GEORGE TOWN, Cayman Islands, May. 31, 2017 /PRNewswire/ -- Quarz Capital Management, Ltd.

(QCM), an
investment manager, today issued a letter urging HG Metal Manufacturing Limited to take immediate steps to
address the severe undervaluation of more than 60% which its share price is trading at to its highly liquid and
easily valued intrinsic book value despite the commendable efforts of management in steering the company
through one of the toughest slumps in steel prices.
QCM proposes that HG Metal conducts a full strategic review on the potential divestment of its non-core but
substantial 22.6% stake in BRC Asia with a market value in excess of SGD 30 million (67% of Mkt Cap). Quarz
believes that multiple buyers are interested in building up substantial stakes in BRC Asia as evident by the
unsolicited bid announced by the company recently. Any of the buyers could establish a near majority control of
BRC with the purchase of HGs stake and a proportion of additional market and selective purchases from other
less substantial shareholders. Quarz proposes that part of this capital released can be returned to shareholders
upon the completion of the sale through dividends or share buyback. Quarz also urges the company to
immediately distribute up to SGD 10 million (22% dividend yield) of the excess net cash of SGD 29 million which
is currently held by the firm.
Due to the structural headwinds faced by the Trading Division, QCM recommends the firm to scale back on its
Trading Division and to redeploy the capital and human resources released to its Manufacturing Division whose
profitability is leveraged to the structural trend of increasing construction productivity and the improving
construction sector in Singapore. QCM has delivered the following letter to HG Metal Manufacturing Limiteds
management team, board of directors and other stakeholders.

QUARZ CAPITAL MANAGEMENT, LTD. ISSUES OPEN LETTER TO

THE BOARD OF DIRECTORS OF HG METAL MANUFACTURING LIMITED (SGX: BTG)
.
ALL RECIPIENTS ARE ADVISED TO READ
IMPORTANT DISCLOSURE INFORMATION
AT THE END OF THE ATTACHED LETTER
.
QUARZ CAPITAL MANAGEMENT, LTD.
CLIFTON HOUSE 75 FORT STREET
GEORGE TOWN I KY1-1108 I GRAND CAYMAN
CAYMAN ISLANDS
31 May 2017

TO ENGAGE ON THE PROPOSALS FOR THE RETURN OF EXCESS CAPITAL, REVIEW OF NON-PERFORMING
BUSINESS AND NON-CORE STAKES, AND REFOCUSING ON KEY BUSINESS
- POTENTIAL TOTAL UPSIDE OF >40% IN HGS SHARE PRICE BY 2018 -
Dear Members of the Board,
Quarz Capital together with its affiliates have built up a sizeable position in HG Metal Manufacturing
Limited (the Company, Firm, HGM SP, HG, or HG Metal). We commend HGs management for
steering the company through one of the toughest slumps in steel prices and achieving profitability in 2016.
We forecast HGs net income to further improve from 2H2017 attributed to a stabilizing and increasing
steel price as well as the cost optimization efforts taken by the management.
Despite the turnaround in profitability, HG Metal continues to trade at a market cap of SGD 45 million1,
in our view a fire-sale discount of 60% to its highly liquid and easily valued NAV of SGD 111 million. HGs
NAV is mainly made up of its net cash of SGD 29 million, net receivables and inventories of SGD 42 million
and a strategic 23% stake in listed BRC Asia2 with an estimated market value in excess of SGD 30 million.
The firm has consistently traded at discounts of 20% and 35% to its listed steel trading/distribution and
manufacturing peers. We postulate that HGs intrinsic value is being obscured by 1) the lack of investors

