4. RISK FACTORS 4. RISK FACTORS BEFORE INVESTING IN OUR SHARES, PROSPECTIVE INVESTORS SHOULD PA Y PARTICULAR ATTENTION TO THE FACT THAT OUR COMPANY, AND TO A LARGE EXTENT OUR GROUP AND OPERA TlONS, ARE GOVERNED BY THE LEGAL, REGULA TORY AND BUSINESS ENVIRONMENT IN MALA YSIA IN WHICH WE OPERA TE. OUR BUSINESS IS SUBJECT TO A NUMBER OF FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL. PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS SHOULD CAREFULL Y CONSIDER, ALONG WITH THE OTHER MA TTERS SET FORTH IN THIS PROSPECTUS, THE RISKS AND INVESTMENT CONSIDERA TlONS AS SET OUT BELOW. PROSPECTIVE INVESTORS SHOULD NOTE THA T THE FOLLOWING LIST IS NOT AN EXHAUSTIVE LIST OF ALL THE RISKS THAT WE PRESENTLY FACE OR RISKS THA T MA Y DEVELOP IN THE FUTURE. ADDITIONAL RISKS, WHETHER KNOWN OR UNKNOWN, MAY POTENTIALLY HA VE AN ADVERSE EFFECT ON US OR OUR SHARES. PROSPECTIVE INVESTORS WHO ARE IN ANY DOUBT AS TO THE INFORMATION CONTAINED IN THIS SECTION SHOULD CONSULT A STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR OTHER PROFESSIONAL ADVISER. 4.1 Risks relating to our business and operations 4.1.1 Our operations are reliant on certain approvals, licences and permits We are primarily involved in the provision of earthworks and civil engineering services that are bound by the rules and regulations set by government bodies such as the CIDB who governs the registration of contractors and the NWSC who regulates the water services industry under the Water Services Industry Act 2006 (Act 655). Over the past three (3) financial years up to the FYE 31 December 2016, the revenue contributed from earthworks and civil engineering services accounted for approximately 92.3%, 87.1 % and 91.2% of our Group’s total revenue, respectively. Please refer to Sections 6.1 and 11 of this Prospectus for further details in relation to our business activities and its respective revenue contributions. Under Section 25(1), Part VI of the LPIP Act 1994, it is mandatory for all contractors who carry out and complete any construction works in Malaysia to be registered and hold a valid certificate of registration issued by the CIDB. There are a total of seven (7) registration grades that determine the capacity of a contractor in tendering for the value of construction work and the geographical area where the construction project operates in Malaysia, whereby Grade “7” being the registration grade that allows the contractor to tender for construction works that are of unlimited value and operate throughout Malaysia. We are currently a Grade “7” contractor registered with the CIDB and also a Grade “7” contractor registered with the CIDB under SPKK that enables us to participate in tenders called by the Government authorities that is otherwise regarded to be in the public sector. Furthermore, our Group currently also holds Industri Perkhidmatan Air (“IPA”) Permit Type C1 (Sewerage) issued by the NWSC under Section 50(1), Chapter 1, Part IV of the Water Services Industry Act 2006 (Act 655) for the construction, installation or modification to any part of a sewerage system by a contractor. Accordingly, we are able to undertake civil engineering projects which involve the construction of sewerage system. 4. RISK FACTORS (CONT’D) 4.1.2 The Grade “7” registered contractor certificate issued by the CIDB and the IPA Permit Type C1 (Sewerage) issued by the NWSC are key to the continuity of our core business operations. We usually renew these licences and permits on three (3) years basis which is the maximum validity tenure of these licences and permits. The list of all our approvals, major licences and permits for our business operations is set out in Section 6.10 of this Prospectus. As stated above, the validity of these licences and permits are subject to renewal and in the event we fail to comply with the rules and guidelines issued by the governing authorities such as the CIDB and the NWSC, our licences, permits, approvals and any other relevant certificates in relation to our business operations may be revoked, suspended or not renewed. Similarly, any breach of these rules and regulations can result in penalties, fines and/ or potential criminal prosecution against our Company. Such revocation, suspension and non-renewal of our licences, permits and certificates will affect our ability to continue our business operations and hence affect our profitability. As at the LPD, our Group has not encountered any revocation, suspension or non-renewal of our existing approvals, licences, permits and other clearances from authorities prior to expiration and have renewed our registration with the CIDB for a validity period of three (3) years from 15 June 2016 to 15 June 2019, SPKK certificate under the CIDB for a validity period of three (3) years from 3 May 2016 to 15 June 2019 as well as our IPA Permit Type C1 (Sewerage) permit for a validity period of three (3) years from 25 June 2016 to 24 June 2019. Notwithstanding the above, there can be no assurance that our Group will be able to obtain renewals of our licences, permits and certificates in the future, especially if there are changes to the present rules, guidelines, regulations and/ or policies. Our contracts are on project basis hence the absence of long-term contractual agreement with our customers Earthworks and civil engineering services contracts are normally awarded on a project