On behalf of the Board of Directors, I present the Annual Report of Melewar Industrial Group Berhad and its group of companies ("the Group" or "MIG") for the financial year ended 30 June 2020 ("FY2020").

FINANCIAL RESULTS

The Group's principal activity is in the mid and down-stream sectors of the steel industry, focusing mainly on the manufacturing of Cold Rolled Coil ("CRC") steel sheets and Steel Tubes and Pipes ("Steel Tubes") through its 74.13% interest in its public listed subsidiary, Mycron Steel Berhad ("Mycron").

The other businesses of the Group, are conducted through its 100% owned subsidiaries, Ausgard Quick Assembly Systems Sdn Bhd ("AQAS") who is in the business of supplying commercial and residential buildings using the Industrialised Building System (IBS) to niche markets, and 3Bumi Sdn Bhd which is involved in farming and trading of food products.

For the year under review, the Group recorded total revenue of RM596.5 million, a decrease of RM97.6 million or 14.1% compared to the preceding financial year.

The Group would have registered a pre-tax profit for the current financial year had it not been for the six weeks of business shutdown in compliance with the Movement Control Order ("MCO") due to the COVID-19 global pandemic. Prior to the declaration of the MCO on 18 March 2020, the Group's steel businesses had outperformed the preceding financial year period-to-period.

The Group's business resumption in May 2020 proved challenging, given that administrative compliance of post-MCO rules, hampered the Steel Division's customers' business resumption. Sales and order fulfilment only begun to pick-up in June with both the CRC and Steel Tube segments turning-in a positive performance at the operation level.


STEEL DIVISION

Mycron Steel Berhad encompasses the combined operations of two subsidiaries, namely Mycron Steel CRC Sdn Bhd ("MCRC") and Melewar Steel Tube Sdn Bhd ("MST"). MCRC is involved in the mid-stream sector of the steel industry, converting Hot Rolled Coil ("HRC") steel sheets into thinner gauge Cold Rolled Coil ("CRC") steel sheets. MST is involved in the down-stream sector, in the manufacture of Steel Tubes and Pipes, which are made from HRC and CRC.

CRC OPERATIONS REVIEW

For FY2020, the CRC segment achieved sales revenue of RM417.7 million, which was RM45.3 million lower than the preceding year. The decline is mainly attributable to unfair competition from Vietnamese CRC producers that were aggressively price dumping CRC into the Malaysian domestic steel market during the first half of FY2020. The latter half of FY2020 was significantly impacted by the COVID-19 pandemic. The ramifications of this pandemic impaired CRC's operations during the third and fourth quarter of FY2020.



CRC's revenue for the first quarter (Q1) was higher than the preceding quarter with sales tonnage increasing by 35.3%. As a result, the segment registered a pre-tax profit of RM0.71 million for the quarter.

In the second quarter (Q2), sales revenue and tonnage dropped by 10.4% and 5.0% respectively. As a result, CRC segment registered a pre-tax loss of RM3.63 million, mainly due to unfair competition from Vietnamese CRC producers. The prolonged thin-to-negative spreads, between the cost of CRC's raw material (HRC), and imported CRC, severely affected the CRC segment's sales and margins.

These negative margin spreads (i.e. where the price of CRC finished goods, is actually cheaper than the cost of its core HRC raw material) was caused by direct subsidies (distinguished as tax rebates), by as much as 16%, given by the China government, for exported Chinese CRC. These subsidised Chinese CRC enter Vietnam, and are physically swapped with Vietnamese made CRC, which are then exported to Malaysia. The physical CRC entering Malaysia, may not be Chinese made, but the Chinese subsidies, allows Vietnamese CRC to be shipped to Malaysia, at subsidised prices.

The third quarter (Q3) was a demanding quarter for the CRC segment. The segment reported a 13.7% drop in sales tonnage and recorded a pre-tax loss of RM5.99 million. The loss was due to a combination factors such as seasonal Chinese New Year holidays, the beginning of the COVID-19 outbreak in China, and the implementation of the MCO by the Malaysian government on 18 March 2020. The global outbreak of the COVID-19 virus caused steel prices to slump during the third quarter.

The fourth quarter (Q4) was an extremely challenging quarter due to COVID-19's impact on the domestic economy. The mandatory closure of manufacturing and business activities domestically since the start of the MCO, significantly impaired Mycron's sales and revenue for Q4. Even though the CRC segment had healthy book orders, the CRC segment was not able to deliver during the months of April and May, as most sectors of the economy only began resuming their operations in June. Due to the reasons stated above, the CRC segment's sales tonnage during Q4 dropped by 26.7% to 27,520 tonnes, whilst sales revenue dropped by 23.3% to RM72.9 million. The segment registered a pre-tax loss of RM3.49 million for the quarter.

STEEL TUBE OPERATIONS REVIEW

The Steel Tube segment's revenue decreased by 21.7% to RM203.3 million for FY2020 due to slow demand for steel pipes and the COVID-19 pandemic impact on its operations. The tube segment registered a lower pre-tax profit of RM1.61 million for FY2020 compared to the preceding year. year.



