Dragon Group International

Chairman and CEO’s Message
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Dear Shareholders,

While the world looked at the events of 2009 with abated breath, we took the opportunity to review, rationalise and realign our business and resources. The result is a leaner operation, lower bank borrowings and significantly reduced expenses by the close of FY2009. Nonetheless, despite a stronger final quarter, affected by the global economic contraction, we closed the year with a net loss of $7.9 million after taking into account $7.0 million incurred in impairments of fixed and financial assets and provision for the disposal of subsidiaries.

Within DGI we are constantly reviewing and re-evaluating our businesses. To overcome the challenging market conditions the changes were faster and of larger magnitude this year. We contracted both our supplier and customer bases and focused our efforts on niche business areas with good growth potentials. Reduction in our bank borrowings resulted in significantly lower financing costs. Subsequently, the contraction in some parts of our businesses releases resources for us to recruit new people with the skill sets that we require. By realigning our resources we were able to mitigate certain business risks while pursuing our growth strategy.

Geographically, China will remain our focus as we continue to expand and anchor our footprints in the country. Recent events have proven the country’s resilience and the nimbleness of the Chinese government to quickly react and isolate its economy from the effects of global financial turmoil. More importantly, the world witnessed the acumen and shrewdness of China when it acted swiftly to acquire and invests in strategic but financially stressed businesses. Today, the world’s largest organisation is from China, one of the world’s major oil and gas drilling company was sold to China, one of the world’s foremost private equity firms is now owned by China and Chinese banks proliferates the world. In less than two decades from the time when the late Mr Deng Xiao Ping opened China’s economy, the growth of this country has been nothing short of astounding and the world listens when China speaks.

Since the burst of the dot com bubble at the turn of 2000, the performance of the IT industry started to deteriorate. A decade of famine has changed the fate of many IT companies. Those who cannot adapt are now history while others merged to survive. Into the new decade, I foresee the arrivals of new IT applications that will once again bring changes to our lives. Three key needs will spur the arrival of new applications: mobility, wireless accessibility and power consumption.

he global infrastructure is ready to accommodate many of our needs. Going forward, users need devices that are highly powerful and portable, convenient and fast wireless access to the internet “on-the-go” and devices that have lower power consumption. Consumers and businesses are hungry for new solutions. Some of the examples that we can see around us are the Apple i-Phone and the netbooks. The already mobile world will become even more mobile and a new facet to communication will emerge. In the larger scheme of things, the purchasing power of modern China cannot be underestimated and DGI is already strategically positioned to meet these new needs.

Anticipating these changes, we continue to invest in our research and development efforts. Ensconced in a population of more than 1.3 billion people, we have a ready source of human capital in our backyard and a ready market with growing purchasing power in front of us. Herein lies the power of DGI. I once said “China had history, and will always have history, and her history will be her future.” This is also the future of DGI.

Having weathered a difficult year, on behalf of my colleagues at DGI, I thank all our stakeholders for their trust and confidence in us and we look forward to your support in the new financial year. To all our customers, bankers, employees and business associates, thank you for your dedication and hard work. The road ahead will not be easy, nevertheless, let us be honest, hardworking and harmonious, take good care of our families and friends and have some fun at the same time.

OPERATION REVIEW

Relative to the second half of the year, business was relatively slow in the first half due to global economic uncertainties and weak consumer demand. Despite the 6.5% revenue improvement in the fourth quarter of the year, the Group reported 23.2% decrease in its full year revenue, which decreased from $300.8 million (FY2008) to $231.1 million (FY2009).

By business segment, revenue from the Electronics Distribution business, which accounted for 98.8% of the Group’s aggregate revenue, reported a decline of 22.6% to $228.3 million due mainly to the cessation of certain business divisions and weaker demand in the first nine months of FY2009. Revenue contribution from the Semiconductor Test & Consumable business, which accounted for 1.2% of the Group’s revenue, was 53.2% lower declining from $6.0 million (FY2008) to $2.8 million this year.

The implementation of cost control measures gave rise to lower operating expenses, which decreased by 27.8% from $31.1 million to $22.4 million (FY2009). Financing costs were also lower, declining from $4.2 million to $2.8 million due to the lower utilisation of trade receivables and reduced bank borrowings. Included in the accounts of FY2008 were a $3.8 million provision for doubtful debt. In FY2009, the Group has taken a one-off repayment charge on an available-for-sale financial asset and assets of Semiconductor Test & Consumables business. These exceptional items amounted to $7.0 million.

At the close of the year, the Group reported a net operating profit of $0.06 million, an improvement from the loss of $5.3 million reported in the previous financial year.

Other salient points this year include the reduction of our bank borrowings, lower inventory and the Group’s healthy cash position. The Group’s inventory balance decreased from $23.6 million to $17.4 million due to improvement in inventory management. Bank borrowings were lower, decreasing from $31.4 million to $24.2 million due to repayment of bank loans in FY2009. At the close of FY2009, the Group has a balance of $20.7 million in cash and cash equivalents compared to $24.2 million in FY2008. The difference is mainly attributable to cash used for redemption of bank borrowings during the year.

While business has picked up in the second half of FY2009, according to the Semiconductor Industry Association (“SIA”), it expects the return of the normal seasonal patterns, suggesting that there may be a modest slowdown in the first quarter of 2010. In view of the current market conditions, we will continue with our efforts at cost-effi ciency management and strengthen our operations and competitive capabilities.



Yours sincerely,


Dato' Michael Loh

Executive Chairman and Chief Executive Officer
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