FLIGHT. taking BOARD OF DIRECTORS SENIOR MANAGEMENT GROUP CEO & PRESIDENT S MESSAGE CORPORATE MILESTONES OPERATIONS REVIEW FINANCIAL HIGHLIGHTS

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1 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS taking OPERATIONS REVIEW FLIGHT

2 CONTENTS GROUP CEO & PRESIDENT S MESSAGE.02 BOARD OF DIRECTORS.08 SENIOR MANAGEMENT.10 CORPORATE MILESTONES.16 FINANCIAL HIGHLIGHTS.18 OPERATIONS REVIEW.21 TAKING OFF ON ADVANCED TECHNOLOGY.26 RAISING SHAREHOLDER VALUE.32 CONQUERING NEW HEIGHTS.38 CONFIDENCE TO SOAR.44 CORPORATE STRUCTURE.48

3 GROUP CEO BOARD SENIOR CORPORATE I always like to think ahead of others. & PRESIDENT S OF DIRECTORS MANAGEMENT MILESTONES MESSAGE I don t like to play catch up. FINANCIAL HIGHLIGHTS OPERATIONS REVIEW OLIVIA LUM FOUNDER, GROUP CEO & PRESIDENT

4 The challenge for us is to grow our company into the leading water treatment company in the world. OLIVIA LUM THE STRAITS TIMES, SINGAPORE PRESS HOLDINGS, 26 MARCH 2004 OLIVIA RECEIVED THE ENTERPRISE AWARD FOR HYFLUX AT THE SINGAPORE BUSINESS AWARDS OLIVIA LUM Group CEO & President page 02.03

5 GROUP CEO & PRESIDENT S & MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW taking FLIGHT This time last year, we promised to create value for your investment in us and to achieve another year of profitable growth. We are pleased to have done that and more. The strength of our broadened portfolio, combined with excellent execution, made for a sterling finish with a S$19.5 million post-tax profit for the fiscal year ended 31 December 2003 (2002: S$12.3 million). Hyflux today commands a market capitalisation of around S$460 million. Having grown our market capitalisation six fold, we were ranked as one of the best performing companies on the Singapore Exchange Sesdaq board and was upgraded to the Mainboard listing in April Our success last year was largely due to the fact that we remained focused on the course we had charted for ourselves to stay ahead. These achievements represent the collective efforts of our staff to excel at every level and the support received from our shareholders who today exceeds 5,000, our customers, suppliers and business partners A YEAR OF MANY MILESTONES 2003 was truly a year of many milestones for Hyflux. Two municipal projects were completed in Singapore: The S$27.0 million Chestnut Avenue raw water treatment plant which is the largest potable water plant in Asia using membranes and the S$27.8 million third NEWater plant at Seletar using our own in-house developed ultrafiltration membrane system. Undoubtedly, the highlight of the year was the award of Singapore s first seawater desalination plant to us, with a project value of some S$200 million, followed by the conclusion of a financing deal with top international banks for this landmark project. These projects have provided Hyflux with the credentials and confidence to venture forth more aggressively internationally, targeting potential projects of similar stature. In addition to growing our industrial applications, 2003 also saw our entry into the consumer product market. Hence, the theme of this year s report...taking Flight.

6 Our know-how and technology has no boundaries. We are not just confined to water even though we are just a water treatment company. OLIVIA LUM SMART INVESTOR, VOLUME XII, 2004 WATER FOR 20 YEARS In early 2002, PUB invited tenders for Singapore s first-ever seawater desalination project. Through a rigorous and demanding bidding process, Singspring Pte Ltd, a wholly-owned subsidiary of the Hyflux Group, was eventually selected to build, own and operate the desalination plant in Tuas that will supply water to PUB for 20 years under a Water Purchase Agreement signed in April A cornerstone in Singapore s future water self sustainability, this project-financed deal will enhance our track record and image in the Asia Pacific region and provide the springboard for us to clinch further projects. REACHING INTO THE REGION AND BEYOND Underpinning the support and confidence garnered for this project, Singspring concluded the financing agreement with four leading regional and international banks, led by DBS bank, in December The deal also clinched the Euromoney Asia Pacific Water Deal of the Year Such strong support and recognition will stand us in good stead as we take flight and extend our reach into the region and beyond. Construction of the desalination plant commenced in January When completed in the 4th quarter of 2005, the desalination plant will have a designed capacity of over 136,000 cubic metres of potable water a day, one of the largest such facilities in the world. CHINA A KEY MARKET Our growth in China was robust. We won an extra S$20 million worth of orders from Sinolac (Singapore) Pte Ltd, raising the value of a contract previously awarded to Hyflux to S$46.9 million. The increased contract value involves the supply of an organic acid plant, including the membrane filtration system, with design capacity double that of the original design. This represents our biggest industrial project to date and will position us strongly to make further inroads in China. page 04.05

