KINSTEEL BHD - malaysiastock.biz KINSTEEL BHD (Company No. 210470-M) AnnuAl RepoRt 2017 1 CONTENTS...

KINSTEEL BHD(Company No. 210470-M)

ANNUAL REPORT

2017

KINSTEEL BHD (Company No. 210470-M) AnnuAl RepoRt 2017

1

CONTENTS

Corporate Information 02 Corporate Structure 03 Group Financial Highlights 04 Managing Director’s Statement 05 Directors’ Profile 07 Key Senior Management Profile 09 Statement on Corporate Governance 10 Other Disclosure Requirements 20 Audit Committee Report 22 Management Discussion and Analysis 26 Statement on Risk Management and Internal Control 28 Financial Statements 31 Properties Owned 142 Analysis of Shareholdings 144 Notice of Annual General Meeting 148 Proxy Form

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CORPORATE INFORMATION

Directors

Tan Sri Dato’ Sri Pheng Yin Huah Managing Director

Dato’ Henry Pheng Chin Guan Chief Executive Officer

Dato’ Lew Choon Executive Director

Pheng Chin HuatNon-Independent Non-Executive Director

Chong Hoi Sheong @ Chong Hoi CheongIndependent Non-Executive Director

Datuk Lim Chaing Cheah Independent Non-Executive Director (Resigned on 17 March 2017)

Shamsudin @ Samad Bin Kassim Independent Non-Executive Director (Resigned on 5 July 2017)

Dato’ Sri Md Sharif Bin ShamsuddinIndependent Non-Executive Chairman (Resigned on 21 August 2017)

Pheng Chin Shiun (Alternate Director to Tan Sri Dato’ Sri Pheng Yin Huah) (Resigned on 22 May 2017)

Datin Hong Cheng Guat (Alternate Director to Dato’ Lew Choon)(Resigned on 13 June 2017)

Audit Committee

Chong Hoi Sheong @ Chong Hoi Cheong Independent Non-Executive Director

Datuk Lim Chaing Cheah Chairman/ Independent Non-Executive Director (Resigned on 17 March 2017)

Shamsudin @ Samad Bin Kassim Independent Non-Executive Director (Resigned on 5 July 2017)

Remuneration and nomination Committee

Shamsudin @ Samad Bin Kassim Chairman/ Independent Non-Executive Director (Resigned on 5 July 2017)

Datuk Lim Chaing Cheah Independent Non-Executive Director (Resigned on 17 March 2017)

Chong Hoi Sheong @ Chong Hoi Cheong Independent Non-Executive Director

secretaries

Yeap Kok Leong (MAICSA 0862549)Tan Bee Hwee (MAICSA 7021024)

Registered Office

B-38, 1st FloorLorong Sri Teruntum 139Off Jalan Bukit Ubi25200 Kuantan Pahang Darul Makmur

Tel: +609-513 4066Fax: +609-513 0660

Auditors

Crowe Horwath Level 16 Tower C, Megan Avenue II12 Jalan Yap Kwan Seng50450 Kuala LumpurMalaysia

Registrar

Tricor Investor & Issuing House Services Sdn BhdUnit 32-01, Level 32, Tower A, Vertical Business Suite, Avenue 3,Bangsar South, No.8, Jalan Kerinchi,59200 Kuala Lumpur Wilayah PersekutuanMalaysia

Tel : +603-27839299 Fax: +603-27839222

Principal Bankers

RHB Bank BerhadHong Leong Bank BerhadOCBC Bank (Malaysia) BerhadMalayan Banking Berhad Standard Chartered Bank Malaysia BerhadAmBank Berhad AmIslamic Bank BerhadCIMB Bank Berhad Bank Muamalat Malaysia Berhad

stock exchange listingBursa Malaysia Securities Berhad - Main Market (Stock Code: 5060)

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CORPORATE STRUCTURE

51% 100% 100% 100%

50%

PeRFeCtCHAnnelsDn BHD

(718481-V)

Manufacturing andtrading of steel beams,

sections, bars,wire rods, nails,stretched wire,

wire mesh, and othersteel products

Kin KeeMARKetinG

sDn BHD(187977-D)

Trading in steelbars and related

product

HARVARDVisiOn

sDn BHD(408124-A)

Property

Investment

Kin Kee steelseRViCe CentRe

sDn BHD(408124-A)

Manufacturingand trading of

wire mesh

DARUl BAnGsA

HOlDinGssDn BHD

(1175698-T)

InvestmentHolding

28.75%

PeRWAJAHOlDinGsBeRHAD

(798513-D)

InvesmentHolding

100%

PeRFeCtWiReMAKeRs

sDn BHD(771267-H)

Manufacturingof hard drawn

wire, galvanizedsteel wires and

other wireproducts

80%

Ds steelsDn BHD

(Formerly known as JulangSalam Sdn Bhd)

(1183802-H)

Procurement ofalloy stall (squarebars and billets)and trading of

steel bars.

100% 100%

PeRWAJAsteel

sDn BHD(187922-H)


direct reductioniron, steel billets,

beam blanksand blooms

esteeMsCORe

sDn BHD(823447-X)

Provide vocational

and technical trainingand operateseducational

centres

PERWAJAHOLDINGSBERHAD(798513-D)

28.75%

51%

InvesmentHolding

Manufacturing andtrading of steel beams,

sections, bars,wire rods, nails,stretched wire,

wire mesh, and othersteel products

PERFECTCHANNELSDN BHD

(718481-V)

100%

100% 100% 100%

KIN KEEMARKETING

SDN BHD(187977-D)

Trading in steelbars and related

product

HARVARDVISION

SDN BHD(408124-A)

PropertyInvestment

KIN KEE STEELSERVICE CENTRE

SDN BHD(408124-A)


wire mesh

PERFECTWIREMAKERS

SDN BHD(771267-H)

Manufacturingof hard drawn

wire, galvanizedsteel wires and

other wireproducts

100%100%

ESTEEMSCORE

SDN BHD(823447-X)

Provide vocationaland technical training

and operateseducational

centres

PERWAJASTEEL

SDN BHD(187922-H)

Manufacturingand trading ofdirect reduction

iron, steel billets,beam blanksand blooms

50%

DARUL BANGSAHOLDINGSSDN BHD

(1175698-T)

InvestmentHolding

80%

DS STEELSDN BHD

(1183802-H)

(Formerly known as Julang Salam Sdn Bhd)

Procurement ofalloy stall (squarebars and billets)and trading of

steel bars.

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GROUP FINANCIAL HIGHLIGHTS

4

(RM million) 2012 2014 2015 2016 2017 Revenue 2,147 1,804 414 299 225 Loss Before Taxation (236) * (1,248) (94) * (93) (345) (Loss)/Profit Attributable to Shareholders (110) * (426) 92 * (74) (324) Tangible Assets Employed 4,032 2,767 1,495 1,430 1,207 Shareholders’ fund 537 111 141 69 (257) Paid-up Share Capital 210 210 210 52 83 Net Tangible Assets per Share (sen) 99 (6) 42 34 (25) Earnings/(Loss) per Share (sen)-Continuing Operation

(10.6) 16.0 5.0 (7.0) (31.1)

Earnings/(Loss) per Share (sen)-Discontinued Operation Dividend - Tax Exempt (%)

- (68.0) (4.0) 0.0 -

Dividend - Tax Exempt (sen per share) - - - - -

Revenue (RM million) Loss Before Taxaon (RM million)

Tangible Assets Employed (RM million) Shareholders' Fund (RM million)

2012

2,1471,804

414 299 225

2,500

2,000

1,500

1,000

500

-2014 2015 2016 2017

2012

4,032

2,767

1,495 1,4301,207

2014 2015 2016 2017

5,000

4,000

3,000

2,000

1,000

-2012

537

111 141 69

(257)

2014 2015 2016 2017

1,4001,2001,000800600400200

-(200)

2012

(236)

(1,248)

(345)(94)

2014 2015 2016 2017

200

-

(200)

(400)

(600)

(800)

(1,000)

(1,200)

(93)

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MANAGING DIRECTOR’S STATEMENT

On behalf of the Board of Directors, I hereby present the Annual Report and Audited Financial Statements of Kinsteel Bhd (“KB” or “the Company”) for the financial year ended 30 June 2017.

