LETTER TO OUR SHAREHOLDERS

The year 2002 dawned on a world racked by terrorism and instability, which was reflected in a business environment full of uncertainties and challenges. The Philippines, like many other countries, had to face the economic fallout of September 11.

Despite the volatility in the global marketplace, our economy performed creditably. It actually saw an expansion of the GDP which was fueled mainly by the strengthening of the services sector and the recovery of the industry sector. Growth in agriculture and strong consumer spending were also major factors. Inflation was at a historic low and interest rates were kept at less than 10% per annum, while exports rebounded in the wake of a recovery in the electronics sector.

Notwithstanding such performance, we remain aware of the need for further strengthening of certain structures in our economy, notably tax collection, non-performing loan ratios, security considerations, etc. There is no doubt, though, that the fundamentals of the economy are sound and the necessary reforms are slowly being put in place.

In 2002, your company also demonstrated some of its inherent strengths and capacity to thrive in a challenging business environment. Our after-tax net income of P67.577 million, while lower than that of 2001, substantially exceeded our expectations. This primarily came from operating income which, at P60.590 million, was also higher than expected. Although competition intensified because low-priced imports caused severe reduction in local caustic soda prices, our ability to expand our market base allowed us to soften the impact of the drop in revenue. We also increased our importation of caustic soda as a hedge against low international prices and depressed local selling prices.

Our hydrochloric acid sales volume continued to grow steadily with the increasing demand from the electric power producers and the semiconductor industry. This was further bolstered by notable improvements in its selling prices. Liquid chlorine sales registered a slight downward adjustment but essentially sustained the remarkable growth achieved in 2001. Our revenue from sodium hypochlorite continued to post modest growth with improved demand, particularly with the Visayas-Mindanao market kicking in.

The trading business and logistics services that we provide to other companies also contributed significantly to our revenues. Activities included the trading of industrial salt, caustic soda pearls PVC valves, and the utilization of our storage tanks and logistics facilities.

Even in the face of the bleak economic prospects and apprehensions, your company continues to be optimistic about the future. Sizeable investments in projects that will further enhance the position of your company as an industry leader and supplier of choice will be maintained.

The Ion Exchange Membrane Caustic Expansion Project is on schedule. The new plant will feature state-of-the-art IEM technology supplied by Chlorine Engineers Corporation and co-developed with Tosoh Corporation. It will add a sizeable quantity of higher quality, lower cost caustic soda and chlorine-derivative products to our capability.

To complement the increase in production, a new marine tanker for hydrochloric acid will be acquired. The additional bottom capacity will dramatically improve our ability to move hydrochloric acid to the market.

We are also increasing and replenishing the number of chlorine cylinders in step with the demands of the market. Cylinders have to pass stringent quality control tests, as your company considers safety of prime importance. The tough prequalification tests that cylinders are subjected to prior to refilling account for the regular retirement of some of them.

The advantages of utilizing the IEM technology in caustic soda production will not be limited to the plant expansion project. The diaphragm cell process caustic soda plant, which was built in 1979, is currently undergoing assessment to determine requirements when the plant should be converted to the same modem IEM technology.

With the emergence of Batangas as an important international seaport, as well as the continuing industrialization of the Calabarzon region, the Luzon Logistics operations will be consolidated into the expanded BBTI depot in Bauan, Batangas.

Your company will continue to be competitive and maintain its leadership edge as a manufacturer of chlor-alkali products.

Outlook for 2003

We view 2003 with optimism, despite the challenges to the world economy brought on by the US-Iraq conflict.

The Philippine economy is expected to gather strength and sustain last year's growth in all major sectors. With President Gloria Macapagal-Arroyo's declaration that she would not run for re-election, local businesses have more reasons to hope that the government will be able to focus on pursuing its supplyside economic growth programs.

All major sectors of the economy are showing positive trends. The services sector expects to continue last year's 5% growth rate, with expansion plans announced by the largest players in the telecommunications industry. Industry recovery in the second quarter of 2002 is expected to continue, considering that tariff rates for capital goods and other inputs not locally produced have been reduced to zero percent. The fact that no minimum wage adjustments have been mandated this year will also help Philippine industry to weather the storm of globalization, as well as preserve jobs in the interim. There are also positive developments in the agriculture sector, with a bumper crop in palay and newfound strengths in poultry production, fishery and livestock production.

The eruption of hostilities in the Middle East could mean spiraling fuel costs and reduced income remittances from overseas contract workers, creating a dampening effect on consumer spending. On the other hand, the prospects of an early resolution of the US-Iraq conflict will bring about greater global stability, continued growth and strengthening of domestic demand. In view of these factors, the government has downscaled its initial 5% projected growth in GDP to a more conservative 4.3% for 2003. With NEDA pushing for increased productivity, lower costs of doing business, higher growth potentials and reduced risk factors for local businesses, the outlook for 2003 is encouraging.

