Executive Chairman’s Message

“Throughout our operations, we seek to balance our duties towards our investors, our employees, our customers and society as a whole.” YBhg Tan Sri Rozali Ismail Executive Chairman of PNHB Group

Dear Shareholders,

2007 was another year of significant progress. Despite the challenging business environment, we met or exceeded most of our Key Performance Indicators, intensified our efforts and contribution towards protection and enhancement of the environment, in particular matters related to raw water source, and successfully launched a series of operational initiatives aimed at ensuring that we remain on track to achieve our vision to be a leading and dynamic integrated water services company. However, we are well aware that further progress is required to improve the level of customer satisfaction, while the environmental battle is still far from won.


TAKING STOCK


For the global economy, the second half of 2007 was particularly difficult as sub-prime mortgage problems in the USA developed into a wider credit crunch.

Thankfully, Malaysia’s strong fundamentals combined with the rise in oil prices protected the country from the worst of the market volatility. During the year, buoyant consumer spending and the healthy expansion of various key sectors continued to facilitate development, while the Government’s capital market liberalization programme attracted an inflow of foreign capital. Combined with the launch over the last two years of five economic corridors across the country, this enabled the nation to achieve a commendable annual GDP growth of 6.3%.

Against this backdrop, on behalf of the Board of Directors of Puncak Niaga Holdings Bhd (‘PNHB’), I am pleased to present the Annual Report and Audited Financial Statements of the Group and Company for the financial year ended 31 December 2007.



REPORTING RESULTS


Though 2007’s results were down on the previous year, they remained healthy. Revenue from water services grew from RM1,265.9 million to RM1,333.1 million, but construction revenue declined from RM162.2 million to RM56.6 million. As a result, total Group revenue dipped 2.7% to RM1,389.8 million from RM1,428.1 million the year before.

Meanwhile, pre-tax profit fell 68.6% to RM115.4 million compared with RM367.3 million in 2006, mainly due to higher finance costs and a non-recurring gain of RM205.8 million recorded in the preceding financial year.

During the year, the Group revised its projected water revenue for the concession period, which resulted in a rise in both the depreciation of concession assets and the amortization of project development expenditure. The effect was an increase of RM18.64 million in the depreciation and amortization charge for the year and a decrease of RM13.98 million in profit after tax and retained earnings.

Nevertheless, given the Group’s financial strength, the Board is delighted to recommend a tax exempt first and final dividend of 10 sen per share for the financial year ended 31st December 2007 (compared to a tax exempt dividend of 8 sen per share for the financial year ended 31st December 2006).



BUILDING THE BUSINESS

In 2007, we successfully concluded the Capital Repayment exercise launched in October 2006. Involving both a Bonus Issue and a Capital Distribution, the exercise improved the Company’s capital structure, rewarded investors for their continuous support of PNHB and helped to unlock shareholder value.

Having issued 587,346,993 shares via the Bonus Issue, the Company completed the exercise in March by making a Capital Distribution of RM763.551 million. This was followed by a consolidation of the Company’s entire issued and paid-up share capital, which was reduced to RM411,142,895. The Capital Repayment was partially funded by the sale of all of PNHB’s remaining 12,335,600 treasury shares in the open market for RM39,364,456.

I am pleased to report that 2007 saw no change to the credit ratings of our Debt Papers, reflecting our strong financial standing.

To finance its operations and capital expenditure programme, in May, Syarikat Bekalan Air Selangor Sdn Bhd (‘SYABAS’) issued RM125.4 million of Redeemable Cumulative Preference Shares to the Minister of Finance Incorporated. Later in the same month, in accordance with its Concession Agreement, SYABAS issued RM110.0 million worth of 7% Redeemable Convertible Unsecured Loan Stocks to PNHB and Kumpulan Darul Ehsan Berhad.

In August, PNHB acquired the remaining 30% equity interest in Puncak Oil & Gas Sdn Bhd (‘POG’) from Damini Corporation Sdn Bhd (‘Damini’), making POG a wholly-owned subsidiary. POG has entered into joint ventures with Aerosystems Tactical Sdn Bhd (‘ATSB’) to carry out businesses related to the oil and gas sector.

In November, Puncak Niaga (M) Sdn Bhd (‘PNSB’) carried out a first mandatory partial redemption of RM54,687,500 of the outstanding RM546,875,000 nominal value Junior Notes A from PNHB. PNHB in turn utilized the proceeds to undertake a mandatory partial redemption of RM54,687,500 of the outstanding RM546,875,000 nominal value Redeemable, Unconvertible Junior Notes (‘RUN’) from PNHB’s RUN holders.

On 1 November 2006, the Government approved an increase in the tariff levied by SYABAS which was due since 1 January 2006. Arising from the delay in the approval and implementation of the water tariff revision, the Government compensated SYABAS in the form of a Government Grant of RM129.8 million which is only available for NRW works. A sum of RM50.0 million was received in August 2007 and a further RM75.0 million in January 2008. The balance of RM4.8 million remains outstanding as at the date of writing.

During the year, the Company participated in tenders for various water projects at home and abroad. In an initiative to broaden our horizons by focusing on regional opportunities, in July, we collaborated with India’s Patel Engineering Ltd in a bid to secure the IV Mumbai Water Supply Project. Though the bid was unsuccessful, we learned some valuable lessons along the way which should stand us in good stead as we seek to expand overseas.


MEETING CUSTOMER EXPECTATIONS

While we are wholly committed to meeting our customers’ expectations, we must acknowledge that we still receive requests for better water quality, and that there are some localized low water pressure problems and interruptions to supply. In 2007, we remained resolute in pursuing our commitment to continuous improvement and rapid response to customer concerns.