1 As of 30th May 2017

2 BRC Asia has a market cap of SGD130m (30th May 2017) and is one of the top 3 manufacturers of prefabricated construction steel in Singapore
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confidence in the long-term profit sustainability and competitiveness of its Trading Division, and 2) the lack
of clarity on the allocation of the substantial level of excess liquid assets.
We believe that readily available steps exist for HGs Board to unlock an estimated SGD 20 25 millions
of value for the firm which can potentially yield an attractive >40% total return for shareholders.
In the HG Metal Value Creation Proposal (Value Creation Proposal) outlined in this letter and the
accompanying presentation, we provide actionable steps which the board can take to address HGs severe
undervaluation:
Recommendation 1: Conduct a full strategic review on the potential divestment of HGs non-core
23% stake in BRC Asia with a market value in excess of SGD 30 million. As evident in the recent
announcement by BRC Asia, multiple parties are interested in increasing their stakes in the company
Recommendati on 2: Immediate distribution of SGD 10 million (22% dividend yield) of the SGD 29
million excess net cash held by the company to shareholders
Recommendation 3: Scale down and/or spin off HGs Trading Division which has consistently
generated low rates of return to release initial capital of SGD 10-15 million
Recommendation 4: Establish the Manufacturing Division as HGs core business and expedite on
investment plans to strengthen the divisions capability
Recommendation 5: Provide clarity on the allocation of excess capital of SGD 60 million (~135% of
Mkt Cap) from the sale of stake in BRC Asia, scale back of Trading Division and existing net cash
HG Metal in Summary
HG is the 4th largest3 listed steel player in Singapore with Steel Trading/Distribution and Manufacturing as
its 2 main divisions. The Trading business focuses on the distribution of steel products for real estate
construction, shipping and industrial requirements. HG Manufacturing fabricates customized steel
products for its predominantly Singapore construction clientele base. The firms market cap has slumped
by more than 60% and underperformed its sector since 2014 attributed to weak profitability in the
Trading/Distribution Division. Falling steel prices have compressed trading margins and led to heavy write-
downs of inventory value. Earnings have also been affected by structural changes in the sector.
Uncertainty of the long-term profit sustainability of the Trading Division
We forecast that HGs Trading Division will achieve profit breakeven in 2H 2017 attributed to stabilizing
steel prices (driven by stronger global economic growth and curtailment of steel supply in China) and active
cost control by HGs management. Similar to other investors, our main concern is the sustainability of the
divisions profit over the longer term. Our discussions with major end users of steel products in Singapore
have concluded that the increasing accessibility and efficiency (shortened lead time from order to delivery)
of sourcing from steel mills and distributors in China together with the ease of finding storage areas in
Singapore for these products have reduced the amount of orders they place with local steel distributors.
This structural trend is well reflected in the falling revenue of listed steel traders in Singapore.
While HG Metal has diversified sales to Myanmar which now accounts for over 50% of its revenue, the
increased geographic risk has not been compensated by improved margins. Extensive consultations with
physical steel traders reveal the competitive environment of steel distribution in Myanmar where
distributors may be able to accept thinner distribution margins through the delivery of substandard and
cheaper steel products which do not conform to local building regulations. The ratification of the
investment law, increasing stability of the government and stronger global economic growth will
potentially improve the business environment in Myanmar. However, we remain skeptical of HGs ability
to generate a sufficient rate of risk adjusted return on the capital of SGD ~50 million deployed in this
business over the long term.

3 Ranked by revenue
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Manufacturing business (reinforcing steel products for construction industry) with secular growth trend
Despite being a late entrant, HG has established significant expertise in this area as evidenced by the
improving profitability of this segment even in the current weak construction environment. The
frontloading of government infrastructure projects and improving construction sentiments from 2018
onwards should provide this division with a clear pathway to profit growth.
The division is also highly leveraged to the Singapores government ambitious target of increasing
construction productivity to lower the reliance on foreign manpower. BCAs (Building Construction
Authority) consistent increase in the minimum content for prefabricated steel products4 in construction
projects together with the MOMs (Ministry of Manpower) tightening quota5 to hire foreign workers will
continue to drive the increasing trend of using manpower saving prefabricated construction steel
products.
This sector also faces low risk of disruption from foreign competitors due to the difficulties in coordinating
the customization and the inefficiencies of transporting pre-fabricated steel products.
We are optimistic that this secular trend will further catalyze HG Metals profit growth in this segment.
Excess cash and strategic stake in BRC Asia valued in excess of SGD 59 million together
HG Metal retains an excess net cash position of SGD ~29 million (65% of Mkt Cap). It is currently the 2nd
largest shareholder in BRC Asia with a 23% stake which has a market value of SGD ~30 million (67% of Mkt
Cap).
HG Metal Value Creation Proposal
Our proposed strategic plan provides clear executable steps that the Board can readily undertake to
increase shareholder value:
Recommendation 1: Conduct a full strategic review on the potential divestment of the 23% stake in BRC
Asia
The stake currently provides no tangible value and/or contribution to HGs operations. We are of the view
that the board should deliver clarity to investors on how and when it intends to monetize the stake. As
evident by BRC Asias announcement, multiple parties have indicated interests in building significant stakes
in the company as a strategy to further consolidate the reinforcing steel products industry in Singapore or
to attain a strong partner with whom they can collaborate, share expertise and introduce the production
of high value-added steel products for the construction sector. The implementation of this
recommendation can realize more than SGD 30 million of cash (67% of Mkt Cap) for HG Metal.
Recommendation 2: Immediate distribution of SGD 10 million (22% dividend yield)
HG will continue to retain a net cash balance in excess of SGD 19 million which can potentially increase to
> SGD 50 million with the execution of Recommendation 2 and 3 of the Value Creation Proposal. We believe
that the remaining excess cash is more than sufficient to execute on strategic and opportunistic plans.
Recommendation 3: Scale down and/spin-off - of the Trading Division
We are of the view that this business should be further scaled down to focus on products which are
complementary to HGs Manufacturing Division offerings and/or generate sufficient risk adjusted return to