Financial Highlights

For the financial year ended 30 June 2017, the Group incurred a net loss of RM342 millioncompared to RM92 million in the previous financial year. The significant losses reported in current financial year were mainly due to impairment of securities and related parties debts amounted to RM171 million arising from its RCULS and receivables in Perwaja Holdings Berhad Group (“Perwaja”) following the lapsed of the Proposed Regularisation Scheme with Zhiyuan International Investment & Holding Group (Hong Kong) Co. Limited and Perwaja de-listed from the Official List of Bursa Securities pursuant to Paragraph 8.04 of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad. The Group finance costs increased by RM89 million with additional accrued interest costs due to the Group removal from the Corporate Debt Restructuring Committee’s (CDRC) purview effective from 7 February 2017 resulted from its inability to fulfil the conditions precedent in the Debt Restructuring Agreement (“DRA”) with all its Lenders. Accordingly, the original interest costs agreed in the DRA will no longer valid and the additional interest costs accrued was based on the original facilities given by the lenders. Furthermore, the revenue and profit for the Group were significantly affected due to the difficulty in obtaining additional banking facilities resulted in the Group difficulty to procure raw materials at competitive prices and the increases in electricity and gas tariffs that driven up production costs further.

Corporate Developments

The various significant corporate developments events occurred since the date of the last Annual Report till the date of this report were as follows:

On 27 October 2016, the Group announced that the Company is an affected listed issuer under Practice Note 17 (“PN17”) of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad (“MMLR”) (“Bursa Securities”). This is due to the Company having triggered paragraph 2.1(d) of PN17 as the Company’s auditors have expressed a disclaimer opinion in the Company’s latest audited financial statements for the financial year ended 30 June 2016. The Company is required to submit a regularisation plan to Securities Commission Malaysia or Bursa Securities by 26 October 2017.

On 3 January 2017, the Company has been granted an order pursuant to Section 176(1) and 176(10) of the Companies Act, 1965 (the “Act”), by the High Court of Malaya in Kuala Lumpur (“High Court”) to restrain all further proceedings, and any and all actions or proceedings brought by any party including its Scheme Creditors consists of creditors and bankers up to 28 February 2017 (“the Order”). The Order was applied for in order to facilitate the Company to convene a meeting with its creditors pursuant to Section 176(1) of the Act for the purpose of considering and if thought fit, to approve with or without any alteration or modification, a proposed scheme of arrangement and compromise for the Company.

On 7 February 2017, the Board of Directors of KB (“Board”) were informed that the Corporate Debt Restructuring Committee (“CDRC”) has notified the Company of its removal from CDRC’s purview effective on that date as the Group has not been able to fulfil the conditions precedent in the DRA including payment for the balance of the stamp duties. KB together with the scheme’s advisor are currently negotiating a resolution of its debts directly with all the major lenders.

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Managing Director’s Statement (cont’d)

On 11 April 2017, the Company has been granted an order pursuant to Section 366(1) and 368(1) of the Companies Act 2016 (the “Act”), by the High Court of Malaya in Alor Setar in the state of Kedah Darul Aman (“High Court”) to restrain all proceedings and actions brought by any party including its Scheme Creditors consists of creditors and bankers for a period of three (3) months effective from 11 April 2017 (“the Order”). The Order was applied by CTJ Logistics (M) Sdn Bhd, the unsecured creditor of the Company, to facilitate the KB to convene a meeting with its creditors pursuant to Section 366(1) of the Act for the purpose of considering and if thought fit, to approve with or without any alteration or modification, a proposed scheme of arrangement and compromise for KB. Full details of the proposed scheme of arrangement will be contained in an Explanatory Statement which will be issued to the Scheme Creditors in due course (“Details of the Proposed Scheme”).

On 11 July 2017, Kinsteel Bhd, Kin Kee Marketing Sdn Bhd and Perfect Channel Sdn Bhd have been granted an Order pursuant to Section 366(1) and 368(1) of the Companies Act, 2016 by the High Court of Malaya in Shah Alam to restrain all proceedings and actions brought by any party including its creditors for a period of ninety (90) days effective from the date of the Order been granted.

On 9 October 2017, the Company has been granted an order pursuant to Section 366(1) of the Company Act 2016 (the “Act”) by the High Court of Malaya in Ipoh to restrain all proceedings and actions brought by any party including its creditors for a period of three (3) months effective from 9 October 2017.

Prospects

The prospects remain challenging as the Group is undertaking a debt restructuring exercise to address its liquidity issue. The Group’s prospect is highly dependent on the successful implementation of the proposed restructuring scheme with its financial lenders and major creditors. The Group requires to operate profitably to generate sufficient cash in the future to fulfill their obligations as and when they fall due and financial support from the lenders and various stakeholders.

Appreciation

On behalf of the Board of Directors, I wish to place on record our deep appreciation and thanks to all our directors, management and staff for their effort, dedication and commitment throughout the year.

We also wish to thank all our valued shareholders, customers, business associates, and lenders fortheir continued support and cooperation.

TAN SRI DATO’ SRI PHENG YIN HUAHManaging Director

Date : 6 December 2017

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DIRECTORS’ PROFILE

TAN SRI DATO’ SRI PHENG YIN HUAHMale, Managing Director (Age 69, Malaysian)

Tan Sri Dato’ Sri Pheng Yin Huah was appointed as Director on 03 January 1991 and subsequently appointed as Managing Director of Kinsteel on 19 January 1991.

He began his apprenticeship in the steel business in 1964 under the tutelage of his late father, Mr Hong Kim Kee, the founder of the Kin Kee group of companies. Through his leadership and guidance, the Kin Kee group of companies has transformed from collection of scrap iron into a conglomerate of integrated steel based companies involved in the trading and manufacturing of a wide variety of steel products. His involvement in the steel industry for more than 30 years has earned him the recognition and respect as one of the leading businessmen in the steel industry.

Tan Sri Dato’ Sri Pheng Yin Huah is the Executive Chairman of Kin Kee Hardware Sdn Bhd, Kin Kee Metal Sdn Bhd, Kin Kee Properties Sdn Bhd and Perniagaan Kin Kee Sdn Bhd, which are involved in trading of iron, metal and steel products and property development. Tan Sri Dato’ Sri Pheng is the Non-Independent Non-Executive Director of Perwaja Holdings Berhad. He also sits on the board of several other private limited companies in Malaysia.

In addition to the above, he is also actively involved in social work. He is currently the President of the Federation of Chinese Associations Malaysia (Hua Zong), Deputy President of the Malaysia Steel Association, Honorary Advisor of The Federation of Malaysia Hardware, Machinery and Building Materials Dealers’ Association, Executive Advisor of Pahang Chinese Chamber of Commerce and Industries, Advisor of Persatuan Peniaga Logam Dan Jentera Pahang, Honorary Advisor of the Associated Chinese Chamber of Commerce and Industry of Malaysia, Vice-President of the Hokkien Association of Kuantan, Chairman of the Board of Governors of Sekolah Menengah Chong Hwa Kuantan, President of the Gabungan Persatuan-Persatuan Cina Pahang and President of the Yayasan Pendidikan Gabungan Persatuan Cina Pahang, Honorary President of the Chinese Chamber of Commerce & Industry of Kuala Lumpur & Selangor, Honarary President of the Associated Eng Choon Societies of Malaysia and Life Honorary President of Persatuan Eng ChoonKuantan.

