Further details on the Proposed SCR are set out in the ensuing sections of this Announcement.

Transcription

1 KOBAY TECHNOLOGY BHD ( KOBAY OR THE COMPANY ) PROPOSED PRIVATISATION OF MAJOR SUBSIDIARY, LIPO CORPORATION BERHAD ( LIPO ) BY WAY OF A PROPOSED SELECTIVE CAPITAL REDUCTION AND REPAYMENT EXERCISE UNDER SECTION 64 OF THE COMPANIES ACT, 1965 TO BE UNDERTAKEN BY LIPO ( PROPOSED SCR ) 1. INTRODUCTION On behalf of the Board of Directors of Kobay ( Board ), OSK Investment Bank Berhad ( OSK ) wishes to announce that the Company had on 22 March 2012 issued a letter to the board of Lipo to privatise Lipo by way of a selective capital reduction and repayment exercise under Section 64 of the Companies Act, 1965 ( Proposed SCR ) to be undertaken by Lipo ( SCR Offer Letter ). As at 19 March 2012, Lipo has an issued and paid-up share capital of RM50,356,000 comprising 50,356,000 ordinary shares of RM1.00 each ( Lipo Shares ). As at 19 March 2012, Kobay holds directly 26,768,600 Lipo Shares, representing approximately 53.16% equity interest in Lipo. Further details on the Proposed SCR are set out in the ensuing sections of this Announcement. 2. DETAILS OF THE PROPOSED SCR 2.1 Proposed SCR Subject to the terms and conditions of the SCR Offer Letter, the proposal involves Lipo undertaking a Proposed SCR to all shareholders of Lipo other than Kobay, whose names appear in the Record of Depositors as at the close of business on an entitlement date to be determined at a later date ( Entitlement Date ) ( Entitled Shareholders ). Kobay will waive their entitlements to repayment of capital pursuant to the Proposed SCR. Pursuant to the Proposed SCR, the Entitled Shareholders will receive a total capital repayment of up to RM29,929,250, which represents a cash amount of RM1.25 ( SCR Offer Price ) ( Purchase Consideration ) for each Lipo Shares held on the Entitlement Date assuming all the outstanding employee share options ( ESOS Options ) (save for the 500,000 ESOS Options held by Koay Cheng Lye) are exercised into Lipo Shares prior to the Entitlement Date. As at 19 March 2012, Lipo has an issued and paid-up share capital of RM50,356,000 comprising 50,356,000 Lipo Shares. The issued and paid-up share capital of Lipo shall be reduced by way of cancellation of Lipo Shares on the basis of one (1) Lipo Share to be cancelled for every RM1.00 paid by Lipo to the Entitled Shareholders as capital repayment. Accordingly, as at 19 March 2012, up to 23,943,400 Lipo Shares will be cancelled pursuant to the Proposed SCR assuming all the outstanding employee share options ( ESOS Options ) (save for the 500,000 ESOS Options held by Koay Cheng Lye) are exercised into Lipo Shares prior to the Entitlement Date. As at 19 March 2012, there are 856,000 ESOS Options remaining in force and exercisable into 856,000 new issued and paid-up Lipo Shares. Koay Cheng Lye, who is also a director of Lipo, currently holds 500,000 ESOS Options and has given his undertakings that he will not exercise his ESOS Options. All Entitled Shareholders will receive a cash payment amounting to RM1.25 per Lipo Share pursuant to the Proposed SCR. Minimum Scenario : Assuming that none of the ESOS Options are exercised prior to the Entitlement Date pursuant to the Proposed SCR and Lipo does not conduct any share buy-back exercise 1