For the first financial quarter (Q1), the Steel Tube segment was relatively stable as sales tonnage recorded a slight increase that translated to 20,462 tonnes compared to the previous quarter of 20,082 tonnes. However, sales revenue dropped by 2.4% to RM60.0 million. Consequently, Profit Before Tax ("PBT") for the quarter dropped to RM0.35 million. This is mainly due to the significant slowdown of infrastructure projects and construction activities across Malaysia. The drastic softening of steel prices also caused buyers to bide their time in making purchases.

The Steel Tube segment reported a flat second quarter (Q2) with marginal profit. Total sales revenue was RM63.3 million, which is 5.5% higher than the previous quarter. Domestic demand for pipes remained weak, resulting in a downward trend throughout the quarter. Steel Tube segment only managed to achieve a PBT of RM0.15 million in Q2.

The third financial quarter (Q3) was a mixed quarter. The Steel Tube segment registered a decline in sales tonnage and revenue due to the seasonal Chinese New Year holidays and the beginning of the COVID-19 pandemic. However, it registered a pre-tax profit of RM3.1 million due to higher margins achieved.

The Steel Tube segment suffered a weak fourth quarter (Q4) with significant decline in sales tonnage, revenue, and profit. This was mainly due as a consequence of the MCO and mandatory business closures imposed by the Malaysian government in March 2020. Sales revenue dropped by 63.7% to RM21.3 million. Sales tonnage dropped by 60.5% to 8,200 tonnes and the tube segment registered a loss before tax of RM1.99 million.


ENGINEERING DIVISION

Melewar Integrated Engineering Sdn Bhd ("MIE") operated on its existing Terengganu Silica Project from the past and has not had any new engagements. The last outstanding project had not come into full completion as it strived to secure the client's final acceptance sign-off. The disposal of MIE on 14 August 2020, brings this engineering segment to closure.

AQAS is expected to complete its pre-commercialisation contract in FY2020 with the completion of three remaining structures. The vital data collection, testing, and improvements, executed during the pre-commercialisation period, have been incorporated into final versions of its quick assembly buildings. AQAS endeavours to secure additional projects for its order book for fiscal 2020 and beyond.

ANTI-CORRUPTION POLICY

MIG is fully committed toward eradicating corruption. The Group maintains a strict, zero-tolerance position against corruption, bribery, or any kind of abuse of power. Aligned with this, the Group had adopted its Anti-Corruption Framework and Policy on 1 June 2020.

The Group expects its Directors, Senior Officers, Employees, and Business Partners to operate in full compliance with the Company's Policy, with the highest standard of ethical conduct, integrity, and professionalism. The full version of the policy is available on the company's website:
(http://www.melewar-mig.com/corp-gov/anti-corruption-policy.pdf).

LONG-TERM OUTLOOK

The Steel Division has been, and continues to be the major contributor to the Group in terms of profit.

As reported by Mycron Steel Berhad, the successful Anti-Dumping petition on CRC imports of more than 1,300mm width from China, Vietnam, Korea, and Japan, on 24 December 2019, provided positive support to Mycron's CRC segment. This measure is effective from December 2019 until December 2024.

Mycron continues to make efforts to address unfair trade practices, and to stop CRC price dumping from Vietnamese CRC producers. Aligned with that, MCRC has filed a petition to initiate a review of Anti-Dumping Duty with regards to imported CRC of 1,300mm width and below, originating from Vietnam. The Steel Division is confident of obtaining higher Anti-Dumping duties against Vietnamese CRC producers, which will improve the domestic industry's future outlook.

Holistic development remains crucial for the substantiality of the Malaysian domestic steel industry value chain. To address unfair competition and unjust operating environment from cheap imports, the Group has been actively engaging various government ministries by advocating reforms and developing the way forward for the industry, by active participation in reshaping the National Iron and Steel Policy.

The implementation and execution of the new National Iron and Steel Policy by the end of 2020 will be a game changer for the domestic steel industry for the foreseeable future.

The Group is confident that the new policy and measures, will be implemented, to protect Malaysian steel manufacturers and their workforce.


PROSPECTS FOR THE NEW FINANCIAL YEAR

The simultaneous restart of domestic economic activities witnessed pent-up steel demand from the construction and manufacturing sectors, and at a time when raw steel material supplies faced short-term disruptions due to cross-border logistic and shipping constraints. Upward trending regional steel prices on the back of China's growth recovery and robust steel demand, have also supported domestic steel demand.

The revival of Malaysia's mega projects such as the East Coast Rail Link (ECRL), Kuala Lumpur-Singapore High-Speed Rail (HSR), and Mass Rapid Transit Line 3 (MRT3) should increase domestic steel demand, which in turn, would favour the Group's Steel Division.

Moving into the new financial year, the Group will be on a lookout for suitable investment opportunities that may arise during the recovery phase of the COVID-19 pandemic. The Group intends to further expand its business in the areas of farming and food trading. Notwithstanding external factors, the Group remains resolute in propelling performance from within through its various cost rationalisation and operational efficiency programmes.


ACKNOWLEDGEMENT AND APPRECIATION

On behalf of the Board, I would like to express my sincere gratitude to the management team and staff for their commitment, dedication, and contributions to the Group. To our valued business associates, customers, suppliers and shareholders; thank you for your continued invaluable support, confidence and trust you have placed in us.

Finally, I would like to thank my fellow Board members, for their stewardship and contributions to the Group.



TUNKU DATO' YAACOB KHYRA
Executive Chairman