7 GROUP CEO & PRESIDENT S & MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW DRAGON-FLY 2003 also saw the commercial launch of our new consumer product, the Dragon-fly, simply called the Air-2-Water machine. This is yet another example of our ability to leverage on Hyflux s proprietary ultrafiltration membrane and purification technology to develop innovative products to benefit consumers. Following the launch, we have received some 20,000 units of firm orders in Singapore, Indonesia, Malaysia, the Middle East and the United States, with firm enquiries pouring in from India, Sri Lanka, the Caribbean, Korea, Taiwan and Thailand. CLEAR STRATEGY FOR R&D Over the past ten years or so, the context in which we are operating and the resources and expertise that we possess have changed dramatically. However, one thing which remains clear to us and continues to be the bulwark of our growth strategy is our investment in R&D and the need to stay technologically ahead. For years, Hyflux has dedicated itself to investing in research and development. Our core business lies in the development and application of membrane technology. We firmly believe that the only way to maintain a competitive edge in business is through improving membrane technology and its innovative use in new markets. We will always leverage on our core capabilities and membrane technology to make pure water readily available and affordable to every individual whether it is NEWater, or from seawater, or even from the air. Clearly, with the flexibility that comes from the continuous development of our proprietary membranes, the market potential is enormous. To further facilitate advancements in the applications of membrane technology, Hyflux signed a Memorandum of Understanding with the Nanyang Technological University s Environmental Engineering Research Centre (EERC) in October 2003 for collaboration in water treatment research. We welcome similar collaborations with other research bodies and tertiary institutes. UNDOUBTEDLY, THE HIGHLIGHT OF THE YEAR WAS THE AWARD OF SINGAPORE S FIRST SEAWATER DESALINATION PLANT TO US, WITH A PROJECT VALUE OF SOME FOLLOWED BY THE CONCLUSION OF A FINANCING DEAL WITH TOP INTERNATIONAL BANKS FOR THIS LANDMARK PROJECT. S$200 MILLION,

8 The sky is the limit. With the directions we have set and with new blood in our management team, we are confident that Hyflux will continue to be a nimble, highly focused and leading enterprise. We move into 2004 on a charted course, with excitement and confidence that we have in place the right strategy, the right people and the right leadership to take us to greater heights. OLIVIA LUM OUTLOOK Just like the previous year, we are also entering the new year with a healthy order book, valued at some S$62 million. This time, growth drivers will come from the China market and the consumer business segment. THE CHINA MARKET With rapid industrialisation and increasing focus on the availability of water resources to sustain economic development, China continues to present high growth opportunities, especially in the pharmaceutical and biotechnology segments. We therefore intend to continue with our on-going efforts to build on our reputation and standing in China, and to extend our business portfolio there. We are penetrating new segments such as the chemical and petrochemical industries. Hyflux Filtech was incorporated in November 2003, as a joint venture with a team of Chinese entrepreneurs to develop and market membranebased niche applications for the process industries in China. Our Chinese partners also bring with them in-depth knowledge of the distribution channels in a market, estimated to have a value of over US$500 million. The synergistic alliance will thus give us immediate access to this vast market as reflected by the deals already secured and will complement our existing strong presence in the electronics, the pharmaceutical and the biotechnology sectors. Elsewhere, we are exploring business opportunities in countries like the Philippines, Indonesia, Vietnam and Thailand. CONSUMER PRODUCTS POISED TO TAKE OFF The Group also expects sales of consumer products to take off in We have made some inroads in this area and will now strengthen our business development fundamentals to expand this line of business in the region. The Dragon-fly, sold mainly through a network of distributors, represents an additional and recurring revenue stream for us. We will continue to develop new membranebased home products to fuel our foray into the consumer and lifestyle markets. page 06.07

9 GROUP CEO & PRESIDENT S & MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW FLYING FORWARD We intend to fly high and fast. Our key strength lies in the development and commercialisation of membrane technology. This will continue to be our forte. The technology has a wide range of applications from treatment of water and wastewater to the reclamation of water (NEWater) and desalination, process liquid purification, as well as the production of potable water from ambient air. We will continue to leverage on this core capability and the tremendous energy and passion within Hyflux to provide customised solutions to our customers and those who wish to be our clients. PERSONAL THANKS I would like to welcome our new Director, Mr S. Iswaran to the Board. With his vast experience in the private and public sectors, I am confident he will be an invaluable member of the Board. I would also like to thank Dr Deirdre Murugasu and Mr Foo Hee Kiang for their contributions to the Board for the past three years. For corporate governance reasons, Dr Murugasu and Mr Foo will be stepping down from the Board in February They will both join the executive committee of the board. ON WINGS OF FLIGHT Taking flight the sky is the limit. With the directions we have set and with new blood in our management team, we are confident that Hyflux will continue to be a nimble, highly focused and leading enterprise. We move into 2004 on a charted course, with excitement and confidence that we have in place the right strategy, the right people and the right leadership to take us to greater heights. Finally, and with great pride and gratitude, I would like to thank all our shareholders, customers, business partners, suppliers and employees for believing in us and for their continuing support. Hyflux will strive towards even better performance in 2004, exploring fresh ideas, breaking new grounds and flying high to create wealth for those who believe in us. OLIVIA LUM Group CEO & President JUST LIKE THE PREVIOUS YEAR, WE ARE ALSO ENTERING THE NEW YEAR WITH A HEALTHY ORDER BOOK, VALUED AT SOME S$62 MILLION.

10 OLIVIA LUM OOI LIN Olivia Lum is Group CEO and President of the Hyflux Group. She started corporate life as a chemist with Glaxo Pharmaceuticals Pte Ltd and left in 1989 to start up Hydrochem (S) Pte Ltd, the precursor to Hyflux Ltd. Managing the Group for more than ten years now, Olivia Lum is the driving force behind the Group s growth and business expansion, responsible for policy and strategies formulation and corporate direction. A Nominated Member of Parliament since July 2002, Olivia Lum holds several positions in the public service. She is a board member of SPRING Singapore and the National University of Singapore Council. She is also an advisor to the Singapore Institute of International Affairs. In 2003, she was awarded the International Management Action Award (IMAA) and the Business Times Most Creative Entrepreneur Award. Ms Lum holds an Honours degree in Science from the National University of Singapore. 2. GAY CHEE CHEONG Mr Gay was appointed Nonexecutive Director of the Group on 3 August Currently Deputy Chairman/CEO of 2G Capital Pte Ltd, he was JIT Group s Group Executive Director and MD to the various JIT companies in Singapore and overseas during the four years he was there. Mr Gay holds directorships in a number of listed companies in Singapore. page 08.09

