Business environment

Throughout 2010, the global economy had experienced an asymmetric recovery, with the emerging countries leading the robust economic growth, while the sluggish developed countries remain vexed in searching for solutions to the dilemmas originated from sub-prime mortgages, financial over-leverage, and sovereign debt issues. In spite of the vicissitudes of the global economic situation, Far Eastern New Century (the Company) was able to rise above the fast-evolving changes and achieved an earnings number of record-high in the Company’s 61 years of history.

While signs of recovery after a devastating economic crisis have emerged above the horizon, we opt to remain cautious on the near-term outlook of global economy given: 1) the potential negative impact on supply chain and consumer spending from the tragic earthquake in Japan; 2) food crops shortage caused by the heavy drought in northern China and severe flood in Australia; 3) fears of oil supply disruptions due to the chaotic warfare in Egypt and Libya provoked a surge on the crude oil price; and 4) the ample liquidity derived from the QE2 program of the United States generated a robust momentum on the prices of several commodities such as gold and cotton. Undeniably, the current level of commodity prices appropriately reflects the incremental demand underpinned by a cyclical rebound in the global economic activities; then again, in our opinion, hot money speculation and inventory re-accumulation, to some extent, expedited the pace of price escalation as a result of easy financial conditions.

In order to revitalize its stagnant economy, the US Federal Reserve weakened the US dollar via easing monetary policy and pegging the interest rate at virtually 0%, while insistently accusing China with its artificially undervalued Renminbi currency for the large US trade deficit and that thus formed a stumbling block on the recovery path of the US economy. The stimulus policy adopted by the US consequentially built up currency tensions with the rest of the world as currencies of China and other emerging countries inevitably appreciated relevant to the rapidly deteriorating dollar, jeopardizing the prospect of further progress in the GDP growth of the aforesaid emerging markets.

Higher global inflation has induced European Central Bank (ECB) and emerging countries such as India, Brazil, and China to execute rate hikes in order to lessen the bubbly momentum effects emanated from super-expansionary monetary policies adopted by the US. Particularly in the case of China, its recently released food CPI has exceeded 11% implicating that People’s Bank of China will raise the bank reserve ratio regularly to constrain the rising inflation pressure. In addition, the general economic atmosphere in the Euro Zone has once again turned unclear with uncertainties from heavily indebted countries like Greece, whom although implemented austerity measures to battle its economic crisis, still face the possibility of becoming insolvent due to a high sovereign debt over GDP ratio.

In past years subsequent to the financial crisis, China’s impressive economic growth not only rescued the global economy from a deeper recession but also had a significant impact on the Company’s performance in 2010. Today, the economic structure of China is experiencing a transition as indicated by its 12th Five-Year Plan that new economic policies are aimed at heightening domestic consumption while reducing hefty reliance on exports through measures like balancing wealth distribution, upgrading industry structure, and cultivating newly emerging industries, with an ultimate goal of becoming the global market.

After the signing of ECFA (Economic Cooperative Framework Agreement) with Beijing, the newly formed relationship across the Taiwan Strait has presented both sides with countless possibilities. The island’s economy has steadily rebounded to its pre-financial-crisis level, and further sustainable improvement can be anticipated as both Taipei and Beijing governments continue to have conversations on a regular basis, in order to create more business opportunities.

With restriction of frequent direct flights being lifted and fast-growing number of mainland Chinese tourists, the Taiwanese economy is experiencing a vigorous vibe in the retail and tourist sectors as well as a rapid recovery in the domestic consumption. More significantly, the Company now has access to duplicate its growth model not only into China alone but a vast unified market with a combined population between the Taiwan Strait; such pivotal advantage will undoubtedly continue our business expansion into the future.

Operating Result

In 2010, the financial results of the Company not only improved substantially but also achieved remarkable record-high earnings in 61 years since its inception. The operating revenue reached NT$53.8 billion and NT$200.2 billion on the parent-alone basis and the consolidated basis, respectively. The net income rose to NT$12.9 billion, an increase of 59% YoY, translating into an EPS of NT$2.7. Reasons for this improvement in financial results are: 1) the combined profit from the polyester chain increased substantially; 2) diversified investments in property, cement, retail and telecommunication businesses generated a better-than-expected return underpinned by a 45% increase from the previous year.

The Board has proposed to pay a cash dividend of NT$2 per share and a stock dividend of NT$0.3 per share, representing a combined payout ratio of 85%.