basis whereby the contracts generally range from three (3) months to five (5) years depending on the nature of construction services, size and complexity of the construction works and customers’ requirements. As such, we have to bid competitively for new contracts and constantly look out for new tender opportunities. In the event that our Group is unable to secure any new contracts, our profitability, long term sustainability and business growth will be adversely impacted. The financial performance of our Group is dependent on our ability to secure new contracts on a timely basis to sustain our order book. Our Group has undertaken 39, 25 and 27 projects involving earthworks and civil engineering services for the past three (3) financial years up to FYE 31 December 2016, respectively as disclosed in Section 11.1 (a) of this Prospectus (Review of our historical result). Furthermore, our order book as at the LPD amounting to approximately RM572.48 million, which we expect would sustain our Group’s operations for the next 24 months, the details of which are provided in Section 11.5 of the Prospectus. 4. RISK FACTORS (CONTD) 4.1.3 4.1.4 There is no assurance that our current order book can be sustained in the future and there can be no certainty that projects from our order book may not be delayed or terminated and we may face a situation of inability to secure new contracts which in turn may result in an adverse impact on the financial performance of our Group. Reliance on major customers During the past three (3) financial years under review, the aggregate revenue contributed by S P Setia group and Eco World group accounted for approximately 55.5%, 45.9% and 42.4% of our total revenue, respectively. These customers may continue to account for similar proportion of our Group’s total revenue in the near future in view of our established working relationships with both S P Setia group and Eco World group and the ongoing construction projects with them. The details of our past projects as well as on-going construction projects are provided in Sections 6.1.1, 6.14 and
11.5 of this Prospectus. Our working relationship with S P Setia group started since 1994 while we have worked with Eco World group since 2013. As mentioned in Section 4.1.2 of this Prospectus, our contracts are usually awarded on a project basis hence we encounter the risk of not having long term contractual agreements with our customers. Therefore, there is no assurance that S P Setia group and Eco World group will continue to engage us in the future. In the event that these customers terminate their business relationships with our Group, we may not be able to secure other customers who can contribute the similar proportion of the revenue on a timely basis. As such, our business operations and financial performance may be adversely affected. Furthermore, our business operations and financial performance may be adversely affected should there be any adverse changes specific to S P Setia group and Eco World group’s operations, financial performance and external factors that are beyond their internal control. This may result in the delay and/ or default in their contractual payments to us and may also lead to the decline in the number of contracts to be awarded to us. We have not experienced any default in our collections from our major customers i.e. S P Setia group and Eco World group on the amounts owing by them to us and neither have we seen any form of declined in the number of contracts awarded to us by these major customers. Notwithstanding that, there is no assurance that our financial performance and business operations will not be adversely affected by our reliance on S P Setia group and Eco World group. Our construction works are dependent on the services of our subcontractors As set out in Section 6.1.1 of this Prospectus, Our Group’s core business activity and main area of expertise focus on earthworks, of which bulk of the works are usually carried out by our in-house team. However, in the event of shortage of manpower and specialised machinery and equipment, subcontractors will be engaged to carry out this particular scope of earthworks. On the contrary, we usually engage subcontractors to support our civil engineering services such as bridge construction, water supply works and sewerage system as these specialised works are not within our major core strength. Notwithstanding that, our Group undertakes the role of project manager who is responsible for the overall project management for these civil engineering services. Please refer to Section 6.1.1 of this Prospectus for further details on our business activities. 