World Class Process Equipment Manufacturer

KNM GROUP BERHAD(521348-H)

ANNUAL REPORT2008

(521348-H)

vision

mission

visionmission

visionTo be a top 5 global manufacturer of process equipment for the oil, gas, petrochemicals, minerals processing and energy industries

mission• To be a one stop centre for world class process equipment manufacturer

with technology• To enhance our global market share and reputation• To add value to our stakeholders with care towards society• To be the global employer of choice

2 CorporateInformation

3 CorporateStructure

4 KNMataGlance

6 Chairman'sMessage

11 5-YearGroupFinancialHighlights

12 AwardandAchievements

13 ProfileofDirectors

CONTENTS17 CorporateGovernanceStatement

32 AuditCommitteeReport

37 StatementonInternalControl

39 AnalysisofShareholdings

42 ListofMajorProperties

44 FinancialStatements

121 NoticeofAnnualGeneralMeeting

FormofProxy

� KNMGROUPBERHAD ANNUALREPORT�008

CORPORATE

INFORMATION

BOARD OF DIRECTORS

Dato’ Mohamad Idris bin MansorIndependent Non-Executive ChairmanIr Lee Swee Eng Group Managing Director

Lim Yu Tey Senior Independent Non-Executive Director

Dato’ Ab Halim bin Mohyiddin, DPMSIndependent Non-Executive Director

Company SecretariesLauBeeGeeMAICSA 0817743

ChiaKwokWhyMAICSA 7005833

Share RegistrarSymphonyShareRegistrarsSdnBhdLevel�6,MenaraMulti-PurposeCapitalSquareNo.8,JalanMunshiAbdullah50100KualaLumpurMalaysiaTelNo. :603-�7�1����FaxNo. :603-�7�1�530/�531

Registered Office15,JalanDagangSB4/1TamanSungaiBesiIndah43300SeriKembanganSelangorDarulEhsanMalaysiaTelNo. :603-89463000FaxNo. :603-89434781Emailaddress:knm@knm-group.comWebsite:www.knm-group.com

AuditorsKPMGCharteredAccountantsLevel10,KPMGTower8FirstAvenueBandarUtama47800PetalingJayaSelangorDarulEhsanMalaysiaTelNo. :603-77�13388FaxNo. :603-77�13399

Date of IncorporationIncorporatedon��July�000asaprivatecompanylimitedbyshares.Convertedtoapubliccompanylimitedbyshareson1�September�000.

Stock Exchange Listing ListedontheSecondBoardofBursaMalaysiaSecuritiesBerhadon11August�003TransferredtotheMainBoardofBursaMalaysiaSecuritiesBerhadon30September�005Stockname :KNMStockcode :7164

Lee Hui LeongExecutive Director

Gan Siew LiatExecutive Director

Chew Fook SinExecutive Director

Ng Boon SuExecutive Director

Board Committees

Audit Nomination Remuneration ESOS Committee Committee Committee Committee

Chairman Dato’AbHalim LimYuTey Dato’Mohamad LimYuTey binMohyiddin IdrisbinMansor

Member Dato’Mohamad Dato’Mohamad IrLeeSweeEng Dato’Mohamad IdrisbinMansor IdrisbinMansor IdrisbinMansor

Member LimYuTey Dato’AbHalim LimYuTey GanSiewLiat binMohyiddin

3 KNMGROUPBERHAD ANNUALREPORT�008

CORPORATE

STRUCTUREAS AT 18 MAY 2009

4 KNMGROUPBERHAD ANNUALREPORT�008

KNMATA

GLANCE

Operating subsidiaries:

Germany

Italy

Saudi Arabia

UAE

India

Indonesia Australia

Brazil

USA

Canada

Malaysia

China

ITALYFBMHudsonItalianaSpAFBMIcossSrl

UNITED ARAB EMIRATESFBM-KNMFZCO

CHINAKNMSpecialProcessEquipment(Changshu)CoLtd

MALAYSIAKNMProcessSystemsSdnBhdKPNGasTechnologySdnBhd

GERMANYBORSIGProcessHeatExchangerGmbHBORSIGZMCompressionGmbHBORSIGBoilerSystemsGmbHBORSIGMembraneTechnologyGmbHBORSIGServiceGmbH

