MALAYSIAN ECONOMY AND FURNITURE INDUSTRY

The Malaysian Economy had proven to be more resilient than expected. It grew at 6% in 2006 as compared to 5.2% achieved in the previous year. The continued expansion of the Malaysian economy amidst high crude oil prices, rising inflationary pressures and monetary tightening in major advanced economies, was in tandem with h3 global growth, particularly in the United States (“US”) and Asia. However, inflation rate in Malaysia which was maintained at below 2% annually during the 2000-2004 periods had edged up to 3.6% in 2006. Inflationary pressures had in fact hit the peak at 4.8 in April 2006.

The Malaysian furniture industry recorded a growth rate of 9% in exports from RM 6.9 billion in 2005 to RM 7.5 billion in 2006. As an export driven industry, the stakeholders are receptive to changes in the marketplace, global environment and consumer demands. The furniture industry was affected by rising raw material prices and stiff global competition in 2006. To achieve better competitive edge, it is now marching towards original design manufacturing by upgrading the production of higher value added furniture, incorporating indigenous design and better finishing.

FINANCIAL AND OPERATION REVIEW

For the year under review, the Group recorded a marginal growth in revenue from RM88 million in 2005 to RM94.5 million in 2006. This represents a mere growth rate of 7.3%. The lacklustre performance of the domestic market was off-set by an increase in exports revenue. Sales from exports displayed a h3 growth rate at 26.9% and contributed a significant 64.5% of the Group’s revenue. In the domestic market, revenue had decreased by 16.3% since 2005.

Despite higher revenue, profit before tax decreased from RM 8.8 million in 2005 to RM 6.5 million in 2006. Accordingly, earnings per share was only 6.89 sen as compared to 8.98 sen in the previous financial year. Nevertheless, net tangible assets per share rose 5 sen to 76 sen per share at the end of the financial year end.

CORPORATE DEVELOPMENTS

The Group started construction of the third plant in Rawang in the beginning of 2006. The plant was completed at end of the year. With this third plant operating, it will provide an additional 110,000 sq feet of production and warehousing capacity to the Group, translating to an increase of approximately 50% production capacity. This will ensure the Group is well positioned to meet increased orders not only from existing markets, but also from new emerging ones.

AWARDS AND ACCREDIATION

We are pleased to report that our commitment towards product research and development has earned us an award in the 2006 Malaysian Furniture Industrial Fair (“MIFF”). EURO’s newly launched range of office chair “Senses” clinched the Furniture Excellence Award for the Office Furnitue Category in the exhibition.

We won “thebrandlaureatte” Grammy Awards for Bestbrands Office Furniture 2006/2007 organised by Brand Laureate Sdn Bhd, a member of the Asia Pacific Brands Foundation. This award is again a testament to the Group’s effective brand-building strategy and commitment towards innovation and quality.

EURO was also included in OSK’s 100 Top Malaysian Small Cap Companies issued in their 2006 edition. EURO was included as one of the small cap companies recommended for investment.

DIVIDENDS

Subject to approval of shareholders at the forthcoming Third Annual General Meeting, the Board of Directors is pleased to recommend a final dividend of 2.8 sen per ordinary share each less 27% tax for the financial year ended 31 December 2006.

FUTURE PROSPECTS AND PLANS

The Malaysian economy is forecast to grow at 6% in 2007, spurred by public development expenditure. Private consumption pullback will likely remain modest amidst positive wealth effect from rising equity market. Although global economic risk has heightened, it is deemed moderate on account of the anticiapted ‘soft landing’ of the US economy. The Malaysian economy will ride on the domestic driven growth of the Asian economies. Rapid growth in these developing countries has been apparent, with China and India leading the pack. China and India will continue to drive growth in international trade and investment.

In tandem with the better performance growth expected from the Asian economies, the appreciating trend of the ringgit against the US dollar will pick up pace over the medium term. We expect the ringgit’s appreciation to continue as there is room for further appreciation to catch up with other currencies. And thus lies the biggest challenge to the Group, as more than 60% of the Group’s revenue is expected from exports sales. The other major challenge faced by the Group is persistent high raw materials cost.

The Group has developed some strategies to counter the challenges faced. It will further enhance cost efficiency and increase productivity to mitigate the above. The recent completion of the third plant will now serve to enhance competitive advantage with regards to raw materials consistency through larger warehousing space and to provide additional capacity to meet higher demands. Relocation and re-alignment of machinery and plant facilities are currently underway to streamline the overall production process. The Group will also invest heavily in machinery and modern plant facilities to increase automation, thus reducing dependence on labour, expedite production, improve quality and achieve quality consistency.

EURO’s quality and product development will continue to be Research & Development (“R&D”) driven. Our R&D team will gear towards developing and launching new and innovative products to meet customers’ expectations and to stay ahead of competition. The other key function of the R&D team in 2007 is to source for new materials to improve product quality and economics.

Emphasis would be made to improve the level of service and quality to our customers for that competitive edge. Exports will remain the key growth driver to the Group. The Group will penetrate further into the Indian and South East Asia market, for example in Indonesia, Philippines and Vietnam. These are emerging-market economies, which are mostly market–driven reforms that include the opening up of markets i.e. the removal of competition barriers and abolishment of protectionist policies. This is in line with the Group’s vision to be the largest office furniture manufacturer in the South East Asia region. There will also be more efforts channeled to the Middle East (Gulf) market where rapid and major developments have taken place in recent years.

The Group will further develop contract manufacturing overseas; OEM and ODM to broaden the revenue stream. It will also serve to provide the stability in future revenue contribution to the Group. Nevertheless, emphasis will still be on developing own house brand to carve a path into the more up-market higher segment. EURO’s growth will still be driven by Original Brand Manufacturing sales. This is to create more brand awareness of EURO as a brand that is associated with innovation and quality by continuously pursuing a path of active promotions. We believe we will be more resillient through product differetiantion, branding and market diversification.

The Group will seize the opportunities to diversify its business via acquisition of new companies and new investments to grow the Group in the long term. The Group plans to vertically integrate and may even consider venturing into other segments of the furniture industry or another new industry.

We will strive our best to improve shareholders’ value and barring any unforseen circumtances, will garner better performance in 2007.

ACKNOWLEDGEMENT

We are pleased to welcome Dato’ Choong Yuen Keong @ Tong Yuen Keong as a Non-Independent, Non-Executive Director to the Board of Directors of Euro Holdings Berhad on 24 April 2007. Dato’ Choong brings with him a wealth of experience in the property development and recycling sector, having been in the industry for over 25 years.

On behalf of the Board of Directors and Management of EURO Holdings Berhad, I would like to thank our diligent and conscientious employees, valued customers, business partners, shareholders, government authorities, bankers and other stakeholders for their support to the Group and the Company. We look forward to your continuing support and cooperation in the future.

DATO’ MOHD HANIFF BIN ABDUL AZIZ
Chairman