11 GROUP CEO & PRESIDENT S MESSAGE BOARD OF OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW He holds an Honours degree in Electronic Engineering from Royal Military College of Shrivenham, UK and in Economics from University of London. He also has a MBA from the National University of Singapore. 3. LEE JOO HAI Mr Lee was appointed Independent Director on 19 December A CPA with memberships to ICPAS and Institute of Chartered Accountants in England and Wales, he is a partner in a public accounting firm in Singapore. He has more than 20 years of experience in accounting, auditing, taxation and company secretarial work. Mr Lee holds directorships in a number of other listed companies in Singapore. 4. TEO KIANG KOK Mr Teo was appointed Independent Director on 19 December A lawyer with more than 20 years experience in legal practice, he is a senior partner of Shook Lin & Bok, a firm of advocates and solicitors. He is currently the finance partner and Head of Corporate Finance and China practice groups in Shook Lin & Bok. His main areas of practice are corporate finance, international finance and securities. He has advised listed companies extensively on corporate law and compliance requirements. He holds a Bachelor of Law (Honours) degree from the University of Hull and is a Barrister-at-Law from Lincoln s Inn. 5. S. ISWARAN Mr S. Iswaran was appointed Non-executive Director of the Group on 2 June Managing Director at Temasek Holdings Pte Ltd and MP for West Coast GRC, Mr Iswaran holds directorships in a number of companies such as SembCorp Industries, Sunningdale Precision Industries and SciGen. He has also held various appointments at the Ministry of Trade and Industry, National Trades Union Congress and Singapore Technologies

12 SINGAPORE OFFICE DEIRDRE MURUGASU (DEE DEE NG) Dr Dee Dee Ng is Chief Operating Officer (COO) and Executive Vice President for the Hyflux Group. She worked for nine years with the Ministry of Health before joining Hyflux in Her last appointment there was as a specialist in Family Medicine. Her previous appointment in Hydrochem (S) Pte Ltd (whollyowned subsidiary of Hyflux Ltd) was Head of Business Development, responsible for the development, application and marketing of new products and services. 2. FOO HEE KIANG Mr Foo is Executive Vice President for Special Projects. He worked as a Sales Manager for Multico System Engineers Pte Ltd, a construction equipment and building materials company, for eight years before joining Hyflux in Mr Foo is in charge of the Group s special projects, which require intensive management expertise and structured planning. With more than 15 years of marketing and sales experience behind him, he also supports the marketing and sales of the Group s products and services. Her current appointment as the Group COO entails overseeing the Group s day-to-day operations, sales and marketing. Mr Foo holds a Bachelor of Engineering degree from the National University of Singapore. Dr Dee Dee Ng holds a Masters of Medicine (Family Medicine) from the National University of Singapore. page 10.11

13 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW 3. LIM KIM SENG Mr Lim is Executive Vice President of Finance and Company Secretary for the Hyflux Group. He heads the Group s financial management, legal and corporate secretarial and investor relations functions. Mr Lim has over 25 years of experience in industry and banking. Prior to joining the Group in 2000, he held senior positions in finance, corporate secretarial functions and human resources with major American MNCs and a leading local bank. Mr Lim graduated with a degree in accountancy from the University of Singapore and holds a MBA from the National University of Singapore. He is a non-practising member of the Institute of Certified Public Accountants. 4. GRACE GOH Ms Goh is Senior Vice President of Finance and Chief Financial Officer for the Hyflux Group. She is responsible for the financial management of the Group covering accounting, treasury, tax and financial control and reporting. She also handles investor relations and assists in corporate secretarial functions. Ms Goh has more than 15 years of experience in external and internal audit, financial management and control, and human resource administration with both MNCs and SMEs. She holds a Degree in Accountancy from the University of Singapore and a MBA from the University of Wales and Manchester Business School (UK). Ms Goh is also a Certified Internal Auditor and non-practising member of the Institute of Certified Public Accountants of Singapore. 5. CHRISTOPHER MURUGASU Mr Murugasu is Senior Vice President for Corporate Services. He is responsible for the Group s human resource, procurement and general administration functions. Prior to joining Hyflux in August 2001, Mr Murugasu accumulated over 15 years of experience in the public sector as well as with a foreign bank. He holds an Honours degree in Computing Science from the Imperial College and a Masters degree from the London School of Economics

14 FREDDY SOON Mr Soon is Senior Vice President for Business & Corporate Development. He is responsible for new business development, corporate communications, branding and customer relations. Mr Soon has over 30 years of experience in productivity and competitiveness policy and strategy formulation, industrial design, quality assurance and standardisation, business excellence management, and international relations. Prior to joining Hyflux, he was Deputy Chief Executive of the Standards, Productivity and Innovation Board (SPRING Singapore), responsible for corporate planning and development and major national initiatives including Benchmarking, Best Practices and the Singapore Quality Award. He holds an Honours Degree in Science from the University of Western Australia and a Certificate of the Advanced Management Programme from INSEAD. 7. HURN DAVID CHARLES Mr Hurn is Senior Vice President for Structured Projects. Prior to joining Hyflux, he worked for more than ten years in the power industry, initially in the construction of power stations and later in the development and financing of independent power projects. Mr Hurn leads development for the Group s subsidiary, Hyflux Engineering, which invests in the growing market of privately financed water projects and other process industries that utilise Hyflux s membrane technologies. He holds a Masters degree from Cambridge University, UK. page 12.13

