“The recent disruptions to the semiconductor sector offer an opportunity for Serial System to leverage its distribution expertise to grow its supplier base. Combined with the post-pandemic business recovery in China, we expect business momentum within the segment to remain healthy.”
I present to you the results for the financial year ended 31 December 2022 (“FY2022”).
The pandemic has exerted exceptional challenges on our business – first with the disruptions and restrictions, and later with the effects of over-stocking of semiconductor chips and order delays even as business and travel resumed.
Nonetheless, we have continued to make progress in our growth strategies as outlined in our “Update on Business and Operational Matters” announced on 21 December 2020. As shareholders will recall, we embarked on a major strategic review after the loss in late 2018 of a major supplier. In that review, we outlined a recovery and growth strategy that included expanding our product portfolio and supplier relationships, improving internal efficiencies and expanding our computer peripherals business under Achieva Technology.
As we emerge from the pandemic, these are even more relevant. Hence, I am pleased that despite the challenges I outlined earlier, the management team has pulled together without losing sight of our goals.
Revenue has continued to climb as we continued to grow our customer and supplier base for the electronic components distribution business. Even though the China economy has slowed in the last two years or so, the semiconductor sector remains vibrant. New applications from electric vehicles, to automation, 5G and data centres all require reliable access to semiconductors. The supply chains are still being redefined due to the ongoing US-China “tech war”. These challenges have also galvanized local Chinese chip designers and fabricators to develop new products.
In this re-alignment, the semiconductor industry will need to rely on trusted distributors who have deep domain knowledge, local networks and expertise and an ever-growing pool of suppliers as well as customers.
We continue to calibrate and refine our strategy amid the major ongoing issues even though China has just eased its Zero-COVID policy. Economic growth will be slower than before as manufacturers are more hesitant; interest rates have climbed and the Chinese Renminbi has depreciated against the US Dollar. In the near term, we have already felt the effects of delays in orders.
For the year under review, this has resulted in the Group having to record allowances for inventory obsolescence of US$4.7 million, as well as foreign exchange losses related to the weakness of both the Chinese Renminbi and the Japanese Yen.
The Group recorded revenue of US$906.7 million for FY2022, an increase of 1% from US$895.9 million in FY2021.
Revenue for the electronic components distribution business increased 3% to US$843.0 million, lifted by higher sales across all regions. In Hong Kong and China we experienced higher demand in the industrial, renewable energy, artificial intelligence and automotive segments.
In Southeast Asia and India, the Group saw an improved performance, particularly in the industrial, consumer and telecommunication sectors in the Philippines, Singapore and Thailand. Turnover in South Korea and Taiwan also saw an uptick, driven by higher demand for certain product lines in the industrial and automotive segments.
Revenue from the consumer products distribution business declined to US$56.5 million in FY2022 from US$73.6 million a year ago. As travel and stay-at-home measures eased, demand for computer peripherals softened in our main market, Malaysia. This slowdown in Malaysia was offset by fresh contributions from Thailand arising from existing and new product lines that have been onboarded during the year.
Revenue for other businesses declined 7% to US$7.2 million from US$7.7 million. Higher revenue contribution from the segment’s medical device assembly and distribution business was offset by lower turnover in the trading and distribution of fast-moving consumer goods business in Singapore.
We maintained our gross profit margin of 8.1% for both FY2022 and FY2021. While the consumer products distribution business saw lower margins amid intense competition in a challenging market environment, it was offset by higher margins from our other businesses.
Other Operating Income
Other operating income decreased 16% to US$10.8 million in FY2022 from US$12.9 million in FY2021, mainly due to (i) fair value loss on listed financial assets of US$0.8 million as opposed to fair value gain on listed and unlisted financial assets of US$0.9 million a year ago; (ii) allowances for inventory obsolescence of US$4.7 million for FY2022 as opposed to a write-back of allowances for inventory obsolescence of US$3.1 million a year ago; and fair value loss on derivative financial instruments of US$0.2 million as opposed to fair value gain of US$1.4 million recorded in FY2021. The decline was partially offset by a gain on re-measurement of associated company, Otsaw Digital Pte. Ltd. to financial assets, at fair value through profit or loss of US$2.3 million and also gain on dilution of its interest amounting to US$1.0 million in FY2022.
The Group recorded an increase in distribution expenses of US$0.8 million, or 2%, to US$43.4 million, mainly due to a rise in sales commission expense, partially offset by a reduction in staff costs, trade credit insurance charges and storage charges.
Administrative expenses rose by US$0.9 million, or 10%, to US$9.7 million, attributable to increased staff-related costs, bank charges and utility costs.
