establish a distribution network comprising facilities to refill gas cylinders will create a barrier to entry for new entrants into the Industrial Gas Industry.
• Facilities to refill gas cylinders are necessary due to the high cost of transporting industrial gas cylinders over long distances. Not only are filled gas cylinders transported to the client, but empty gas cylinders must also be transported back to the industrial gas producer for refilling.
• It is more economical for an industrial gas producer to transport industrial gases in bulk liquid form to a refilling facility, where it is converted into gas and used to refill gas cylinders.
• As a result, an industrial-gas producer that does not have facilities to refill industrial gas cylinders will be restricted to serving customers that are located close to the industrial gas plant.
• A new entrant will require time and resources to establish a network of refilling facilities, which are crucial if it wishes to serve new customers and expand its market. This creates a moderate barrier to entry.

10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) o VITAL FACTOR CONSULTING Creating Winning Business Solutions 9.3 Safety • The need to establish and maintain stringent safety procedures creates a barrier to entry for new entrants. This is particularly true for new entrants who intend to manufacture acetylene, as acetylene is a highly flammable gas that requires special packaging and handling procedures to be transported and stored safely.
• The new entrant will also require technicians and workers who have experience in handling acetylene.
• It is likely that a new entrant will require time and resources to establish and maintain the required safety procedures, particularly for new entrants who intend to manufacture acetylene. This creates a moderate barrier to entry.

9.4 Technical Skills • In general, technical skills are required to efficiently and safely operate an industrial gas production facility equipped with an Air Separation Unit. Some of the key personnel required include the foIlowing:
Professional chemical engineers and qualified technicians to carry out chemical analysis on the industrial gases produced. Professional mechanical engineers and qualified technicians to keep the Air Separation Unit in good working order.

• A higher level of skill and experience is required if the new entrant intends to produce more specialised industrial gas products such as gas mixtures. Gas mixtures consist of two ofmore gases that are mixed together in a specified proportion.
• The proportion of gases mixed must be tightly controIled, as gas mixtures are often used in specialised applications. Gas mixtures that fail to meet the client’s specifications are commonly discarded, as they cannot be used for other applications. This results in monetary loses.
• Having access to a pool of professional engineers and technicians that have the necessary qualifications and experience would create some barrier to entry for new entrants.

10 BARRIERS TO EXIT • The barriers to exit from the Industrial Gas Industry for an operator that owns an Air Separation Unit and/or acetylene production plant are high.
• Most of the plant and machinery used by industrial gas producers, particularly the Air Separation Unit and machinery and equipment used to produce acetylene, are highly specialised and cannot be modified to fulfil other functions.

SIG Gases Berhad 17 Industry Assessment 284 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 11 INDUSTRY OUTLOOK • There are strong indications that economic conditions in Malaysia are improving from the negative effects of the global fmancial crisis that began in mid-2007. The near term outlook, particularly for 2010, is likely to be more positive than 2009.
• In 2009, Malaysia’s real GDP contracted by 1.7%. However, the real GDP growth forecast for 2010 is 4.5% to 5.5% (Source: Bank Negara Malaysia).
• The Malaysian economy registered strong real GDP growth of 10.1% in the first quarter of 20I0, led by continued expansion in domestic demand and stronger external demand (Source: Bank Negara Malaysia).
• There are also indications of improvement in the manufacturing sector in general and the Industrial Gases Industry in particular:

While the sales value of the output of the overall manufacturing sector for the first, second, third and fourth quarters of 2009 were lower than the corresponding quarters in 2008, there are some indications that the performance of the overall manufacturing sector may be improving. The sales value of output for the second quarter of 2009 was 7.2% higher than the sales value of output for the first quarter of 2009, while the sales value of output for the third quarter of 2009 was 10.6% higher than the second quarter of 2009. The sales value of output for the fourth quarter of 2009 was 4.1 % higher than the third quarter of 2009 (Source: Department of Statistics). Similarly, while the sales value of the manufacture of industrial gases, whether compressed, liquefied or in solid state for the first, second and third quarters of 2009 were lower than the corresponding quarters of 2008, the sales value for the second quarter of 2009 was 24.9% higher compared to the first quarter of 2009, and sales value for the third quarter of 2009 was 34.1 % higher compared to the second quarter of 2009. However, in the fourth quarter of 2009, the sales value of the manufacture of industrial gases, whether compressed, liquefied or in solid state declined slightly by 2.4% compared to the third quarter of 2009 (Source: Department of Statistics). • The relatively strong quarter on quarter increases in the sales value of the manufacture of industrial gases, whether compressed, liquefied or in solid state reported in the frrst three quarters of 2009 indicates that demand for industrial gases is recovering in line with the improvement seen in the overall manufacturing sector. Moving forward, this is a positive development for the outlook of the Industrial Gases Industry. SIG Gases Berhad 18 Industry Assessment 285 10. INDEPENDENT MARKET RESEARCH REPORT (Conf’dj Q VITAL FACTOR CONSULTING Creating Winning Business Solutions DRIVERS OF GROWTH12 • Some ofthe drivers ofgrowth for operators in the Industrial Gas Industry include: Continuing demand from user industries such as the shipbuilding, iron and steel, machinery and equipment, building and construction, oil and gas and other industries will help sustain demand for industrial gases. In general, the diversified nature of the Industrial Gas Industry in terms of the wide range of user industries served, helps to mitigate against a slowdown in any individual user industry. Any negative impact on one user industry may be balanced by growth in other user industries. Social-economic growth as evidenced by increasing real GDP will generally boost demand for manufactured goods. This inturn will boost manufacturing activities, which will increase the demand for industrial gases. Malaysian Government assistance and support would also help to promote and encourage growth and business activities as evidenced by the first RM7 billion stimulus package announced in November 2008, and the second RM60 billion stimulus package announced in March 2009, which are designed to counter or minimise the impact of the global financial crisis. 13 THREATS AND RISK ANALYSIS 13.1 Global Financial Crisis • Any prolonged and/or widespread downturn in the global economy, such as that caused by the current global financial crisis, is likely to have a negative effect on the Malaysian economy in general. A slowdown in the local and global economy will impact on business and manufacturing activities, including the Industrial Gas Industry. Mitigating Factors • As evidenced in the past, the Malaysian Government’s continued prompt policy flexibility in implementing pro-growth measures to sustain the country’s growth momentum, by raising domestic demand to compensate for slower external growth, has helped Malaysian companies to counter some of the effects of the slowdown in the global economy.
• In early November 2008, the Malaysian Government announced a RM7 billion stimulus package which is to be channelled into 15 projects, some of which include housing projects, road and health infrastructure, transport system, high technology sectors, training to promote business activities and help minimise the impact of the global financial crisis. It is expected that these measure will help to generate domestic business activities and domestic consumption, which will help to counter the slowdown in the global economy.

10. INDEPENDENT MARKET RESEARCH REPORT (Conf’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 14  AREAS OF GROWTH AND OPPORTUNITIES  14.1  Recovery of the Overall Manufacturing Sector  •  The recovery of the overall manufacturing sector in Malaysia should continue to create demand for operators in the Industrial Gas Industry.  •  Although the sales value of the output of the overall manufacturing sector for the first, second, third and fourth quarters of 2009 were lower than the corresponding quarters in 2008, there are some indications that the performance of the overall manufacturing sector may be improving. The sales value of output for the second quarter of 2009 was 7.2% higher than the sales value of output for the first quarter of 2009, while the sales value of output for the third quarter of 2009 was 10.6% higher than the second quarter of 2009. The sales value of output for the fourth quarter of 2009 was 4.1 % higher than the third quarter of 2009 (Source: Department of Statistics). This may indicate that the performance of the overall manufacturing sector is recovering.  14.2  Diversification into Other User Industries  •  Operators in the Industrial Gas Industry generally have the opportunity to diversify their customer base by targeting users in industries that they do not already serve. This is because there are generally a large number of uses and user industries for most industrial gases.  •  For example, an operator that produces oxygen exclusively for customers in the healthcare industry can easily diversify into the construction industry, and machinery and equipment manufacturing industry, where oxygen is widely used in oxy­acetylene metal cutting and welding.  14.3  Development of the Export Market  •  Most of the industrial gases produced in Malaysia are currently used locally. As a result, there are opportunities for operators to grow their business by exploring the export market, particularly for bulk liquid gases.  15  CRITICAL SUCCESS FACTORS  •  The critical success factors for operators in the Industrial Gas Industry include: Product Quality: Product quality is a critical success factor as industrial gases are commonly used in industrial processes where users do not tolerate the presence of impurities or deviations from their specifications. Established Track Record: The possession of an established track record for consistency, service and product quality is a key advantage in securing orders.
SIG Gases Berhad 20 Industry Assessment 287 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Safety: Maintaining stringent safety procedures is a critical success factor, particularly for operators that produce potentially hazardous industrial gases such as acetylene. Operators that follow stringent safety procedures can minimise or eliminate the risk of potentially serious accidents. Distribution Network: Operators in the Industrial Gas Industry that wish to serve a geographically diverse customer base need to establish a distribution network incorporating industrial gas cylinder refilling facilities. This is necessary due to the high cost of transporting industrial gas cylinders over long distances. Diversity in User Industries: Operators in the Industrial Gas Industry with the capability to produce industrial gases that are suitable for use in a diverse range of applications and user industries are more likely to be in a stronger position to ensure business sustainability. Financial Stability: Operators who are in a healthy financial position are more likely to retain and attract new customers. Potential customers would emphasise financial stability as a key criterion in the evaluation of a prospective supplier of industrial gases as they would not want any disruption in the supply of industrial gases. 16 ESTIMATED MARKET SIZE, SHARE AND RANKING 16.1 Market Size Based on Domestic Production Oxygen • In 2009, the market size for oxygen in Malaysia based on the sales value of domestic production was RM76.4 million (Source: Department o/Statistics).
Nitrogen
• In 2009, the market size for nitrogen in Malaysia based on the sales value of domestic production was RM156.1 million (Source: Department o/Statistics).