Your company will be working towards achieving an operating income of P64 million for the year 2003, better than our 2002 actual figure. In the international market, caustic soda prices are expected to improve with the apparent weakening of chlorine demand. The steady growth of hydrochloric acid sales is expected to continue. Sales of liquid chlorine is projected to increase as well, while sales volume of sodium hypochlorite is expected to remain stable. Overall, our sales revenue for 2003 is projected to hit P942.673 million.

We continue to reaffirm our commitment to environmental protection and community development. Over the long term, a healthy environment and a well-developed society will provide us with a sustainable foundation for growing our business.

As we view the brighter prospects for the following year, your Board has approved a declaration of cash dividend equivalent to P0.06 per share to stockholders of record as of March 24, 2003, payable on or before April 11, 2003. This dividend payout is a manifestation of your Board's continuing commitment to give shareholders a fair return on their investment.

We would like to express our gratitude to the Board of Directors for their valued contribution and support for our strategic programs. Their broad perspective of business developments has enabled your company to prepare for a better future.

We express our sincerest thanks to our customers for their patronage and loyalty. We will continue to offer them the best products and services available in the chlor-alkali business.

We thank our employees for their wholehearted dedication, commitment and sense of solidarity with our business goals and corporate values. We would also like to recognize our banking institutions, subcontractors and suppliers for their untiring support of our business goals.

Finally, to our shareholders, our heartfelt gratitude for your continued support and confidence. We will, as in the past, strive to enhance the value of your investment in Mabuhay Vinyl Corporation.


RENATO B. MAGADIA
Chairman and Chief Executive Officer

EDWIN LL. UMALI
President & Chief Operating Officer

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REVIEW OF OPERATIONS

MARKETING

The year 2002 registered mixed results. Of major significance was the continuous softening in the international prices of liquid caustic soda, prompting an inflow of low-cost material into the country. Mabuhay Vinyl protected its market from their inroads by relying heavily on its strength as a manufacturer and importer of chlor-alkali products.

Sales figures reached P862.215 million or 10% lower than the previous year.

The trading business and logistics services continue to grow and contribute to the revenue of the company. They are also emerging as significant collateral business that complements Mabuhay's position as a preeminent supplier of chlor-alkali chemicals.

Your company ended the year stronger with a wider customer base, and more robust with its products present in more and newer applications.

MANUFACTURING

The entry of low-priced material into the country necessitated a change in production strategies.

Iligan manufacturing facilities were operated at levels adapted to the shifting demands and requirements of the market for hydrochloric acid and liquid chlorine. Mabuhay provided for the other requirements of the market by continuing its role as the country's largest importer of its product range.

The Mabuhay Premium Bleach Plant in Sta. Rosa, Laguna, produced sodium hypochlorite at almost the same levels as 2001, but this was achieved over a smaller market. The Iligan sodium hypochlorite plant supported the Visayas and Mindanao markets, while developing other market opportunities as well. Its strategic location in the region has enhanced product availability and quality, and reduced transport costs. Already it has produced more sodium hypochlorite over its planned production budget for the year.

FINANCE

Mabuhay Vinyl Corporation ended the year with a net income after taxes of P67.577 million or about 4% lower than the P70.634 million (excluding extraordinary income from the sale of PRII shares and the PVC business) made in 2001.

Gross profit was also slightly lower, mainly because of the sharp decline in the selling prices of caustic soda brought about by the abundance and availability of supply in the international market.

The dramatic drop in interest rates, while reducing income from money market placements, also substantially reduced the interest expense, with your company gaining the upper hand in the exchange.

The company remains profitable with earnings per share of P0.089. Book value increased to P1.642 per share (inclusive of P0.168 appraisal increase on land) from P1.385 in 2001.

PROJECTS
IEM NaOH Expansion Project (Ion Exchange Membrane)

Construction and fabrication works of the IEM NaOH Expansion Project started during the year and is proceeding as scheduled. The new plant, which will bring a considerable addition to the total production of caustic soda and chlorine, will utilize state-of-the-art IEM technology supplied by Chlorine Engineers Corporation and co-developed with Tosoh Corporation.

It is expected that commercial operations will start in the second half of 2003 and the project will be within its budgeted cost.

The project is registered with the Board of Investments, under the Omnibus Investments Code of 1987, approved on a pioneer status and eligible for an income tax holiday of three years.

Acquisition of Hydrochloric Acid Tanker

With the increasing demand from new customers and for new applications, particularly in Luzon, we plan to augment the capability to transport hydrochloric acid with a new seagoing tanker.

The new vessel will be ready in time for the start of operations of the IEM caustic soda plant.

Consolidation of the Luzon Logistics Operations and Expansion of the BBTI Depot

Because of the port modernization project at the North Harbor in Manila, Mabuhay Vinyl is in the process of consolidating Luzon logistics operation at its BBTI Depot in Bauan, Batangas.

