Chairman Statement 
Dear Shareholders
It has been a challenging period Darco Water Technologies Ltd. Our Taiwan market was especially affected as a result of changes in economic and political environment in FY2009. Most of the traditional EPC (Engineering, Procurement and Construction), projects in Taiwan were remodelled as BOT (Build, Own and Operate) contracts instead. This change has significantly reduced the number of projects in FY2009, and greatly affected the GroupÊs performance in FY2009. Revenue decreased 39.6% to S$58.5 million in FY2009 from S$97.4 million in FY2008.
Looking ahead
You may also recall that Darco Engineering Taiwan registered a loss of about S$5
million from EPC contract activities last year. With fewer EPC contracts this year,
we have actually done better by booking in a significant gain in BOT success fees.
Therefore, we have in fact registered a small net profit from these municipal project
activities.
You will note, however, that our Taoyuan North solid waste recycling plant has shutdown at the end of 2009, after operating for slightly over one and a half year of a
6-year concession period. The investment has in fact been significantly written off in
this financial report. I do believe we have a very good case to seek court redress and
have promptly filed a legal claim, details of which are found in the later pages of this
Financial Statement report. Nevertheless, we believe that the Taoyuan North project
failure is an isolated event, and that we shall remain committed to seek for the next
project given the vast potential of solid waste recycling in Taiwan.
As for the soil remediation project reported last year, our client has in fact only recently
being granted the temporary site license for soil remediation. Consequently, we were
therefore unable to complete the soil treatment as expected in FY2009. However, it
now looks certain that the project is expected to be substantially completed by the
end of FY2010.
Still in Taiwan, I want to take this opportunity to assure our shareholders that I am
not at all satisfied with our Taiwan performance in the last two years. I have begun
to restructure the whole senior management team there to rectify some problems and
strengthen our operations.
While we are unsure if the economic recovery is sustainable, we are
encouraged to see signs of recovery across markets, and we expect
the outlook of Darco to improve this year.
Our BOT strategy for Taiwan would be to take the position as a lead
sponsor and seek for suitable investors to form a Special Purpose
Vehicle (SPVA) and bid for such projects. Darco shall undertake the
position as the qualified party for tender preparation and submission
as well as financial planning proposals. As for equity investment, we
shall aspire only to take minimum investments to the BOT project to
fulfill the contractual requirement of holding an equity stake typically
in the region of between 20 to 51%. In addition, Darco shall be
the party to undertake the design, engineering, procurement and
construction (EPC), as well as the operation and maintenance (O&M)
of the water treatment plants. Based on such an arrangement, Darco
shall draw its revenue stream from three main sources: incorporation
fee of SPV, billings from EPC and income from O&M.
On this front, we have made encouraging progress as we recently
secured a new BOT project from the Taoyuan County Government
to build and operate a 15,000 m3 per day wastewater treatment
plant for a concessionary period of 35 years. The construction of
the project would be divided into three phases, with Phase One
at 7,500 m3 per day, Phase Two at 3,750 m3 per day, and
Phase Three at 3,750 m3 per day. The initial construction period is
expected to take two years, and Darco is set to reap contributions
from this year onwards on progressive construction activities. Upon
commencement, Darco will operate and maintain the plant. An SPV
was formed to invest S$79.0 million over the entire construction
period of seven years and over the three phases, and where Darco
is the leading investor and owns 51% of the SPV. The whole BOT
project is expected to bring in about S$298.0 million revenue over
the concessionary period.
Despite the shortcomings we faced, the fact remains Taiwan continues
to be the most exciting market for Darco with business opportunities
aplenty, especially in the municipal sector. We see this project as an
excellent entry point for securing more projects of such arrangements
going forward.
Our second Build, Own and Operate (BOT) project in China, Deqing Qianyuan, will complete construction in the next six months upon drawing down our loan facility in February 2010, and we do not foresee any further delay in the operation of the plant. The BOT project is expected to produce 100,000 m3 per day of potable water and contribute about S$4.8 million annual cash flow per year, starting from 4Q FY2010. This project, together with our first BOT project Deqing Wukang, will strengthen our recurring income base.
We have been receiving substantial business enquiries from our customers in the electronic and semi-conductor sectors since the last quarter of FY2009, and have recently begun to take in orders. WIth improved business sentiments in Malaysia, recovery should be gradual. With respect to our BJV with Denmark-based Envidan A/S in Malaysia, we are pleased with the progress so far as we booked in over S$4 million worth of contracts in our order-book.
No less anxious as you are, I have personally made a recent trip up to Qatar with regards to our MOU. Yet, despite Qatar GovernmentÊs continued interest in our concept, they were still unable to finalise and assign the project to a ministry at the present moment. We regret that there is little progress on this front. Nevertheless, we are still looking forward to the project.
On behalf of the Board, I would like to thank the management team, employees, business partners, suppliers, customers and shareholders for your unwavering faith and loyalty afforded to Darco during this difficult period. With your continuous support, we will continue to work hard and get back on the track of growth.
Mr. Thye Kim Meng
Chairman and Managing Director