4 In Nov 14, BCA implemented minimum prefabrication level, adoption rate of Prefabricated Bathroom unit & PPVC for specific
GLS (Government Land Sales) sites. The min level for the usage of prefabricated products was raised again in Nov 2015. In Feb
2017, BCA mandated that buildings constructed for office usage on selected land parcels under the GLS programme will require a
minimum level of 80% of the total office area to be undertaken with structural steel construction (which needs to be
prefabricated).
5 MOM has decreased the sector dependency ratio (no of foreign workers per 1 Singapore worker) and increased the foreign
worker levy annually since 2015. In Jan 2017, it mandated that construction firms are required to have least 10% of their work
permit holders to be qualified as Higher Skilled R1 workers with higher base salaries.
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capital employed. We believe that SGD 10-15 million of capital can be released from the initial reduction
in activities of this business. Talent, capital and managements focus can be redeployed to strengthen the
Manufacturing Business.
Recommendation 4: Establish Manufacturing Division as HGs core business
Despite the slowdown in construction activities in Singapore, we are highly optimistic about the long-term
prospect of this business due to its secular drivers. We advocate the board to expedite on investing and
strengthening the capabilities of this division with the ambitious goal of HG Metal becoming a major
business in this industry.

Recommendation 5: Provide clarity on the allocation of excess capital of SGD 60m

The implementation of our recommendations has the potential to increase the net cash position to ~SGD
60 million (135% of Mkt Cap). We request the board to provide investors with a clear and coherent strategy
on the allocation of this excess capital such as on the strengthening of the HG Manufacturing Division and
other projects which provide sufficient risk adjusted return. We are of the view that HG can return part of
the excess capital over a 2-3 year period in the form of special dividends and share buybacks. The strategy
while allowing the board and management to continually assess value accretive opportunities, also
provides a strong signal to investors about their clear commitment on the effective allocation of
shareholders capital.

Conclusion

We firmly believe that our Value Creation Proposal can provide a clear pathway to deliver a significant
return of at least 40% for all HGs shareholders in the mid-term. Post capital distribution, HG continues to
retain substantial levels of cash which can be further deployed into higher value creation businesses or
progressively returned to shareholders. The execution of HGs well planned strategy of expanding in the
steel manufacturing sector and stronger industry dynamics will potentially deliver further sustainable
shareholder returns in the long-term. We look forward to working collaboratively with the board and
management team and share our thoughts on the significant opportunity which can be realized at HG
Metal.

Sincerely yours,
Mr. Jan F. Moermann
Chief Investment Officer, Quarz Capital Management, Ltd.

Mr. Havard Chi, CFA

Portfolio Manager, Quarz Capital Management, Ltd.