2 Maximum Scenario : Assuming that all of the ESOS Options (save for the 500,000 ESOS Options held by Koay Cheng Lye, who has given his undertakings not to exercise his ESOS Options) are exercised prior to the Entitlement Date pursuant to the Proposed SCR and Lipo does not conduct any share buy-back exercise As at 19 March 2012, based on the Minimum Scenario and a total of 23,587,400 Lipo Shares held by the Entitled Shareholders, the Entitled Shareholders will receive a total capital repayment in cash amounting to RM29,484,250. As at 19 March 2012, based on the Maximum Scenario, the Entitled Shareholders shall hold a total of 23,943,400 Lipo Shares. Consequentially, the total capital repayment in cash would amount to RM29,929,250. Upon completion of the Proposed SCR, Lipo will become a wholly-owned subsidiary of Kobay. The Board have indicated that they do not intend to maintain the listing status of Lipo on the Main Market of Bursa Malaysia Securities Berhad ( Bursa Securities ) upon the completion of the Proposed SCR. 2.2 Basis and justification of arriving at the Purchase Consideration The SCR Offer Price of RM1.25 per Lipo Share was arrived at after taking into consideration, amongst others, the following: Premium to the historical market prices of Lipo Shares A comparison of the SCR Offer Price of RM1.25 per Lipo Share against the historical market price of Lipo Shares and the respective VWAP is as follows: Last transacted price of Lipo Shares on Bursa Securities as at 19 March 2012, being the last trading day prior to the date of the SCR Offer Letter 5-day VWAP of Lipo Shares traded on Bursa Securities up to 19 March month VWAP of Lipo Shares traded on Bursa Securities up to 19 March month VWAP of Lipo Shares traded on Bursa Securities up to 19 March month VWAP of Lipo Shares traded on Bursa Securities up to 19 March year VWAP of Lipo Shares traded on Bursa Securities up to 19 March 2012 Share price^ SCR Offer Price Premium (RM) (RM) (RM) (%) Note: ^ Source: Bloomberg. Based on the above, the SCR Offer Price of RM1.250 per Lipo Share represents a premium of RM0.210 or 20.19% over the last transacted price of RM1.040 on 19 March The SCR Offer Price of RM1.25 per Lipo Share represents a premium ranging from RM0.166 to RM0.281 or 15.31% to 29.00% over the five (5)-day, one (1)- month, three (3)-month, six (6)-month and one (1)-year VWAP of Lipo Shares up to and including 19 March

3 2.2.2 P/E Multiple and P/B Multiple (i) Premised on the SCR Offer Price, the price-to-earnings multiple ( P/E Multiple ) based on Lipo and its subsidiaries ( Lipo Group ) audited basic earnings per Lipo Share ( EPS ) for the financial year ended ( FYE ) 30 June 2011 is as follows: EPS (sen) P/E Multiple (times) Audited EPS for the FYE 30 June (ii) Premised on the SCR Offer Price, the price-to-book multiple ( P/B Multiple ) based on Lipo Group s audited net assets ( NA ) per Lipo Share as at 30 June 2011 is as follows: Audited NA per Lipo Share as at FYE 30 June 2011 NA (RM) P/B Multiple (times) As set out in the table below, the comparisons of the P/E Multiple and P/B Multiple of Lipo based on the SCR Offer Price of RM1.25 per Lipo Share, with the selected comparable companies are as follows: Selected comparable companies Share price as at 19 March 2012^ P/E Multiple P/B Multiple (RM) (times) (times) Eng Teknologi Holdings Bhd Wong Engineering Corp Bhd N/A 0.39 Pentamaster Corp Bhd N/A 0.69 Kein Hing International Bhd Dufu Technology Corp Bhd Ewein Bhd Jotech Holdings Bhd 0.180* # 1.52 # Notion Vtec Berhad Notes: High Low Average Lipo Minimum Scenario 6.76 (a) 0.80 (c) Lipo Maximum Scenario 6.80 (b) 0.80 (d) ^ Source: Bloomberg. * Price is based on the offer price based on a merger exercise between AIC Corporation Berhad, Jotech Holdings Berhad and AutoV Corporation Berhad as announced by Jotech Holdings Berhad on Bursa Securities on 29 July # Excluding Jotech Holdings Berhad in the computation as it is an outlier. (a) The P/E Multiple of Lipo was computed based on the audited Lipo Group s basic EPS for the FYE 30 June 2011 of sen. (b) The P/E Multiple of Lipo was computed based on the audited Lipo Group s basic EPS for the FYE 30 June 2011 of sen. (c) The P/B Multiple was computed based on the audited Lipo Group s NA per Lipo Share for the FYE 30 June 2011 of RM1.57. (d) The P/B Multiple was computed based on the audited Lipo Group s NA per Lipo Share for the FYE 30 June 2011 of RM1.56. N/A Not applicable. 3

