Reasons for over 20% change in financial performance

(Translation) No.H.T 040/2006 May 15, 2006 Re: Explanation of the 1st Q. 2006 of which operating result varied over 20% vs. last year To: Managing Director of SET The major priority in the first quarter has been to effectively execute and complete the program of actions to improve the quality of the Company's installment receivables, which commenced during the 4th quarter of 2005. This included: the raising of minimum down payments compulsory insurance (including credit default insurance) with all motorcycle hire purchase contracts automation of the internal blacklist process the establishment of a golden rule to ensure prompt repossession from defaulting customers central credit approval for motorcycle accounts was introduced for selected branches in February 2006 and will apply to all branches by April 2006 at which time all customer applications will be checked against the National Credit Bureau register the Singer Thailand Call Center was established in February and this will also be used as part of the credit and collection process the processing capability of the Sena distribution center has been trebled in order to reduce the timeline between repossession and resale of motorcycles As anticipated, the corrective actions have reduced sales increased the number of repossessions and consequently reduced profitability during the implementation period. However the Company will reap the benefits in future months as the branches resume normal sales activity levels backed by more robust credit control procedures. The program has also improved operating cash flows, which were positive Baht 254 million in the first quarter 2006. This compares to a cash utilization of Baht 491 million in the first quarter of 2005, a giving rise to Baht 745 million better cash generation over the prior year. Singer started selling motorcycle since 2002 with the portion of 6% of revenue and it increased as the result of the motorcycle market growth plus the expansion of selling area to nationwide. In 2005 motorcycle sales increased to 58% of total revenue. Motorcycle market situation in 2005 was very competitive. The market offered low down payment. The easy credit assessment with many channels for consumer finance resulted the high increase of personnel credits. When there was a sign of the economic slow-down in the second half of 2005 reflecting through a lot of debt collection cases continuously publicized in the newspapers. The company decided to issue strong measures to prevent high losses on bad debts in the future. The debt improvement program then implemented since the last quarter of 2005 continuously to the first quarter of this year. Singer has high ability in product repossession as their sales forces are in the same customers living areas covering nationwide. Consequently the company got high revert-in accounts especially motorcycle accounts. The new sales of motorcycle also decreased as the result of the tightening the credit assessment. All measures implemented had subsequently negatively affected the company new sales but their new accounts would be better and would give better operating result in long term. Sales Comparison In the 1st Quarter Year 2006 Year 2005 New motorcycle 235,321 914,828 2nd Hand motorcycle 164,849 70,426 Home Appliance 447,410 499,552 Total Gross Sales ('000) 847,580 1,484,806 Revert-In Year 2006 Year 2005 Motorcycle -614,475 -192,044 Home Appliance -157,003 -110,067 Total Revert-In ('000) -771,478 -302,111 Net Product Sales 76,102 1,182,695 From the above tale, the 1st quarter gross sales registered at 57.1% of the same period last year. The high decrease was new motorcycle sales Baht 679.5 million or 45.7% lower than the same period last year. The high decrease was due to tightening credit assessment and the limit of buying new motorcycle in order to push the sales of 2nd motorcycle. The company has the capability to sell 2nd hand motorcycle which its market size is much bigger than new motorcycle. The sales of 2nd hand motorcycle this year was higher than the previous year Baht 94.4 million. The decrease of Home Appliance sales was mainly due to the time spent in following up problem accounts instead of creating new sales. This year home appliance sales was Baht 52.1 million lower than the same period last year but it was close to the last quarter of 2005 (Baht 454.5million). The 1st quarter of this year had revert-in value of Baht 771.5 million against last year at Baht 302.1 million. The increase was due to measures implemented to ensure the accounts quality. Interest from installment sales decreased Baht 22.6 million or only 6.5% of the previous year. The decrease was due mainly to the high revert-in. It is not impacted to the same degree as sales by the high level of repossessions since its our policy to cease interest from installment sales recognition for accounts that are more than three months in arrears. Other Revenue was Baht 14.0 million higher than the same period last year mainly due to the sales of Compulsory Insurance (including credit default insurance) or Smart-Care insurance which commenced in the 4th quarter of 2005. Gross Margin decreased Baht 154.5 million. However the gross margin ratio this year registered at 46.2% against last year at 38.3%. The better ratio was mainly due to lower portion of motorcycle sales. The quarter of this year was 47% while last year was 66%. Product gross margin of motorcycle is lower than home appliance. Loss on Repossession increased Baht 86.0 million. It was the result of the installment receivables accounts improvement program. Selling & Administration Expense decreased Baht 40.1 million. The decrease was due mainly to lower pay of selling commission Baht 51.1 as a result of lower sales. As a result of high revert-in, Hire Purchase accounts and collection were lower. Subsequently the collection commission decreased by 24.0 million and provision for bad debt increased by Baht 34.1 million. Interest expense increased Baht 20.2 million The increase was due mainly to higher interest rate. The average interest rate was 4.9% against the same period last averaging at 3.0%. The higher rate impact was Baht 14.6 million and the rest of Baht 5.4 million was due to higher borrowing of Baht 294 million. However our borrowings at end of March 2006 were Baht 324 million lower compared to end of December 2005. Net Loss of Baht 162.3 million. As details mentioned above, the company get a Net Loss of Baht 162.3 million compared to the same period last with the Net Profit at Baht 41.9 million. The implementation of accounts improvement program and the tightening the credit approval for motorcycle accounts are the main causes but they will better our operating result in long term. Installment and other receivables - net It decreased from Baht 4,706 million at end of 2005 to Baht 4,194 million at end of March 2006. The decrease was due to the lower Hire Purchase accounts at end of last year standing at 417,024 accounts to 363,642 accounts at end of March 2006. It was the consequence of implementation of installment receivables accounts improvement program by high revert-in accounts at 35,735 accounts with Baht 771.5 million. The provision for bad debt installment accounts increased from 6.0% at end of 2005 to 7.7% at end of March 2006. Based on our actual bad debts written off statistic for average 3 years and 5 years backward they were 2.2% and 2.1% respectively. In addition motorcycle accounts opened from the 4th quarter of 2005 onward would be included with Smart-Care Insurance which will subsequently reduce the risk of bad debt. There was on change in provision for bad debt policy as it is considered suitable to the operation. Inventory -net The inventory increased from the end of last year Baht 152.3 million mainly due to 2nd hand motorcycle. As a result of high revert-in 2nd hand motorcycle increased 11,718 units at end of March 2006. There were around 30,000 units of 2nd hand motorcycle at end of March 2006. The company had planned to focus on selling 2nd hand motorcycle due to bigger market size and the company has the high capability to sell through their existing sales channels. Operating Cash Flow The Accounts Receivable improvement program has also improved our operating cash flows which was positive Baht 254 million in the first quarter of 2006. This compares to cash utilization of Baht 491 million in the first quarter of 2005 a giving rise to Baht 745 million better cash generation over the prior year. Debt / Equity Ratio The company was able to maintain it at 1.72 as the same of December 2005 as a result of limiting buying new motorcycle and continuously pushing 2nd hand motorcycle for sales. Replacement of Managing Director With effect from 1st June 2006, Khun Kwanchai Mogpradit is appointed as Managing Director of Singer Thailand and Mr. Jim Kelly has resigned effective the same date. Khun Kwanchai has over 20 years experience in the consumer finance market in Thailand with industry leaders such as Aeon and GE Capital. Kindly be informed Yours truly, Prateep Saenghiranwathana Controller & Finance Director