5 KNMGROUPBERHAD ANNUALREPORT�008

Germany

Italy

Saudi Arabia

UAE

India

Indonesia Australia

Brazil

USA

Canada

Malaysia

China

INDIAKNMEngineeringServicesPrivateLimited

CANADAKNMProcessEquipmentInc

SAUDI ARABIAKNMSaudiLimitedCo

UNITED STATES OF AMERICAKPSTechnology&EngineeringLLC

BRAZILKNMMetalmecGroupofCompanies

AUSTRALIAW.E.SmithEngineeringPtyLtd

HEAAustraliaPtyLtd

INDONESIAPTHeatExchangersIndonesia

6 KNMGROUPBERHAD ANNUALREPORT�008

CHAIRMAN'S

MESSAGE

On behalf of the Board of Directors, it gives me great pleasure to report on the activities undertaken by the Company and the Group in 2008.

7 KNMGROUPBERHAD ANNUALREPORT�008

CHAIRMAN'S

MESSAGE(CONT’D)

FINANCIAL HIGHLIGHTS

TheGroupcontinuedtoregisterastrongperformancein�008despiteitbeingayearfullofparadoxthatshookthefinancialworldandaffectedmost,ifnotall,economiesandindustriesglobally.Year2008signifiedatrulyhistoricyearofgrowthandexpansionfortheGroupwhenitcompleteditsacquisitionoftheBorsigGroupofCompaniesinGermany(“Borsig”)forapproximatelyRM1.78billion(“BorsigAcquisition”).Despiteoperatinginchallengingtimesasfallingdemandshaveweakenedorerodedmarginsformostsectorsacrosstheboardduetoeconomicslowdowncausedbylowerglobalconsumptionandinvestments,theGroupcontinuedtodeliverstrongcommendablefinancialresults.TheGroup’soverallprogressin2008haschartedrecordsalesandincreasedmanufacturingnetworkandcapacityforfuturegrowth,largermarketshareandmoreexpansions.

Revenuegeneratedjumpedby106%toahighofRM�.53billionovertheRM1.�3billionrecordedinthepreviousyear.GroupProfitBeforeTaxrose111%atRM453.7millioncomparedtoRM215.4millionin2007whilstGroupProfitAfterTaxincreasedtoRM336.�millionby80%overpreviousyear.Keycontributorstothesharp improvementof theGroup’sfinancialresults inyear2008wereattributabletotheconsolidationofresultsinJune�008resultingfromthecompletionoftheBorsigAcquisitionaswellashigherrevenuecontributionsfromtheGroup’shigh-endprocessequipmentsectorparticularlyfromitsforeignsubsidiaries.TheGroupwillcontinuouslyfocusonimprovingquality,productivityandcostefficienciesaswellasmaximizingitsresourceutilization.EffortswillbeintensifiedtoreinforcetheGroup’spositioninthedomesticfrontaswellastocapitalizeonglobalopportunities.ClientsatisfactionwillremainoneoftheGroup’spriorities.TheGroupwillstrivetoreduceitsturnaroundexecutionanddeliverytimebyimprovingitsprocurementandoperationalcentres.

BUSINESS DIRECTION

ThedirectionandgrowthoftheGrouphavebeenandareconstantlyfuelledbyinnovativeandaggressivebusinessstrategiesalignedtomanagingtheeverchanginganddynamicoperatingforces.In brief, year2008wasanexpansionary year for theGroup.Newsubsidiaries fromGermanyandBrazilwereacquired,newstrategicpartnershipse.g.withProsernatSAofFrancewereformedandnewmarketnetworksandsupplychainswereadded.

8 KNMGROUPBERHAD ANNUALREPORT�008

CHAIRMAN'S

MESSAGE(CONT’D)

Sincebeinglistedinyear�003,this“quantumleap”fromjointventures(JVs)andmergerandacquisition(M&A)activitiesaswellasfromtheGroup’sownorganicgrowthhasenabledtheGrouptobuildupandleverageonitstechnicalandtechnologicalprowesswiththecompletionofthe“KPLGroup”acquisitioninAustraliain�006,the“FBM”acquisitioninItalyin�006andtherecent“Borsig”acquisitioninGermanyand“HZM”acquisition(nowknownasthe“KNMMetalmec”)inBrazil,bothinyear2008.TheseacquisitionshavealsospeduptheGroup’sforayintothehigh-endprocessequipmentvaluechain,therebydiversifyingtheGroupintodifferentgeographicalmarketsandindustrysectors.Movingforward,theGroupwillcontinuetofocusonitscorecompetencies,onrationalizingitsresources,onintegratingitsnewacquisitionsapartfromcontinuingtoinvest,trainandupgradetheskills,knowledgeandproficienciesofitshumanassetsandcapital.

