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QUARZ CAPITAL MANAGEMENT, LTD.

ISSUES OPEN LETTER TO


THE MANAGEMENT AND BOARD OF CSE GLOBAL LIMITED (SGX: 544)
.
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
26 February 2018

TO ENGAGE ON THE PROPOSALS FOR THE RETURN OF EXCESS CAPITAL, RIGHTSIZING OF COST BASE,
GROWTH STRATEGY AND THE ALIGNMENT OF BOARD, MANAGEMENT AND SHAREHOLDERS INTERESTS
- POTENTIAL TOTAL RETURN IN EXCESS OF 40% OVER THE MID-TERM -

Dear Mr Lim, Mr Foo and Members of the Board,


Quarz Capital together with its affiliates have built up a sizeable position in CSE Global (the “Company”,
“Firm”,” “CSE SP”, “CSE Global” or “CSE”). We, together are among the top 10 shareholders of the firm
and hold a substantially larger shareholding than the current management and board of CSE combined.
CSE’s share price has slumped by over 40% since 2015 despite the firm’s ‘cash rich’ balance sheet with net
cash and net-working capital (ex-net cash) positions of more than S$48million1 and S$722million
respectively (~27% and ~41% of market cap3). While the fall in oil price has decimated many Oil & Gas
service companies in Singapore, CSE generated S$13million of underlying Net Income (ex-one offs) in 2017
mainly from its infrastructure business segment. With the upswing in commodity prices and already
secured orderbook, we estimate that the increase in contributions from the firm’s Oil & Gas (O&G) and
Mining segments will result in a Net Income in excess of S$16million in 2018E. As a result, the firm will
trade at an attractive P/E 2018E of 11.1x, 8.1x (ex-cash).
Apart from the correction in commodity prices, we believe that the severe undervaluation of CSE’s stock
price is attributed to the following key reasons:
- Investors’ lack of confidence in CSE due to its inadequate cost and operational discipline over the
utilization of the firm’s substantial net cash position. Shareholders suffered an extraordinary one-off
loss of S$58.5million in 2017 while board and top management remunerated themselves a sizeable
~S$18million for the past 3 years
- Misalignment of interests among board, top management and shareholders. Combined value of
Board and top management’s shareholding in CSE (~2%) is less than their annual remuneration
- Lack of strategic direction and inability of CSE to leverage on new growth drivers despite its strong
expertise and track record. S$28million of acquisitions since 2015 have not arrested continuing slide
in profitability. Board and top management have expressed intention to spend more shareholders’
capital on further acquisitions
- Investors’ poor understanding of the recurring nature of CSE’s revenue and misperception of the
firm as a pure Oil & Gas player (2017 underlying Net Income mainly generated from sectors ex-O&G)

1
We classify CSE’s S$31.4million of short term loans under working capital and exclude it from the calculation of net cash as this sum is mainly
short-term financing for the purchase of equipment and services for clients’ projects (which clients have committed to purchase)
2
CSE’s S$31million of short term loans is included here
3
CSE’s Share Price and Market Cap of S$0.345 and S$178million respectively (23 February 2017)