Tan Sri Dato’ Sri Pheng Yin Huah is the brother of Dato’ Hong Thian Hock who is a major shareholder of the Company. He is the father of Dato’ Henry Pheng Chin Guan and Mr Pheng Chin Huat.

He attended four out of five Board of Directors’ meetings held during the financial year 30 June 2017.

He has no conflict of interest with the Group and has not been convicted for offences within the past five years, other than traffic offences. There were no sanctions and/or penalties imposed on him by any regulatory body during the financial year.

DATO’ HENRY PHENG CHIN GUANMale, Chief Executive Officer (Age 46, Malaysian)

Dato’ Henry Pheng Chin Guan was appointed as an Executive Director and Chief Executive Officer of Kinsteel on 05 February 1997. He is the Chairman of the Risk Management Committee. Together with Tan Sri Dato’ Sri Pheng Yin Huah, he is responsible for formulating and implementing Kinsteel Group’s business policy and strategy. In addition, he also manages the overall operations of Kinsteel. He graduated in 1993 with a Bachelor of Commerce degree from the University of Wollongong, New South Wales, Australia. He is a full member of the CPA Australia and a Chartered Accountant with the Malaysian Institute of Accountants.

Dato’ Henry Pheng Chin Guan is currently the Honorary Secretary of the Malaysia Steel Association. He is an Executive Director in Perwaja Holdings Berhad. He also sits on the board of various other private limited companies in Malaysia.

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Directors’ Profile (cont’d)

Dato’ Henry Pheng Chin Guan is the son of Tan Sri Dato’ Sri Pheng Yin Huah who is the Managing Director and a major shareholder of the Company. He is the brother of Mr Pheng Chin Huat.

He attended all five Board of Directors’ meetings held during the financial year 30 June 2017.


DATO’ LEW CHOONMale, Executive Director (Age 60, Malaysian)

Dato’ Lew Choon was appointed as an Executive Director of Kinsteel on 19 January 1991. He is a member of the Risk Management Committee. He has been involved in the steel industry for more than 20 years and has accumulated much invaluable hands-on experience and exposure in all respect of the steel business. He is currently the Director responsible for marketing, production planning and quality control for the Kinsteel Group. He also sits on the board of various other private limited companies.

Dato’ Lew Choon is the brother-in-law to Tan Sri Dato’ Sri Pheng Yin Huah, the Managing Director of the Company and major shareholder of the Company.

He attended three out of five Board of Directors’ meetings held during the financial year 30 June 2017.


PHenG CHin HUAt Male, Non-Independent Non-Executive Director (Age 44, Malaysian)

Mr Pheng Chin Huat was appointed as an Non-Independent Non-Executive Director of Kinsteel on 12 August 2002. He is a member of the Risk Management Committee.

He graduated with a Bachelor of Business Administration from University of Central Oklahoma, United States in 1996. He also sits on the board of various other private limited companies in Malaysia.

Mr Pheng Chin Huat is the son of Tan Sri Dato’ Sri Pheng Yin Huah, the Managing Director of the Company and major shareholder of the Company. He is the brother of Dato’ Henry Pheng Chin Guan.



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Directors’ Profile (cont’d)

CHOnG HOi sHeOnG @ CHOnG HOi CHeOnG Male, Independent Non-Executive Director (Age 71, Malaysian)

Mr Chong Hoi Sheong @ Chong Hoi Cheong was appointed as an Independent Non-Executive Director on 12 August 2002. He is also a member of the Audit Committee and Remuneration and Nomination Committee. After his retirement from the teaching profession in 1992, he joined a property based company as the manager. In 1995, he formed a property development company and is currently active in the day-to-day operations of the company.


He does not have any family relationship with any Director and/or major shareholder of the Company and does not have any conflict of interest with the Company. He has not been convicted for offences within the past five years, other than traffic offences. There were no sanctions and/or penalties imposed on him by any regulatory body during the financial year.

KEY SENIOR MANAGEMENT PROFILE

DATO’ HENRY PHENG CHIN GUANMale, Chief Executive Officer of Kinsteel Bhd (Age 46, Malaysian)

Please refer to his Director’s Profile appearing in Page 7 of the Annual Report.

TAN SRI DATO’ SRI PHENG YIN HUAH Male, Managing Director of Kinsteel Bhd (Age 69, Malaysian)


DATO’ LEW CHOONMale, Executive Director of Kinsteel Bhd (Age 60, Malaysian)


9


STATEMENT ON CORPORATE GOVERNANCE

introduction

The Malaysian Code on Corporate Governance 2012 essentially aims to set out principles and specific recommendations on structures and processes used to direct and manage the business and affairs of the Company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long-term shareholders’ value.

The Board of Directors of Kinsteel Bhd strives to adopt the substance behind corporate governance prescriptions and not merely the form. The Board is fully committed to the maintenance of high standards of corporate governance by supporting and implementing the prescriptions of the principles and recommendations set out in Malaysian Code of Corporate Governance 2012 (“MCCG 2012”) respectively.

The manner in which the Corporate Governance framework is applied is summarized as follows:-

BOARD OF DiReCtORs

Board Responsibilities

The Board is primarily responsible for the Group’s overall strategic plans for business performance, overseeing the proper conduct of business, succession planning, risk management, shareholders’ communication, internal control, management information systems and statutory matters; whilst management is accountable for the execution of the expressed policies and attainment of the Group’s expressed corporate objectives. The demarcation complements and reinforces the supervisory role of the Board.

The Board has approved the Board Charter which sets out a list of specific functions that are reserved for the Board. The Board Charter addresses the following matters:

i. Board Membership, which includes composition, appointments and re-election and independence of Directors;

ii. Role of the Board, which includes duties and responsibilities and matters reserved for the Board;

iii. Role of Chairman, Managing Director and Chief Executive Officer; iv. Board Committees and Board Meetings; v. Financial Reporting; vi. Directors’ Remuneration;vii. Directors’ Training and Continuing Education;viii. Company Secretary; ix. Investor Relations and Shareholders’ Communication; x. Access to Information and Independent Advice; and xi. Directors’ Code of Conduct and Ethics.

The approval and adoption of the Board Charter in which the Code of Conduct and Ethics for Directors is embedded in the Board Charter formalizes the standard of ethical values and behavior that is expected of its Directors at all times.

The Board Charter will be reviewed periodically to ensure its relevance and compliance.

As at the end of the financial year under review, the Board Charter had yet to be made publicly available. Nonetheless, steps will be taken to upload the salient features of the Board Charter on the company’s website at www.kinsteel.com.my in line with recommendation 1.7 of the MCCG 2012.

10


Statement on Corporate Governance (cont’d)

11

The Board recognizes the environment sustainability role as a corporate citizen in its business approach and always endeavors in adopting most environmental friendly, ecological and cost effective production process.

The Board also endeavors in developing Group objectives and strategies having regard to the Group’s responsibilities to its shareholders, employees, customers and other stakeholders and ensuring the long term stability of the business, succession planning and sustainability of the environment. The corporate social responsibilities undertaken by the Group is stated in page 19 of the Annual Report 2017.

Board Balance and Composition

There are presently five (5) Board members in Kinsteel Bhd comprising mainly three (3) executive directors, one (1) non-independent non-executive director and one (1) independent director. The Board is made up of Directors who are qualified and experienced in various fields including accountancy, engineering and economics. The profiles of the Directors are provided in pages 7 to 9 of the annual report.