45 4. RISK FACTORS (CONT’D) 4.1.5 4.1.6 For the past three (3) financial years, our total subcontractor fees accounted for approximately 42.4%, 42.4% and 40.7% of our Group’s total cost of sales, respectively. These subcontractors are engaged on a project basis and are appointed by our Contracts department and Project Management department. Notwithstanding our formal contractual relationships with our sUbcontractors, any failure of a subcontractor to fulfil its contractual obligations may lead to damages and penalties against our Group in favour of the customer who awarded the construction project to us. Our projects may be delayed and experience cost overrun or poor quality work attributed to our subcontractors due to instances such as insufficient availability of resources during the course of construction period and poor quality deliverable. In addition, our subcontractors are also subject to the rules and regulations governed by the regulatory body such as the CIDB and the Immigration Department of Malaysia in relation to the employment of foreign workers in the local construction industry. The non-compliance of these rules and regulations may affect their renewal of relevant registrations or licences and/ or may even lead to revocation of their registrations or licences. As at the LPD, our Group’s business operations and financial results have not been adversely affected by the failure of our subcontractors in fulfilling their contractual obligations. Nevertheless, there is no assurance that our financial performance and business operations will not be adversely affected due to poor quality deliverables of our subcontractors. We are subject to the risks of possible delays in completing our construction projects The terms of our construction projects include the agreed milestones and specific completion timeline. However, the completion of our projects may be interrupted due to unforeseen external circumstances, which are beyond our control. Any extensions of time in the completion of the projects would result in project cost overrun, attract negative feedbacks and legal uncertainties such as the possibility of enforcement of the LAD penalties by our customer. As such, the timely completion of our earthworks and civil engineering services projects is vital in maintaining our Group’s financial performance and upholding our Group’s reputation in the local construction industry. As at the LPD, our Group has not experienced any failure in obtaining extension of time for our construction projects which results in LAD penalties enforced against us and we have not encountered project cost overrun that lead to an adverse impact on our business operations and financial result. Notwithstanding the above, there can be no assurance that there would not be a delay in completion of our future projects which may result in legal suits, liabilities and lower profitability that would adversely impact our Group’s future earnings and reputation. Our business may be affected by defects in our construction works The nature of our Group’s business exposes us to the risk of defect liability claims by our customers due to the defects which occurred in our earthworks and civil engineering services during the defect liability period. Defect liability period usually ranges between 12 to 24 months after the CPC is issued to us upon the completion of our construction works. 4. RISK FACTORS (CONT’D) 4.1.7 Generally, our construction projects are subject to a retention sum of 5.0% of the total contract value awarded to us, which will be set out in the contract with our customers. This retention sum serves as a security by our customer to guarantee the performance of the contractor in order to safeguard against the defects which occurred during the defect liability period in the event that we fail to satisfactorily rectify such defects. Our customer will hold the entire retention sum throughout the contract period until the issuance of the epe, of which 50.0% of the total retention sum will be released to us together with the issuance of epe whilst the remaining of the retention sum will be held by our customer until the end of the defect liability period. Should there be any defects occurred in our earthworks and civil engineering services due to our fault during the defect liability period, we are liable for the repair work and rectification of such defects at our cost whereby our customer will utilise the remaining retention sum to remedy such defects. As such, we may not be able to receive the remaining amount of the retention sum in full and accordingly, our financial results may be adversely impacted. In addition, we may also be held responsible for any latent defects in our completed construction projects that had been undertaken by us. Latent defects are in its nature concealed and may not show itself for a long period of time which may be extended beyond the defects liability period. As at the LPD, we have not experienced any defects in our earthworks and civil engineering services during the defect liability period and any latent defects as mentioned above. Nevertheless, there is no assurance that the aforementioned will not occur in the future. The construction projects undertaken are subject to risk of unforeseen ground conditions Our construction projects are dependent upon the ground conditions of the construction sites and the design of our projects is highly reliant on the accuracy of soil investigation works in soil test reports done prior to the awarding of the project. The variations in ground conditions may not be thoroughly detected due to insufficient samples for soil investigation test or unexpected movements of soil conditions. As such, our construction works may encounter problems such as excessive settlement of surrounding ground or cracks in adjoining structures in the event the ground conditions are poorer than the tested or expected soil conditions. We have not experienced any adverse ground conditions or any discrepancies between the actual ground condition and the result of soil investigation test that could adversely impact our Group’s business operation and financial results. Notwithstanding the above, there can be no assurance that we will not encounter any adverse ground conditions that may impact our business operations and our customers will agree to pay additional fees to us for the additional soil investigation test due to the unforeseen ground conditions. 