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Group Operations Review

SembCorp Industries closed 2004 with its operations turning in a strong showing, delivering solid top and bottom line growth.

Group Profit after Tax and Minority Interest (PATMI) in 2004 grew by 39% to S$395.5 million. Group PATMI excluding exceptional items (EI) grew a credible 26% to S$231.7 million. Our Utilities business continued to lead contributions, with its contribution to Group PATMI excluding EI at 47%, or S$108.9 million. Meanwhile, our Marine Engineering business delivered record profits in 2004. Our share of these profits amounted to S$60.8 million, representing a growth of 24%. This year, the Group turned in a Return on Equity of 21%, well above our target of 12%. Return on Equity excluding EI was a healthy 13%.

Key Milestones
In 2004, the Group sharpened its strategy for our key businesses. This involved identifying future directions to prime the businesses for medium to long term growth, and executing key milestones.

Our Utilities business strengthened its operations in Singapore and the UK whilst making inroads towards replicating its business model in emerging markets. SembCorp Utilities UK delivered a strong performance in its first full-year contribution to the Group. This underpinned the doubling of Utilities’ overseas PATMI contribution in 2004 over the previous year. Its operations were strengthened further via the addition of a new 42 megawatt Combined Heat and Power plant at Wilton Power Station, which commenced operations in October 2004.

Utilities’ Jurong Island operations in Singapore also performed better in 2004. In addition, Utilities enjoyed full-year contributions from its increased shareholdings in SUT Sakra, SembGas and SembCogen.

Meanwhile, Utilities also strengthened its presence in key emerging markets. The Phu My 3 power company in Vietnam, in which Utilities holds a one-third share, generated a profit within its first year of operations. In addition, Utilities bolstered its new beachhead in China, with the incorporation of a new wholly-owned Shanghai-based subsidiary, SembCorp Utilities Investment Management (Shanghai) Limited, in September 2004. With people, systems and resources stationed at this new office, Utilities can now respond to new opportunities more quickly and manage its assets better in China, setting the stage to expand its presence there.

Our Marine Engineering business also saw a sterling year, with strong growth in ship conversions and ship repair, and a record orderbook of S$2.3 billion as at December 31, 2004. Building orders were spurred by its cutting edge proprietary designs, with five orders for Baker Marine Pacific Class 375 deep drilling offshore jack-up rigs, and eight orders of 2,600 TEU proprietary design container ships, received by February 2005. Throughout 2004, Marine Engineering continued its efforts to ride on the boom in the oil and gas sector by moving aggressively into rig building.

In addition, Marine Engineering’s acquisition in July 2004 of a 30% stake in the Cosco Shipyard Group in China further realised its long-term goal of developing a network of strategically located shipyards along global shipping routes. The deal fortified Marine Engineering’s China hub and significantly grew its ship repair and marine business in China, whilst leveraging on the already successful partnership between our Marine Engineering business and Cosco Shipyard Group.

This year, Logistics divested its 20% stake in Kuehne & Nagel International, unlocking significant value for Logistics’ shareholders, including SembCorp Industries.

Meanwhile, Logistics continued to enlarge its pan-Asian supply chain network, boosting its capabilities in this region. Logistics’ Vietnam joint venture commenced operations in 2004, and joint ventures in Indonesia and the Philippines were added to its Southeast Asian operations in early 2005.

During the year, Logistics’ North Asian operations performed well, generating 34% more revenue than last year, and contributing 24% to turnover from supply chain management operations. This was underpinned by stronger performance in China, Korea, and Japan. Logistics’ Japanese operations were strengthened further through Footwork Express’ acquisition of Kyushu Sanko Unyu, the second largest transportation company in Kyushu. Dedicated marketing efforts targeting North Asia were increased to capitalise on rising trade within the region, and the growing trend of Japanese and Korean companies relocating manufacturing activities to China. To this end, our Logistics business also established a North Asia Regional Office in Shanghai in April 2004.

Environmental Engineering continued to deliver double-digit PATMI growth. Its Singaporean operations were strengthened with a new S$63.0 million public cleansing contract from the National Environment Agency, and eight major projects to apply its proprietary pneumatic waste technology.

As a strategy to broaden its revenue base, Environmental Engineering continued to expand its total integrated environmental services to key overseas markets. During the year, it acquired a 51% stake in India’s largest integrated biomedical waste management and treatment services provider, and inked a Heads of Agreement with Chinese state-owned enterprise Shanghai Environment Investment, to develop the entire waste management chain in Shanghai’s newly corporatised municipal waste market.

Engineering & Construction continued to prioritise profitable execution of its projects, and improved its performance in 2004 over the previous year. It maintained its predominant focus on higher-value process engineering contracts, with these constituting 67% of its orderbook. In addition, it increasingly explored higher-margin projects overseas, particularly in the oil and gas, and petrochemical sectors in Asia and the Middle East.

Our Overseas Strategy
As the SembCorp Group expands its overseas presence to ride on continued growth in the Asia-Pacific, we continue to observe several guiding principles to help us manage the risks of entering these new markets and stay competitive. Firstly, we embark on overseas ventures which leverage on our established experience and success in Singapore. Secondly, we choose strong overseas partners to work with, in strategic cities or niche markets. Lastly, we continue to innovate, move up the value chain and capitalise on technological developments to add value to our customers and business partners.

Outlook: Poised for the Future
Backed by an all-time strong orderbook, the Group’s businesses are well-positioned for the future. The Group’s orderbook at December 31, 2004 stood at S$5.9 billion, up 61% from 2003. This excludes long term contracts held by our Utilities and Logistics businesses.

Going forward, the business environment is likely to feature continued growth in the oil and gas sector in the next few years, due to worldwide demand as well as the opening up of new opportunities in emerging economies. This is expected to impact favourably on our marine and offshore businesses, as demand for new and replacement rigs rises.

There are also increasing opportunities overseas for the provision of integrated utilities and energy as well as waste management services. We are well-positioned to explore and exploit them.

SembCorp Industries will continue to capitalise on industry trends and shape the strategic directions of our businesses to ride the wave of these developments. Looking ahead, we remain committed to build on our businesses for long-term sustainable growth. We will continue to strive to optimise our portfolio and grow our core businesses, advancing them to the forefront in their respective fields.