15 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW 8. EDMUND WONG Mr Wong is Senior Vice President, responsible for the Group s water and wastewater treatment business for both industrial and municipal markets. Having joined Hyflux in August 2003, he brings with him over 25 years of experience in various sales/marketing and management capacities for companies in the pulp & paper, petrochemical, minerals, power, steel and municipal markets in North America and Asia. He graduated with a Masters of Science degree in Chemical Engineering from Stanford University in California, USA. 9. TERENCE MATTHEWS Mr Matthews is Senior Vice President of Sales and Marketing, providing global sales and technical support to clients and representatives for water, water reclamation and wastewater treatment applications. He has more than 20 years of experience in the industry and is a long time member of the Water Environment Association of Ontario, Canadian Pulp and Paper Association, American Water Works Association and the Water Environment Association. He is a graduate in Chemical Engineering from McMaster University in Ontario, Canada. 10. ROSE TONG LAY KUEN Ms Tong is Senior Vice President and Head of Hyflux s Consumer Products Division. She is responsible for spearheading the Group s global growth in the Consumer Products arena and securing new revenue streams from this segment. Ms Tong has over 20 years of experience in Consumer Banking. Prior to joining the Group in February 2004, she held senior management positions in Branding, Product Management, Marketing and Sales & Service in major foreign and local banks. Ms Tong graduated with a degree in Science, majoring in Computer Science and Economics from the National University of Singapore and is a member of the Chartered Institute of Marketing

16 CHINA OFFICE GE WEN YUE Mr Ge is Vice President for Business Development and the General Manager of Hydrochem Engineering (Shanghai) Co. Ltd. He joined Hydrochem in Being a pioneer in the China operations, he is also responsible for overseeing the research, development and sales of membrane technology in China. Mr Ge holds a Bachelor of Chemistry degree from Shanghai Science and Technology University. 2. GU JIA LONG Mr Gu is Vice President for Finance and Administration and the Vice General Manager of Hydrochem Engineering (Shanghai) Co. Ltd. He joined the Group in 1990 and is responsible for the daily operations, financial jurisdiction and general administration of Hydrochem. Mr Gu has more than 36 years of experience in a wide range of industries. Having headed chemical factories and institutions and development companies, he has also covered portfolios in finance and human resource. page 14.15

17 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW 3. DAVID WEI CHEN Mr Chen is Executive Director for Hyflux Filtech (Singapore) Pte Ltd. He is responsible for the overall business direction, corporate strategy, human resource and financial functions of Hyflux Filtech. Mr Chen has more than 15 years of regional experience in strategic planning, business development and management. Prior to joining the Group in November 2003, Mr Chen was an executive in the liquid filtration industry, and later served as CEO and Managing Director of two Chinese companies. He holds a B.S degree in Mechanical Engineering from Shanghai s Jiao Tong University. 4. GARY GUOXING LI Mr Li is General Manager of Hyflux Filtech (Singapore) Pte Ltd. He is responsible for the overall sales and marketing and the daily operations of Hyflux Filtech. Before joining Hyflux in November 2003, Mr Li accumulated more than ten years of sales and marketing experience in China s liquid filtration industry. He is also experienced in developing related applications for the chemical and petrochemical sectors. Mr Li holds a degree in Mechanical Engineering from Shanghai Chemical College and a MBA degree from Inter American University

18 january.december 2003 JANUARY 2003 Awarded contract by PUB for Singapore s first 30MGD 20-yr BOO Seawater Desalination Plant in Tuas Invested in revolutionary Air-2-Water technology Aquosus water generator FEBRUARY 2003 Awarded Singapore s Best Small Company 2003 by Asiamoney APRIL 2003 Upgraded to SGX Mainboard Listing MAY 2003 Recorded 155 percent surge in net profit for the year s first quarter, despite weak market sentiments JUNE 2003 Hyflux Engineering secured an additional order of S$20 million from Sinolac s manufacturing facility in China Hyflux Group increased its stake in the seawater desalination project with acquisition of outstanding shares in Singspring Pte Ltd from Ondeo Degremont page 16.17

19 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW Recieved ISO 9001:2000 Certification for Design, Fabrication, Installation & Commissioning of Fluid Treatment Systems AUGUST 2003 Recorded 133 percent surge in net profit and 99 percent increase in sales for the first half of the year OCTOBER 2003 Signed a Memorandum of Understanding with the Nanyang Technological University (NTU) for research collaboration in water treatment using membrane technology NOVEMBER 2003 Recorded 133 percent surge in net profit for the year s third quarter DECEMBER 2003 Singspring Pte Ltd secured the financing deal for the seawater desalination project with four regional and international banks Official launch of Dragon-fly, the first commercial model of Aquosus Incorporated Hyflux Filtech as a joint venture to extend its arm into niche applications for the process industries in China

20 (S$ 000) Revenue 6,929 20,759 27,235 45,267 81,172 Profit Before Tax and Minority Interests 430 8,631 9,447 11,803 19,941 Minority Interests Profit Attributable to Shareholders 79 6,370 7,355 12,261 19,510 Shareholders Equity 310 9,131 31,366 53,915 85,479 Total Assets 5,271 17,921 43,247 72, ,158 Net Tangible Assets ,610 50,409 76,362 Net Tangible Assets per share (cents) Earnings per share (cents) Dividend per share (cents) Return on Revenue (%) 1.1% 30.7% 27.0% 27.1% 24.0% Return on Equity (%) 25.5% 69.8% 23.4% 22.7% 22.8% Having grown our market capitalisation six fold, we were ranked as one of the best performing companies on the Singapore Exchange Sesdaq board and was upgraded to the Mainboard listing in April OLIVIA LUM page 18.19

