SME DEVELOPMENT SURVEY 2005

1. SME DEVELOPMENT SURVEY 2005 Chen Yew Nah managing director DP Information Group “SME – Beyond Financing; Taking the Next Steps”

2. OBJECTIVES Explore growth strategies in the different development stages Human Resource Issues faced by SMEs Hurdles and Drivers of SMEs going overseas Foreign Currency Impacts and Hedging Practices Leveraging on FTAs Perspectives of SMEs financial performance

3. SURVEY METHODOLOGY • 2-prong approach • Questionnaire to capture SMEs’ opinions/responses • Submission of their financial statements • Random sampling of 10,000 companies (no. of companies selected as reflected by sectors’ contributions to Singapore GDP 2004) • 11 broad sectors covered • All respondents are given phone-in hotline

4. 5 PRIMARY SECTIONS … 32 QUESTIONS Development Stage & Growth Strategy Human Resource Issues Expanding Overseas Hedging and FTAs SMEs’ Profile, Headcounts & Business Outlook

5. PROFILE OF RESPONDENTS • 1004 responded; 185 repeats (last year - 804) • 684 financials were collated (last year - 395) • 54% are exempt private companies (80% of 150k SMEs are exempt) • 40% with >$1 mil paid-up capital • 75% with <= 50 employees • 13% with >=100 employees; more mid-sized SMEs are represented

6. PROFILE OF RESPONDENTS - continued • 74% are older than 10 years • 28% with > $1mil-$5mil turnover & 17% with >$5mil-$10mil turnover; largest 2 blocks • 23% not-profitable, 51% generating up to $100k profit • 31% does not have any form of overseas operations • 69% have overseas operations; 74% of them having more than 5years doing so

7. TABLE OF INDUSTRY SECTORS • Sectoral distribution consistent with last year; with slight increase representation from Commerce and Mfg sectors

8. Business Strategies

9. STAGE OF DEVELOPMENT & GROWTH STRATEGIES • Stages of Development • Accelerating Growth : >10% turnover growth rate • Moderate Growth : • > 0% - =< 10% turnover growth rate • Mature : • 0% turnover growth rate • Decline : • < 0% turnover growth rate • One in three are mature • 55% of the companies are experiencing growth

10. KEY BUSINESS STRATEGIES for NEXT 2 YRS • 3 main strategies; New Overseas Market (33%) & Improving Cost Efficiency/Productivity (30%); New Products & Services (18%) • New Overseas Markets opted mainly by younger companies (<10yrs) and older companies (>40yrs); also identified themselves being in growth stages • Companies within 11-40yrs give equal importance to both 2 top key business strategies

11. TOP HINDRANCE to GROWTH BY SMEs • Last year – Uncertain Economic Conditions; moved into 3rd position • This year – Increasing Local/Overseas Competition & Operating Cost taken up the top spots • Cashflow moved to 6th position

12. KEY HINDRANCE TO GROWTH IN DIFFERENT STAGE OF GROWTH • Different stages raise different concerns • Start-Ups to pay more attention to Increasing Operating Cost (47%) • Companies in accelerating & moderate growth identifies Increasing Local/Overseas Competition a key concern

13. Access to Financing

14. SME's Ability to Access Financing as compared to previous 2 years Has improved 48% Is the same 43% Has worsened 9% Grand Total 100% Access to Financing by SMEs • 48% of respondents access to Financing improved as compared to 2 years ago • Only 9% find their access have worsened

15. Access to Financing by SMEs • Government initiatives has helped to put focus to help SMEs in access to financing • Banks responded well; Creating financing products specially targetted at the SMEs • SMEs are now spoilt for choice: Previously, they are underserved

16. TYPES OF BANK FACILITIES USED BY SMEs

17. TYPES OF BANK FACILITIES USED BY SMEs • Increase cash management & treasury services • Banks focusing to cater to new term loans & trade financing • Still strong reliance on Overdraft (44%); nevertheless downward trend • Companies with no banking facilities dropped from 21% to 19%

18. Overseas Challenges

19. HOW MUCH REVENUE IS GENERATED FROM OVERSEAS?

20. OVERSEAS OPERATIONS TURNOVER

21. OVERSEAS OPERATIONS TURNOVER • 73% of companies with >$50m turnover have more than 5 years in overseas operations; 1 in 10 with such turnover does not have any overseas operations • 45% of companies with low turnover does not venture overseas; 31% have ventured for more than 5 years • 2 main concentrations; stay domestic or having ventured overseas for some length in time • 40% of companies in Decline Stage have never had any overseas operations; foreign revenue can be key in driving growth • 36% of companies in Decline Stage have >5 years in overseas operations; need to stay innovative to remain competitive

22. POPULAR COUNTRIES FOR EXPORT & EXPANSION • Improved ties with Malaysia • Recovery of the Indonesian & Thai markets

23. OBSTACLES FACED GOING OVERSEAS • Top 1st and 3rd concerns are external in nature • IE & SPRING can help on the 2nd top concern with • Overseas Centres • Business Matching Programmes • Overseas Trips • Pooling of MNCs / SMEs in joint ventures or ‘clusters’

24. SOURCES OF FUNDS FOR OVERSEAS OPERATIONS • 62% experienced difficulty when seeking external sources of funds • 69% of these companies expressed ‘Lack of Collateral’ as key reason for inability to access external funds • 58% relied on retained earnings • More are using Trade Credit and Trade Financing instead of Overdraft as compared with last year

25. FOREIGN CURRENCY IMPACT on SMEs • 88% are affected by Exchange Rate Fluctuations; 43% of them to a great extent • 71% traded with >50% in SGP dollar currency • 13% are only affected due to volatility while 50% are affected by its exchange values • Only 20% practice foreign currency hedging • Key constraints for Practicing Hedging • 42% due to lack of Information/Knowledge • 27% due to Cost