The Board is currently made up of predominantly executive directors due to resignation of three (3) independent directors up to the date of this report. The Board and management are still identifying qualified person to replace all the independent directors who have resigned to ensure the Board is fairly represented by the substantial shareholders of the Company and, together with the independent non-executive directors, to ensure no individual or small group of individuals that can dominate the Board’s decision making process.

In line with the MCCG 2012, the roles of the Chairman, Managing Director and Chief Executive Officer of the Company are separate with clear division of responsibilities between them to ensure balance of power and authority.

The Chairman is primarily responsible for ensuring Board effectiveness and conduct and the Group’s strategic business direction. He encourages a healthy debate on issues raised at meetings, and gives opportunity to Directors who wish to speak on motions, either for or against them.

The Managing Director has the overall responsibility for the management of the Group’s operations,organizational effectiveness and implementation of Board policies, decisions and strategies.

The Chief Executive Officer has the responsibility of ensuring that the implementation of the Board’s policies, decisions and strategies are effectively implemented and that the day-to-day management of the business are effectively managed as delegated by the Board from time to time.

The segregation between the duties of the Chairman, Managing Director and Chief Executive Officer ensures appropriate balance of role, responsibility and accountability at the Board level. Up to the date of this report, Dato’ Sri Md Sharif Bin Shamsuddin being the Independent Non-Executive Chairman of the Board has resigned and his role is currently being taken over by Tan Sri Dato’ Sri Pheng Yin Huah.

The Non-executive Directors support the skills and experience of the Chairman, the Managing Director and Chief Executive Officer, contributing to the formulation of policy and decision making through their knowledge and experience of other businesses sectors.

The Independent Non-Executive Directors are independent of management and free from any business relationship which could materially interfere with the exercise of their independent judgment Together, they play an independent role in ensuring that the strategies proposed by the management are fully deliberated and examined, taking into account the long term interest of the shareholders, employees, customers, suppliers and the many communities in which the Group conducts its business.

11



12

The composition and size of the Board are reviewed from time to time to ensure appropriateness. The Remuneration and Nomination Committee examines the size and composition of the Board with a view of determining the impact of the number upon effectiveness and makes recommendations to the Board on what it considers an appropriate size and composition for the Board.

Recommendation 3.2 of the MCCG 2012 recommends that the tenure of an Independent Director should not exceed nine (9) years cumulatively. Upon completion of the nine (9) years, an Independent Director may continue to serve on the board subject to his re-designation as a Non-Independent Director.

There are presently one (1) independent directors namely Mr. Chong Hoi Sheong @ Chong Hoi Cheong whose tenure of independent director has exceeded nine years. He did not wish to seek re-appointment in the coming Annual General Meeting.

The current Board will seek new appointment for independent directors to fulfils the requirement under Main Market Listing Requirements of Bursa Malaysia Securities Berhad to have at least 1/3 of the board comprised of Independent Non-Executive Directors.

Board Meetings

During the financial year ended 30 June 2017, five (5) board meetings were held. The attendance record of each Director is as follows:-

Directors Attendance

Tan Sri Dato’ Sri Pheng Yin Huah 4/5

Dato’ Pheng Chin Guan 5/5

Dato’ Lew Choon 3/5

Pheng Chin Huat 3/5

Chong Hoi Sheong @ Chong Hoi Cheong 3/5

Dato’ Sri Md Sharif Bin Shamsuddin

(Appointed on 19 October 2016 and resigned on 21 August 2017)

2/4

Datuk Lim Chaing Cheah

(Appointed on 19 October 2016 and resigned on 17 March 2017)

3/3

Shamsudin @ Samad Bin Kassim

(Resigned on 5 July 2017)

3/5

All the Directors holding office at the end of the financial year ended 30 June 2017 have complied with the minimum attendance at Board meetings as stipulated by the Listing Requirements of Bursa Malaysia Securities Berhad.

12



13

Appointments to the Board

The appointment of new Directors is under the purview of the Remuneration and Nomination Committee which is responsible for making recommendations to the Board on the suitable candidates for appointment. However, with the resignation of two (2) of its committee during the period, the Board is currently responsible to find suitable candidates for appointment of new Directors.

Recommendation 2.2 of the MCCG 2012 states that the Board should establish a policy formalizing its approach to boardroom diversity. The Board has no immediate plans to implement a gender diversity policy or targets as it is of the view that Board membership is dependent on each candidate’s skills, experience, core competencies and other qualities regardless of gender.

time commitment of accepting new directorships

Directors are expected to have such expertise so as to qualify them to make a positive contribution to the Board’s performance of its duties and to give sufficient time and attention to the affairs of the Group. Any Director shall notify the Chairman before accepting any new directorship and the notification shall include the indication of time that will be spent on the new appointment. The aforesaid is set out in the approved Board Charter.

Re-election

All Directors (including the Managing Director) will retire at regular intervals by rotation once at least every three (3) years and they are eligible to offer themselves for re-election.

supply of information

Prior to each Board meeting, every director is given an agenda and a set of Board Papers for each agenda item to be deliberated. The Chief Executive Officer will lead the presentation of board papers and provide comprehensive explanation of pertinent issues. Information provided to the Board goes beyond quantitative performance data to include other qualitative performances. All directors are entitled to call for additional clarification and information to assist them in matters that require their decision. In arriving at any decision on recommendation by the Management, thorough deliberation and discussion by the Board is a prerequisite. All proceedings of Board meetings are minuted and signed by the Chairman of the meeting.

There is a schedule of matters reserved specially for the Board’s decision, including the approval of acquisition and disposal of major assets, major investments, changes to the management and control structure of the Group and issues in respect of key policies and procedures.

In furtherance to their duties as Directors, whenever independent professional advice is required, external independent experts may and have been engaged at the Group’s expense.

All Directors have access to the advice and services of the Company Secretary.

13



14

Committees

The Board, in discharging its fiduciary duties, is assisted by the following Board Committees, each entrusted with specific tasks:-

(i) Audit Committee; (ii) Remuneration and Nomination Committee; and (iii) Risk Management Committee.

These committees have the authority to examine particular issues and report to the Board their recommendations. The ultimate responsibility for the final decision on most matters lies with the entire Board.

(i) Audit Committee

As at the date of this Report, the minimal requirements of three members to form the Audit Committee were not met due to the resignation of the two of its members. The members of the Audit Committee who serve during the financial year ended 30 June 2017 until the date of their resignation are as follows:

(a) Chong Hoi Sheong @ Chong Hoi Cheong (Member, Independent Non-Executive Director)

(b) Shamsudin @ Samad Bin Kassim (Member, Independent Non-Executive Director) (Resigned on 5 July 2017)

(c) Datuk Lim Chaing Cheah (Chairman, Independent Non-Executive Director) (Resigned on 17 March 2017)

Subsequent to the resignation of the above Chairman and member of the Audit Committee, the functions of the Audit Committee has been redesignated to the Board of Directors. The Audit Committee Report is detailed in pages 22 to 25 of the annual report.

(ii) Remuneration and Nomination Committee

As at the date of this Report, the minimal requirements of two members to form the Remuneration and Nomination Committee were not met due to the resignation of the two of its members. The members of the Remuneration and Nomination Committee who serve during the financial year ended 30 June 2017 until the date of their resignation are as follows:

(a) Chong Hoi Sheong @ Chong Hoi Cheong (Member, Independent Non-Executive Director)

(b) Shamsudin @ Samad Bin Kassim (Chairman, Independent Non-Executive Director) (Resigned on 5 July 2017)

(c) Datuk Lim Chaing Cheah (Member, Independent Non-Executive Director) (Appointed on 19 October 2016 and resigned on 17 March 2017)

The functions of the Remuneration and Nomination Committee has been redesignated to the Board of Directors. The primary functions of the Remuneration and Nomination Committee are as follows:

To assess and recommend new directors to the Board; To review annually the mix of skills and experience, and other qualities to enable the

Board to function completely and efficiently; To implement formal appraisal process for the evaluation of the effectiveness of the

Board as a whole, the committees and the individual contribution of each Board member; To recommend to the Board the framework of executive remuneration and its cost,

including the remuneration package for the Executive Director;

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To recommend to the Board the framework of fee payable to Non-Executive Directors.