21 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW GROUP REVENUE BY COUNTRY REVENUE GROWTH BY COUNTRY S$ 000 % % 31% % % 0 0 FY1999 FY2000 FY2001 FY2002 FY2003 S$ 000 % % % % % FY2001 FY2002 FY2003 SINGAPORE PRC OTHERS REVENUE GROWTH % SINGAPORE PRC OTHERS SINGAPORE GROWTH PRC GROWTH GROUP REVENUE BY SECTOR (FY2002) GROUP REVENUE BY SECTOR (FY2003) 3% CONSUMER 52% INDUSTRIAL 48% MUNICIPAL 42% INDUSTRIAL 54% MUNICIPAL

22 FINANCIAL HIGHLIGHTS (CONT D) PROFIT BEFORE TAX (PBT) PROFIT AFTER TAX (PAT) S$ ,941 11,803 8,631 9, FY1999 FY2000 FY2001 FY2002 FY2003 S$ ,510 12,261 7,355 6, FY1999 FY2000 FY2001 FY2002 FY2003 SHAREHOLDERS EQUITY NTA/SHARE S$ 000 S$ CENTS ,479 53,915 31,366 9, FY1999 FY2000 FY2001 FY2002 FY FY1999 FY2000 FY2001 FY2002 FY2003 page 20.21

23 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW MANPOWER OVERVIEW Employee headcount grew by about 30 percent from 352 at year-end 2002 to 495 at end of this year. About one-half of this increase was for Singspring s seawater desalination plant project. The rest of the increase was mainly in R&D, engineering and sales personnel. A breakdown in the employee workforce is as follows: Singapore Shanghai Hangzhou and Ningbo 83 78

24 PERFORMANCE OVERVIEW (a) Key Financial Data S$ MILLION INCREASE Revenue % Earnings before interest, tax, depreciation & amortisation (EBITDA) % Earnings before interest & tax (EBIT) % Profit after tax after MI % Earnings per share (EPS) (cents) % Net asset value (NAV) per share (cents) % page 22.23

25 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW (b) Revenue In FY2003, revenue for the Group increased by 79 percent to S$81.2 million on the back of strong demand from its two main markets in China and Singapore. Revenue in Singapore doubled to S$48.4 million, from a year ago, largely due to completion of the two municipal projects for Singapore s Public Utilities Board the Chestnut Avenue raw water treatment project and the Seletar NEWater project. Sales in China surged by 62 percent or S$12.3 million to S$32.1 million, mostly from the pharmaceutical and biotechnology sectors. During the year, the Group also announced its entry into the consumer market. Its new consumer product, Dragon-fly, which uses patented technology, was launched in the fourth quarter of the year and contributed 3 percent of total sales. (c) Profit after Tax Group profit after tax of S$19.5 million was higher by 59 percent or S$7.2 million compared to that in FY2002. Growth in profits was driven by contributions from China, which contributed to 62 percent of the Group s profit from operations. This was due to higher margins achieved from the pharmaceutical and biotechnology sectors. In tandem with the higher sales, raw and consumable materials increased by 98 percent to S$36.7 million in FY2003, yielding a gross margin of 55 percent compared to 59 percent in FY2002. The lower gross margin was largely due to higher municipal sales in Singapore. Operating costs and expenses were also higher, largely due to civil work and subcontractor costs of S$8.7 million for the two municipal projects in Singapore and the startup and operating costs of the new consumer business. Overall, net profit margin was marginally lower by 3 percent to 24 percent this year largely due to lower margins from municipal projects. REVENUE BY COUNTRY (FY2003) PROFIT FROM OPERATIONS BY COUNTRY (FY2003) 40% CHINA 60% SINGAPORE 62% CHINA 38% SINGAPORE

26 (d) Earnings Per Share (EPS) Earnings per share rose 44 percent to 7.68 cents compared to 5.33 cents in FY2002. This was despite the enlargement of share capital with a new share issue and a bonus issue in The higher EPS was the result of higher profit after tax for FY2003. (e) Balance Sheet Review The Group s equity base strengthened by 59 percent or S$31.6 million to S$85.5 million as of 31 December The strengthening was mainly due to the net profit for the year of S$19.5 million, the private placement of 11.8 million shares and due to 2 million of option shares exercised pursuant to the Hyflux Employee Share Option Scheme less dividend payment. EPS/DPS (CENTS) Current assets increased by 45 percent or S$24.2 million to S$78.1 million largely due to the stronger cash position of S$31.9 million and higher trade receivables as a result of increased sales. Higher trade payables and accruals accounted for the bulk of the increase in current liabilities of S$15.5 million. This led to the lower current ratio of 2.9 compared to 4.8 in FY FY1999 FY2000 FY2001 FY2002 FY2003 EPS DPS In the area of capital expenditure, construction-in-progress for the seawater desalination plant amounted to S$10.1 million. The other significant area of investment in 2003 was in research and development expenditure which rose by S$5.6 million. Compared to FY2002, net asset value per share increased by 20 percent to 27.4 cents per share whilst debt equity ratio improved from 0.14 to page 24.25