BUSINESS STRATEGIES

TheGroupwillseektoconsolidateandautomatemoreofitsexistingmanualsystemsandprocessestoimprovequality,speedupdeliveryandhavebetteroptimizationandusageofresources.Newproductlines,newmarketsandnewventurestomoveuptheprocessequipmentvaluechainwillbedelvedinto.Whilstensuringthatorganicexpansionissustainedandremainsanimportantcatalystforgrowth,theGroupstrivestoimproveitsglobalreachandmarketshareforprocessequipmentbyrationalizingitsresources,increasingitssalesandmarketingactivitiesandcreatingmoresignificantpresenceintheprocessequipmentsegmentbyundertakingandprovidingengineering,design,procurement,construction,managementandmaintenanceservicesnotjusttotheoilandgasindustrybutcoveringotherenergy,power,chemicals,petrochemicals,mineralsaswellasthebiomassandagri-technologysectorstoo.

NEW TECHNOLOGIES & BUSINESSES

TheGrouphasventuredintothe“sulphurremovalandrecovery”technology:-

(a) intheUnitedStatesofAmerica(“USA”),viatheformationofKPSTechnology&EngineeringLLC,its60%subsidiarycompanyinKansas,USA,toprovidelicencedtechnologyandprocessdesignpackagesaswellasengineeringandprocurementservicesforsulphurremovalandsulphurrecovery;and

(b) inMalaysia,viatheformationofKPNGasTechnologySdnBhd,aJVcompanywithProsernatSA,acompanybasedinParis,France,toprovideprocesstechnologies,engineering,procurement,construction,commissioning,start-up,operationandmaintenanceforfieldgasseparationandgastreatmentfacilitiesincludingdesalting,gasdehydration,gassweetening,NGLrecovery,sulphurrecoveryandmodularunits.

Theinvestmentin“sulphurrecovery”technologywasmadetoaddressenvironmentalconcernsinseekingtolimit,controlandrestrictsuchsulphuricgasemissionsworldwide.

Aspartofitsgrowthplans,theGroupwillcontinuetoexplorenewventuresandnewbusinessactivitieswhicharesynergisticorcomplementarytotheoperationsoftheGroupworldwidetomakefurtherinroadsintopotentialnewM&Aopportunities,newJVtie-ups,newproductsandbusinessdevelopmenttopenetrateotherpromisingmarketsegmentsandmarketplaces.

9 KNMGROUPBERHAD ANNUALREPORT�008

CHAIRMAN'S

MESSAGE(CONT’D)

GLOBAL STANDING & ACHIEVEMENTS

TheGroupcatapultedfrombeingadomesticallyknownbrandnameintoagloballyrenownedinternationalbrandaidedbythetechnicalcontributionsfromtheGroup’smainsubsidiaries,i.e.theBorsigGroupinGermany,theFBMHudsonItalianaGroup(“FBM”)inItalyandtheKPLGroup(“KPL”)inAustralia.Withnineteen(19)patents to itscredit,Borsig’sstrong forte liesnotably indesign,engineering, fabricationandprovidingmaintenanceservicesforprocessgaswasteheatrecoverysystems,membranetechnology,gascompressorsandquenchcoolers;whereasFBMspecializesinthermaldesign,fabricationandengineeringofaircooledheatexchangers,processgaswasteheatrecoverysystems,heavydutyheatexchangersandspecialshellandtubeheatexchangers;andKPLspecializesinautoclavesandbuttedkettleheatexchangers.Onthehomefront,KNMGrouphasto-dateclinchedseven(7)MalaysiaBookofRecordssinceinceptionforitsproductsinthefollowingcategories-(a)TallestRoofSupportingSingleMastin1998,(b)TallestColumnin1999,(c)LargestLPGMoundedVesselin�00�,(d)BiggestFurnacein�003and(e)LargestProcessTankin�005.Moredetailscanbefoundonpage1�ofthisAnnualReport.CompletionoftheGroup’smanufacturingplantsinTofield(Canada)thisyearandinJubail(SaudiArabia)andKabil(Batam,Indonesia)nextyearwillprovideadditionalmanufacturingcapacity.ThesewillelevateandenhancetheGroup’sstrongglobalpresencetobegeographicallyspreadover12countriesandtobringtheGroupclosertoitsclientsandprojects.