The Remuneration and Nomination Committee may draw on the expertise of consultants before making recommendations to the Board. The final remuneration package before offered to the Executive Directors and fee payable to Non-Executive Directors are the responsibilities of the entire Board and individual director is required to abstain from discussion on his own remuneration.

The Remuneration and Nomination Committee assesses the performance of the Board and Audit Committee on annual basis.

The Remuneration and Nomination Committee also reviews and recommends to the Board the structure, size, balance and composition of the Board and Committee.

The Remuneration and Nomination Committee has reviewed and assessed the mix of skills, expertise and composition, size and experience of the Board, the contribution of each individual Director, and the overall effectiveness of the Board and the Board Committees. The Remuneration and Nomination Committee was of the opinion that the Board size and its composition are adequate and all Directors had discharged their responsibilities in a commendable manner and contributed to the overall effectiveness of the Board.

The Remuneration and Nomination Committee had also assessed and recommended to the Board the retirement of Directors eligible for re-election or re-appointment having regard to the individual’s experience, contributions and performance and the Board has endorsed the Remuneration and Nomination Committee’s recommendations. The Remuneration and Nomination Committee also assessed and recommended new candidates for appointment to the Board.

(iii) Risk Management Committee

The present members of the Risk Management Committee are:

(a) Dato’ Henry Pheng Chin Guan (Chairman, Chief Executive Officer)(b) Dato’ Lew Choon (Member, Executive Director) (c) Mr. Pheng Chin Huat (Member, Non-Independent Non-executive Director)

The Risk Management Committee is in the process of establishing the framework for Kinsteel Bhd.

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16

Directors’ Training

All the Directors of the Company have completed the Mandatory Accreditation Programmers and are supportive of the Continuous Education Programmers and seminars so as to keep abreast with the current developments in the industry as well as the current changes in laws and regulations.

During the financial year under review, none of the Directors have attended any training programmers conducted in-house and seminars conducted externally.

DIRECTORS’ REMUNERATION

level and Make Up

The Company has adopted the objective as recommended by the Code to determine the remuneration of the Directors so as to ensure that the Company attracts and retains the Directors needed to run the Group successfully. The component parts of their remuneration are structured so as to link rewards to corporate and individual performance in the case of Executive Directors. In the case of Non-Executive Directors, the level of remuneration reflects the experience and level of responsibilities undertaken by the individual Non-Executive Director concerned.

Aggregate remuneration of Directors of the Company and Group during the financial year can be categorised into the following components:

Directors’ Fee

(RM’000)

salaries and otheremoluments

(RM’000)

total

(RM’000) Company Group Company Group Company GroupExecutiveDirectors

- - 1,470 2,289 1,470 2,289

Non-ExecutiveDirectors

199 199 6 1,106 205 1,305

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17

Directors’ remuneration are broadly categorised into the following bands:

number of DirectorsRange of remuneration executive Directors non-executive DirectorsUp to RM50,000 - 3RM50,001 – RM100,000 1

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RM100,001 – RM150,000 - -RM150,001 – RM200,000 1 -RM200,001 – RM250,000 - -RM300,001 – RM350,000 - -RM400,001 – RM450,000 - -RM450,001 – RM500,000 - -RM500,001 – RM550,000 - 1RM550,001 – RM600,000 - 1RM650,001 – RM700,000 - -RM950,000 – RM1,000,000 1 -RM1,000,001 – RM1,500,000 1 -

The remuneration of the individual director is not disclosed due to security reasons. The directors’ fees are subject to the approval by shareholders at the forthcoming Annual General Meeting of the Company.

inVestORs RelAtiOn AnD sHAReHOlDeRs COMMUniCAtiOn

Shareholders are kept well informed of developments and performances of the Group through disclosures to the Bursa Malaysia Securities Berhad and the press (where appropriate) as well as the annual report. The annual report contains all necessary disclosures in addition to facts and figures about the Group. The Company also maintains a website www.kinsteel.com.my for access by the public and shareholders.

Notices of Annual and Extraordinary General Meetings of the Group and related papers are sent out to shareholders within a reasonable and sufficient time frame in accordance with the Company’s Articles of Association. Adequate time is given during the Annual and Extraordinary General Meetings to allow shareholders to seek clarifications or ask questions on pertinent and relevant matters. The results of all the resolutions set out in the Notice of Annual General Meetings and Extraordinary General Meetings were announced on the same day via Bursa Link which is accessible on the website of the Company and Bursa Malaysia Securities Berhad.

Recommendation 8.2 of the Code recommends that the Board should encourage poll voting for substantive resolutions. Pursuant to Paragraph 8.29A(1) of the Main Market Listing Requirements, a listed issuer must ensure that any resolution set out in the notice of any general meeting, or in any notice of resolution which may properly be moved and is intended to be moved at any general meeting, is voted by poll. Hence, all the resolutions set out in the notice of the Company’s forthcoming26th Annual General Meeting will be voted by poll. The Board will evaluate the feasibility of carrying out electronic polling at its general meetings in future.

From time to time, the Directors and Senior Management will meet with the Institutional investors and analysts to explain to them the Group’s Strategy, performance, major developments, and others matters affecting the shareholders interests. However, any information that may be regarded as undisclosed material information about the Group is not given.

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18

ACCOUntABilitY AnD AUDit

Financial Reporting

The Board aims to present a balanced, clear and meaningful assessment of the Company’s and the Group’s financial position and prospects in all their reports to the shareholders, investors and regulatory authorities. This assessment is primarily provided through the annual financial statements, quarterly announcements of results to the shareholders as well as the Chairman’s statement and review of the operations in the Annual Report. The Board is assisted by the Audit Committee to oversee the Group’s financial reporting process and the quality of its financial reporting.

Directors’ Responsibility Statement on Annual Audited Financial statements

The Directors are responsible for preparing the annual audited financial statements and the Board ensures that the financial statements and other financial reports of the Company and the Group are prepared in accordance with the applicable approved accounting standards in Malaysia and the provisions of the Companies Act, 2016.

statement on Risk Management and internal Control

The Statement on Risk Management and Internal Control furnished on pages 28 to 30 of the annual report provides an overview of the Group’s state of internal control.

Relationship with external Auditors

The Company maintains an appropriate and transparent relationship with the external auditors in seeking their professional advice and towards ensuring compliance with the accounting standards. The Company’s External Auditors play an essential role by enhancing the reliability of the Company’s financial statements and giving assurance of that reliability to users of these financial statements.

The Audit Committee has explicit authority to communicate directly with the External Auditors. The Group’s External Auditors are invited to attend the Audit Committee meeting as and when necessary. The Audit Committee meets the External Auditors without the presence of the Executive Director and Management to discuss any concerns including management’s cooperation in the audit process, quality and competency in the financial reporting function, sharing of information and audit issues in relation to appropriate accounting treatment.

The effectiveness, independence and performance of the External Auditors are reviewed annually by the Audit Committee.

The external Auditors are required to declare their independence annually to the Audit Committee in accordance with the International Federation of Accountants’ Code of Ethics for Professional Accountants and the Malaysian Institute of Accountants’ By-Laws (On Professional Ethics, Conduct and Practice). The external Auditors had made the declaration in their annual audit plan presented to the Audit Committee that they were independent throughout the conduct of the audit engagement in accordance with the terms of the relevant professional and regulatory requirements.