27 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW (f) Cash Flows and Liquidity In FY2003, net cash generated from operating activities amounted to S$26.5 million compared to S$3.4 million in FY2002. The substantial improvement of S$23.1 million in cash from operating activities was largely the result of higher operating profit and improvement in working capital. For investing activities, higher cash outflow of S$16.7 million was due to the Group s investment in the seawater desalination project, acquisition of new technologies and research and development projects. (g) Shareholders Returns Return on Equity, Dividends and Earnings Per Share Despite the larger share capital as a result of a new share issue and a bonus issue, return on equity was maintained at 23 percent in FY2003. The Group will continue its policy of ploughing most of its cash resources back into fuelling business growth. It has therefore proposed a final cash dividend of 0.7 cents per ordinary share compared to a total dividend payout of 1.5 cents in Cash flow generated from financing activities such as shares issuance amounted to S$11.0 million, which was partially offset by repayment of the term loans. As at 31 December 2003, the Group s cash position stood at S$31.9 million, which is S$14.8 million higher than that of FY2002. In addition to the current positive cash and cash equivalents position, the Group has established short-term and medium-term financing facilities with various financial institutions to fund the Group s working capital requirements and capital expenditure programme.

28 taking off on advanced TECHNOLOGY This is literally a Ground Breaking Ceremony (and) for us at Hyflux, it is also figuratively a ground breaking breaking new grounds as we progress to be one of the world s leaders in water technology and business. OLIVIA LUM AT THE GROUND BREAKING CEREMONY OF SINGAPORE S FIRST SEAWATER DESALINATION PLANT AT TUAS page 26.27

29 GROUP CEO & PRESIDENT S MESSAGE BOARD OF DIRECTORS SENIOR MANAGEMENT CORPORATE MILESTONES FINANCIAL HIGHLIGHTS OPERATIONS REVIEW Our message is clear: Membranes are the future... Membranes for every product

30 SELETAR NEWATER PLANT 2003 was truly a year of many milestones for Hyflux. Two municipal projects were completed in Singapore: The S$27.0 million Chestnut Avenue raw water treatment system which is the largest potable water plant in Asia using membranes and the S$27.8 million third NEWater plant at Seletar using our own in-house developed ultra-filtration membrane system. OLIVIA LUM page 28.29

31 TAKING TAKING OFF OFF ON ON ADVANCED TECHNOLOGY RAISING SHAREHOLDER VALUE CONQUERING NEW HEIGHTS CONFIDENCE TO SOAR With a clear vision to become a leader in water treatment and membrane technology, Hyflux goes beyond the conventional description of a water-treatment company. It develops and manufactures its own proprietary membranes. Membranes are inspired by, none other than nature. Similar to a human body, the internal organs and skin work like high tech membranes to provide the necessary purification and processing. Hyflux believes that the only way forward to maintain its competitive edge in water treatment is through the use of advanced membrane technology. Hence, the growth strategy is to harness the development and application of membrane technology as its core strength, making it a true integrated solutions provider for a spectrum of liquid treatment systems. Hyflux advanced membranes have wide-ranging applications across different separation fields not only applicable to water and wastewater treatment and desalination, but are also used in fluid treatment for industrial processes or in new products for the consumer market. With its proprietary technology, Hylfux is able to incorporate and customise its in-house membranes for the more demanding filtration processes, to fulfil unique and stringent criteria for different projects, unlike off-the-shelf membranes. The Seletar NEWater plant, for example, uses Hyflux s Kristal300 ultra-filtration membranes with capacity to produce 24,000 cubic metres of NEWater daily. Minister for the Environment, Mr Lim Swee Say, in a speech at an International Symposium on Water Resource Management in December 2003, mentioned the five

32 DRAGON-FLY PUREFLO Our core business is in the development and application of membrane technology and we are trying to mimic what nature has provided for us. OLIVIA LUM SMART INVESTOR, VOLUME XII, 2004 challenges in management of water resources. One of them is the use of advanced technology for water treatment. With conventional water treatment technology, it is not economical to treat rainwater for drinking. With new membrane technology, not just rainwater, but even sea and wastewater can be cost-effectively treated. Advanced technology in water treatment and purification can only enhance Singapore s available water resources. INNOVATION CREATES LIFT Membrane technology is not new, but Hyflux s innovative applications and research have pushed back the boundaries of what was previously possible. Research, development and production of membranes are carried out by Hyflux in Singapore, as well as in China through its 55-percent-owned subsidiary, Hangzhou Zheda Hualu Membrane Engineering. The subsidiary, not only strengthens the group s presence in China but also provides access to a larger pool of R&D talent. To tap external expertise, Hyflux also partners universities and research institutes for R&D work in membrane applications. In October 2003, Hyflux signed a Memorandum of Understanding with Nanyang Technological University s Environmental Engineering Research Centre to collaborate in water treatment research. The agreement allows Hyflux to tap the Centre s expertise and advanced equipment and facilities. SPREADING WINGS Another reason for Hyflux s competitive edge is its ability to respond faster than bigger competitors. It does not merely produce standardised membranes. Hyflux is able to improvise and customise the membrane structures for its clients. Another strength is its dedicated laboratories and fully equipped test plant facilities which allow specialists to conduct evaluation trials before embarking on the actual manufacturing process. In 2003, sales of membrane systems to China s pharmaceutical and biotechnology sectors surged. Hyflux s membranes are now enjoying greater acceptance in the processing of fluids such as those found in the agri-food, pharmaceutical, biotech, chemical and petrochemical industries. page 30.31

