Dear Shareholders, In my message last year, I spoke about our strategy to increase the Group’s focus in the China market and leverage the synergies within the Group by improving the fit among our entities. Our plans to grow our business were disrupted in the final quarter of the year when the world economy came to an abrupt halt. This crisis left no economies unscathed. Bucking the trend this time is China, where demand continues to grow while many countries are reporting economic contractions. The market consolidation that we anticipated in China became reality. Unfortunately, following the aftermath of the global financial and economic crisis, the contractions were more magnified. Towards the end of the year, many global economies sank into recession. China, despite its large domestic market, also felt the impact. However, opportunities still abound in this country as government expenditures on infrastructure development injected timely support and encouragement to businesses and consumers. Sharing his thoughts on the country’s strategy to achieve modernization during his visit to Cambridge University in February 2009, Chinese Premier, Wen Jiabao said, “To basically achieve modernization by the middle of this century, we must accomplish three major tasks: first, achieve industrialization, which Europe has long completed, while keeping abreast of the latest trends of the scientific and technological revolution; second, promote economic growth while ensuring social equity and justice; and third, pursue sustainable development at home while accepting our share of international responsibilities. The journey ahead will be long and arduous, but no amount of difficulty will stop the Chinese people from marching forward. Through persistent efforts, we will reach our goal.”

Demonstrating China’s determination and its ability to bring itself to the realm of major global economies, the government embarked upon major infrastructure investments. Among them is the upgrade of the country’s telecommunications infrastructure. This move is both astute and timely. At a time when the world is hastening to curtail capital expenditures, rescue fledgling financial institutions and multinational organizations, China’s move to implement 3G licenses in the country will inevitably attract the attention of the global business community. The information technology and telecommunications industries will be among the beneficiaries of this project. In anticipation of these opportunities, we have reinforced our presence in China. To facilitate our progress, I assumed additional responsibilities as the Chief Executive Officer of DGI in June 2008 and as the President of the ASTI Group’s China operations. These roles enable me to expedite our thrust into China, bringing me closer to our customers and our teams on the ground. By the end of the year, we further expanded our reach into the country and market intelligence from our network provides support to our marketing and business development efforts. We believe that China will be able to pull itself out of the crisis and its economy will grow while that of other economies continues to contract or languish.

Over the years, DGI has expanded its operations and reach in China and focused our efforts in growing our design, develop and distribute (“DDD”) business. Today, within the Group, we have access to more than 3 manufacturing facilities and 17 offices located in 9 cities across China.

DGI’s performance in FY2008 mirrors the effect of the unusually weak business environment. Our revenue decreased by 6% to $300.8 million and we incurred a net loss of $7 million at the close of FY2008. Our core businesses i.e. the Electronics Distribution and Semiconductor Test & Consumables reported significant business revenue contractions giving rise to an operating loss before tax totaling $5.9 million at the close of FY2008.

Anticipating a worsening global business climate ahead of us, we adopted immediate measures to contain our costs. Operating expenses such as communication, utilities and traveling costs were curtailed, direct headcounts reduced and our offices now operate on a four-day work week. On the business front, DDD has become our key business segment. Going forward, the growth of our DDD business will lead DGI’s development into a China-centric and communication market segment centric business model. Mitigating other areas of our business risks, we realigned our customer-base and reviewed our products and services offerings to ensure that resources are directed to areas commanding better margins and growth prospects.

OPERATION REVIEW

The reorganization that commenced in the previous financial year, continued into FY2008. Dragon Tech, which we acquired in 2007, is driving our DDD distribution model. These capabilities have allowed us to achieve growth in the China communications market while engaging top-tier suppliers and customers.

FY2008 saw the impact of our transition and weakening demand in the global semiconductor industry. The onset of the global financial and economic crisis in the final quarter of the year brought businesses to an abrupt halt. At DGI, we closed the year with a 6% decline in revenue, which dipped from US$320.5 million in FY2007 to US$300.8 million this year. Affected by the unexpected turn of events with the sudden onslaught of the global financial and economic crisis, we reported a net loss of $7 million in FY2008.