In recognition of the progress we made in these areas, we were deeply honoured when, in May, the SYABAS Customer Service Centre, PUSPEL, was named the winner of the 2007 Malaysia Water Award (Management Category) by the Malaysian Water Association. PUSPEL was praised specifically for its efficient and systematic services and for its efforts to solve water problems faced by customers and to create awareness of the consumers’ role.


IMPROVING GOVERNANCE

Throughout our operations, we seek to balance our duties towards our investors, our employees, our customers and society as a whole. This means not only conducting our business efficiently, ethically and profitably, but upholding the principles of openness and transparency.


TAKING RESPONSIBILITY

For PNHB, environmental and social responsibility is a matter of crucial importance. In 2007, we added another advanced water treatment technology at our Sungai Rumput and Kepong Water Treatment Plants (‘WTPs’): Ultra Filtration Membrane Technology. Since then, the treated water quality produced has improved tremendously from 3 - 5 Nephelometric Turbidity Unit (‘NTU’) previously to below 0.5 NTU today. With this installation, plant shutdowns that frequently occurred in the past whenever there was high raw water turbidity at these two WTPs, especially during the rainy season, can now be minimized. As a result, we have been able to improve our services in terms of supply as well as quality.

We are pleased to announce that in November 2007, we received an Honourable Mention in the Prime Minister’s CSR Award for our efforts in forming young minds through our education initiatives. One of these is the River Rescue Brigade (Briged Penyelamat Sungai) in which students are taken on visits to PNSB’s WTPs and dams to learn about the importance of protecting our environment and especially our rivers.

Programmes such as this reaffirm our zeal to enhance our corporate social responsibility by improving on the sustainability of our various CSR endeavours. Over 6,000 schoolchildren have benefitted from the various educational programmes implemented over the last ten years, enjoying especially the hands-on approach adopted. We are passionate about the environment and are determined to excel in our community work.

The main challenges we foresee for 2008 involve global climate change. This is one of the most critical challenges of our time. Recent events have emphatically demonstrated our growing vulnerability to climate change, and scientific consensus has confirmed that human activities are largely responsible for the problem. Climate change will damage agriculture, cause sea-levels to rise, accelerate the erosion of coastal zones, increase the intensity of natural disasters, drive various species to extinction and foster the spread of water-borne diseases.

At PNHB, we are aware of the impacts of greenhouse gas emissions on the atmosphere. Our strategy focuses on understanding the impacts of climate change, monitoring the situation, developing and implementing adaptation measures and raising awareness. As yet, we do not have a cohesive programme to offset our greenhouse gas emissions or any substantial energy reduction plans. To meet the challenges of climate change, we will continue to be responsible, innovative and sustainable in the conduct of our business.


MOVING FORWARD

Prospects are good for PNHB. Despite the slowdown of the US and EU economies, the Malaysian economy is projected to grow between 6% and 6.5% in 2008, and we are optimistic that the local water industry will continue to expand at the projected rate of 6% until 2010.

The execution of water-related projects during the second half of the Ninth Malaysia Plan 2006-2010 presents great opportunities for all market players. PNHB, being one of the country’s largest and most efficient water companies, is well placed to leverage on its expertise to carry out the projected jobs, thus helping to ensure an affordable supply of clean drinking water for the people of Malaysia.

After several years of planning, the Government officially commissioned the National Water Services Commission (‘SPAN’) in April 2007, and the Water Services Industry Act 2006 (‘WSIA’) became effective on 1 January 2008. With this development, Malaysia is now taking a holistic approach to the management of the water and wastewater industries. The momentum of reform will continue in 2008 and beyond with the enforcement of the SPAN Act 2006 and the WSIA. We believe that restructuring the industry through smart partnerships between the State and Federal Governments and private companies will benefit both the general public and the nation as a whole.

With SPAN fully established, we are looking carefully at whether our subsidiaries, PNSB and SYABAS, should maintain their current status as concessionaires or become licensees under SPAN. In making this decision, the Group will act in the best interests of its shareholders, lenders, customers and all its stakeholders.

In the years ahead, we will continue to seek out opportunities to enhance shareholder value by expanding our operations in areas related to our core business. Avenues for exploration include moving into other states within Malaysia, undertaking projects overseas (especially Build Operate & Transfer water supply projects in India, China and the Middle East), and moving into the wastewater industry. In particular, expanding into the wastewater industry would not only be a synergistic extension of our current business, but would also be in line with the objectives of the recent Water Bills to integrate the water supply system with the sewerage system.

Meanwhile, with our continuing efforts to reduce non-revenue water, increase collection and control overheads, we are confident that, in 2008, the Group will continue to record solid financial results and deliver value for our shareholders and all our stakeholders.


GIVING THANKS

The commendable results we achieved in 2007 are a splendid tribute to the hard work and dedication of our staff. On behalf of the Board, I would like to offer each and every one of them our sincere appreciation.

We are profoundly grateful for the unwavering support we received during the year from our shareholders, customers, business partners and financiers. I would also like to extend our thanks to the Federal Government and the Selangor State Government as well as various government authorities, agencies and non-governmental organizations for the guidance they so consistently provided.

Finally, I wish to offer my heartfelt gratitude to my fellow Board members and the entire Management team for the tremendous contribution they made to the business throughout the year.

Together, with the support of all our stakeholders, we are confident that we will meet the challenges that lie ahead in 2008.