33 TAKING TAKING OFF OFF ON ON ADVANCED TECHNOLOGY RAISING SHAREHOLDER VALUE CONQUERING NEW HEIGHTS CONFIDENCE TO SOAR In June 2003, Hyflux Engineering (a wholly-owned subsidiary of Hyflux) was also awarded an additional order of S$20 million from China s Sinolac Manufacturing Facility, raising the value of a previous contract to S$46.9 million through a doubling of the design capacity of its membrane system. DEVELOPING THE CONSUMER MARKET DRAGON-FLY Named Dragon-fly, the first commercial model of Aquosus was rolled out in December Aquosus was an investment made by the Group in January 2003 in a US-incorporated entity, which holds the 20-year patent for the Air-2-Water technology, which we call Aquovate Technology. PureFlo is another example of Hyflux tapping on this niche: A new water filter that brings ultra-filtration membrane technology into the home. Affixed to taps, PureFlo allows consumers to enjoy purified water of unrivalled standards. This state-of-the-art water filter, which leverages on Hyflux proprietary ultra-fine membrane systems, uses doubleskinned purification membranes that even filter out viruses, unlike commonly available filtration systems. With new lifestyle habits and greater awareness of the health benefits of using pure water, demand for this high-quality water filter is expected to flow in Hyflux has adroitly transformed part of itself to enter the consumer market and secure a new income stream, through successful miniaturisation of its large-scale membrane-based systems. OUR GROWTH IN CHINA WAS ROBUST. WE WON AN EXTRA S$20 MILLION WORTH OF ORDERS FROM SINOLAC (SINGAPORE) PTE LTD, RAISING THE VALUE OF A CONTRACT PREVIOUSLY AWARDED TO HYFLUX TO S$46.9 MILLION.

34 raising shareholder VALUE Mainboard-listed Hyflux Ltd is forecasting an annual growth rate of 30 percent over the next five years, as China, one of its main markets, continues its rapid economic ascent. TODAY, MEDIACORP PRESS, 27 FEBRUARY 2004 page 32.33

35 TAKING OFF ON ADVANCED TECHNOLOGY RAISING SHAREHOLDER VALUE CONQUERING NEW HEIGHTS CONFIDENCE TO SOAR Exploring fresh ideas, breaking new grounds and flying high to create wealth for those who believe in us

36 GUEST OF HONOUR, MR LIM SWEE SAY, MINISTER FOR THE ENVIRONMENT OFFICIATING THE GROUND BREAKING CEREMONY OF THE SINGSPRING SEAWATER DESALINATION PLANT 2. OLIVIA PRESENTING A TOKEN OF APPRECIATION TO CHAIRMAN OF PUB, MR TAN GEE PAW AT THE GROUND BREAKING CEREMONY OF THE SEAWATER DESALINATION PLANT 3. SIGNING CEREMONY OF THE SEAWATER DESALINATION PROJECT FINANCING DEAL page 34.35

37 TAKING OFF ON ADVANCED TECHNOLOGY RAISING SHAREHOLDER VALUE CONQUERING NEW HEIGHTS CONFIDENCE TO SOAR In 2003, the Hyflux Group achieved record growth and laid down significant markers for the future. On 12 December 2003 Singspring Pte Ltd (a wholly-owned subsidiary of Hyflux) inked the financing agreement for the project to develop, design, procure, construct, test and commission Singapore s first seawater desalination plant. The transaction was lead arranged by DBS Bank Ltd, also the facility agent, the security trustee and the account bank. This landmark project financing deal attracted interest from three global banks. ING Bank N.V., KBC Bank N.V. and Standard Chartered Bank. Repayment of the loan facility will be over a period of up to 18 years from the date of commercial operation of the plant. For the first ten years, the interest rate has been fixed under an interest rate swap facility with DBS Bank. For the remainder of the period, the interest rate will be floating at the swap offer rate plus a fixed margin. Such strong support from four leading regional and international banks clearly testifies to the standing of Hyflux the off-taker and the sponsor of the project and the project itself. The fact that the loan was oversubscribed by more than 30 percent is testimony to the lending community s faith in the Hyflux Group. The S$165 million issue comprises a senior debt facility of up to S$158.5 million to fund 80 percent of the project costs, and a contingency facility of up to S$6.5 million to pay for 70 percent of any cost overrun. The balance of the total project costs or cost overrun will come from Hyflux s equity in Singspring. A historic ground breaking ceremony was held on 16 January 2004 to mark the start of construction for Singapore s first-ever seawater desalination plant. Scheduled for completion by end 2005, Asia s largest tropical seawater desalination plant at Tuas is capable of supplying over 136,000 cubic metres of desalinated water a day to meet some ten percent of Singapore s water needs.

38 Many successful companies have gone into all kinds of different fields but we have chosen to focus on membrane technology and water-related businesses. So the challenge is how we can capture the market because it is definitely growing. OLIVIA LUM THE BUSINESS TIMES SUPPLEMENT, SINGAPORE PRESS HOLDINGS, 26 MARCH Currently, water in Singapore is supplied through three taps: water catchment areas, importation of water and alternative sources like NEWater. Completion of the desalination plant in 2005 will truly turn on the nation s fourth tap a momentous occasion for both Singapore and Hyflux. The desalination project also confirms Hyflux s arrival as a key player in the water industry. With Hyflux acquiring in July 2003 the 30 percent stake in Singspring previously held by Ondeo Degremont, Singspring is now wholly owned by Hyflux. Reverse osmosis membranes will form the core technology for the desalination plant. Hyflux s membranes also ensure a higher recovery rate of seawater, in addition to higher energy savings and also being environmentally friendly. Hyflux provided the necessary engineering, procurement and construction (EPC) management, as well as operational experience and financial expertise for the project. This signals Hyflux s ability to undertake similar large-scale municipal projects, whether at home or abroad, and heralds its entry into the big league. Projects which were successfully completed in 2003 included the commissioning of the Seletar NEWater plant in January 2004, Hyflux s second venture into the municipal market. The plant, operating on proprietary Kristal300 Ultrafiltration membranes, reverse-osmosis membranes and ultra-violet technologies, now meets around 15 percent of the country s total water needs. The raw water treatment works at Chestnut Avenue marked Hyflux s third municipal project in Singapore. Commissioned in January 2004, the project to outfit PUB s plant with an advanced membrane filtration system with a capacity of 273 million cubic metres per day. The Chestnut Avenue facility is currently the second largest raw water membrane treatment plant in the world. page 36.37