For further information, please contact:

Havard Chi, CFA (hch@quarzcapital.com , +65 9433 3898)

About Quarz Capital Management

Quarz Capital Management, Ltd. is a value oriented and research driven investment advisory firm that
seeks to earn above average, long-term returns by identifying value investments across the globe.
www.quarzcapital.com

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 IMPORTANT DISCLOSURE INFORMATION
SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF HG METAL MANUFACTURING LIMITEDS SECURITIES AND ACTION
THAT HG METAL MANUFACTURING LIMITEDS BOARD MAY TAKE TO ENHANCE THE VALUE OF ITS SECURITIES. OUR VIEWS ARE
BASED ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN
BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE, NOR CAN THERE BE ANY ASSURANCE
THAT OUR ASSUMPTIONS ARE CORRECT. HG METAL MANUFACTURING LIMITED ACTUAL PERFORMANCE AND RESULTS MAY DIFFER
MATERIALLY FROM OUR ASSUMPTIONS AND ANALYSIS. WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY
THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS LETTER. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS INDICATING
THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. WE DO NOT RECOMMEND OR ADVISE, NOR DO WE
INTEND TO RECOMMEND OR ADVISE, ANY PERSON TO PURCHASE OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS LETTER
OR ANY ASPECT OF THIS LETTER TO PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. ALTHOUGH
WE STATE IN THIS LETTER WHAT WE BELIEVE SHOULD BE THE VALUE OF HG METAL MANUFACTURING LIMITEDS SECURITIES, THIS
LETTER DOES NOT PURPORT TO BE, NOR SHOULD IT BE READ, AS AN EXPRESSION OF ANY OPINION OR PREDICTION AS TO THE PRICE
AT WHICH HG METAL MANUFACTURING LIMITEDS SECURITIES MAY TRADE AT ANY TIME. AS NOTED, THIS LETTER EXPRESSES OUR
CURRENT VIEWS ON HG METAL MANUFACTURING LIMITED. IT ALSO DISCLOSES OUR CURRENT HOLDINGS OF HG METAL
MANUFACTURING LIMITED SECURITIES. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL
OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER
ACTIONS REGARDING HG METAL MANUFACTURING LIMITED WITHOUT UPDATING THIS LETTER OR PROVIDING ANY NOTICE
WHATSOEVER OF ANY SUCH CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING HG METAL
MANUFACTURING LIMITED AND ITS PROSPECTS WITHOUT RELYING ON, OR EVEN CONSIDERING, ANY OF THE INFORMATION
CONTAINED IN THIS LETTER.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS LETTER ARE FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO,
STATEMENTS THAT ARE PREDICATIONS OF OR INDICATE FUTURE EVENTS, TRENDS, PLANS OR OBJECTIVES. UNDUE RELIANCE
SHOULD NOT BE PLACED ON SUCH STATEMENTS BECAUSE, BY THEIR NATURE, THEY ARE SUBJECT TO KNOWN AND UNKNOWN
RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE OR ACTIVITIES
AND ARE SUBJECT TO MANY RISKS AND UNCERTAINTIES. DUE TO SUCH RISKS AND UNCERTAINTIES, ACTUAL EVENTS OR RESULTS
OR ACTUAL PERFORMANCE MAY DIFFER MATERIALLY FROM THOSE REFLECTED OR CONTEMPLATED IN SUCH FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF THE FUTURE TENSE OR OTHER FORWARD-
LOOKING WORDS SUCH AS VIEW, BELIEVE, CONVINCED, EXPECT, ANTICIPATE, INTEND, PLAN, ESTIMATE,
SHOULD, MAY, WILL, OBJECTIVE, PROJECT, FORECAST, MANAGEMENT BELIEVES, CONTINUE, STRATEGY,
PROMISING, POTENTIAL, POSITION OR THE NEGATIVE OF THOSE TERMS OR OTHER VARIATIONS OF THEM OR BY
COMPARABLE TERMINOLOGY.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS SET FORTH IN THIS
LETTER INCLUDE, AMONG OTHER THINGS, THE FACTORS IDENTIFIED IN THE RISK SECTIONS IN HG METAL MANUFACTURING
LIMITED ANNUAL REPORT FOR THE YEAR ENDED DEC, 2015, PROSPECTUS AND INFORMATION MEMORANDUM FOR ITS
MULTICURRENCY MEDIUM TERM NOTE PROGRAMME DATED JAN 2015. SUCH FORWARD-LOOKING STATEMENTS SHOULD
THEREFORE BE CONSTRUCTED IN LIGHT OF SUCH FACTORS, AND QUARZ CAPITAL MANAGEMENT IS UNDER NO OBLIGATION, AND
EXPRESSLY DISCLAIMS ANY INTENTION OR OBLIGATION, TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY LAW.

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