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The prolonged disappointing performance in CSE’s share price requires immediate action to preserve the
long-term interest of shareholders. In our CSE Value Creation Proposal, we provide readily available and
actionable steps which we urge CSE’s board to consider and implement to unlock a potentially attractive
total return of >40% for shareholders:
 Recommendation 1: Immediate distribution of S$18million (~10% dividend yield) of the S$48million4
of net cash. CSE will still retain more than S$30million to capitalize on attractive opportunities.
Substantial destruction of shareholder value has resulted in net cash balance falling from
~S$100million in 2015 to current levels.
 Recommendation 2: Commit to pay at least 80% of Net Income as dividend with a dividend payout
floor of S$12.5million (~7% dividend yield). This is in view of CSE’s sizeable cash balance
 Recommendation 3: Target Return on Equity of >10% (>S$17.3million of annual income). This can be
achieved by rightsizing CSE’s US business (profitable at oil price of >US$50/bbl), integrating subsidiaries
and new acquisitions, reducing corporate expenses and targeting future growth opportunities
 Recommendation 4: Seize growth opportunities in structural growth areas such as the infrastructure
segment in Singapore and Australia (Australia 1st 15-year Infrastructure Plan, Singapore Smart
Nation initiatives)
 Recommendation 5: Increase in alignment of board, top management and shareholders’ interests.
This can be achieved by a transparent link between board and top management’s compensation with
total shareholder return as well as increasing the proportion of share-based compensation which will
vest over the mid and long term
Having extensively evaluated CSE’s business, on further price weakness of the firm due to weak execution,
we and our affiliates are prepared to increase our shareholding. We reserve our rights to propose
measures in AGMs and EGMs including the election of board members who can advance strategies to
increase value for shareholders. Other shareholder value accretive strategies can include the sale of all or
part of the firm to parties who recognize the intrinsic value of the firm.

CSE Global in Summary


CSE was spun off from ST Engineering in the 1990s and has established itself as one of the top control and
communication system integrators for the offshore Oil & Gas and materials industries. The firm has
partnered with blue chips such as BP, Conoco Phillips, Fluor, Samsung, Technip, China National Petroleum
(CNPC) and BHP Billiton in the installation and maintenance of supervisory, control, safety and
communication systems for their infrastructure (pipelines, wells, production facilities). While the low
commodity prices have put off capex spend in these industries, the need to maintain, service and upgrade
the existing systems to meet production and safety requirements and the ‘stickiness’ to the integrator
who installed the system (due to the high cost and possible disruption of switching to another service
provider) will continue to provide recurring income to the firm.
CSE has maintained the current ERP system since its commission in 1998 and is also part of the consortium
which will implement the S$556million next generation ERP-2 project. The firm has also undertaken
projects both directly and as sub-contractors for various government ministries including the Land
Transport Authority (LTA), Ministry of Defence (MINDEF) and Ministry of Home Affairs (MHA).
In Australia, the firm is a majority shareholder of Orion, the largest commercial Digital Mobile radio (DMR)
2-way radio network operating across the country and services clients in critical sectors such as airports,
ports, public safety, local government and transportation networks. These users are unable to rely on

4
CSE reported a net cash position of S$48million in 2017 Full Year result. The firm will tentatively pay out S$7.8million (~4.3% dividend yield) in
May 2018 for 2017’s final and special dividend. During this period, the firm is estimated to generate at least the same amount of net profit and
cashflow

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public cellular networks which are often disrupted (due to overloading) during natural disasters and other
emergencies. The firm also has a strong track record of implementing communication systems for clients
such as the Victoria Emergency Services Telecommunications Authority, Royal Adelaide Hospital, South
Australian Country Fire Services, Sir Charles Gairdner Hospital, Adelaide to Darwin Rail Project and the
Gold Coast Light Rail System.

Lack of Operational and Cash Discipline


CSE reported a substantial one-off loss totaling ~S$58million in 2017 attributed to the Office of Foreign
Asset Control (OFAC) settlement and the write down of its account receivables in EMEA and intangibles
relating to its Oil & Gas business. As shareholders, we were surprised at the lack of reaction and changes
to the board and top management in consideration of the significant loss of shareholder value. The
majority of the current board and top management team were present when the occurrences took place.
CSE’s underlying net profit has also fallen by more than 50% from 2015 despite the firm spending more
than S$28 million in acquisitions during that period. The complete divestment of Servelec (one of CSE’s
key subsidiaries) through an IPO was grossly short-sighted as CSE did not retain any stake in the company.
Servelec was taken over by Montagu in Nov 2017 at GBP 3.135/share (75% above its IPO price), costing
CSE’s shareholders more than S$165million (~90% of CSE’s current mkt cap) in proceeds.

