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Message to the Shareholders

 

Dear Shareholders,

Global economy continued to show weakening trend in 2016 impacted by the low commodity prices, declining capital flows to emerging economies. Global economic growth remained lackluster in 2016 at around 3.0% lower than the growth in 2015 with 3.2%. In the developed countries, the United States (US) deemed to be engine of global growth, has still not gained momentum. Recovery in Europe and Japan has also yet to strengthen. The Brexit referendum that led the UK out of EU zone potentially reduced the Europe’s economic prospects in the medium term. China, as one of Indonesia’s trade partners, continues to consolidate and rebalance its economy. China’s economic growth in 2016 continued to be restrained and lower than the previous year’s growth of above 7%. Likewise, India’s economic growth, which used to be fairly impressive, seemed to lose its momentum in the recent periods.

As an open economy, Indonesia is not immune to the unfavorable global condition. But, it has the resilience and flexibility to adjust and respond to the global risks. Amidst sluggish growth of global economy, Indonesia registered a growth rate of 5.02% in 2016 as compared to 4.8% in 2015, but marginally lower than the prediction by Bank Indonesia at 5.2%. Economic growth in 2016 was primarily supported by domestic consumption growth and investment performance improvement. Domestic consumption grew relatively strong, supported by controlled inflations.

The fall in crude prices continued thru’ 1st quarter of 2016 and hit a low of US$28/ per barrel in Feb 2016, but gradually recovered and stabilized around US$50/Barrel by end of the year. Crude prices continue to recover and remained stable in Q1 2017 around US$54/Barrel, indicating some stability and recovery in commodity segment.

The inflation in 2016 was quite moderate at 3.02% well below the BI targeted rate of 4±1% (yoy) and as compared to 3.38% for the previous year. The drop in the oil prices and the prices of key commodities are the primary reason for the drop in the inflation.

Indonesian currency remained resilient through the year and relatively stable backed by solid economic growth and better economic outlook going forward. Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.27 percent at IDR 13,436 per US dollar by end of December 2016. In full-year 2016 the currency of Indonesia appreciated 2.60 percent against the US dollar. BI has lowered its key interest rate (BI Rate) four times during the period from 1st January 2016 till 21st July 2016 by 100 basis point (from 7.50% to 6.50%) in consistent with the macroeconomic stability of the Country.

Polyester Industry: Global and Domestic Trends

The global polyester chain witnessed a modest recovery in 2016 after hitting a bottom of its growth cycle in 2014/15 caused by a combination of factors such as excess capacity, weaker demand growth in the key markets, especially in China. PTA margins did not show any significant recovery during 2016 as expected and continued to remain weak within a narrow band. In most part of the year it remained below cash cost levels forcing older capacities to shut down. However, Cotton prices have trended upwards in the second half of the year and remained steady supported by stable supply demand gap during the season.

Overall growth of polyester fiber continues to remain subdued at 3.70% in 2016 with the operating rates remain at 69.6% during the year. Average polymer utilization rates have also maintained low at just 76.1%. PTA world capacity reached 77.8 mil tonnes, almost unchanged from 2015. Hence, the operating rates for 2016 increased to 76.5% as compared to 74% for the previous year. The continuous mismatch in supply and demand of PTA and excessive capacities of average 18 million tonnes impacted PTA margins adversely. PTA margins were under constant pressure and did not recover as expected; the average margin levels remained at US$67/MT (spot).

The weaker consumption being shaped to some extent by the current economic scenario, slowdown in China, key textile market and uncertainties due to commodity price crash affected the global textile trade, dampening the demand outlook. Moreover, huge capacity additions in PTA in the past, Polyester Fiber and Filament led to lower worldwide operating rates, impacting the performance of the polyester industry globally. Domestic market also remained depressed due to sluggish demand and stiff price competition through increased imports of polyester fiber and yarn from China, Malaysia and India. The cheap imports had been crossing the vertical chain of domestic industry. Indeed, the Government needs to provide focus and clarity in scheme to revive the textile industry so the synergy is created for the growth.

Company Performance

The Company’s performance continued to be impacted by a host of adverse factors such as global economic slowdown, sluggish market conditions, falling crude and commodity prices, depressed polyester chain margins on account of supply/demand imbalance. The feedstock prices also remained volatile and moved in tandem with the crude price, which in turn have pushed down the Polyester chain prices and margins continued be under pressure. As a result, the sales revenue for the year 2016 has dropped significantly to US$356 million as compared to US$385 million for the previous year. Domestic market remained sluggish throughout the year with downstream activities slowed down on account of fall in retail consumption and stiff price competition due to cheap imports of Polyester Fiber and Yarn. Filament yarn prices and margins were severely affected, in particular, due to excessive supply and lack of demand from downstream weaving and knitting sector. Hence the production of yarn was curtailed in view of lack of demand for certain type of products. Overall drop in yarn production is 3.25% over 2015, While Fiber and Polymer production were marginally higher. The drop in the sales of 7.5% over the previous year is primarily attributed to fall in selling price and marginally by volume. However, Sales of Performance Fabrics division of the Company has marginally increased to US$8.59 million in 2016 as compared to US$7.74 million for the previous year.

Nevertheless, the overall financial performance of the Company in terms of earnings before interest and depreciation (EBITDA) improved. Amidst the unpredictable raw material fluctuation throughout the year, Company posted a positive EBITDA of US$3.226 million in 2016 as compared to a negative EBITDA of US$6.605 million for the previous year. The improvement in the performance was mainly on account of outsourcing of PTA from market. The operational losses of PTA plant due to very low margins were fully eliminated by the Company’s strategic decision to shut down and mothball the plant till it is revamped to improve the cost efficiency at par with the newer plants.

