Design Studio

Chairman's Statement

Dear Shareholders,

I am delighted to present Design Studio Group's Annual Report for the financial year ended 31 December 2016 ("FY2016").

Financial Review

Our trend for profitability and value creation continued in FY2016 as we closed the year with a profit net of tax of S$20.5 million, an increase of 21.7% from S$16.8 million in FY2015. This is a particularly robust result given the challenging business landscape which continues to be afflicted by geopolitical uncertainties, weak economies and soft consumer demand. More importantly, our performance is testament to the resilience of our business model, which focuses on customer service, operational excellence and cost efficiency.

For the full year to 31 December 2016, we delivered revenue of S$179.0 million, a 7.2% increase from S$166.9 million in FY2015. This increase was primarily due to higher revenue contribution from the Hospitality & Commercial division, partially offset by lower revenues from the Residential Property division.

Taking a closer look at the performance of our key markets, Singapore continues to be our largest market accounting for S$121.8 million or 68.0% of total revenue. Revenue from Singapore declined 14.1% or S$20.0 million from S$141.8 million in FY2015, as the Group completed fewer residential property projects during the year.

Malaysia was the Group's second largest geographical market in FY2016. The country contributed 19.2% or S$34.4 million of total revenue in FY2016, compared to S$17.7 million in FY2015.

The Group opened first retail showroom in Dongguan, Guangzhou in FY2012, and recorded revenue of S$0.5 million in China that year. Since that time, revenues from China have grown at a healthy pace. In FY2016, revenue from China accounted for S$3.4 million or 1.9% of total revenue, reflecting a six-fold increase over the four-year period.

As a result of the Group's strategy to prudently expand into new markets, revenue contribution from United Arab Emirates, Japan, and the United States of America increased significantly from the year-ago period. In aggregate, these markets contributed S$19.2 million or 10.7% of total revenue in FY2016. This compares with a combined contribution of S$7.2 million or 4.3% of total revenue in FY2015.

Gross margin increased 1.6 percentage points from 20.7% in FY2015 to 22.3% for FY2016, primarily due to higher margins recorded in some projects completed during the financial year. The Group's marketing and distribution expenses increased 27.4% to S$6.1 million in FY2016, from S$4.8 million in FY2015, whilst general and administrative expenses decreased from S$10.3 million in FY2015 to S$8.9 million in FY2016.

As a result, the Group achieved an improved profit before tax of S$25.3 million for FY2016, as compared with S$19.8 million for FY2015. After accounting for tax expenses, the Group's net profit after tax was S$20.5 million for FY2016.

Given our prudent approach to capital management, we continued to ensure the strength of our balance sheet and ended the year in a healthy net cash position of S$54.0 million.

In the light of these achievements and a strong cash position, the Board is delighted to reward shareholders with a total dividend of 6.50 Singapore cents per ordinary share in FY2016. This total dividend comprises a final dividend of 1.25 Singapore cents per share, the interim dividend of 1.25 Singapore cents per share declared on 4 August 2016 as well as a special dividend of 4.00 Singapore cents per share.

Operational Review

Notwithstanding the challenging business environment across the Group's key markets, we secured 51 quality contracts (including additional works for existing projects) from new and existing customers, strengthening our order book value to S$193.1 million. This significant achievement is testament to the strength and value of the Design Studio Group brand which is today, globally recognized for quality, innovation and service excellence. We believe that our track record of delivering innovative solutions and service excellence continues to position Design Studio Group as the partner of choice with major local and international developers.

Hospitality and Commercial

Over the years, the Group's Hospitality and Commercial division has established a leadership position in the interior fitting-out business, and a reputation for delivering quality products and services. Supported by our strong brand, DDS Singapore and DDS Malaysia made good progress during the year, securing an aggregate of 30 contract wins.

In Singapore, the Group secured several contracts for landmark projects including 634 rooms, hotel lobby & Akira Back Restaurant of JW Marriott Singapore South Beach, and the 129-key Yotel Hotel at The Jewel Changi Airport.

In Malaysia, key project wins included interior design and fitting-out works for Mandarin Oriental, Kuala Lumpur; a luxurious oceanfront resort in Langkawi; 280-units within the Ritz Carlton Residences in Kuala Lumpur; public areas of Tropicana Gardens; and an integrated commercial centre in Nusajaya.

Residential Property

Over 20 years ago, Design Studio Group secured and successfully delivered its first residential property project. Our strategic move into this sector in 1996 was timely, as it provided us with a platform to grow a new division for the Group. Since that inaugural residential project, we have completed numerous notable high-end residential projects, delivering quality results on a timely basis to leading developers in Singapore and abroad.

Despite the challenging operating environment in FY2016, we were able to secure 21 new contracts. These new contracts were awarded by leading global property developers for major real estate projects in Singapore, Malaysia, China, Bangkok and Dubai.