Arising from the cease of function of the Audit Committee, the Board of Directors has assessed and is satisfied with the competence and independence of the external Auditors. The external Auditors, Messrs Crowe Horwath are not seeking re-appointment at the forthcoming Annual General Meeting. A substantial shareholder of the Company, nominating Messrs Baker Tilly Monteiro Heng as the Auditors of the Company for the financial year ending 30 June 2018 in place of the outgoing Auditors, Messrs Crowe Horwath. The appointment of Messrs Baker Tilly Monteiro Heng as the new Auditor of the Company is subject to the Shareholders’ approval at the forthcoming Annual General Meeting.

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The amount of audit fees and non-audit fees paid or payable to the external Auditors for the financial year ended 30 June 2017 were as follows:

Fee incurred Audit Fee Non-Audit FeeThe Company 125,000 5,500The Group 220,000 5,500

stAteMent OF CORPORAte sOCiAl ResPOnsiBilitY

The Group practices an informal policy on Corporate Social Responsibility.

Together with the Board of Directors, the Group has continuously carried out its responsibility as a caring employer, preserving the environment and the betterment of the community.

CORPORAte DisClOsURe POliCY

The Board places importance in ensuring disclosure made to shareholders and investors is comprehensive, accurate and on a timely and even basis as it is critical towards building and maintaining corporate creditability and investors confidence. A Corporate Disclosure Policy for the Group to set out the policies and procedures for disclosure of material information will be addressed in due course, following the emphasis by Bursa Malaysia Securities Berhad as outlined in its Corporate Disclosure Guide.

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OTHER DISCLOSURE REQUIREMENTS

20

1. UtilisAtiOn OF PROCeeD RAiseD FROM CORPORAte PROPOsAl

There were no utilization of proceed raised from corporate proposal during the financial year ended 30 June 2017.

2. MAteRiAl COntRACts inVOlVinG DIRECTORS’ AnD MAJOR SHAREHOLDERS’ inteRest

Save as disclosed below, there are no other agreements which are material which have been entered into by Kinsteel or its subsidiaries involving the interests of the directors, chief executive who is not a director or major shareholder either still subsisting at the end of the financial year ended 30 June 2017 or entered into since the end of the previous financial year:

type Date Parties Consideration and Modeof satisfaction

Relationship

ServiceAgreement

22/04/1997 Kinsteel Bhd andTan Sri Dato’ SriPheng Yin Huah

Monthly salary and yearlybonus to be paid to TanSri Dato’ Sri Pheng YinHuah

Tan Sri Dato’ SriPheng Yin Huah is aManaging Directorand SubstantialShareholder ofKinsteel

3. ReCURRent RelAteD PARtY tRAnsACtiOns

Recurrent related party transactions of revenue or trading nature pursuant to shareholders’ mandate during the financial year ended are as follow:-

transactingParties

RelatedParties nature of transaction

Amount oftransaction duringthe financial Year

RM’000Kinsteel Group Kin Kee Group Sale of steel bars and scrap iron

Purchase of hardware material, fuel oiland lubricants, rental expenses, spareparts and machinery parts

14,269

327


20






Relationship

ServiceAgreement






transactingParties





14,269

327


20






Relationship

ServiceAgreement






transactingParties





14,269

327


20






Relationship

ServiceAgreement






transactingParties





14,269

327

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Other Disclosure Requirements (cont’d)

Kinsteel Group – Kinsteel Bhd and its subsidiaries.

Kin Kee Group – Includes Perniagaan Kin Kee Sdn Bhd (PKK), Kin KeeHardware Sdn Bhd, Kin Kee Metal Sdn Bhd, Kuantan Metal & MachineryParts Sdn Bhd, Kin Kee Transport Sdn Bhd and PCS Vision Sdn Bhd whereby the interested directors, major shareholders of Kinsteel Group and persons connected to them are as follows:

(i) Interested Directors: Tan Sri Dato’ Sri Pheng Yin Huah, Dato’ Hong Thian Hock, Datin Hong Cheng Guat, Pheng Chin Huat, Dato’ Lew Choon, Dato’ Pheng Chin Kiat, Dato’ Henry Pheng Chin Guan and Pheng Chin Shiun

(ii) Interested major shareholders of Kinsteel Group:PKK and Kin Kee Holdings Sdn Bhd

(iii) Persons connected to Interested Directors and Major Shareholders: Hong Heng Sek, Pong Tian Tiam Poh, Hong Chye Lai, Hong Heng Gek andKin Kee Hardware Sdn Bhd

Maju Group – Includes - Ipmuda Edar Sdn Bhd and Ipmuda Bhd, whereby the interested directorsand major shareholders are as follows:

(i) Interested Major Shareholders Tan Sri Abu Sahid Bin Mohamed (ii) Interested major shareholders Maju Holdings Sdn Bhd.

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AUDIT COMMITTEE REPORT

22

The Audit Committee was established since 15 May 2002. The Board had adopted the terms of reference for Audit Committee in conformity with the Main Market Listing Requirements of Bursa Malaysia Securities Berhad.

COMPOsitiOn OF tHe AUDit COMMittee AnD MeetinG AttenDAnCes

The members of the Committee for the financial year ended 30 June 2017 comprise:

name Designation Directorship Attendance(Audit Committee

Meeting)Datuk Lim Chaing Cheah (Appointed on 19 October 2016 and resigned on 17 March 2017)

Chairman IndependentNon-Executive Director

3/3

Shamsudin @ Samad Bin Kassim (Resigned on 5 July 2017)

Member IndependentNon-Executive Director

3/5

Chong Hoi Sheong @ Chong Hoi Cheong

Member Independent Non-ExecutiveDirector

4/5

The Audit Committee has held five (5) meetings during the financial year ended 30 June 2017. The Audit Committee plans to have at least four (4) meetings a year at quarterly intervals with additional meetings convened as and when required.

Arising from the resignation of Datuk Lim Chiang Cheah as Director and Chairman of the Audit Committee on 17 March 2017 and resignation of Shamsudin @ Samad Bin Kassim as Director and member of the Audit Committee on 5 July 2017, the Company is in non-compliance with Paragraph 15.09(1)(a) and 15.09(1)(c) of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad (“Listing Requirements”) whereby the composition of Audit Committee must not less than three members (3) and one of the member must hold the membership of Malaysian Institute of Accountants or must have at least (3) three years working experience and hold any other qualification prescribed in the said paragraph.

As the Company is an affected listed issuer under Practice Note 17 (“PN17”) of the Listing Requirements and due to the present challenging times for the Company, it has been difficult to get a qualified person to join the Kinsteel Board. The Board and Management are still identifying qualified candidates to serve in the Audit Committee and Board.

Subsequent to the resignation of Shamsudin @ Samad Bin Kassim on 5 July 2017, the function of the Audit Committee has been assumed by the Board as the Audit Committee does not have quorum to convene a meeting.

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Audit Committee Report (cont’d)

sUMMARY OF WORK OF tHe AUDit COMMittee

During the financial year ended 30 June 2017, the Audit Committee carried out its duties as set out in its Terms of Reference and the activities of the Audit Committee included the following:

1. Reviewed the unaudited 4th Quarterly results for the financial year ended 30 June 2016.

2. Reviewed the unaudited 1st, 2nd and 3rd quarterly results for the financial year ended 30 June 2017.

3. Reviewed the Audit Planning Memorandum of the Group for the financial year ended 30 June 2017 prepared by the external Auditors, setting out the responsibilities of the external Auditors, their scope of work and key audit areas in connection with the audit of the Group and reviewed the Audit Review Memorandum for the financial year ended 30 June 2016.

4. Reviewed the audited financial statements of the Group for financial year ended 30 June 2016,the issues arising from the audit, their resolutions as well as the Independent Auditors’ Report thereon at the Audit Committee Meeting prior to submission to the Board for their consideration and approval;

5. Reported to the Board on significant audit issues and concerns discussed during the AC meetings which have significant impact of the Group from time to time, for consideration and deliberation by the Board.