Beingaglobalemployer,theKNMGroupcurrentlyhasaworkforceofmorethan4,000staffworldwidewhereby,approximately67%oftheGroup’sRevenueforyear2008wasderivedfromoverseasoperationsandover95%fromtheexportmarket.

CORPORATE GOVERNANCE

TheDirectorsarefullycommittedtoensurethattheGroupadherestoandcomplieswiththeprinciplesandbestpractices’standardsofcorporategovernanceassetoutintheMalaysianCodeonCorporateGovernance.The Group believes that long-termshareholder value can be attainedthrough maintaining conscientiousaccountabi l i ty for the Group’seffectiveness, operational efficiencyand competitiveness. Initiativesundertakenwill focuson intensifyingperformancemanagement,enhancingeffect iveness and bui ld ing upmanagement’scapabilities.

RISKS & CHALLENGES

The Board is mindful of the everchanging sphere of economicchallengesthatfaceseveryindividual,corporation,industryandsectorbothathomeandabroad.Externally,theoperatingenvironmentcontinuestobehighlycompetitivewhilstinternally,theGroupiscontinuallyfocusedonstrengtheningtheGroup’smarketshareandposition.Theenergysectorremainshighlydependentonthedemand,supplyandpricesforcrudeoil.

10 KNMGROUPBERHAD ANNUALREPORT�008

CHAIRMAN'S

MESSAGE(CONT’D)

FUTURE PROSPECTS & OUTLOOK

TheGroup’sfundamentalsremainupbeat.Amidaslowdownintheworldeconomythatstartedinearly�008,theGroupexpectstodowellmovingforwardasaresultof its leadership in thehigh-endprocessequipmentsuchasprocessgaswasteheatrecoverysystems,compressors,quenchcoolers,membranetechnology,aircondensers,aircooledheatexchangersandautoclaves.

Withitsstrongglobalpresenceandsuperiormanufacturingknow-how,theGroupwillbenefitfromprojectsglobally.AstheGroupstrategicallymovesuptheproductvaluechaintolessencompetition,thiswouldinvariablyhelptoimprovemarginsinthelongterm.

Asenergydemandsaroundtheworldremainrobust,theGroupseesgreatpotentialfornumerousoilandgasandpowerrelatedprojectstokickofforbeinitiatedoncetheglobalfinancialcrisisshowssignsofrecovery.Despitethegloomyapprehensionoverthecurrentmarketsituation,theGroupisneverthelessoptimisticthatthelongtermoutlookfortheoilandgas/energysectorsremainsstrong.In facing thesechallenging times, theGroupwill intensifymanagementefforts to improve cost efficiencies.Capital expenditurewill be spentcautiously for plant upgrade and maintenance. Sales and marketingactivitieswillbesteppedup.Newbusinessopportunitieswillbeexploredand all measures taken will be constantly reviewed to ensure that theGroup’slong-termgrowthissustained.

DIVIDEND

InrecognitionoftheGroup’sperformanceduringtheyear,theDirectorshaddeclaredaninterimdividendof1senlessincometaxof25%and0.5sentaxexemptperordinaryshareofRM0.25eachforthefinancialyearended31December2008whichwaspaidon18March2009.

APPRECIATION

OnbehalfoftheBoard,Iwouldliketothankourshareholders,clients,affiliates,financiersandbusinesspartnersforyourcontinuedsupportandunwaveringconfidenceintheGroup,andtothevariousregulatoryauthoritiesfortheirassistance,guidanceandcounsel.MysincereappreciationalsogoestotheemployeesoftheKNMGroupfortheircontribution,dedicationandcommitmentthathavebeensignificanttotheGroup’ssuccess.

Lastbutnotleast,IwishtorecordmygratitudetomyfellowBoardmembersfortheircontinuousprudentadviceinsteeringtheGroup’sdirectiontoensureitscontinuedgrowthandsuccessinthebusiness.

Dato’ Mohamad Idris bin MansorIndependentNon-ExecutiveChairman