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Letter to Shareholders

Extracted from Annual Report 2018

Chairman "In this challenging environment, our efforts have been focused resolutely on cost reduction and cash generation measures in particular. We are also committed to stabilising the business and exploring various initiatives that will further drive our growth and strengthen our business model."

Dear Shareholders,

Over the past 12 months, external uncertainties such as heightened geopolitical risks, additional regulatory measures and increased market competition continued to plague the operating environment of Fabchem China Limited ("Fabchem" or the "Group").

In this challenging environment, our efforts have been focused resolutely on cost reduction and cash generation measures in particular. We are also committed to stabilising the business and exploring various initiatives that will further drive our growth and strengthen our business model.

Currently, the Group has three core business segments, (a) explosive devices such as boosters; (b) industrial fuse and initiating explosive devices such as detonating cords and non-electric tubes; and (c) industrial detonators such as non-electric detonators and piston non-electric detonators.

In recent years, manufacturing operations within our niche and highly specialised industry were subjected to more stringent safety requirements from the relevant authorities due to unfortunate incidents at unrelated production facilities in the same province.

And as a result, the Group's two manual production lines of boosters had to cease production due to new safety directives a few years back. Since then, we have progressively completed two automated boosters production lines and both have successfully passed the relevant authorities' inspection and are already in operations.

Chairman

To align to the growing demand for boosters products from our customers, we have started construction on our third automated boosters production line and barring unforeseen circumstances, it is expected to be completed by the end of the upcoming financial year.

As the product segment of boosters accounts for a significant portion of the Group's domestic and overseas sales, it has contributed significantly to the Group's overall revenue for the financial year ended 31 March 2018 ("FY2018"), which increased 28.8% year-on-year.

With a view to further enhance our business model and drive additional value creation for shareholders, we announced the proposed acquisition of Shandong Laizhou Ping'an Commercial Explosives Co., Ltd. ("Laizhou Ping'an") in June 2018.

Operating in a high barriers to entry market segment since 1998, Laizhou Ping'an is in the business of trading in commercial explosives products, and together with its three wholly-owned subsidiaries, also provides blasting services, targeting mining customers located in Laizhou, Yantai City, Shandong, PRC. Notably, more than 90% of Laizhou Ping'an sales in FY2018 were derived from repeat customers.

Review of Our Financial Performance

Although faced with a challenging operating environment, the Group achieved a revenue growth of 28.8% to approximately RMB 191.3 million in FY2018.

With two automated boosters production lines in operation during FY2018, the Group's production capacity of boosters increased significantly, hence sales of explosives devices surged to approximately RMB 79.0 million during FY2018.

The Group's two product segments, explosive devices and industrial detonators, registered revenue growth of 136.2% and 11.7% respectively, while revenue from the product segment of industrial fuse and initiating explosive devices declined 13.7%.

Notably, the Group's sales to overseas markets increased by 114.3% to approximately RMB 66.5 million in FY2018 as there are more sales of boosters to Australia, which accounted for approximately RMB 57.1 million.

While the Group's production activities continue to normalise during FY2018, gross profit margin improved from 15.0% to 18.8% in FY2018. However, the Group registered lower average selling prices across our products range due to higher market competition from other manufacturers in other provinces.

Corresponding to higher revenue and sales activities recorded during FY2018, distribution expenses increased by RMB 2.4 million to approximately RMB 21.3 million. However, administrative expenses dipped marginally by RMB 0.5 million or 1.7% to approximately RMB 30.7 million in FY2018.

Despite our collective efforts, the Group registered a net loss from continuing operations of approximately RMB 19.8 million in FY2018. However, this was an improvement from a net loss from continuing operations of approximately RMB 25.1 million recorded during the previous financial year.

Analysis of Our Balance Sheet

As at 31 March 2018, the Group's total assets stood at approximately RMB 511.7 million with a gearing of 0.12x, while cash and cash equivalent position stood at approximately RMB 89.0 million.

Trade receivables, another major component of current assets, stood at approximately RMB 53.2 million as at the end of March 2018.

As at 31 March 2018, the Group had total liabilities of approximately RMB 162.4 million, of which the major components are trade and other payables, total of approximately RMB 95.9 million and other financial liabilities of approximately RMB 59.7 million.

As at end of March 2018, shareholders' equity stood at approximately RMB 349.3 million and net asset value per share stood at RMB 7.46 per share.

Cash Flow Highlights

During FY2018, the Group adopted more stringent working capital management measures which generated net cash from operating activities of approximately RMB 27.7 million. However, the Group recorded net cash used in investing activities of approximately RMB 18.6 million and net cash used in financing activities of approximately RMB 3.4 million.

As a result, the Group generated an overall net cash inflow of approximately RMB 5.8 million in FY2018.

Moving ahead, one of our continual strategic focus is to proactively look into new measures to utilise our working capital more efficiently and strengthen our liquidity position.

In Recognition And Appreciation

As we navigate through these challenging times, there have been some changes to our Board of Directors.

A special note of thanks and appreciation to Mr Sun Bowen who is re-designated from the position of Managing Director to Executive Director and Senior Advisor of the Company with effect from 1 January 2018.

Mr Bao Hongwei, an Executive Director has been appointed as Managing Director of the Company in place of Mr Sun Bowen with effect from 1 January 2018.

And as announced earlier on 23 May 2018, Mr Tan Keng Keat has resigned as Non-Executive and Independent Director of the Company to focus on his own work commitments.

Please join us in giving thanks to Mr Tan for his contributions and dedicated service during his tenure in our Company.

We would also like to take this opportunity to commend on the collective efforts of our fellow Board members, management and all employees for their hard work and dedication during the past demanding year.

Last but not least, we would also like to extend my deepest gratitude to our valued shareholders, business associates, customers and many others who have supported the Group throughout the year. We believe that our strong relationships will continue to strengthen our edge as one of the leading commercial explosive manufacturers in China.

With our focus on creating synergies and new value propositions, we are confident that the support, passion and commitment that we put in our work will create long-term benefits for our customers, business partners and shareholders.

Thank You!


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