Despite the market conditions and low average utilization levels, the Company continues to operate its plant at optimum capacity supported by its strong customer base and the sustained demand from domestic market. Damiano Investments BV., Netherland, our majority shareholders continue to provide the working capital facility and increased to US$97.5million of Letter of Credit limit through Deutsche Bank, Hong Kong. Damiano also provided additional Capex loan of US$1.50 million to meet certain critical capex investments.

The Company continued to move towards its committed strategic direction of product and market diversification with its focused-on efforts on increased the volume of specialty and value added products into new market segments. The value added products range from automotive fabrics, fleece, non-woven, and other technical application. The Company has also initiated various cost saving measures at both the locations, especially in the area of energy that are expected to yield significant cost savings going forward.

The Board of Directors are pleased to inform that all these strategically critical actions should help the Company to strengthen its competitiveness and significantly enhance its product offerings in its core product areas and significantly improve its performance in the coming year.

Business Outlook

Indonesia’s Economic outlook for 2017 onwards looks more promising with an accelerated GDP growth of 5.3% and 5.5% respectively. The improving commodity price development and ongoing global economic improvement are expected boost the export performance of Indonesia. Household consumption in Indonesia is strengthening in terms of improved purchasing power amidst low inflation and stronger currency. Besides, the series of economic policy packages announced by the Indonesian government including deregulation and fiscal incentives should boost direct investment in Southeast Asia's largest economy next year. Tax amnesty program is expected to enhance the government's fiscal room and would make sure that the ambitious infrastructure spending would go in faster pace.

However, external factors such as ongoing financial volatility coupled with sluggish trade and subdued growth in advanced economies, continued deceleration of China’s economy, global policy uncertainty, particularly concerning global trade agreements and the pace of interest rate normalization in the US are the possible risks to the future growth outlook.

Domestic manufacturing sector is expected to recover with the help of supporting measures by the government to boost the battering domestic manufacturing industries, especially to TPT sector to improve its competitiveness. Government concerted efforts to protect the domestic industries by imposing restriction on illegal imports, anti-dumping duties on Fiber and yarn, rationalization of import duties etc. are expected to revive the growth prospects. In addition, the government has introduced a number of fiscal measures to support investment and export.

The analysis of polyester industry trend confirmed that the bottom of the polyester cycle is over in 2014/15 and the emerging investment profile indicates that the polyester markets are on a more reliable path of recovery globally. Global fiber industry will be determined increasingly by growth in demand in Textiles and Apparel in Asia. Although economic growth in developed regions such as in North America, EU 28 and Japan remains modest, they continue to be major consumers of downstream textiles and apparel products sourced from Asia. Most importantly, polyester is widely accepted within China and elsewhere in Asia by major retailers and apparel brand owners as the key performance fiber for the higher added value technical textile sectors.

The Company with its newly added capabilities to increase the volume of specialty products (Colored yarns/PBT) for automotive/ home textiles applications and its strategy to enter new markets for performance oriented textile and non-textile segments, will be able to face the competition and improve its performance in the years to come. We have started many market initiatives to expand our sphere of marketing. This marketing expansion will be strengthen through appointment of some sales positions in various large countries with feasible potentials. We also initiate the change management and realignment for these revised market condition which are being undertaken in 2017.

The long delay in finding a solution to its secured debt restructuring continues to remain a major barrier to your company to move forward and implement its growth plans. The high-level committee appointed by the Ministry of Finance for the purpose of finding a restructuring solution, has competed their financial and legal due diligence and submitted its recommendation to the Ministry for a final decision. While the majority of the secured creditors are already in agreement with the restructuring plan, the Company is hopeful that a final solution will be in place during the course of this year. The company is actively following up on the meeting and updated proposals are being evaluated to help completing the restructuring process. Post restructure, the Company’s financial position will improve significantly with healthy and sustainable debt/equity structure. This would in turn enable the company to raise finance from market to meet its short and long terms investments to implement its growth plans.

Corporate Governance

The Company has exercised Good Corporate Governance principles with the appointment various committees such as Audit Committee, Risk Management Committee, Nomination and Remuneration committees to functionally assist the Board of Directors and Commissioners in complying with the governance standards and policies of the Company. It has set up strong internal control systems and procedures to ensure that Company policies are complied with. The Group has a team of professional managers to manage various risks of the business environment in which the Company operates

Board of Commissioners

The Board of Directors is pleased to welcome Mr. Robert (Bob) McCarthy, who is appointed as the President Commissioner in the place of Mr. Robert Clive Appleby in the extra-ordinary meeting of Shareholders held on 9th March 2017. Bob has a long association with the manufacturing sector and good working knowledge of our business.

The Board wishes to place on record its deep appreciation of the valuable contribution and guidance given by Mr. Robert Clive Appleby during his tenure as the President Commissioner in the Company and wish him all the success in his future endeavour.

The Board of Directors is also pleased to welcome Mr. Christopher Ian Teague and Mr. Alexander Shaik as Commissions on the Board of the Company and look forward to their valuable guidance and contribution to the growth of the Company.

We would like to take this opportunity to express our sincere gratitude to our Shareholders, Customers, Suppliers, Bankers, and Employees who continue to support the Company during these tough and challenging periods and to retain our strategic position in the polyester industry.


V. Ravi Shankar

President Director