6. Reviewed the performance of the External Auditors and made recommendations to the Board on their re-appointment and remuneration.

7. Reviewed the recurrent related party transactions and also the Circular to Shareholders in connection with the recurrent related party transactions entered into by the Group to ensure that the transactions are fair and reasonable to, and are not to the detriment of, the minority shareholders;

8. Reviewed internal audit reports on internal controls and risk management presented by the outsourced Internal Auditor for the Group and approved the internal audit plan;

9. Reviewed the Audit Committee Report and the Statement on Risk Management and Internal Control prior to submission of the same to the Board for consideration and inclusion in the Annual Report of the Company.

10. Had private sessions with the external Auditors without the presence of management.

teRMs OF ReFeRenCe

Objectives

1. To ensure transparency, integrity and accountability in the Group’s activities so as to safeguard the rights and interests of shareholders.

2. To assist the Board of Directors (“Board”) in fulfilling their responsibilities and duties relating to the Group and the Company’s financial reporting, risk management, internal controls and compliance of statutory and legal requirements.

3. To provide the necessary independent and neutral avenue for reporting, and to maintain effective communication between the Board, the external auditors, the internal auditors and senior management in order to ensure good practices are adopted.

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Membership

The Audit Committee is appointed by the Board and its members shall comprise at least three directors, the majority of whom are independent. All members of the Audit Committee shall be non-executive directors and financially literate. At least one member of the Audit Committee must fulfill the Paragraph 15.09(1)(c) of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad (“Bursa Securities”). No alternate director shall be appointed to the Audit Committee.

The members of the Audit Committee shall elect a Chairman from amongst their numbers who shall be an independent director. In the event of any vacancy in the Audit Committee resulting in the non-compliance of subparagraph 15.09(1) of the Main Market Listing Requirements of Bursa Securities, the Board must fill the vacancy within three months of that event. .Authority

1. The Audit Committee is authorized by the Board to investigate any matters within its terms of reference, or as otherwise directed by the Board, to determine the resources required and to have full access to external auditors as well as any employees of the Group for information.

2. The Audit Committee is authorized to seek independent professional or other advice when needed and may invite outsiders with relevant expertise to attend its meetings if necessary.

Meetings

1. The Audit Committee shall meet at least four times a year or as frequently as required. Written notice of the Audit Committee Meeting together with the agenda shall be given to the Audit Committee members and the external auditors, where applicable. The quorum for an Audit Committee Meeting shall be two members constituting a majority of independent directors and any decision shall be by a simple majority.

2. The Head of Finance, the head of internal audit function and the external auditors or their representatives are expected to attend all meetings of the Audit Committee. The Chief Executive Officer and other officers of the Company shall attend by invitation. The Audit Committee shall convene meetings with the external auditors, internal auditors or both, excluding the attendance of other directors and employees at least twice during the year.

3. The Chairman of the Audit Committee shall report on each Audit Committee Meeting to the Board. The Company Secretary or in his absence, his/ her deputy shall be the secretary to the Audit Committee and shall circulate the minutes of the Audit Committee Meetings to all members of the Board.

DUties AnD ResPOnsiBilities

(a) To review the quarterly, half-yearly and year-end consolidated financial statements before submission to the Board and focusing on:- Compliance with accounting standards; Compliance with Bursa Securities and other statutory requirements; Changes in major accounting policies and practices; Significant adjustments arising from the audit; Going concern issues of any entity within the Group; Significant and unusual events.

(b) To discuss and review with the external auditors their audit plan, evaluation of the systems of internal controls, the nature and scope of audit and ensure co-ordination when more than one audit firm is involved with the Group;

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(c) To do the following in relation to the internal audit function:

i) To review the internal audit programme, internal auditors’ reports, their findings and recommendations, and the response by management and remedial action taken and to ensure that appropriate corrective action is taken;

ii) To ensure the adequacy of the scope, function, competency, effectiveness and resources of the internal audit function and that it has the necessary authority to carry out its work;

(d) To review the related party transactions and conflict of interest situation that may arise within the Group including any transaction, procedure or course of conduct that raises questions of management integrity and to verify and approve the limits of such transactions;

(e) To consider and recommend the appointment and remuneration of external auditors and to deal with matters relating to their resignation or dismissal;

(f) To investigate any matter within its terms of reference as authorized by the Board, and to seek any information it requires from the external auditors and all employees are directed to cooperate with any request made by the Audit Committee;

(g) To review the risk management policies and practices of the group to ensure their effectiveness;

(h) To perform such other functions as may be agreed to by the Audit Committee and the Board.

inteRnAl AUDit FUnCtiOn

Since September 2005, the Internal Audit function of the Group has been outsourced to an external audit firm. However, the role is currently vacant due to resignation of the outsourced internal auditor and will be appointed once the Audit Committee resumed its function with the new appointment to replace the Directors who have resigned.

The activities undertaken by the internal auditor during the financial year ended 30 June 2017 included the following:-

1. Tabled Internal Audit Plan for the Audit Committee’s review and endorsement.2. Reviewed the existing systems, controls and governance processes of various operating units

within the Group. 3. Conducted audit reviews and evaluated risk exposures relating to the Group’s governance

process and system of internal controls on reliability and integrity of financial and operationalinformation, safeguarding of assets, verifying the existence of such assets, efficiency of operations, compliance with established policies and procedures and statutory requirement.

4. Provided recommendations to assist the various operating units and the Group in accomplishing its internal control requirements by suggesting improvements to the control processes.

5. Appraising operations to ascertain whether results are consistent with established objectives and goals and whether the operations are being carried out as planned.

6. Issued internal audit reports incorporating audit recommendations and management’s responses in relation to audit findings on weaknesses in the systems and controls to the Audit Committee and the management of the respective operations.

7. Presented internal audit reports to the Audit Committee for review. 8. Followed up review to ensure that the agreed internal audit recommendations are effectively

and timely implemented.

The total cost, incurred for the internal audit function of the Company and the Group during the financial year was RM114,000.

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MANAGEMENT DISCUSSION AND ANALYSIS

Financial Performance

2017

2016

changeConsolidated statement of Profit or loss RM Million RM Million %

Revenue 225 299 -25%Loss before tax (345) (93) -271%Loss, net of tax (342) (92) -272%

Consolidated statement of Financial Position

Total assets 1,207 1,430 -16%Current assets 176 312 -44%Total liabilities 1,199 1,079 11%Loans and borrowings 803 800 -0.4%Shareholders’ fund (257) 69 -472%

The revenue for the financial years decreased by 25% mainly due to lower steel production activities in the Group. The difficulty in obtaining additional banking facilities and further decline in current banking facilities has significantly hampered the difficulty to purchase raw material for its production of steel products. The current restructuring undertaken by the Group with its lenders and creditors have further reduce the availability of internally generated fund to for working capital purpose in the production of steels within the Group. In addition, the increase in electricity tariff and gas have resulted in additional costs shouldered by the Group resulted in higher operating costs to manufacture its steel products.

The Group losses before tax for the year increased by RM252 million mainly due to impairment of securities and related parties debts amounted to RM171 million arising from its Redeemable Convertible Unsecured Loan Stock (“RCULS”) and receivables in Perwaja Holdings Berhad Group (“Perwaja”) following the lapsed of the Proposed Regularisation Scheme with Zhiyuan International Investment & Holding Group (Hong Kong) Co. Limited and Perwaja de-listed from the Official List of Bursa Securities pursuant to Paragraph 8.04 of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad. The Group finance costs increased by RM89 million with additional accrued interest costs due to the Group removal from the CDRC’s purview effective from 7 February 2017 resulted from its inability to fulfil the conditions precedent in the Debt Restructuring Agreement (“DRA”) with all its Lenders. Accordingly, the original interest costs agreed in the DRA will no longer valid and the additional interest costs accrued was based on the original facilities given by the lenders.