Misalignment of interests among board, top management and shareholders


The substantial loss of capital has triggered speculations of a reduction in dividend due to the lower net
cash balance. Despite the severe underperformance of CSE’s share price and the net loss of S$39million
suffered by the firm, top management and board is projected to pay themselves in excess of S$3.5million
with remuneration increasing to more than 25% of 2017 underlying net profit (or 100% of net profit in
consideration of the loss). Annual remuneration exceeds the combined value of top management and
board’s shareholding in CSE.
Board and top management have allowed CSE’s key subsidiaries to operate independently which further
increase corporate layers as well as management and corporate expenses.

Lack of strategic direction and inability of firm to leverage on new growth drivers despite engineering
expertise
In addition, CSE has not been able to leverage on its strong engineering expertise to secure key projects
in relation to the ‘Smart Nation’ initiative in Singapore.

CSE Global Value Creation Proposal


Our recommendations provide clear executable steps that the Board and management can readily
undertake to increase shareholder value:

Recommendation 1: Immediate distribution of S$18million (10% dividend yield) of the S$48million of


net cash position
CSE will continue to retain a net cash balance in excess of S$30million which can potentially increase to
~S$45million given increased efficiency in the usage of working capital (~S$72million). The remaining net
cash balance is more than sufficient to execute on strategic plans and capitalize on opportunities.

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Recommendation 2: Commit to pay at least 80% of Net Income as dividend with a dividend payout floor
of S$12.5million (~7% dividend yield)
This is in view of the substantial net cash balance and capex-light nature of CSE’s existing business. We
believe that our proposed capital return policy will instill a higher level of cash and operational discipline
in the firm.

Recommendation 3: Target Return on Equity of >10% (>S$17.3million of annual income)


This can be achieved through the rapid rightsizing of CSE’s US business to realize profitability at oil price
of >US$50/bbl, integration of subsidiaries and acquisitions to reduce duplicity and corporate overheads
and an accelerated execution of a growth strategy. The upswing in commodity prices can provide further
tailwinds to the firm in growing revenue and profitability.

Recommendation 4: Seize growth opportunities in structural growth areas such as the infrastructure
segment in Singapore and Australia (Australia 1st 15-year Infrastructure Plan, Singapore Smart Nation
initiatives)
In our view, CSE’s transition to a professionally managed firm has diminished its ‘can do’ spirit of
entrepreneurship. This motivation force was the key driver to the management buyout of CSE in the 1990s
and the firm’s successful expansion thereafter. Focus has now been targeted at margins and cashflow
instead of organic expansion into new growth areas.
We call on management to take advantage of CSE’s strong engineering expertise and track record in
implementing communication, control and surveillance systems and expand into adjacent areas of
growth. Both Singapore’s Smart Nation initiatives and Australia 1st 15-year Infrastructure Plan provide
attractive growth areas which CSE can expand its services into. We believe that the firm can establish itself
as one of the thought leaders in these areas.

Recommendation 5: Increase in alignment of board, top management and shareholders’ interests


We support a clearer link between board and management’s remuneration and the total return for
shareholders over the mid to long-term. In this respect, we propose their compensation package to
include a sizeable proportion of share-based compensation which will vest over the mid-term and upon
the fulfillment of transparent mid and long-term key performance indicators.

Conclusion
We firmly believe that the execution of our Value Creation Proposal can provide a clear pathway to deliver
a significant potential return of more than 40% for all shareholders in the mid-term. CSE continues to
retain sufficient cash balance as buffer and to take advantage of opportunities. An ‘energized’ CSE with
the tailwinds from stabilizing commodity prices and revenues from new growth areas can deliver
sustainable returns to shareholders over the long term. As long-term shareholders, Quarz looks forward
to working with CSE’s management team and share our thoughts on the significant opportunity at CSE
Global.