Finance expenses increased 79% to US$9.4 million, amid higher interest rates across all trade facilities and an increase in total borrowings in FY2022 compared to FY2021.
Other operating expenses increased by US$11.0 million or 66% to US$27.8 million. The Group recorded a higher net foreign exchange loss of US$6.6 million amid the strengthening of the US Dollar against the Chinese Renminbi and Japanese Yen, and allowances for inventory obsolescence of US$4.7 million which contributed mainly to the increase in other operating expenses.
The Group’s associated companies recorded a total loss of US$0.8 million, as compared to US$0.7 million a year ago, mainly due to a higher share of losses from Otsaw Digital Pte. Ltd. and Grandpointe Acquisition LLC, partly offset by a higher share of profit from Bull Will Co., Ltd and PT Sentral Mitra Informatika Tbk. during the year in review compared to FY2021.
As a result of the higher net foreign exchange loss and allowances for inventory obsolescence as outlined above, the Group recorded a net loss of US$4.6 million in FY2022, compared to a net profit after tax of US$11.1 million in FY2021.
The Group’s cash and cash equivalents stood at US$36.0 million as of 31 December 2022, compared to US$51.0 million as of 31 December 2021.
Trade and other receivables increased by US$8.7 million to US$178.4 million (net of factored trade receivables), contributed by the Group’s electronic components distribution subsidiaries, its consumer products distribution subsidiary and project financing subsidiary in Thailand. Average turnover days for trade receivables increased to 70 in FY2022 from 65 in FY2021.
Inventories climbed to US$163.0 million from US$133.7 million, mainly contributed by the Group’s electronic components distribution subsidiaries in Hong Kong, China, Singapore and South Korea, as well as consumer products distribution subsidiaries in Thailand and Japan.
Financial assets, at fair value through profit or loss (non- current assets) increased by US$4.7 million to US$12.2 million attributable to the reclassification to financial assets of the Group’s 19.90%-stake in associated company, Otsaw Digital Pte. Ltd. arising from the Group’s divestment and dilution of equity interests in FY2022. The Group’s equity interest in Otsaw Digital Pte. Ltd. was reduced from 19.90% to 15.92%.
Investments in associated companies decreased by US$5.1 million mainly due to the reclassification of US$4.9 million to financial assets, at fair value through profit or loss (non-current assets) as detailed above.
Property, plant and equipment decreased by US$3.6 million, mainly due to currency translation loss of US$1.8 million and depreciation charges amounting to US$3.3 million in FY2022. The decline was partially offset by additions of US$1.5 million to property, plant and equipment.
Trade and other payables increased by US$12.5 million, mainly due to the increase in purchases by the Group’s Singapore, South Korea and Taiwan electronic components distribution subsidiaries and the Group’s Singapore consumer products distribution subsidiary. Average payment days for trade payables were maintained at 30 days for both FY2022 and FY2021.
Borrowings increased by US$20.0 million, mainly due to additional borrowings by the Group’s electronic components distribution subsidiaries and Singapore consumer products distribution subsidiaries to finance an increase in working capital requirements.
Serial System’s total number of issued shares as of 31 December 2022 was 904,841,914 (excluding treasury shares of 946,000), unchanged from the same period a year earlier.
We remain optimistic about the long-term growth trajectory of the semiconductor chips sector, despite softer short-term demand. In response, we will leverage our distribution expertise to support emerging industries such as IoT, 5G infrastructure, artificial intelligence, and electric and autonomous vehicles, as the continuous improvement of technology necessitates more high- quality chips with improved processing power and larger memory storage.
The recent disruptions to the semiconductor sector offer an opportunity for Serial System to leverage its distribution expertise to grow its supplier base. Combined with the post-pandemic business recovery in China, we expect business momentum within the segment to remain healthy.
Nonetheless, Serial System anticipates several challenges on the horizon, including prolonged Sino-US trade tensions and geopolitical uncertainty due to the Russia-Ukraine war. Moreover, the impact of higher interest rates and inflation on operating margins cannot be ignored. As a response, the management team will remain focused on improving internal efficiencies, controlling operating costs and managing inventory and trade credit risks.
I would like to thank our customers, suppliers and business partners for their trust and support throughout the year. I also want to thank our staff, whose commitment and dedication have brought Serial System to where we are today.
Lastly, thank you, our shareholders, for your support throughout the challenging year. We will continue to seize new opportunities and build upon our foundation to further enhance shareholder value.
Dato’ Seri Dr. Derek Goh Bak Heng BBM(L)
Group Chief Executive Officer