CEO's Statement

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Extracted from Annual Report 2016

Dear Fellow Shareholders,

New Factory and Office Building

This year marks a new chapter for AEI, as the Group moved into its new factory and office building located at Tuas South Street 13 in end January 2017. The new factory is built on a smaller site, but with the purpose-built layout, it should allow us to operate at good efficiency to achieve good productivity and optimal resource utilization. The relocation was carried out successfully without major disruption to the daily business and operation of the Group. We look forward to continue to serve our customers and business partners from this new factory site.

The Year 2016 in Summary

The hard disk drive and electronics industries experienced a tepid year, with worldwide demand remaining weak especially for personal computer and data storage products. With the exception being the smartphone industry with the surprise global recall of Galaxy Note 7 smartphone, overall, 2016 had not been a particularly exciting year for the global electronics industry.

Over the past few years the industry had witnessed a major shift in the way users seek and consume information. More are switching to using handheld devices such as smartphone and tablets to search for and use information. We are seeing a trend of shifting away from using a computer that is essentially fixed on your desk, towards a more mobile way of life, where personal devices can be carried anywhere easily, and readily available mobile internet connection that has made access to the internet so convenient, at almost any place and at any time. Given the demand on the portability of these devices, most would run on flash memory which has smaller footprint and consumes less power, as battery life becomes a key issue in the buying choice of such devices. This trend largely explains the current weak performance of the personal computer and hard disk drive industries.

On the other hand, the proliferation of mobile browsing behaviour also creates the need for more information storage, as devices get more powerful in function, such as high definition camera and 4K TV, as well as the rising popularity of sites such as Youtube with increasingly more users and content creators. There is now the rising popularity of the usage of cloud storage, which consists largely of enterprise grade storage servers. These big storage servers require large storage capacity which explains the growth in the enterprise grade hard disk drives.

With these major shifts in industry trends, businesses operating within the industry will need to remain nimble, flexible, and adapt to the ensuing change in customer requirements, to ensure long term business survival. Old components may no longer be adequate to meet the higher performance specifications of new generation hard drives (e.g. helium filled drive). These shifts will take away business from some suppliers, at the same time, create new opportunities for others. Businesses who are able to adapt and tap on these new opportunities will survive and even do well in the new business landscape.

The Group's Performance in 2016

For the financial year just ended, the Group registered total business turnover of $12.2 million, a decrease of 36.5% compared to last year, following weak global demand for personal computers and hard disk drive products in its core Electronic and Precision Engineering customer segment.

Despite achieving gross profit of $0.2 million for the same financial year, the Group posted a loss after tax of $4.2 million, after taking into account impairments related to inventory and property, as well as disposal of the Group's discontinued forging business in China.

You can refer to the Operations Review section of this annual report for a detailed review of the Group's financial results in FY2016.

Internal Restructuring and Transfer of Ownership of Subsidiary AEI Engineering

In June 2016, the Group completed the business transfer agreement of its previous wholly-owned subsidiary AEI Engineering Pte. Ltd., to under the ownership of another subsidiary, AEI Corporation (Singapore) Pte. Ltd. The rationale of this exercise was to streamline the operations and group structure to achieve greater administrative efficiency.

Creditors' Voluntary Liquidation of Indirect Subsidiary

Following the above-mentioned completion of the disposal of the Group's forging business in China, Form Tecknik (Shanghai) Co. Ltd., the Group subsequently also placed its indirect shareholding subsidiary, Form Tecknik Pte. Ltd. under creditors' voluntary liquidation, pursuant to a resolution passed at the Extraordinary General Meeting held on 30 December 2016.

Going Forward

Analyst forecasts for the personal computers and hard disk drive industries remain weak. The Group continues to invest in strengthening our capability in order to maintain our leadership position to keep in pace with the latest development in this key customer segment.

AEI had for many years honed our competence to remain a top player in this market. Our ability to adapt and develop new expertise, and to stay responsive to our customers' new and increasingly stringent requirements, had allowed us to overcome obstacles, and remain up-to-date and competitive in this market. It will continue to help us scale the business challenges of tomorrow.

Disk Drive companies are relocating their manufacturing bases away from China back to Thailand and Malaysia, as operating costs get increasingly higher, and as China's own economy goes through a new phase of transformation. The Group aims to capitalise on this trend as customers will be nearer to us.

Aluminium raw material and energy prices continue to show volatility, in line with uncertainty in global markets. They will continue to be monitored closely, as they may continue to impact on the Group's profitability.

The Group also continues its efforts to manage its strategic product mix and pricing, as it expects to face intensified competition in the midst of weak business climate, at the same time working towards better operational efficiency, productivity improvements and costs controls, as we work towards greater contribution to the Company and shareholders value.

Appreciation

On behalf of the team at AEI Corp, I would like to express my heartfelt appreciation to all our customers, suppliers, business associates, shareholders and board members for all their generous support and I look forward to our continued partnership for the exciting years ahead.