The Group total assets decline by RM223 million or 16% mainly due to impairment of its trade receivables and related parties amounted to RM129 million. The current assets reduced by RM136 million were mainly due to the impairment of its trade receivables and related parties. Also, an impairment of investment in securities amounted to RM52 million due to its investment in Perwaja Holdings Berhad’s RCULS which further reduced the total assets reported in current financial year. The total liabilities increase by RM120 million or 11% was mainly due to additional interest accrued during the year amounted to RM133 million for the current financial year.

The shareholders’ fund has further reduced to negative fund of RM258 million at the end of the financial year due to the losses reported in current financial year as explained above.

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Management Discussion and Analysis (cont’d)

Review of Operating Activities

The Group manufactures and trades in long steel products used in the manufacturing, construction and infrastructure industries. Its range of products include upstream products such as steel round bars, deformed bars, and downstream products such as sections and drawn wires. It operates in two steel plants located at Gurun, Kedah and Kuantan, Pahang.

Malaysia’s apparent steel consumption increased by 2.5% from 10.0 million metric tons in 2015 to 10.3 million metric tons in 2016. The local production of steel bars and wire rods increased by 3.9% to 3.4 million metric tons. In contrast, imports of steel bars and wire rods decreased by 26.6% to 1.85 million metric tons. (Source: South East Asia Iron and Steel Institute Statistical Yearbook).

It was further relief for the local steel millers when the Government imposed the final determination of safeguard duties for both steel reinforcing bars and steel wire rods for a period of 3 years commencing from April 2017. The trade measures imposed by the Government had led to lower steel imports. This had helped the local steel millers to regain market share from imports and secure a reasonable profit margin.

Despite positive measures and demand for steel increased during the year, the Group recorded a significant loss during the financial year and declining revenue for the year under review as the Group is going through a debt restructuring exercise to address it liquidity issue. The difficulty in obtaining additional banking facilities has resulted in decrease in production quantity due to non-availability of banking facilities to procure steel products for production. In addition, the increase in electricity and gas tariffs have driven up production costs further and hampered the profit margin for the current financial year.

Future plans and Prospects

The prospects remain challenging as the Group is undertaking a debt restructuring exercise to address its liquidity issue. The Group’s prospect is highly dependent on the successful implementation of the proposed restructuring scheme with its financial lenders and major creditors. The Group requires to operate profitably to generate sufficient cash in the future to fulfill their obligations as and when they fall due and financial support from the lenders and various stakeholders.

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STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL

introduction

Pursuant to paragraph 15.26(b) of the Bursa Malaysia Securities Berhad (“BMSB”) Main Market Listing Requirements, the Board of Directors of Kinsteel Bhd is pleased to provide the following statement on the state of risk management and internal control of the Group for the financial year ended 30 June 2017, which has been prepared by taking into consideration the Statement on Risk Management and Internal Control – Guidance for Directors of Public Listed Companies issued by the Institute of Internal Auditors Malaysia and adopted by the BMSB.

Board Responsibility

The Board acknowledges its responsibility for maintaining a sound system of internal control, and for reviewing its adequacy and integrity. Because of the limitations that are inherent in any system of internal control, the Board recognizes that the Group’s system of internal control is a concerted and continuing process, designed to manage rather than eliminate the risk of failure to achieve business objectives. The system of internal control covers, inter alia, risk management, financial, organizational, operational and compliance controls.

Risk management objectives and policies

The Board recognises that there is a process of identifying, evaluating and managing significant risks faced by the Group. The Group is inherently exposed to the following risks in its day to day operations:

(a) Foreign currency exchange risk

The Group is exposed to foreign currency risk as a result of transactions denominated in foreign currency arising from the normal business activities. The currency giving rise to this risk is primarily US dollars. Exposure to foreign currency risk is monitored on an ongoing basis and when considered necessary, the Group will consider using effective financial instruments to hedge its foreign currency risk.

(b) interest rate risk

The Group’s exposure to interest rate fluctuations is due to the Group’s borrowings being mainly dependent on the lending financial institutions’ base lending rates and market cost of funds particularly for its term loans, overdrafts and trade financing loans.

(c) Credit risk

The Group seeks to invest cash assets safely and profitably. It also seeks to control credit risks by setting appropriate credit terms and limits for customers and ensuring that sales of products are made to customers with good credit assessment.

(d) liquidity and cash flow risk

The Group exercise prudent liquidity risk management to maintain sufficient cash and short term investments and the availability of funding through an adequate amount of credit facilities. However, recent depressed markets make this challenging.

The above risk management objectives and policies are reviewed by the Board annually.

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Statement on Risk Management and Internal Control (cont’d)

enterprise Risk Management and internal Audit

Towards the aim of formalizing the risk management functions within the Group, since September 2005, the Board had engaged a professional accounting firm to handle the internal audit function of the Group. The service was discontinued after the end of the second quarter of the current financial year ended 30 June 2017 and the Board is currently seeking the right candidate to engage in such function.

The internal audit function will independently review the control processes implemented by the Management and also advise executive and operational management on areas for improvement. The reports are submitted directly to the Audit Committee, which reviews the findings with the Management.

In assessing the adequacy and effectiveness of the system of internal controls and accounting control procedures of the Group, the Audit Committee reports to the Board of Directors its activities, significant results, findings and recommendations or changes arising therefrom.

Other Risks and Control Processes

Quality management places emphasis in satisfying the requirements of quality policy and objectives as outlined in the Quality Manual issued by the Chief Executive Officer. This Quality Management process is implemented throughout the financial year and monitored closely by the Chief Executive Officer.

The above functions, processes and procedures provide for continuous assurance to be given to the Board. All these functions provide their respective degrees of assurance as to the operations and validity of the system of internal control.

The Chief Executive Officer reports to the Board on significant changes in the business and external environment, which affects significant risks. The Management team provides the Board with both qualitative and quantitative information on a periodical basis. Where areas of improvement in the systems are identified, the Board considers the recommendations made by the Audit Committee based on reports of the internal and external auditors.

The Board is of the view that there is no breakdown or weaknesses in the system of internal control of the Group that may result in any material losses incurred by the Group for the financial year ended 30 June 2017. The Group continues to take the necessary measures to strengthen the effectiveness of its internal controls processes.

Conclusion

For the financial year under review and up to the date of approval of this statement, the Board is of the view that the system of internal control of the Group that is in place is adequate to safeguard the interest of the shareholders’ investments and the Group’s assets. The Group continues to take the necessary measures to strengthen its internal controls.

Pursuant to Paragraph 15.23 of the Main Market Listing Requirements of Bursa Malaysia Securities Berhad, the external auditors have reviewed this Statement on Risk Management and Internal Control. Their review was performed in accordance with the Recommended Practice Guide (“RPG”) 5 issued by the Malaysian Institute of Accountants. RPG 5 does not require the external auditors to form an opinion on the adequacy and effectiveness of the risk management and internal control systems of the Group.

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Statement on Risk Management and Internal Control (cont’d)

Based on their review, the external auditors have reported to the Board that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the processes adopted by the Board in reviewing the adequacy and effectiveness of the risk management and internal control system of the Group, in all material respects, in accordance with the disclosures required by paragraphs 41 and 42 on the Statement on Risk Management and Internal Control: Guidelines for Directors of Listed Issuers.

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KINSTEEL BHD - malaysiastock.biz KINSTEEL BHD (Company No. 210470-M) AnnuAl RepoRt 2017 1 CONTENTS...

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