16.2 Market Size Based on Apparent Consumption Oxygen • In 2009, the market size for oxygen in Malaysia based on apparent consumption was RM81 million (Source: Vital Factor Consulting Sdn Bhd).
Nitrogen
• In 2009, the market size for nitrogen in Malaysia based on apparent consumption was estimated at RM180 million (Source: Vital Factor Consulting Sdn Bhd).

SiG Gases Berhad 2i industry Assessment 288 10. INDEPENDENT MARKET RESEARCH REPORT (Cont’d) Q VITAL FACTOR CONSULTING Creating Winning Business Solutions 16.3 Market Share Based on Domestic Production Market Share for Oxygen • In 2009, SIG Gases Group’s market share for oxygen based on local production was estimated at 13% (Source: Vital Factor Consulting Sdn Bhd). Market Share for Nitrogen • In 2009, SIG Gases Group’s market share for nitrogen based on local production was estimated at 2% (Source: Vital Factor Consulting Sdn Bhd). 16.4 Market Share Based on Apparent Consumption Market Share for Oxygen • In 2009, SIG Gases Group’s market share for oxygen based on apparent consumption was estimated at 12% (Source: Vital Factor Consulting Sdn Bhd). Market Share for Nitrogen • In 2009, SIG Gases Group’s market share for nitrogen based on apparent consumption was estimated at 2% (Source: Vital Factor Consulting Sdn Bhd). 16.5 Market Ranking Based on Revenue • In 2009, SIG Gases Group ranked fifth (based on total revenue) among industrial gas producers in Malaysia that operate ASU and produce atmospheric gases such as nitrogen and oxygen (Source: Vital Factor Consulting Sdn Bhd). Note: The market ranking based on total revenue is only indicative of the overall financialsize ofcompanies thatoperate ASUandproduceatmosphericgasessuch as nitrogen and oxygen. As such, the ranking is only indicative ofthe overallfinancial size ofthe companies under consideration. • In 2009, SIG Gases Group ranked fifth (based on total revenue) among producers of acetylene in Malaysia (Source: Vital Factor Consulting Sdn Bhd). Note: The market ranking based on total revenue is only indicative of the overall financial size of companies that produce acetylene. As such the ranking is only indicative ofthe overallfinancial size ofthe companies under consideration. 10. INDEPENDENT MARKET RESEARCH REPORT (Conf’dj Q VITAL FACTOR CONSULTING Creating Winning Business Solutions Vital Factor Consulting Sdn Bhd has prepared this report in an independent and objective manner and has taken all reasonable consideration and care to ensure the accuracy and completeness of the report. It is our opinion that the report represents a true and fair assessment of the industry within the limitations of, among others, secondary statistics and information, and primary market research. Our assessment is for the overall industry and may not necessarily reflect the individual performance of any company. We do not take any responsibilities for the decisions or actions of readers ofthis document. This report should not be taken as a recommendation to buy or not to buy the shares of any company. Yours sincerely
Wooi Tan Managing Director

 

 

 

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