In addition to our achievements in delivering the financial results, FENC also improved several non-financial value drivers, which we believe would lead to the continuing growth in the future, and those are recapped below:

A leading polyester producer
FENC successfully completed vertical integration at its core business production lines both in Taiwan and Shanghai, from upstream PTA plants to downstream textile and packaging products. Continual upgrade of product mix is persevered to sustain the Company’s leading position in the polyester industry. The Company has already commenced productions of several high value-added products such as high-denier industrial yarns used for conveyor belts and tire cords, functional fibers with characteristics of anti-bacteria and regulating body moisture, low-melt staple fibers for thermal bonding, and anti-static PET sheets used for wrapping LCD panels, computer hard drives, and electronic appliances. The production scales of the said products will continue to expand; in addition, these products have greatly benefited the Company’s core business profit as they are exempted from export tariff to China. Within the early harvest list of ECFA, 40% of the 224 zero-duty petrochemical and textile items are related to the products of FENC.

PTA – upgrade production line to expand margin
FENC owns PTA production plants in both Taiwan and Shanghai with capacity of 1 million tons and 650,000 tons, respectively. Affiliate earnings from investments in PTA business not only ranked as the No.2 contributor to the investment income of the Company but also substantially improved the earnings quality of our core business. The strong earnings performance of PTA is resulted from: 1) the increasing demand for polyester due to the substitution effect from the recent high surge in cotton price; 2) the limited PTA capacity in the market. The joint effect of the said factors have increased the PTA price since the global financial crisis in 2008 and accordingly expanded the margin of PTA. New projects are underway to increase the PTA capacity of the Company, as a new PTA production line is planned at the Guanyiin site in Taiwan, with a capacity of 1.2 million tons/year. Meanwhile, a new PTA joint-venture has been formed based on an alliance with Sinopec Yizheng Chemical Fiber Company Limited, a subsidiary of the Sinopec Group. The said plant is located at the Yangzhou Chemical Industrial park and is expected to increase the total PTA capacity of the Company by 36% upon its completion at end 2012.

Polyester – Continual upgrade of product mix
One of the essential elements that constitute FENC strategy is consistent R&D efforts, and that lead to a continual upgrade of the product mix which we believe is a must to maintain the Company’s leading position in the polyester industry. The total polyester capacity of the Company in both Taiwan and China reached 1.6 million tons in 2010, and PET resins represent more than 50% of the said capacity. Applications of PET products have extended into various end uses, while two major applications are food-grade and industrial-grade PET. In terms of food-grade PET, the main application of such type of product is for the packaging purpose of beverage such as drinking water, tea, and carbonated soft drinks, etc. Additionally, it is also used to package fresh and frozen food. A potential growth of Chinese soft-drink market is highly anticipated based on the increasing domestic consumption in China during the period of its 12th 5-Year Plan. As for industrial-grade PET, such product is widely applied to various industries; for example: 1) seat belts, airbags, and tire cords in the auto industry; 2) wound dressings and anti-bacteria fibers in health care; 3) heavy duty conveyor belts in the mining industry. With respect to the amorphous PET sheets, the construction of 6 additional lines at the production plant in Wuhan is completed with an attempt to achieve a larger market share in the mid-western part of China.

Textile – innovative products with high value added
Downstream textile products, including cotton yarns, knitted fabrics, and garments, represent only around 20% of the parent-alone revenue while 10% of the consolidated revenue; however, throughout the years, the Company has established a solid competitive advantage in this business via providing highly qualitative products, vertically-integrated production process, and consistent R&D efforts. The new business target now focuses on the designs and inventions of new raw materials for international sportswear brand names – Nike and Adidas, and the newly emerging China brands – Li Ning, Anta, and Kappa. Nike, being one of the major sponsors of the 2010 FIFA World CupTM in South Africa, assigned FENC the responsibility for the design and manufacturing of the jerseys for national teams of Brazil, Australia, and New Zealand, with selected fibers produced by FENC and made of 100% recycled PET bottles. In order to effectively cope with the diminishing cost advantage of Chinese labor, the Company has commenced commercial operation of its first apparel plant in Vietnam, while the second plant is under planning.

Promising results from land development and equity investments
FENC owns substantial lands with a size of 550,000 pings in Taiwan, and 200,000 pings of them are interspersed among the CBDs of Taipei and New Taipei City. The Taipei Far Eastern Telecom Park (T-Park), located at the outskirt of the Taipei City with a land area of 24.4 hectares, is the primary focus of the land development business as its land value is deemed potentially promising benefited from the municipal upgrade of New Taipei City and various soon-to-be-completed infrastructure and development projects in that particular area. The first residential housing project in the T-Park, California Dream, was sold out in early 2010 while generating a net profit of NT$4.1 billion. The Company has already booked half the net profit, NT$2.1 billion, and the remaining half will be booked based on the percentage-of-completion method in 2011.

