Chairman's Statement

Extracted from Annual Report 2018

Dear Shareholders,

In FY2018, we acted on our strategies to gain greater awareness for our brands across the region, as well as expand our revenue streams and long-term growth potential. With our efforts, we achieved several milestones during the year. We made our maiden foray into the Indonesian market, acquired a Japanese brand into our F&B portfolio, grew our presence in the PRC and entered into the hospitality segment. As a result, we ended the year with 10 F&B brands represented by 43 restaurants in Singapore and 3 in overseas markets, compared to 9 F&B brands with 38 restaurants in Singapore and 1 in PRC at the end of FY2017.

As we continued to expand, our revenue increased by 11.7% to S$64.8 million for FY2018, supported by our online sales growth, dine-in revenue from both new and existing outlets and revenue from the acquisition of Tomo Izakaya Pte. Ltd. (“TIPL”). Understandably, as our business is still growing, costs related to expansion such as the gestation period for new outlets reduced our profits. Consequently, we reported net profit before tax of S$0.6 million for FY2018.

The F&B in Singapore, and the restaurant sector in particular, continues to face pressure owing to slowing economic growth, rising operating costs, and labour shortage. However, we have continued to focus on efforts to mitigate these factors. Other than diversifying our revenue streams across brands, geographies and sectors, over the years we have invested into technological improvements to our operations. In FY2018, we commenced trials of E-Waiters and E-Menus at selected outlets and we are in the midst of integrating technology further into our business processes to reduce reliance on manpower, lower operation cost and improve productivity.

Overall, the aforesaid developments in FY2018 set the pace for future growth and improvements to the overall outlook for the Group.

NOURISHING OUR F&B BUSINESS

The F&B business remains the core business for the Group. Encountering muted consumer sentiments in Singapore over the last couple of years, we aimed our focus on revenue diversification and optimising our operations.

With revenue diversification, we looked towards the expansion of brands and cuisines, as well as enlarging our geographical presence. In October 2018, we acquired 100% of TIPL for about S$0.9 million, the first Japanese cuisine establishment for the Group. TIPL has two well-located restaurants at Clarke Quay and the Esplanade. With this acquisition, the Group’s umbrella of brands and cuisine offerings were expanded, bolstering its suite of offerings and reach in the local market. In our efforts to diversify our revenue and simultaneously increase our presence in the region, together with Ajisen China, we opened two new So Pho outlets in PRC in FY2018, which are located in popular shopping malls New Raffles City, Shanghai and Tianhe Cheng, Guangzhou.

Furthering our plans, this year we were glad to report that a fourth So Pho outlet with Ajisen China was established in January 2019 in Huanmao IAPM Shopping Mall, Shanghai. We also made our maiden foray into the Indonesian market in February 2019 through our So Pho brand, securing an outlet in Plaza Senayan, Central Jakarta, Indonesia. The above developments have strengthened our brand equity in the region and we hope to continue our momentum, exploring other favourable overseas locations and opportunities.

With retail rental rates remaining weakened in Singapore, the Group took the opportunity to expand its operations, attaining strategic locations over the last two years. However, as consumer sentiments in Singapore remain weak, we kept a keen eye on developments to consumer trends and pressed on with regular business evaluations. This has served us well in the past as we identified the demand for greater convenience early, and broadened our online food delivery services, which has shown remarkable growth, almost tripling in revenue from FY2016 to S$7.9 million for FY2018. In FY2018, seven new outlets were opened, two outlets were acquired and one outlet was closed due to mall refurbishment. As part of our evaluations, we assess the viability of each outlet periodically and three non-performing outlets were closed in FY2018.

In order to better integrate technology into our business processes, we have also engaged a Technology Officer. This will help smoothen incorporation of our systems such as Enterprising Resource Planning (ERP), Points-of-Sale (POS), Bill-of-Materials (BOM), and Offline- Procurement-System (OPS), subsequently aiding to reduce reliance on manpower, maintain the consistency of food quality, and enhance overall workflow efficiency and productivity. This is an ongoing initiative which will be especially effective as labour policies to raise productivity and reduce reliance on foreign workers in the services sector come into effect over the next few years.

As the local F&B industry continued to be lacklustre, we explored new business opportunities with the purpose of revenue diversification.

A HOSPITABLE GROWTH OPPORTUNITY

We embarked on our first hospitality venture to bolster our growth prospects and broaden our stream of recurring income through the acquisition of the entire issued share capital of SOPL on 10 December 2018 at net tangible assets value as at 30 November 2018.

SOPL is a provider of affordable and diverse accommodation solutions targeted at corporate expatriates and millennial travellers. Under the brand name ST Residences, currently, SOPL manages 202 units in different apartments and condominiums in Singapore as well as 15 units in Hong Kong. SOPL has been steadily growing since it was acquired, and we continue to see good prospects from this business.

The acquisition will enable us to ride on the rising trends in business travel, especially in the Asia-Pacific region, which is the largest business travel market in the world.

SOPL will not only open the door to the hospitality segment for us, but it also brings the possibility of cross-sector collaboration for our core F&B business and further regional expansion.

OUTLOOK AND FUTURE PROSPECTS

We believe that sales is likely to remain lacklustre as consumer confidence remains below optimistic levels amidst a backdrop of slowing economic growth globally. The mitigating feature is rising real wage in Singapore, which could help improve consumer confidence.

As such, it is important for us to maintain focus on growing the business effectively and managing costs along the way. The Group has two new outlets in the pipeline for the local market located in IMM Building and Jewel Changi Airport but it also has identified three non-performing outlets to be closed in the next 12 months. Such strategic changes to the Group’s operations are essential in improving profitability for the Group. We also expect to see the full effect of revenue from new outlets opened last year to kick in this year.

Additionally, tighter labour policies are expected to come into play over the next few years. Through further integration of technology, we aim to ease reliance on manpower and increase productivity.

A large part of our F&B business growth this year is expected to be focused on collaborations or acquisitions, especially in overseas markets. We entered the Indonesian market in 2019 and it is one of the markets that we will monitor closely for further expansion. We are also pleased with the developments with Ajisen China in growing the So Pho Brand in PRC, and we are keen to see how we can extend on this partnership. Overall, we are open to new markets to further diversify our revenue streams and capture opportunities provided by a growing middle class in Asia.

Apart from our F&B business, we are also aggressively building up our hospitality business through SOPL. According to report by Allied Market Research, the business travel market size set to reach US$1.7 trillion by 2023. The prospect of serviced residences looks promising and we aim to launch two additional apartment buildings comprising about 106 serviced apartments during the year which would bring units managed by SOPL to over 300. At the same time, we are also launching our ST Signature brand which will manage co-living hotel spaces, and seeks to provide guests with more diverse accommodation options at a lower premium compared to traditional hotels. We will be looking to establish our hotel portfolio during the year with three co-living hotels under construction which could add an estimated 180 rooms.

Sustainable growth remains a priority for the Group and we will explore suitable brands and businesses whether internally, through collaborations or acquisitions to add value to our operations both locally and overseas.

ACKNOWLEDGEMENTS

I would like to take this opportunity to extend my gratitude to the Board for their guidance through the year. On behalf of the Board, I would like to express my appreciation to our management team and employees for their relentless commitment and hard work that has helped the Group in its path of growth. I would also like to thank all our customers, suppliers and shareholders for their unwavering support and faith in the Group. We will strive to build on the developments that we have achieved in FY2018 and gain momentum for a better and brighter FY2019.

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