26. FTA BENEFITS on SMEs • 68% are aware but 50% of them do not know how to benefit from it • Only 7% have enjoyed tariff savings • More education help for competitiveness by SPRING & IE • 72% are prepared to learn & inform their overseas trading partners

27. WHY SMEs ARE NOT ENGAGING in OVERSEAS OPERATIONS? • 31% of the respondents no overseas operations • Key reasons are No Requirement (45%) and No Network (35%) • 4% of the respondents stopped previous overseas operations; 5% intend to start • Key reasons are ‘Too Competitive’ (32%), Collections Problem (22%) and High Cost (19%) • Some SMEs made inadequate preparations & lack understanding of these overseas markets

28. BUSINESS SECTORS BREAKDOWN WITH NO OVERSEAS OPERATIONS • Construction & Services Sectors highest • By development stages, more than half (58%) experience no growth • In terms of business strategy, about half (48%) concentrates on internal processes to improve cost efficiency/productivity

29. Human Resource Challenges

30. WORKFORCE OF S’PORE SMEs • 51% with 20 employees or less • Top HR concerns are Recruitment (49%), Productivity (47%) and Employee Retention (45%) • 32% faced > 10% employee turnover rate

31. HR CHALLENGES FOR SMEs • Economy becomes more knowledge based & overseas orientated • Employers require employees with • the right skill sets • the necessary regional exposure & experiences • the adoption of industry best practices • ‘Lack of Appeal’ of SMEs to job seekers; especially amongst the younger workforce • Total Human Capital Management must be addressed by SMEs for Employee Retention

32. TOP 3 HR CONCERNS BY BUSINESS SECTORS FOR SMEs • Key Concern – Recruitment (49%) • Communications/Transport/Storage • Finance • Holding • Property • Services • Key Concern – Productivity (48%) • Wholesale • Construction • Key Concern – Retention (44%) • Retail • Hotel/Food Establishments

33. Financial Performance Perspectives

34. FINANCIAL PERFORMANCE OF OUR SMEs • 684 vs last year’s 395 financials submitted • DP contributes with our DP Credit Ratings, based on Moody’s KMV methodology • DP Credit Rating utilises 3 key values to determine a firm’s probability of default • 3 drivers are market value of assets, asset volatility and leverage • DP1 – DP8 • Investment Grades (DP1-DP4); <1% default probability • High Yield Grades (DP5-DP6); 1%-8% default probability • High Risk Grades (DP7-DP8); >8% default probability

35. DP CREDIT RATINGS

36. SMEs MANAGING CREDIT RISK WELL • 1 in 5 are in Investment Grade; Signify Improved Credit Quality • High Risk Grade companies increased marginally from 28% to 32% • Higher gearing as loans/funds are made more available; Banks to take close monitoring • Sectors with more than a third in High Risk Grades are Retail, Wholesale, Construction, Manufacturing and Property

37. SME DISTRIBUTION BY PROFIT MARGIN • SMEs’ profit margin are thin; Slight improvement • Only 30% with 5% or more in profit margin • Possible concern in sustainability in adverse market conditions and rising oil prices • Productivity & Economies of Scales for Higher Profit Margin

38. PROFIT MARGIN DISTRIBUTION BY SECTORS • More than half in Retail make losses • More than half in Construction has low profit margin • About half in Hotel/Food Establishments has 10% or more in profit margin

39. KEY FINANCIAL RATIOS THE RATIOS • Liquidity (Current Ratio); ability to meet its obligations within the next one year • Leverage (Debt to Worth Ratio); Extent that debt is applied with the company’s capital structure • Efficiency (Asset Turnover); How much working capital is tied-up • Debt Servicing Capability (Interest Coverage); Capacity to meet interest payments • DP Financial Benchmark Indices for the top 4000 companies in Singapore by business sectors as computed as the Industry Norms

40. SME DISTRIBUTION BY LIQUIDITY LEVEL (CURRENT RATIO) • Improved distribution as compared to last year • 70% of SMEs have current ratio which are within/above industry norm

41. SME DISTRIBUTION BY LEVERAGE RATIO • Almost 50% are more highly leveraged than industry norms • Financial Institutions are reaching out to more SMEs; Need close monitoring

42. SME DISTRIBUTION BY EFFICIENCY RATIO (ASSET TURNOVER) • Ability to utilise assets by SMEs remaind same level as last year • Above industry norm has dropped from 20% to 15%

43. SME DISTRIBUTION BY INTEREST COVERAGE • A measure on its income and cost structure • Decline pattern may be a sign of higher financial burden • More than half are below industry norm

44. Our Recommendations

45. DP INFO’S RECOMMENDATIONS Managing Competitiveness • Benchmarking Diagnostic kit • SME Credit Rating • Branding & IP Protection • Internationalisation via Consortiums • Focus Business Matching Privatisation/Commercialization

46. IMPROVING COST EFFICIENCY and PRODUCTIVITY • Technology Adoption & Automation • Focus Financial & Credit Management (Financial Consultants) • Higher Leveraging of FTAs • Innovation

47. Human Capital Management • “Grow our SME Leaders” Scheme • “The International Manager” Scheme • Advisory & Mentoring Scheme

48. SME CREDIT RATING • SMEs to obtain their annual credit rating for benchmarking • To create platform to showcase SMEs with DP1-DP6 for their creditworthiness • Give international partners stronger trust on our SMEs • Government-to-Government arrangements to allow credible SMEs easier overseas access and market development • SME Credit Rating could be the path-breaking mechanism to improve competitiveness overseas

49. THANK YOU www.dpgroup.com.sg