Sincerely yours,
Mr. Jan F. Moermann
Chief Investment Officer, Quarz Capital Management, Ltd.
Mr. Havard Chi, CFA
Head of Research, Quarz Capital Asia (Singapore)

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For further information, please contact:
Havard Chi, CFA (hch@quarzcapital.com, +65 9433 3898)
enquiries@quarzcapital.com
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

IMPORTANT DISCLOSURE INFORMATION


SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF CSE GLOBAL LIMITED’S SECURITIES AND ACTION THAT CSE GLOBAL
LIMITED’S 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. CSE GLOBAL 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 CSE GLOBAL LIMITED’S 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 CSE GLOBAL LIMITED’S
SECURITIES MAY TRADE AT ANY TIME. AS NOTED, THIS LETTER EXPRESSES OUR CURRENT VIEWS ON CSE GLOBAL LIMITED. IT ALSO
DISCLOSES OUR CURRENT HOLDINGS OF CSE GLOBAL 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 CSE GLOBAL LIMITED WITHOUT UPDATING THIS LETTER OR
PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING
CSE GLOBAL LIMITED AND ITS PROSPECTS WITHOUT RELYING ON, OR EVEN CONSIDERING, ANY OF THE INFORMATION CONTAINED
IN THIS LETTER.
As of the publication date of this report, Quarz Capital Management Ltd. and its affiliates (collectively "Quarz"), others that
contributed research to this report and others that we have shared our research with (collectively, the “Authors”) have long
positions in and own options on the stock of the company covered herein (CSE GLOBAL LIMITED) and stand to realize gains in the
event that the price of the stock increases. Following publication of the report, the Authors may transact in the securities of the
company covered herein. All content in this report represent the opinions of Quarz. The Authors have obtained all information
herein from sources they believe to be accurate and reliable. However, such information is presented “as is”, without warranty
of any kind – whether express or implied. The Authors make no representation, express or implied, as to the accuracy, timeliness,
or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject
to change without notice, and the Authors do not undertake to update or supplement this report or any information contained
herein.
This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market
prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice.
The information included in this document is based upon selected public market data and reflects prevailing conditions and the
Authors’ views as of this date, all of which are accordingly subject to change. The Authors’ opinions and estimates constitute a
best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential
complete loss of principal. This report’s estimated fundamental value only represents a best effort estimate of the potential
fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a
summary of past performance, or an actionable investment strategy for an investor.
This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or
commodity discussed herein or of any of the affiliates of the Authors. Also, this document does not in any way constitute an offer
or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities
laws of such jurisdiction. To the best of the Authors’ abilities and beliefs, all information contained herein is accurate and reliable.
The Authors reserve the rights for their affiliates, officers, and employees to hold cash or derivative positions in any company
discussed in this document at any time. As of the original publication date of this document, investors should assume that the
Authors are long shares of CSE Global and have positions in financial derivatives that reference this security and stand to
potentially realize gains in the event that the market valuation of the company’s common equity is higher than prior to the original

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publication date. These affiliates, officers, and individuals shall have no obligation to inform any investor about their historical,
current, and future trading activities. In addition, the Authors may benefit from any change in the valuation of any other
companies, securities, or commodities discussed in this document. Analysts who prepared this report are compensated based
upon (among other factors) the overall profitability of the Authors’ operations and their affiliates. The compensation structure
for the Authors’ analysts is generally a derivative of their effectiveness in generating and communicating new investment ideas
and the performance of recommended strategies for the Authors. This could represent a potential conflict of interest in the
statements and opinions in the Authors’ documents.
The information contained in this document may include, or incorporate by reference, forward- looking statements, which would
include any statements that are not statements of historical fact. Any or all of the Authors’ forward-looking assumptions,
expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements
can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are
beyond the Authors’ control. Investors should conduct independent due diligence, with assistance from professional financial,
legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone
judgment of the relevant markets prior to making any investment decision.
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 CSE GLOBAL LIMITED ANNUAL
REPORT FOR THE YEAR ENDED DECEMBER 31ST, 2016 AND PROSPECTUS. 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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