4 (a) (b) The P/E Multiple of approximately 6.76 times based on the SCR Offer Price is within the range of the trading P/E Multiple of between 4.43 times to 9.22 times and is 7.81% higher than the average trading P/E Multiple of 6.27 times for the selected comparable companies listed on the Main Market of Bursa Securities. We further note, save for Ewein Bhd and Notion Vtec Berhad (excluding Jotech Holdings Berhad as it is an outlier), the P/E Multiple of approximately 6.76 times based on the SCR Offer Price is higher than the other five (5) selected comparable companies listed on the Main Market of Bursa Securities as shown in the table above; and The P/B Multiple of approximately 0.80 times based on the SCR Offer Price is within the range of the trading P/B Multiple between 0.39 times to 1.31 times and is 2.44% lower than the average P/B Multiple of 0.82 times for the selected comparable companies listed on the Main Market of Bursa Securities. We further note, save for Ewein Bhd, Eng Teknologi Holdings Bhd and Notion Vtec Berhad (excluding Jotech Holdings Berhad as it is an outlier), the P/B multiple of approximately 0.80 times based on the SCR Offer Price is higher than the other four (4) selected comparable companies listed on Main Market of Bursa Securities as shown in the table above. 2.3 Mode of settlement The total capital repayment of up to RM29,929,250 to the Entitled Shareholders is as follows: Mode of settlement Minimum Scenario Cash 29,484,250 Maximum Scenario Cash 29,929,250 The Purchase Consideration will be funded via internally generated funds from Lipo. Should there be a shortfall of internally generated funds from Lipo to meet the total capital repayment, Kobay will undertake to address this shortfall by advancing cash to Lipo. Kobay will waive their entitlements to the Proposed SCR. 2.4 Liabilities to be assumed by Kobay Save for the obligations and liabilities arising in and arising from, pursuant to or in connection with the SCR Offer Letter, there are no other liabilities including contingent liabilities and guarantee to be assumed by Kobay arising from the Proposed SCR. 2.5 Additional financial commitment required There are no additional financial commitments required by Kobay to put Lipo s business on-stream. RM 3. INTER-CONDITIONALITY The Proposed SCR is not conditional upon any other proposals of the Company. 4

5 4. INFORMATION OF LIPO Lipo was incorporated in Malaysia under the Companies Act, 1965 on 16 August 1999 as a private limited company under the name of Bright Consolidated Sdn. Bhd. On 2 November 1999, it changed its name to Lipo Corporation Sdn. Bhd. and subsequently, on 1 December 2000, it was converted to a public company and assumed its present name. As at 19 March 2012, being the latest practicable date to the announcement ( LPD ), its authorised and issued and paid up share capital comprises of 100,000,000 and 50,356,000 Lipo Shares respectively. The principal activities of the Company are investment holding and provision of management services. The principal market for Lipo s products and services is in Malaysia, People s Republic of China ( PRC ), Singapore and United States of America ( USA ) and its revenue is mainly derived in Malaysia, PRC, Singapore and USA. As at the LPD, the subsidiaries of Lipo and the principal activities of the subsidiaries of Lipo are as follows: Name of subsidiary Paradigm Precision Components Sdn Bhd Paradigm Metal Industries Sdn Bhd Paradigm Precision Machining Sdn Bhd Suzhou Univex Metal Tech Co Ltd Lipo Precision Industry (Suzhou) Co Ltd Micro Surface Treatment Sdn. Bhd Super Tropica Development Sdn Bhd Principal activity Manufacture of precision machined components. Manufacture of precision metal stamping and sheet metal parts. Inactive. Manufacture of metal products and surface treatment. Manufacture of precision machined parts. Precision plating and surface treatment. Property development. As at the LPD, Lipo does not have any associate companies. As at the LPD, the directors of Lipo and their respective shareholding in Lipo are as follows:- Directors < Direct > < Indirect > No. of Lipo Shares % No. of Lipo Shares % Dato Koay Hean Eng ,768,600 (1) Koay Cheng Lye ,768,600 (1) Lim Swee Chuan Lim Ah Lim Chong Bok Dato Dr. Zainuddin bin Md. Wazir Khaw Eng Peng Note: (1) Deemed interest by virtue of their major shareholding in Kobay Holdings Sdn. Bhd., the major shareholder of Kobay. As at the LPD, the substantial shareholders of Lipo are as follows: Name < Direct > < Indirect > No. of Lipo Shares % No. of Lipo Shares % Kobay 26,768, Kobay Holdings Sdn Bhd ,768,600 (1) Note: (1) Deemed interest by virtue of its major shareholding in Kobay. 5

6 A summary of the financial information of Lipo for the financial period ended ( FYE ) 30 June 2009 to 30 June 2011 is set out as follows:- < Audited FYE 30 June > (Restated) 2011 RM 000 RM 000 RM 000 Revenue 35,095 42,338 67,466 Profit before tax ("PBT") 528 5,252 12,119 Profit after tax and minority interest ("PATAMI") 197 4,367 9,314 Shareholders' funds/ NA 66,645 70,025 78,981 Total borrowings Gearing (times) Commentary on past performance:- FYE 30 June 2009 For the FYE 30 June 2009, the Lipo Group has recorded revenue of RM35.10 million, which represents a decrease of 25.14% as compared to RM46.89 million in the FYE 30 June In tandem with the decrease in revenue, the PATAMI was reduced from RM5.55 million in the FYE 30 June 2008 to RM0.20 million in the FYE 30 June The Group s unfavourable performance was mainly attributable to the decline in revenue as a result of global economic meltdown in FYE 30 June 2010 For the FYE 30 June 2010, the Lipo Group has recorded revenue of RM42.34 million, representing an increase of 20.63% as compared to RM35.10 million achieved in the FYE 30 June In tandem with the increase in revenue, the Lipo Group reported an increase in PATAMI from RM0.20 million in the FYE 30 June 2009 to RM4.37 million in the FYE 30 June The increase in revenue and profits was mainly attributable to the increase in revenue from the local components division and the sales recovery of the overseas components division, particularly Lipo Precision Industry (Suzhou) Co. Ltd. FYE 30 June 2011 For the FYE 30 June 2011, the Lipo Group has recorded revenue of RM67.47 million, representing an increase of 59.35%, as compared to RM42.34 million achieved in the FYE 30 June In tandem with the increase in revenue, the Lipo Group reported an increase in PATAMI from RM4.37 million in the FYE 30 June 2010 to RM9.31 million in the FYE 30 June The increase in revenue and profits was mainly attributable by local sheet metal division and overseas precision components division in PRC which their revenues collectively posted an increase of 71% as compared to preceding financial year. 6