Lease of an adjacent 3,000-square meter lot has been finalized. Relocation of the North Harbor tanks to the BBTI site will soon start. Likewise, two tanks with a capacity of 1,000 cu. m. each, will be constructed on the expansion lot.

Acquisition of Chlorine Cylinders

The company has placed an order for a substantial number of 1metric ton capacity liquid chlorine cylinders to accommodate the increasing demand for the product and the need to retire old cylinders. The first batch of cylinders will arrive in April, while the second batch will come a month later.

Retrofitting of the Diaphragm Cell Plant with the IEM Technology

The cost advantage of a caustic soda plant utilizing the IEM technology is substantial, so Mabuhay intends to use the same technology in modernizing the existing diaphragm cell process caustic soda plant built in 1979. Early assessments indicate that the use of much of the plant's existing equipment could be maximized with the use of new electrolyzers. This will also minimize capital outlay when company decides to shift fully to the IEM technology.

Initial technical evaluation is being prepared by Chlorine Engineers Corporation, and implementation could be as early as, middle of 2004.

CORPORATE SOCIAL RESPONSIBILITY

Mabuhay Vinyl Corporation fosters a cooperative relationship with communities hosting the company's facilities.

Various outreach projects, including a medical mission, child-friendly projects such as the Pamaskong Handog sa Kabataan and cultural activities like the Flores de Mayo and the Summer Dancing Workshop were supported and held with the cooperation and participation of the communities of Barangays Tonggo and Purok 13 in Iligan City.

The company provided training to members of the Barangay Timoga Multi-Purpose Cooperative, resulting in the improvement of their livelihood projects. The community was also assisted through the grant of TESDA scholarships to deserving out-of-school youth.

Your company's dedication to environmental stewardship saw fulfillment in a series of volunteer clean-up activities undertaken with communities around the plant.

The activities were all undertaken in partnership with the local government, as a means of showing our oneness with the communities around us.

SAFETY, HEALTH AND ENVIRONMENT

Your company believes in a workplace environment where employees will be healthy and can feel safe, enabling them to become more productive and supportive of the company.

We put in place a three-pronged approach to employee health program that emphasized illness prevention.

This was expanded to include participation of our contractors and the community.

By also including our contractors in our accident-prevention systems and procedures, our Safety Program achieved an Accident Frequency Rate that was the second lowest in the last five years.

We continue to monitor the potential hazards that our operations might cause the environment, and we safeguard the balance of nature in close coordination with the community.

HUMAN RESOURCES DEVELOPMENT

Our HRD programs focus on developing a positive work environment and on strengthening employee-management relations. The Council of Solidarity of our Luzon and Cebu operations, as well as Iligan’s Industrial Peace Council, held regular meetings to address issues of productivity and employee welfare.

Last year, MVC launched the Outstanding Quality Employee of the Year Award, which recognizes employees who have helped build the company's reputation for excellent business practices. The expression of our corporate values, as embodied in their personal lives, served as part of our criteria for bestowing the award.

Your company was a signatory to the United Nations Global Compact Initiative during the 23rd National Conference and Exhibition of Employers last May, 2002. It signified the company's support for the protection of human rights, employees' freedom of association and the right to collective bargaining, the elimination of forced and child labor, as well as environmental responsibility.

QUALITY MANAGEMENT SYSTEM
ISO 9001: 2000 and ISO 9002:1994

After the expiration of the ISO 9002:1994 certificate, the Iligan Plant successfully renewed its quality management system under ISO 9001: 2000. In its certification audit, SGS Philippines included the sodium hypochlorite plant located within the premises.

In its surveillance visit, TUV Management Service GmbH confirmed the use of a quality management system in our company's nationwide logistics and commercial operations, and in the manufacture of sodium hypochlorite, in accordance with the requirements of ISO 9002:1994.

Environmental Management System

An Environmental Management System is being put in place at the Iligan plant. The plans and programs include the installation of physical structures and the completion of required documentation.

Environmental Protection and Safety

To ensure compliance with the environmental limits for air and wastewater, we have installed online monitoring devices and undertaken regular sampling activities. Acidity or alkalinity (PH) and other wastewater parameters were routinely measured, while chlor-alert detection units monitored the presence of free chlorine in the atmosphere.

Responsible Care

Mabuhay Vinyl is committed and promotes Responsible Care performing self-regulation and product stewardship in an effort to enhance its Safety, Health and Environmental Management practices. The company as an active member of the Samahan sa Pilipinas ng Mga Industriyang Kimika (SPIK) is closely working with SPIK'sResponsible Care Council in pursuit of this initiative. The privilege of using the Responsible Care logo starting 2003 has been granted to MVC.

AWARDS AND RECOGNITION

Some of the awards and recognition received by our company during the year included:
· Citation given by the Pollution Control Association of the Philippines (PCAPI) in recognition of the company's achievement and dedication in implementing an exemplary environmental management program.

· Recognition of the company by the Employers Confederation of the Philippines (ECOP), during its 23rd National Conference, for initiative in promoting greater environmental responsibility.


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