Letter to shareholders

Ladies and Gentlemen, YFY Stockholders,

2018 was a challenging year for YFY. One of the prime reasons, retrospectively, was the amendment of Mainland China environmental policy, which provoked the restraint on the circulation quota of regenerative raw materials in various Asian regions, and eventually disarrayed the global supply chain. What is more, the China-US trade war had formally come to fore mid-year, resulting in tremendous impact on global economy and trade. Taiwan certainly cannot stay out of the afore-mentioned overall economic chaos, yet apart from this, domestic natural disasters like earthquake and torrential rain also took their toll. By the same token, the deepening multiform ideological conflicts had in all aspects exacerbated the economic momentum of Taiwan as well.

As for the primary economies in the world, the deceleration of economic growth had been evident in regions like Europe, Japan, and Mainland China, the only acceleration came about in the United States. The strong confrontational main theme of the Trump Administration had echoed all over the world, hence global politics and economy had passed into a new epoch of opposition. Mainland China had borne the brunt of China-US trade war—the immediate and considerable impacts are trade sanctions and economic obstructions—and Asian regions that kept perennial strong economic connections with China also got caught in the crossfire inevitably. Taiwan showed mediocre growth at a modest rate of 2.6% while global economic growth of 2018 reached around 3.9%. Though maintained an up-to-par rate of 6.6%, the growth of Mainland China hit a record low in past 28 years.

Facing the pincer envelopment of both the turmoil of capital market and the slump of global economy, YFY persisted in our cumulative and steadfast investment strategy. Leveraging strengths from our portfolio, YFY Inc. dispatched and distributed our resources, adapted to the circumstances and coped with contingency in order to render prompt and effective assistance to our portfolio of businesses. Specific actions are summarized below:

1.“Integrity” has been the enterprise value of YFY since our founding, and “sustainability” the purpose we labored to preserve. From Day 1, we are dedicated to excellence in corporate governance, and devoted ourselves unreservedly to social welfare and philanthropy for social reciprocation. “Integrity, Governance, Environment, Society” are our four prime directives. In 2018, YFY Board approved “Corporate Governance Principles,” “Ethical Corporate Management Principles,” and “Sustainability & Corporate Social Responsibility Principles.” These three “Principles” stipulated the afore-said four directives in explicit terms and articles, so that the corporation received standardized norms to conform to, ab intra and ab extra.

2.Packaging Business Group brought online Xinwu No. 3 paper machine and the No. 2 Cogeneration plant, both commenced full operation in 2018. More importantly, our gas emission and effluent discharge have secured a standard of excellence, well below the limits of statutory regulatory environmental standards. These new investment allowed us to improve performance for our Taiwan packaging business, while minimizing our environmental footprint.

3.In June, we acquired additional shares in our South Veitnam joint venture, thus incorporating four additional box plants in Vietnam into our consolidated financials. Late in the year, we commenced pilot run of our North Vietnam packaging plants, further strengthening YFY’s market-leading position in Vietnam packaging market.

4.Pulp and Fine Paper Business Group enjoyed market demand growth during the first half of the year, with YoY revenue growth of 4.9%.

5.In the Consumer Products Business Group, we continued to optimize our product portfolio. In Taiwan, we focused on high value-added products; on Mainland China, we changed our selling and marketing tactics, with YoY revenue growth of 6.5%.

6.Shin Foong Specialty and Applied Materials Co. benefited from flourishing demand of customer plant expansion, YoY revenue growth reached 24.1%. Arizon RFID Technology (Yangzhou) Co. Ltd. grew 3.9% YoY as customer demands in apparel, logistics, and supply chain management continued to be robust.

7.2018 was a year of drastic currency fluctuation. Throughout this volatility, YFY assisted portfolio businesses to hedge their currency exposure, controlled hedging cost, and dynamically adjusted hedging ratio as required. As a consequence, we minimized the impact of currency fluctuation to YFY operations.

8.We began installation of solar power generation across seven plants on both sides of the Strait, with capacity totaling 12 Megawatts. This capacity is enough to power 3,400 households annually, and the combined carbon sequestration is equivalent to 20 Da-an Parks (the largest park in Taipei City).