7 5. SALIENT TERMS OF THE SCR OFFER LETTER The salient terms of the SCR Offer Letter include, amongst others:- (i) (ii) If Lipo declares, makes and/or pays a dividend or other distribution of any nature whatsoever (collectively, Distribution ) after the date of the SCR Offer Letter up to completion of the Proposed SCR, the SCR Offer Price shall be reduced by an amount equivalent to the net Distribution made per Lipo Share. From the date of acceptance of the terms of the SCR Offer Letter until the completion of the Proposed SCR, Lipo shall undertake that:- (a) (b) (c) (d) (e) Lipo will not conduct any form of capital raising exercise, whether in the form of debt or equity and will not grant any options over Lipo Shares or issue any new Lipo Shares; Lipo will not carry out any share buy-back exercise; Lipo and its subsidiaries will not enter into any material commitment or material contract or undertake any obligation or acquire or dispose of any of its assets or create a security interest over any of its assets outside the ordinary course of business; Lipo will not pass any resolution in general meeting (other than in respect of any ordinary business tabled in an annual general meeting or pursuant to the Proposed SCR) or make any alteration to the provisions of the memorandum and articles of association of Lipo or any Lipo subsidiary; and/or Lipo will not do or cause, or allow to be done or omitted, any act or thing which would result (or be likely to result) in a breach of any lawful obligation of Lipo or any Lipo subsidiary; without Kobay s prior written consent. (iii) (iv) In addition, Lipo shall not enter into any discussion or negotiation, or agreement, with any other party with respect to the sale of the asset and liabilities of Lipo or any privatisation proposal involving Lipo or any of its subsidiaries at any time until completion of the Proposed SCR. Lipo also undertakes that, as from the date hereof until completion of the Proposed SCR, it (and it shall use reasonable endeavours to cause and procure that each Lipo subsidiary) shall carry on its business only in the usual, regular and ordinary course in substantially the same manner as the same is carried on as of the date hereof so as to preserve its relationships with all parties to the end that its goodwill and going concern shall not be materially impaired at completion of the Proposed SCR, save as otherwise agreed in writing by the Kobay. 6. RATIONALE OF THE PROPOSED SCR As at 19 March 2012, Lipo is a 53.16% subsidiary of Kobay. Upon completion of the Proposed SCR, Lipo will become a wholly-owned subsidiary of Kobay and its group of companies ( Kobay Group ). The results of Lipo is expected to contribute positively to the financial performance of the Kobay Group. The audited PATAMI of Lipo for the FYE 30 June 2011 was RM9.31 million and on the assumption that the Proposed SCR was effected since the beginning of the FYE 30 June 2011, the PATAMI of Kobay would increase by RM4.36 million. 7