39 TAKING OFF ON ADVANCED TECHNOLOGY RAISING RAISING SHAREHOLDER VALUE CONQUERING NEW HEIGHTS CONFIDENCE TO SOAR ENGAGING MARKETS IN CHINA With biotechnology an up-and-rising industry in China, Hyflux s membrane systems, capable of separating alternative liquid streams such as organic acids, will be in demand. Hyflux has thus devoted significant resources to its regional office in Shanghai, as well as its operations in Hebei and Hangzhou. The competitiveness of Hyflux s systems in China was confirmed by an increased contract from Sinolac, raising the value of a project previously awarded from S$20 million to some S$46 million. Currently, the Group s largest industrial project, the Sinolac deal points towards China as a growing market. In November 2003, a fresh initiative to target new market segments in China was also announced. Hyflux Filtech was incorporated as a joint venture between Hyflux and a team of Chinese entrepreneurs to develop and market membrane-based niche applications in China. By December, the 71-percent-owned subsidiary had already secured orders to the tune of S$8.4 million, a bright start for a youthful enterprise. Hyflux today commands a market capitalisation of around $450 million.

40 conquering new HEIGHTS Nobody knows the chemistry of water better than Hyflux and we have the membrane technology that can be miniaturised for home use. I see great potential in the home consumer market. OLIVIA LUM THE STRAITS TIMES, SINGAPORE PRESS HOLDINGS, 27 FEBRUARY 2004 page 38.39

41 TAKING OFF ON ADVANCED TECHNOLOGY RAISING SHAREHOLDER VALUE CONQUERING NEW HEIGHTS CONFIDENCE TO SOAR Innovations for better living

42 We want to help people improve their lives through creating a better environment for them. One of the worst things is to live in a dirty environment and to have to drink dirty water. OLIVIA LUM THE BUSINESS TIMES SUPPLEMENT, SINGAPORE PRESS HOLDINGS, 26 MARCH 2004 page 40.41

43 TAKING OFF ON ADVANCED TECHNOLOGY RAISING SHAREHOLDER VALUE CONQUERING NEW HEIGHTS CONFIDENCE TO SOAR Industrialisation and economic development are increasingly dependent on usable water. Hyflux offers a number of competitive advantages as the preferred water treatment company. These include: Singapore-manufactured membranes that have the highest quality standards Turnkey experience and in-house system integration capabilities Experience in a wide range of industrial applications Ability to transform pilot plant experience into commercial projects Aquosus marks Hyflux s first foray into the consumer market. By July 2003, Hyflux had received orders for some 20,000 units, slated for delivery in The first commercial model of Aquosus, called Dragon-fly, allows consumers to enjoy fresh and pure water at an affordable price, since the water is generated on its own, converted from ambient atmospheric water vapour. The high-performance water generator will help meet the growing demand for high quality drinking water, especially in countries where piping quality is poor. Aquovated water is kept fresh while in storage through a constant recirculation process, making it even safer than bottled water which may run the risk of bacterial build up. The patented aquovate technology is another example how Hyflux revolutionises the drinking water industry.

44 Just as a dragonfly springs from a larval stage, Hyflux s Dragon-fly transforms air into a different form water. Dragon-fly will bear the proud Made-in-Singapore brand name and enjoy the image of a lifestyle product. Hyflux Aquosus, another wholly-owned subsidiary will manufacture and market Dragon-fly in Asia, targeting an audience who consumes over 25.6 billion litres of water per year, or 23 percent of total global bottled water consumption. Three of the largest Asian markets, China, Indonesia and Thailand, have also joined the top ten markets for bottled water. The consumer market segment contributed S$3 million to Group sales in In 2004, Hyflux s latest home product anticipates to create greater impact. PureFlo, the latest consumer offering to come from the Group, allows homes to enjoy tap water purified through ultra-filtration (UF) membrane technology the purest form of filtering water using tap pressure. Just as a dragonfly springs from a larval stage, Hyflux s Dragon-fly transforms air into a different form water. Dragon-fly will bear the proud Made-in-Singapore brand name and enjoy the image of a lifestyle product. Each UF membrane filter, found in PureFlo has micro-pores so fine at micron that it screens out particles such as sand (100 micron), hair and pollen (10 micron), bacteria (1 micron) and even viruses (0.1 micron) CLEAR VIEW FROM HERE Following the rapid expansion into new markets, Hyflux has concurrently developed its production and manufacturing facilities. Peripheral components are manufactured in China, but the heart of the system, the proprietary Hyflux Filtration Cartridge, is developed and installed in Singapore. PureFlo s compact design allows for easy installation as it comes with two adaptors that are compatible with four major tap sizes. The filter is also equipped with toggle switches offering a choice of Tap Water or Purified Water which extends the shelf life of the membrane. Users can also easily view the condition of the filters and replace the cartridge on time. page 42.43