Through the efforts of all portfolio businesses, YFY secured continued growth in consolidated revenue for a turbulent year of economic instability. Consolidated revenues grew to 76.44 billion NTD, a YoY growth of 14.5%. However, due to unfavorable policies in Mainland China, net operating profit slid to 2.36 billion NTD, with after-tax income of 1.96 billion NTD. Deducting minority interests, consolidated net income attributed to shareholders of YFY was 1.44 billion NTD, or 0.87 NTD a share, below our 2017 results.

Faced with escalating trade conflict and unpredictable currency fluctuation in 2019, risk management continues to be front and center for all economies. As a result, 2019 economic forecasts are all relatively conservative. IMF predicts a 3.7% growth rate for the global economy, with Chinese growth of only 6.2%, the lowest since its Chinese economic reform in the early 1980s. Meanwhile, the economic growth rate in Taiwan is expected to maintained at around 2%.

With global conflict and economic uncertainty in the backdrop, YFY continues to be watchful for risk factors such as currency, government policies, and the adjustments of global supply chain. In 2019, we will direct our portfolio businesses to further necessary restructuring, with long term goal of sustainability of both business and environmental footprint, while at the same time prepared to cope with short-term challenges. Expected actions are listed as follows:

1.To confront mounting pressure from increasing wood chip costs and instability of pulp prices, Forest Product and Fine Paper Business Group shall optimize portfolio mix and focus on developing new products, especially functional products with higher gross margins. At the same time, we shall continue to reduce cost while ensuring product quality.

2.Packaging Business Group shall continue to improve operational efficiency and invest in further automation. We will expand capacity in Vietnam to fulfill market growth. Packaging business shall also strengthen our position as practitioner of circular economy, find ways to reclaim all production residue, towards the our ultimate goal of “zero waste.”

3.Consumer needs and wants continues to be the at the core of our Consumer Products Business Group. Our focus shall be to develop new products to solve vexing problems of consumers, continue to optimize product and channel mix, and focusing on the growth beyond paper category.

4.Continue to promote and invest in renewable energy: At Xinwu Mill, expansion of methane power generation and installation of biomass boiler will set benchmark for renewable energy. Outside of Packaging Business Group, we will continue to study and implement solar energy programs where appropriate.

5.At our extraordinary general meeting on February 1, 2019, Arizon RFID Technology (Yangzhou) Co. Ltd. received support from shareholders to apply for listing in Mainland China. With market growth in new retail, logistics, and ticketing, once listed, Arizon will have access to additional financing to expand production and to enhance investment in research and development.

6.Shin Foong Specialty and Applied Materials Co.’s cultivation medical equipment market continues to bear fruit. With the completion of expansion at its Pingtung facility, capacity will grow by an additional 30% to fulfill growing demand.

7.Our directives of “Integrity, Governance, Environment, Society” of YFY has been clearly spelled out in the three principles passed by the board. Accordingly, related employee training will be planned and implemented in 2019, to ensure that all members of YFY understand the principles fully and continue to practice them our everyday undertakings.

With vigilant retrospect and vigorous prospect, YFY must assess all potential risks in our portfolio. We shall then constructively clarify and address those risks in order to control our investment risk and safeguard our interest. In response increasingly evident climate change and the resulting extreme climate, we must evaluate positive and negative impacts and map out plans for enterprise adaptation, not only to ensure the security of all personnel and equipment, but also to avoid operational disruption. Upholding the spirit of circular economy, we must enhance our recycling efforts at all facilities, support Waste-to-Energy (WtE), and work with respective governments in promoting renewable energy. With rising IT risk, we have strengthened our information security from both hardware/software and administrative management to protect our critical assets in operation and governance.

Consistent in our long-term asset allocation, we will continue to invest in the potential incubation both internally and externally, to carrying forth our heritage of investing in innovation and paradigm shifts, embracing new opportunities in preparation of our centennial. With official approval of our “Sustainability and Corporate Social Responsibility Principles,” we will follow the principles to foster our three pillars—employees, community, and environment—to develop in proportional harmony, continuing to generate equitable return to our shareholders.

Wishing all great health and prosperity,

 

Chairman of the Board

Felix HO