8 In addition, the 1-year volume weighted average price of Lipo as at 19 March 2012 is RM0.969, which is below the audited NA of the Lipo Group as at 30 June The 1-year VWAP of Lipo Shares of RM0.969 do not appear to reflect and commensurate with the fundamentals of the Lipo Group. Save for 11 November 2011 and 29 November 2011, Lipo Shares have been trading below the SCR Offer Price for the past five (5)-years from the date of the SCR Offer Letter. Therefore, the Proposed SCR would provide an opportunity to the Entitled Shareholders to realise their investment in Lipo in efficient and expeditious manner. The products and services offered by Lipo, namely precision machined components, are complementary to the products and services offered by Kobay, namely precision tooling and mould as well as automated and metal works. The Proposed SCR will also provide an opportunity for the Kobay Group and the Lipo Group to integrate into a single management team which will enable them: (i) (ii) (iii) (iv) to increase product offering and scale of operations by pooling together the skills, experiences, competencies and knowledge of the management teams of both the Kobay Group and Lipo Group; to better strategise and coordinate its promotional and marketing activities; to realize synergies from improved economies of scale arising from stronger buying positions with suppliers and more efficient resource allocation; and to reduce the duplication of administrative expenses in maintaining the listing status of both Lipo and Kobay. 7. INDUSTRY OVERVIEW AND OUTLOOK 7.1 Overview of the Malaysian economy The Malaysian economy expanded 5.2% (Q3 2011: 5.8%) in the fourth quarter of 2011 despite increasing external uncertainties. Growth was driven mainly by continued strong domestic demand coupled with a better than expected export performance. On the supply side, all sectors of the economy except mining and quarrying recorded a positive growth. Growth was led by the services (6.4%) and manufacturing (5.2%) sectors. For the year, the economy registered a growth of 5.1% (2010: 7.2%) and was within the official forecast of 5% 5.5%. Risks to global growth have increased significantly. Major risks include escalation of the fiscal and banking problems in the euro area, lack of medium-term fiscal consolidation plans in the US and Japan, possibility of a hard landing in key emerging economies as well as oil supply constraints. Against this backdrop, global growth is projected to decelerate further to 3.3% in 2012 (2011: 3.8%). The Malaysian economy is expected to expand albeit at a moderate pace in the first half of This is reflected by the Leading Index, which grew by an average of 1.5% from July to November On the demand side, growth is expected to emanate from private consumption and investment activities. On the supply side, the services and manufacturing sectors are expected to drive growth. (Source: Quarterly Malaysian Economy, Fourth Quarter 2011, Ministry of Finance Malaysia) 7.2 Manufacturing sector Value-added of the manufacturing sector increase 5.2% (Q3 2011: 5.3%) in line with sustained production activities which expanded 5.3% during the quarter (Q3 2011: 5.4%). The strong growth performance was mainly driven by domestic-oriented industries. Sales of manufacturing products grew 6.2% to RM147.7 billion (Q3 2011: 12.3%; RM150.6 billion) while the overall capacity utilisation rate in the sector rose to 81.2% (Q3 2011: 82.4%). 8

9 Manufacturing production was supported by higher output of domestic-oriented industries which expanded further to 13.7% (Q3 2011: 10.3%). Production of transport equipment surged 15% (Q3 2011: 11%). Significant expansion was recorded, especially for motor vehicles which accelerated 29.2% (Q3 2011: 2.5%) following inventory build up by local car manufacturers. Output of the construction-related sub-sector grew 14.7% (Q3 2011: 19.1%), led by fabricated metal products, non-metallic mineral and other related products as well as basic metals which expanded 17.4%, 13.9% and 11% (Q3 2011: 27.5%; 20.8% and 2.1%), respectively. This was in line with the ongoing expansion in construction activities, in particular residential and civil engineering subsectors. Production of export-oriented industries rose at a subdued pace of 2.7% (Q3 2011: 4%). Of significance, output of electrical and electronics ( E&E ) contracted further by 3.7% (Q3 2011: -0.5%) due to weaker external demand and supply chain disruptions caused by the floods in Thailand. Exports of manufactured goods grew moderately by 3.9% to RM130.7 billion (Q3 2011: 6.2%; RM129.5 billion) in tandem with slowing global external demand for E&E products. Nevertheless, growth was supported by export earnings from non-e&e products which expanded 12.6% to RM71.4 billion (Q3 2011: 17.3%; RM68.3 billion). Exports of chemicals, chemical and plastic products; iron, steel and metal products as well as petroleum products increased 11.3%, 20.4% and 11.8% (Q3 2011: 20.2%, 27%, 11.5%), respectively. E&E exports declined further by 5% to RM59.3 billion (Q3 2011: -3.9%; RM61.2 billion) in line with slowing external demand, following increased global economic uncertainties. Exports of electronic equipment and parts as well as machinery and electrical products shrank 13.6% and 7.4% (Q3 2011: -23.3%; -1.2%), respectively. However, exports of semiconductors expanded 4.5% (Q3 2011: 13.6%) following higher shipment of solar panels and light emitting diodes (LEDs) to China, Germany, Japan and the US. (Source: Quarterly Malaysian Economy, Fourth Quarter 2011, Ministry of Finance Malaysia) 7.3 Overview of the Chinese economy In China, economic growth slowed marginally to 8.9% (Q3 2011: 9.1%) mainly due to weaker external demand. Exports were lower at 14.3% (Q3 2011: 20.6%) following the prolonged euro zone debt crisis while imports moderated to 20.1% (Q3 2011: 24.9%). The manufacturing sector continued to moderate, reflected by the Purchasing Managers Index (PMI) which averaged 49.9 points amid sluggish external demand. Meanwhile, retail sales were sustained at 17.5% (Q3 2011: 17.3%) attributed to higher consumer spending on food items, petroleum-related products and automobiles, ahead of the Chinese New Year Festival. Private consumption remained strong in line with the consumer confidence index which rose 4 points to 108 points. This was on account of easing food inflation as well as macroeconomic policy adjustment, particularly on loans to re-energise growth. The Consumer Price Index (CPI) averaged 4.6% (Q3 2011: 6.3%) due to the decline in global food prices following improved supply conditions. The People s Bank of China maintained its policy rate at 6.56%, while the reserve requirement ratio for major banks was decreased by 0.5 percentage point to 21% in early December (Source: Quarterly Malaysian Economy, Fourth Quarter 2011, Ministry of Finance Malaysia) In PRC, growth will average 9 to 9½ percent during , less than the average of 10½ percent during , as ongoing policy tightening and a smaller contribution from net external demand moderate activity. Investment growth has decelerated with the unwinding of the fiscal stimulus, but it remains the principal contributor to growth. Although inflation pressure remains, efforts to withdraw credit stimulus through administrative limits on credit growth, higher interest rates, and tighter reserve requirements and to rein in property price inflation through loan-to-value limits in mortgage credit and restrictions on multiple home purchases have been gaining traction: property price inflation and credit growth have softened from recent record levels. (Source: Slowing Growth Rising Risks, World Economic Outlook (WEO), International Monetary Fund) 9