FENC holds interests in member companies of the Group, including Far EasTone Telecommunications, Asia Cement, Far Eastern Department Stores, and Oriental Petrochemical, etc. Among them, Far EasTone remains the most important contributor to the affiliate earnings of the Company with its stable earnings performance.While leading the market share in the non-voice services in Taiwan, Far EasTone initiated a strategic cooperation with China Mobile right after the restrictions on investments in Mainland were eased. In addition, Far EasTone has uploaded “S Mart” and “e-Book Town” to the network of China Mobile, allowing subscribers in China to download and purchase.

Swift and proactive actions have also brought promising opportunities for Asia Cement and Far Eastern Department Stores. In May 2010, Asia Cement acquired 70% interests of Hubei Wuhan Xinlinyun Cement Corp. in order to strengthen its market position along the Yangtze River. The retail business continued to sustain its earnings growth with a 33% increase in 2010 after-tax profit compared to the previous year. With the fast growing number of Chinese tourists to Taiwan and the higher consumers’ confidence, further profit growth can be expected as well as more new store openings in both Taiwan and China.

Plans and prospects

Guided by the Company mission “Having innovative thinking, superior technology, and excellent managerial skills, we aim to lead the polyester industry and maximize the value of our holdings in estates and equities, and that shall bring happiness and prosperity to the community where we ourselves belong.” The business plan of the Company in 2011 will focus on the followings:

Continual scale up to lead the polyester industry
To maintain the Company’s leading position in the polyester industry, several plans are executed to increase its production capacity, and important ones are:First, a new PTA production line is planned at the Guanyiin site in Taiwan, expected to increase the total PTA capacity to 1.5 million tons/year.At the end of 2010, a joint-venture with Sinopec Yizheng was formed in Yangzhou, China to build a new PTA plant, providing the Company an annual capacity of 1 million tons/year while commencing operation.Second, a single PET production line, with a capacity of 700,000 tons/year, is planned at the Pudong site in Shanghai, along with new additional recycled PET capacity of 200,000 tons/year; this is the largest single PET production line in the world with the most advanced production technology.Combined with the capacity in Taiwan, such new line is expected to increase the total PET capacity to 3 million tons/year by 2014.Third, further expansion in textile products such as industrial fabrics, spindles, and functional fibers will generate additional value, in our opinion, to the Company.

FENC aims to become one of the world’s top 3 producers in both PTA and PET as well as in recycled PET chips and nonwoven fabrics.We believe that the core value derived from expansions aforesaid would lead to sustainable growth into the future, and therefore, we are likely to continue to lead the polyester industry.

R&D – innovation drive
China’s 12th Five-Year Plan addresses that future growth of the 7 emerging strategic industries are currently the top priority of the Beijing government for economic and social developments, and these industries include, but not limited to, Alternative Energy, Modern Agriculture, Bio-Technology and Environmental Protection industries.To embrace these newly emerging trends and market potentials, FENC has committed efforts to recruit qualitative professionals from related fields.An R&D Center, established in 2002, now consists of six teams focusing their research efforts primarily in relevant areas, with anticipation that outputs derived from the said R&D efforts will provide crucial contribution to the Company’s future growth.

As global community has significantly grown its awareness of conserving the environment, FENC realizes that it is not only a requirement but a social responsibility; therefore, our R&D team has developed environmental-friendly and cost-efficient coal water mixture (CWM) to replace heavy oil for the production factories.At this moment, the PTA plant in China has already consumed CWM into the production process, abandoning expensive and polluted heavy oil.Soon, CWM will be used at the plants in Taiwan as well.

The said above clearly shows that R&D is the essential drive for the Company to continue its innovation into the future.Last year, FENC successfully launched various new innovative products while receiving 25 patents with 32 new patent applications submitted.

Green Product – conserve the environment while fulfilling customers’ demand
As mentioned above, the public’s awareness of the climate change has already created a major impact.International beverage producers in accordance tend to increase their usage of recycled/bio-based PET chips for beverage bottles. For example, Coca Cola, one of our largest customers, initiated the PlantbottleTM Project last year.Heinz, the largest ketchup producer in the US, announced that its ketchup product in 20-ounce bottles will be packaged in plant bottles. Pepsi and Danone both claimed their intention to use recycled/bio-based PET bottles for the packaging purpose of their beverage products. Throughout the recent years, the Company has accelerated its R&D activities to promote recycled/bio-based PET resins as the new packaging materials while having supplied Coca Cola with 500 million plant bottles in 2010, and also began further cooperation with Pepsi and Danone. Oriental Resources Development Ltd., not only the first waste recycling company in Taiwan but also the first polyester producer to start its own bottle recycling business in Asia, is planning to build a recycled PET chip plant with an annual capacity of 200,000 tons.

