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31/5/2017 5.

23 PM SGT

Quarz Issues Open Letter to Undervalued


HG Metal; Urges Immediate Action
SINGAPORE (May 31): Switzerland-based activist
investor Quarz Capital Management today issued an
open letter to the board of steel manufacturer HG Metal
Manufacturing, urging the company to take immediate
steps to address the severe undervaluation of its
shares.

In the letter, a copy of which was seen by The Edge


Singapore, the fund notes that HG Metal remains
severely undervalued, despite a turnaround in
profitability in 2016. The shares, which closed at 35
cents on May 30, trade at a 60% discount to its book
value, and a discount of 20% and 35% relative to its
peers, Quarz said in its letter.

In a filing to the Singapore Exchange on May 30, BRC


noted that it had received an unsolicited offer for shares of the firm. Quarz notes that HG Metals stake currently
provides no tangible value and/or contribution to HG Metals operations, and recommends the company
monetise this stake to unlock value for shareholders.

Quarz also recommends the immediate distribution of $10 million out of the companys current net cash of $29
million.

In addition, the fund is recommending that HG Metal focus on its core manufacturing business by scaling down
or spinning off the companys trading division. This will free up capital of $10 million to $15 million, while allowing
talent, capital and managements focus [to] be redeployed to strengthen the manufacturing 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, Quarz notes in the letter.

Quarz notes that the implementation of its recommendations could increase HG Metals net cash position to
approximately $60 million. 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, Quarz says.

This is not Quarzs first open letter to a SGX-listed company. On January 13, the fund issued an open letter to
the board of medical property developer International Healthway Corp stating its support for the ousting of the
then current board, and outlined a plan to stem the erosion of shareholder value by selling non-core assets.

In September last year, Quarz Capital issued a letter to the management and board of Metro Holdings to urge
the retailer and real-estate developer to return some of its significant cash holdings to shareholders.

For the three months ended Mar 31, HG Metal posted smaller losses of $326,000, down from $1.1 million a
year ago. Revenue surged 108% to $45.6 million from $21.9 million a year ago, but lower operating income, as
well as higher administrative and other operating expenses impacted earnings.

In its outlook, the group notes that it expects the operating environment for the steel industry to remain
challenging. The volatile steel prices, competitive environment, the fluctuations in USD dollar, as well as
increasing geopolitical uncertainty that will affect the global and Singapore economy continue to pose

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31/5/2017 5.23 PM SGT

challenges to the industry. The group is therefore moving forward cautiously through further streamlining of its
operations and cost control, prudent expansion of sales channels and optimising its inventory holdings.

HG Metal was the top percentage gainer on Wednesday, rising 28.6% or 10 cents to close at a 52-week high
of 45 cents with 1.5 million shares traded.

Zavier Ong

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