10 7.4 Overview of the Singaporean economy Among major economies in ASEAN, Singapore s GDP moderated to 3.6% (Q3 2011: 6%), mainly due to a slower growth in the manufacturing sector. Manufacturing output contracted 11.1% (Q3 2011: 11%) on account of weaker demand for electronics and biomedical devices. (Source: Quarterly Malaysian Economy, Fourth Quarter 2011, Ministry of Finance Malaysia) 7.5 Overview of the USA economy The US economy continued to grow moderately at 1.6% (Q3 2011: 1.5%) in the fourth quarter of Private consumption and investment as well as steady exports supported growth. On a quarter-on-quarter basis, the economy expanded 2.8% (Q3 2011: 1.8%), the highest growth registered since the second quarter of Personal consumption expenditure grew at a slower pace of 1.6% (Q3 2011: 2%), mainly due to lower spending on non-durable goods and services. However, consumer spending on durable goods remained steady at 6.5%, especially motor vehicles and parts, which increased 4.8%. Private investment rose 7.7% (Q3 2011: 1%) driven by steady business investment, particularly in equipment and software (9%) as well as higher residential investment which grew 3.4% (Q3 2011: 9.7%; 1.4%). Exports increased 5.2% while imports grew 3.8% (Q3 2011: 6%; 2.1%). Meanwhile, government expenditure which recorded the fourth consecutive quarterly contraction, declined 2.9% (Q3 2011: -2.4%), impacting the overall performance of the economy. The housing market continued to gain traction as sales of new houses improved further to 3.7% (Q3 2011: 1.9%). Building permits and housing starts registered a double-digit growth of 14.8% and 21.9% (Q3 2011: 6%; 5.5%), respectively, the highest level since the first quarter of Furthermore, in some metropolitan areas, both sales and prices of houses were on the rise, while foreclosures were on a declining trend. During the quarter, retail sales rose steadily by 7% (Q3 2011: 8%), attributed to higher sales of motor vehicles and parts as well as building materials. The industrial production index grew 3.7% (Q : 3.7%) while capacity utilisation increased to 78% (Q3 2011: 77.6%). This was in line with the increase in the manufacturing index of the Institute for Supply Management (ISM), which rose 52.5% (Q3 2011: 51%), indicating a continued expansion in the manufacturing sector. The increase was supported by lower prices of raw materials, favourable level of production and new orders. However, the nonmanufacturing index was slightly lower at 52.5% (Q3 2011: 53%) on account of slower recovery in the services sector. The unemployment rate trended downwards to 8.7% (Q3 2011: 9.1%), the lowest level recorded since the first quarter of This was due to improving labour market conditions following new jobs created by businesses, particularly in the transporation and warehousing, retail trade, manufacturing, healthcare and mining sectors. Inflation eased to 3.3% (Q3 2011: 3.8%), largely on account of declining energy and raw material prices during the quarter. (Source: Quarterly Malaysian Economy, Fourth Quarter 2011, Ministry of Finance Malaysia) 8. PROSPECT OF LIPO Lipo s present revenue is mainly derived from the manufacturing of precision components, sheet metal and surface treatment for the E&E industry. The total segmented profit is RM9,435,532 and RM4,430,739 for the FYE 30 June 2011 and FYE 30 June 2010 respectively. The total segment revenue for the FYE 30 June 2011 is RM67,759,083 where the domestic market accounted for 53.06%, PRC accounted for 19.30%, Singapore accounted for 13.81% and USA accounted for 6.29% of the total revenue. The total segment revenue for the FYE 30 June 2010 is RM44,350,133 where the domestic market accounted for 52.12%, PRC accounted for 21.08%, Singapore accounted for 6.25% and USA accounted for 6.53% of the total revenue. 10