In the event of 2010 Taipei International Flora Expo, FENC participated by building a six-story pavilion, named as “FE EcoARK”, in order to promote “Recycle, Reuse, Reduce” as the spirit of conserving the environment.The pavilion is made of 1.5 million post-consumed PET bottles with an aim to raise public interest in recycling.After the Expo, the pavilion can be made into recycled fibers or PET bottles by re-processing the building materials.“FE EcoARK” represents the ideal mixture of art, environmental conservation, and modern architecture technology.

Land Asset – increase the ROE from property development
Due to the change of business model, several of our factories were relocated overseas and the Company now owns substantial lands of more than 200,000 pings (660,000 square meters) as a result.To reuse and monetize the land assets, FENC established Far Eastern Resources Development Corporation, a 100% owned subsidiary, to assume the task.The T-park project mentioned above is the top priority of the land development business.The first product in T-park, a residential housing project, was sold out last year, and the construction of the first commercial office building was also completed and launched for rent, from that a consistent rental income can be expected for FENC.The next development target of the Company’s land holdings will be the piece located in I-lan, and that is planned to be developed into a hotel resort combined with a shopping center.The project plan had already received the permit from the Ministry of Interior in 2009, and the development and construction will begin soon.

Human Resource – the crucial contribution to future growth
The speed of strategy execution inside each company is mainly based on the competence of the management team; therefore, FENC genuinely acknowledges the criticality of human resources in the Company’s future growth.The management team was sponsored to participate in numerous programs, specifically designed to help them improve their management capability and nurture their competence.Besides our training facilities in Taiwan, we established two training centers in Shanghai and Suzhou for our employees based in China as well.Management trainees are offered with opportunities to receive cross-function and cross-region learning through a rotation program, which is implemented continuously, and ensures the productive development of human resources.Despite all the uncertainties in the global economy, the Company’s management team is dedicated to achieving our ultimate goal – increase return on shareholders’ equity, while becoming the leader of innovation and profitability in the industry.

Award Recognitions, CSR and Sustainability
Far Eastern Group has always committed to being a responsible corporate citizen and that all business activities of FENC are directed in support of the common good.The value of the Company and the common good of the society are consistent, and both can be achieved through well-designed business activities.In this aspect, FENC has established several non-profit Foundations and sponsored programs dedicated to the promotion of medical, educational, cultural, and scientific activities.Far Eastern Y. Z. Hsu Science & Technology Memorial Foundation has been sponsoring the “Y. Z. Hsu Scientific Award”, encouraging research activities on nanotechnology, optoelectronics, and biotechnology in Taiwan.Far Eastern Memorial Foundation, dedicated to supporting art and cultural activities, has sponsored “Far Eastern Architectural Award” in past one decade, which is recognized as the leading award in the architecture industry.Our Far Eastern Memorial Hospital has gained a well known reputation for its medical treatment of cardiovascular diseases while being the largest medical center in Taipei County with 1,100 beds, and will open a new wing with additional 1,000 beds.The Group’s Yuan Ze University is the first of its kind to receive the “National Quality Award” from the Executive Yuan together with our Far Eastern Memorial Hospital.

In a world filled with rapid changes and frequent unforeseen contingencies, FENC proactively makes necessary adjustments to achieve outstanding performance and deliver superior results to our shareholders.Never can this be done without the consistent efforts and the continuous hard work of our employees and the management team in the Company. The management team is determined to persevere with the Company’s great tradition, its founding spirit “Sincerity, Diligence, Thrift, Prudence” and “Innovation”, to deliver excellence as it always does. We sincerely thank the continual supports from our shareholders as they have been the major contribution to the Company’s growth.

FENC is enthused to establish new management foundation and fortify leadership based on the Company’s new slogan “Rethink, Rebuild, Reinvent”, with an aim to excel and lead the future. We are confident that the Company possesses the spirit and capacity to look beyond the wall and “see what is visible but not yet seen”. While we maintain our innovative approach and constantly looking out for new opportunities for future growth, we assure you that our customers will be better served and our shareholders better rewarded.