By business segment, all units reported weaker performance. Our results also reflect the lower contributions from both our consumer electronics and our independent trading division. In FY2007, the Group exited the consumer electronics business and provisions were duly made in FY2008 for the losses arising from this division.

Electronics Distribution

Electronics Distribution remained our major business contributor accounting for 98% of our total revenue. The weak demand that prevailed through the year was further exacerbated by rapid business deterioration in the final quarter of the year due to the onset of the global financial and economic crisis.

Relative to the previous financial year, the Electronics Division reported a 5.9% decline in revenue, which decreased from $313.2 million in FY2007 to $294.8 million in FY2008. Profit before tax was $3.4 million this year compared to $2.8 million in the previous financial year.

Semiconductor Test & Consumables

Semiconductor Test & Consumables accounted for 2% of the Group’s revenue. In FY2008, revenue generated by the Semiconductor Test & Consumables division saw a 16% decline, dipping from $7.2 million to $6 million. This division reported an operating loss of $453K or approximately 8% of the Group’s total loss in FY2008.


The Group’s operating expenses rose 3.3% in FY2008 due to provisions for doubtful debts, which amounted to $4 million this year compared to $1.5 million in the previous financial year.

Repayments of bank borrowings during the year reduced bank borrowings from $60.9 million to $57.1 million. As a result, financing costs saw a 10% reduction, declining from $4.6 million to $4.2 million this year. Exceptional items resulted in an expense of $0.5 million due to the impairment of goodwill for a business unit where business activities have been significantly affected by the economic downturn. The stronger US dollar towards the end of the year gave rise to a foreign exchange gain of $0.7 million compared to the loss of $0.2 million in the previous financial year.

The Group’s working capital requirements were significantly reduced this year due mainly to a reduction in its operating costs and the adoption of a more cautious stocking policy. Our inventory was 27% lower this year, decreasing from $32.3 million in FY2007 to $23.6 million in FY2008.

The Company has no exposure to derivative contracts and is not under any undue stress from financial institutions or creditors on loan or debt repayments.


LOOKING AHEAD

The outlook for FY2009 is mired with uncertainties and visibility is extremely low. The problems in the global financial industry coupled with rising unemployment are rapidly retarding business growth. Business and consumer confidence plunged to an all time low and despite efforts from governments to spur spending, demand will continue to weaken in 2009.

These unusual times bring unusual opportunities. While the global business landscape is finding its new footing, we will be looking to engage top tier suppliers to expand our market reach. Our focus in China remains unchanged and we will be actively engaging our business partners to seek new opportunities in the country. In the near term, market demand will undoubtedly be shrouded by uncertainties overhanging the world. On our part, we will exercise prudence and caution in our business management and focus our efforts on generating and conserving cash and liquidity in our organization. While opportunities abound, we have to deploy our resources selectively as financial institutions become increasingly risk averse. Notwithstanding the growth in our China business, its contribution cannot adequately compensate for the overall business contractions in the Group. As a result, we expect FY2009 to be a difficult year and we will closely monitor our operations and adopt new plans and strategies in response to the changing market conditions.

On the business front, following the recent announcement by the Chinese Government on the implementation of 3G licenses in China, we will be stepping up our focus in this rapidly growing telecommunication infrastructure segment in the country. Another opportunity on the horizon is the arrival of the Intel® Atom™ processor. Intel’s smallest processor, built with the world’s smallest transistors and manufactured on Intel’s industry-leading 45nm Hi-k Metal Gate technology, the Intel Atom processor, purpose-built for simple, affordable, netbooks and nettops, is ideal for convergent 3C(communications, computation and consumers) devices that drive the internet economy. Poised to set new benchmarks in the global IT industry, it will also bring new opportunities for our DDD business. These opportunities may not bring immediate results and the entry barriers will undoubtedly be high. Nonetheless, we will continue our pursuit and our resources are ready for this challenge.

The year would have been even more difficult had it not been for the confidence and the trust from our shareholders, bankers, customers, employees and business associates. We thank you for your support and guidance in FY2008 and look forward to better times ahead.


Yours sincerely,


Dato' Michael Loh
Executive Chairman and Chief Executive Officer