11 It is noted that the fluctuation in the United State Dollars ( USD ) and the contraction of the E&E industry by 3.7% and reduction in the total export value by 5% in the calendar year 2011 may have a negative impact to the Lipo Group. In addition, the E&E industry is expected to moderate, due to the prolong uncertainties in Europe and the USA. However, it should also be noted that for the FYE 30 June 2011, the Lipo Group was able to increase the revenue due to increasing demand of Lipo s products amidst the negative outlook for the year Moving forward, the outlook of the E&E industry as highlighted in Section 7.2 of this announcement is unfavourable and the prospects of Lipo is expected to remain challenging in the view of the prolonged uncertainties in Europe and the USA may to a certain extent, have an adverse impact to the local economic growth if the downward pressure for the exports of Malaysian products to these countries continue and, amongst others may result in destabilizing capital outflows and heightened risk aversion which may collectively affect the general market confidence. With the privatization of the Lipo Group, the Board of Kobay would then be able to integrate the management teams and operations of Lipo Group and Kobay Group to realize synergies from improved economies of scale arising from stronger buying positions with suppliers and more efficient resource allocation. 9. RISK FACTORS 9.1 Set out below are risks associated with the Proposed SCR: Completion risks The Proposed SCR is subject to, amongst others, the approval by the shareholders of Lipo, the Securities Commission Malaysia ( SC ) for the equity requirement, the approval of the Ministry of International Trade and Industry Malaysia ( MITI ), if required, and the grant of an order of the High Court of Malaya approving the Proposed SCR. In the event that these approvals/order are not obtained, the Proposed SCR shall be terminated and the benefits arising from the Proposed SCR will not be realised Acquisition risks Although the Board believes that Kobay may derive benefits from the Proposed SCR, there is no assurance that the anticipated benefits of the Proposed SCR will be realized, amongst others, the potential achievement of desired level of synergy on integration of new businesses. However, the Lipo Group is currently our subsidiary and our Board believes that their experience in managing the Lipo Group thus far will allow them to continue managing the Lipo Group effectively and efficiently. 9.2 It is noted that Lipo is currently a subsidiary of Kobay and any risk associated with Lipo s business and operations is currently assumed by Kobay. Assuming if Kobay is to increase its equity interest in Lipo which would result in additional exposure to the risks associated with Lipo s business and operations, the following risk factors are pertinent to note pursuant to the Proposed SCR: 11

12 9.2.1 Technological risk The Lipo Group is exposed to risk of rapid technological changes which would result in the obsolescence of current technology, the requirement of new technology not matched by existing technical staff and that the operations of the Lipo Group are not ready to adopt the new methods. The Lipo Group is continuously exploring other areas of technological improvement, ensuring staff are continuously trained to align their skills with the requirements of new technologies to keep abreast with the latest technology. However, there can be no assurance that the rapid development of technological change will not have a material adverse effect on the Lipo Group s business Political, economic, market and regulatory risks The Lipo Group could be materially and adversely affected by changes in the political, economic, market and regulatory conditions in Malaysia and the countries in which it operates in, sources its supplies from or markets its products. These uncertainties include changes in political leadership, risks of war and riots, expropriation, nationalisation, changes in interest rates, methods of taxation, exchange control policies or rules and immigration policies or rules. In addition, countries could change their interpretation of existing laws, policies and regulations which would impose and/or increase restrictions on the conduct of its businesses in Malaysia and/or overseas, restrict its businesses or export licenses and introduce trade barriers. In terms of economic risks, the Lipo Group s business operations and financial performance may be affected by a downturn in the Malaysian or global economy. There can be no assurance that any changes to political, economic, market and regulatory factors will not have a material and adverse effect on the businesses and prospects of Lipo Group Foreign market risk 33.40% of the revenue of the Lipo Group for the FYE 30 June 2011 is derived from the PRC, Singapore and USA which are exposed to added risks given the different business operating conditions and regulatory environments in those countries such as, among others, the general economy, political stability, legal and tax legislation, credit environment and foreign exchange rules, when compared to Malaysia. If the Lipo Group fails to fully understand the local environment of its overseas venture, it may cause the Lipo Group to make decisions which may lead to a negative outcome which could affect its financial performance High capital investment The business of the Lipo Group operates in a capital intensive industry. New machinery and equipment are required as the trend of manufacturing industry moves towards product miniaturisation, and hence, higher precision levels in the fabrication of machined components and metal stamping, and plating are essential. The Lipo Group would need to continuously invest in costly advance machinery and equipment to enhance its technological competitiveness. Should the Lipo Group fail to consistently invest in capital expenditure, the Lipo Group s operations may be rendered less efficient, resulting in a compromise in quality or losing an edge in technological competitiveness. This may adversely affect the operating and financial performance of the Lipo Group. 12

