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CEO's Message

Extracted from Annual Report 2008

AN OVERVIEW

FY2008 distinguishes itself as a year that witnessed ECS' ongoing margins accretive growth initiatives gaining momentum.

These efforts which were put in place a few years ago, continued unabated throughout FY2008 even though ECS relisted its shares on the Singapore Exchange only in August.

During the period under review, our conscious commitment to enhance operating performance with revenue growth an important but secondary priority saw net profit growth continue to outstrip revenue growth.

But most importantly, our improving bottomline and margins for the year under review, even after the current financial crisis deepened during the second half of calendar year 2008, demonstrated our agility to adapt to challenging economic circumstances and uncertainties.

Realising our limited control over these externalities, we sharpened focus on improving internal efficiencies including generating positive operating cash flow through better management of working capital and more effective management of financial resources.

Continued margins enhancement and improved cash management led ECS to generate not only strong profit and margins growth but also stronger cash flow. This is particularly significant in view of deteriorating financial conditions worldwide.

In fact, these two initiatives will continue to be pivotal to our growth strategy over the next few quarters.

Financial And Operations Review

In FY2008 ECS' net profit attributable to equity holders rose 25.8% to $29.4 million from $23.4 million in FY2007 propelled by continued margins enhancement and improved cash management.

The Group's sustained efforts to enhance operating performance with revenue growth an important but secondary objective saw operating profit increase 22.9% to $52.2 million from $42.5 million even though revenue inched up slightly by 5.8% to $2.9 billion from $2.8 billion over the comparative period.

Consequently, net profit before interest and tax ("PBIT") rose 19.6% to $41.4 million from $34.6 million.

Concurrently gross and operating margins increased to 5.1% from 4.8% and to 1.8% from 1.5% respectively, over the comparative periods.

Despite the slight revenue growth, the Group's total operating expenses increased by 6.5% to $102.1 million from $95.9 million as we stepped up sales particularly in the higher margin enterprise systems business segment.

Due to increases in interest rates, our finance costs also rose 30.0% to $11.4 million from $8.7 million. Current and non-current bank borrowings rose 4.9% to $193.2 million from $184.2 million.

Notwithstanding the challenges in the external environment, throughout the year, the Group retained focus on improving financial health by generating strong profit and margin growth as well as stronger cash flow.

As at 31 December 2008, ECS generated a positive operating cash flow of $16.4 million, up from $7.2 million as at 31 December 2007. We also continued to further reduce accounts receivable days to 43.6 days from 47.8 days during the period under review.

Tighter credit control and shorter cash cycles also led to significant improvements in working capital. As at 31 December 2008, ECS' cash and cash equivalents were $49.5 million, up from $39.4 million a year ago. Net gearing improved to 0.60 times from 0.68 times.

As a result of these efforts, FY2008 earnings per share ("EPS"), on a fully diluted basis, correspondingly rose to 8.0 cents from 6.4 cents while net asset value ("NAV") per share increased to 65.09 cents from 58.20 cents a year ago.

Review By Business Segments

Enterprise Systems

Enterprise Systems continued to be the Group's growth driver in FY2008 even as global economic volatility began to dampen ICT spending rates in the region as ECS reiterated its ongoing strategy to continue pursuing bottomline and margins growth.

Consequently in FY2008, ECS' higher margins' Enterprise Systems segment grew by 17.5% to $1.1 billion from $964.3 million mainly driven by higher sales of servers, networking products and enterprise software in the Group's mainstay North Asia market as well as some Southeast Asian markets.

At the same time, PBIT from this segment strongly increased by 31.5% to $26.4 million from $20.1 million.

Distribution

In line with the slowdown in demand for consumer ICT products, in FY2008 our Distribution sales managed to sustain themselves within the $1.7 billion range to dip only slightly by 0.6%. Encouragingly, Distribution PBIT grew 19.6% to $23.9 million from $20.0 million again propelled by better margins mix of products.

Review By Geographical Markets

ECS' ongoing pursuit of country-specific business thrusts continued to reap results and both North Asia and Southeast Asia continued to deliver revenue and PBIT growth.

North Asia

Led by sustained business ICT infrastructure spending in first and second tier cities which continued throughout FY2008, North Asia revenue grew 5.8% to $1.5 billion from $1.4 billion. PBIT grew 47.6% to $25.3 million from $17.2 million over the comparative periods.

Southeast Asia

During the year under review, sales of both consumer electronics especially notebooks and enterprise products in Malaysia, Indonesia and the Philippines rose 5.7% to $1.43 billion from $1.36 billion while PBIT grew 6.4% to $26.9 million from $25.3 million; Southeast Asia continues to be the major contributor to Group PBIT.

Outlook

While ECS has put a solid foundation into place, we are cognizant of the fact that at least the near-term outlook for the global economy and the global ICT industry continues to be uncertain. The countries in our region will not be immune from the spillover effect of this scenario.

In a revised statement in December 2008, technology sector analyst IDC, said that it anticipates IT spending in the region to fall to US$195.6 billion in 2009 from the US$201.4 billion it had forecast in July 2008. IDC added that strategic investments in IT will remain critical in achieving further efficiency and productivity gains, and driving longer term growth of businesses.

As these external developments remain out of our control, as in the past, we prefer to adopt a prudent business approach by taking the opportunity to further enhance our business fundamentals during trying times.

ECS recognises the importance of strengthening internal competencies that have placed us in good stead even as the economic challenges began to manifest themselves in our industry during the last few months of FY2008.

We believe that by honing these operating and financial efficiencies, ECS will be able to capitalise on the longer-term growth opportunities when markets eventually recover.

Firstly, we intend to enhance operating cash flow and working capital. This will help us to reduce our debt and funding costs, thereby strengthening our balance sheet.

Secondly, we will work on strengthening internal business processes like credit control to make operations more cost-effective.

Finally, we plan to also implement tactical human resource and technological improvements that will further scale up our operational efficiencies.

Looking further ahead, despite the anticipated slowdown in demand for ICT products in 2009, the Directors are confident that in FY2009, ECS will still remain profitable.

In Apreciation

Once again, ECS has delivered an excellent set of results despite the operating uncertainties that dampened global business sentiments during the latter part of FY2008.

I must commend my fellow management team and staff for their relentess determination and hard work which has helped us to make major strides externally and internally.

To my fellow Board members, I would like thank you for your valuable input that has steered ECS onto a solid path for many more future successes.

ECS is on a new threshold and our newly strengthened fundamentals auger well for the vast opportunities that lie ahead of us when the global economy comes back on track.

Tay Eng Hoe
Group Chief Executive Officer & Executive Director
6 April 2009