Singapore project wins include Botanique at Bartley, a 797-unit condominium project by UOL Development (Bartley) Pte Ltd, and The Visionaire, a 632-unit executive condominium by Qingjian Realty Pte Ltd.

In Malaysia, the Group secured several iconic projects including a prestigious 584-unit service apartment project in Johor Bahru's largest urban lifestyle development, and a 1,282-unit eco-green condominium project located in the prime Kepong area of Kuala Lumpur City.

In China major projects secured by the Group include Shanghai Bao Shan (宝山罗店新镇1-3地块住宅项) and Hanking Peak Boulevard (汉京九榕台), a 242-unit mid-to-luxury condominium by the Han King Group.

The Group also secured a contract to supply joinery works to a 982-unit luxury serviced residence project located in heart of downtown Dubai, and an eight-storey, 110-unit high-end condominium in Bangkok.

Our Approach To Innovation And Excellence

We are cognizant that our leadership position and strong branding are key to new business opportunities with new and existing clients. On this front, we will raise the bar by strengthening our human capital through training and talent development, equipping our employees with the best-in-class knowledge and technical skills to take our products and service delivery to the next level.

Equally important is our ability to achieve operational excellence. This area of expertise allows us to maximize cost efficiency and operational productivity to strengthen our competitiveness and sustainability in the longer-term. Whilst we made good progress in FY2016, we recognize that there is still much to do given the absence of industry catalysts and uncertainty in our core markets. We will endeavor to improve on our operational efficiency by harnessing our capabilities across the group and managing our operational costs.

Looking Ahead

The path into FY2017 is expected to be challenging. For industry players, visibility continues to be diminished as the operating environment remains dominated by geopolitical uncertainties, threats of rising interest rates, real estate cooling measures and an unresolved demand-supply imbalance.

The Group expects to see continued opportunities for its Hospitality and Commercial division in Singapore and Malaysia, underpinned by a tourism and hospitality sector that continues to increase demand for hotel accommodation. This demand is expected to fuel the fit-out industry through the refurbishment of existing hotels and build-out of new assets.

The Residential Property division is expected to remain subdued in FY2017 given the various property cooling measures implemented across its key markets, global uncertainty and rising interest rates.

The Group will maintain its focus on its core markets of Singapore and Malaysia, while continuing to expand its footprint into China and other select international markets.

New Leadership And Acknowledgements

On 22 February 2017, Mr Ku Wei Siong stepped down as Executive Director and Chief Executive Officer of Design Studio to pursue his personal interests. On behalf of the Board of Directors, I would like to thank Mr Ku for his professionalism, leadership and contributions to the Group, and wish him well in his future endeavours. With this development, the Board appointed Mr Edgar Ramani to the role of Director and Chief Executive Officer. Mr Ramani comes with strong credentials, extensive knowledge and senior leadership experience in the global engineering and construction sectors. Prior to joining the Group, Mr Ramani was Chief Executive Officer – Asia, at UGL Limited. I believe that his business acumen, leadership skills and deep sector experience will be invaluable to the Group in its next phase of growth.

Ms Kelly Ng Chai Choey, Executive Director, Chief Financial Officer and Company Secretary, submitted her resignation, effective 31 March 2017, to pursue other interests. On behalf of the Board of Directors, we would like to thank Ms Ng for her valuable contribution to the success of the Company, both as an executive and as a director. She has delivered an outstanding job, strengthening the Group's leadership, and our financial and corporate functions over a number of years. We wish her well in her future endeavours. The Group appointed Mr Chua Wui Lik as Chief Financial Officer on 3 April 2017. Mr Chua was previously Group Financial Controller of Intraco Limited, and Chief Financial Officer of KS Distribution Pte Ltd.

During the year, we bid farewell to Mr Muhammad Umar Saleem, who stepped down as Non-Executive Director and member of the Audit Committee on 21 September 2016. I would like to express my appreciation and thanks to Mr Muhammad Umar Saleem for his invaluable contribution during his six-year tenure in office. As part of this transition, I welcomed Mr Hamish Gordon Tyrwhitt to the Board on 29 June 2016 as a Non-Executive Director and as a member of the Audit Committee on 21 September 2016. Mr Tyrwhitt is concurrently the Group Chief Executive Officer and Executive Director of Depa United Group.

I would like to take this opportunity to express my heartfelt gratitude to my fellow Directors for their wise counsel and astute leadership in successfully navigating the Group through volatile and challenging business environments.

I would like to express our heartfelt appreciation to the management and employees of Design Studio Group, whose courage, diligence and commitment to excellence have allowed us to continually reach new heights. To our shareholders, customers, and business partners, thank you for your continued trust and unwavering support.

I am confident that with your continued support, we will overcome the challenges ahead and build on our leadership position for greater success.

Tan Siok Chin (Ms)
Non-Executive Chairman