13 10. FINANCIAL EFFECTS OF THE PROPOSED SCR The Proposed SCR is not expected to have any effect on the issued and paid-up share capital, substantial shareholdings, net assets and gearing of Kobay Earnings and earnings per share ( EPS ) The Proposed SCR is expected to contribute positively to the earnings and EPS of the Kobay Group for the FYE 30 June 2012 in view of its positive PATAMI for the FYE 30 June For illustrative purposes, assuming that the Proposed SCR had been effected on 1 July 2010, the effects of the Proposed SCR on the EPS of Kobay for the FYE 30 June 2011 are as follows: Audited as at 30 June 2011 RM 000 Proforma I After the Proposed SCR RM 000 PATAMI of Kobay 6,553 6,553 PATAMI of Lipo (1) - 4,363 Proforma consolidated profit after tax and 6,553 10,916 minority interest after the Proposed SCR No. of Kobay Shares ( 000) 67,353 67,353 Net EPS Note: (1) PATAMI attributable to Kobay is based on Lipo Shares not held by Kobay, being 46.84% of the audited PATAMI of Kobay for the FYE 30 June 2011 of RM9.31 million Dividends The Proposed SCR is not expected to have any immediate effect on the dividends to be declared by the Company. Any dividends to be declared and paid by Kobay in the future will depend on, amongst others, the profitability and cash flow position of the enlarged Kobay Group. 11. APPROVALS REQUIRED The Proposed SCR is conditional upon approvals being obtained from the following: (i) (ii) (iii) (iv) (v) (vi) the approval of the shareholders of Lipo (other than Kobay) for the Proposed SCR at the extraordinary general meeting of Lipo to be convened; the approval of the shareholders of Kobay for the Proposed SCR at the extraordinary general meeting of Kobay to be convened; the approval of SC for the contents and the issuance of the explanatory statement from Kobay, the circular to shareholders of Lipo and the independent advice letter to the Entitled Shareholders pursuant to the Proposed SCR; the approval of SC for the Proposed SCR under the equity requirement for public companies; the approval of Bursa Securities for the contents and the issuance of the circular to shareholders of Lipo and the circular to shareholders of Kobay pursuant to the Proposed SCR; the approval of MITI (if applicable); 13

14 (vii) (viii) (ix) the approval and/or consent of the existing financiers and/or creditors of Lipo and/or its subsidiaries, where required; the grant of an order of the High Court of Malaya approving the Proposed SCR ( Order ); and where required, the approval or consent of any relevant regulatory authorities being obtained on terms acceptable to Kobay. The Proposed SCR will become effective once an original copy of the Order is filed with the Companies Commission of Malaysia ( CCM ). It is contemplated that payment of the SCR Offer Price to the Entitled Shareholders will be made as soon as practicable after the date of lodgement of the Order with CCM. 12. HIGHEST PERCENTAGE RATIOS The highest percentage ratio applicable to the Proposed SCR under Paragraph 10.02(g) of the Main Market Listing Requirement of Bursa Securities is 66.58% based on the latest audited financial statements of Kobay for the FYE 30 June INTERESTS OF DIRECTORS, MAJOR SHAREHOLDERS AND/OR PERSONS CONNECTED None of the Directors and/or major shareholders of the Company and/or any persons connected with them have any interest, whether direct or indirect, in the Proposed SCR. 14. DIRECTORS RECOMMENDATION The Board after having considered all aspects of the Proposed SCR, including the basis and justification for the Purchase Consideration as set out in Section of this announcement, the rationale as set out in Section 6 of this announcement and the financial effects as set out in Section 10 of this announcement, is of the opinion that the Proposed SCR is in the best interest of Kobay and the terms and conditions in the SCR Offer Letter are fair and reasonable. 15. APPLICATION TO THE AUTHORITIES Barring unforeseen circumstances, the application to Bursa Securities in relation to the Proposed SCR is expected to be made within a period of two (2) months from the date of this announcement. 16. ESTIMATED TIMEFRAME TO COMPLETION Barring any unforeseen circumstances, the Board expects the Proposed SCR to be completed by the third quarter of the calendar year ADVISERS OSK has been appointed by the Company to act as the Adviser for the Proposed SCR. 18. DOCUMENTS FOR INSPECTION The SCR Offer Letter dated 22 March 2012 is available for inspection during normal office hours at the registered office of Kobay located at Plot 30, Hilir Sungai Kluang 1, Bayan Lepas Industrial Park, Phase 4, Bayan Lepas, Penang from Mondays to Fridays (except public holidays) for a period of three (3) months from date of this announcement. This announcement is dated 22 March