4. RISK FACTORS (CONT’D) 4.1.8 4.1.9 Our Company may be affected by the fluctuations in the prices of raw materials Our raw materials consist of industrial diesel, precast products, quarry products, premix products and ready-mix concrete products, in which industrial diesel in particular, is a controlled item whereby its price is controlled by the Government on a weekly basis and may, to a certain extent, be affected by the fluctuation in global market prices. Over the past three (3) financial years under review, the costs of industrial diesel had accounted for approximately 55.2%, 37.5% and 32.8% of the total raw materials costs, respectively mainly due to the declining trend in average diesel price over the past three (3) years from RM2.60 per litre in year 2014, RM1.92 per litre in year 2015 and further declined to RM1.62 per litre in year 2016, despite the fluctuation in diesel usage by our Group over the past three (3) financial years under review at approximately 11.12 million litre, 12.51 million litre and
10.25 million litre, respectively. All our raw materials are locally sourced hence in the event of a sustained increase in the prices of these raw materials in the local market or unavailability of raw materials, which may result in an increase in our operational costs or interruption to our operations which may adversely affect our financial performance. We have neither experienced any adverse price fluctuations in the raw materials nor face shortages in raw materials during the course of our construction activities, which has an adverse impact on our Group’s financial performance over the past three (3) financial years under review. However, there can be no assurance that our Group will not be exposed to the risk of price fluctuation of raw materials for our future projects. Our Group’s operations are dependent on our Directors and key management team Our Group’s continuous success and growth will depend upon our ability to identify, recruit and retain suitable skilled and qualified employees, including our Directors and key management team with the requisite industry experience, knowledge and expertise. Apart from Dato’ Phum and Lim Swee Chai, our key management team is also equipped with extensive working experience and their respective area of expertise in handling construction projects with different requirements as well as different geographical terrains. The profiles of our Directors and key management team are set out in Section 8 of this Prospectus, respectively. Our Executive Directors and key management team have been working in our Group for an average of 16 years. The departure of any of our Executive Directors and key management team without suitable or timely replacement may affect our future business operations, strategic direction and financial performance. The details of our Executive Directors and key management’s qualified experience and their service tenure with our Group are set out in Section 6.3(i) of this Prospectus. Our Group is also dependent on our qualified and technical teams, which include our Finance department, Contracts department, Project Management department and Production and Operation department. 4. RISK FACTORS (CONTD) 4.1.10 4.1.11 As at the LPD, our Group has not experienced any departure of our Executive Directors and key management which has an adverse effect on our business operations in the past. However, there can be no assurance that we will be successful in retaining our existing Executive Directors and key management team or there will be a smooth transition should changes occur, which may have an adverse effect on our Group. Our construction works are reliant on the use of machinery and equipment Our earthworks and civil engineering seNices require the use of a wide range of machinery and equipment such as excavators, bulldozers, compactors, tipper trucks and dump trucks. The number of construction projects that can be executed by our Group simultaneously at any given time is dependent upon the availability of our resources such as the availability and the condition of our machinery and equipment to carry out the construction work. The list of our machinery and equipment is set out in Section 6.16.4 of this Prospectus. Any occurrence of unexpected breakdowns of our machinery and equipment during the construction works may delay our project timeline and affect the quality of the deliverable. This could be due to the difficulties in sourcing for replacement of suitable machinery and equipment or having the machinery and equipment repaired in time. Such incident could also lead us to incur LAD penalties to our customers according to the contract terms should there be delays in the completion of construction works. As at the LPD, we have not experienced any major breakdown of our machinery and equipment that cause adverse impact in terms of financial, litigation and/ or safety to our Company and employees. Nevertheless, there can be no assurance that there will be no occurrence of unexpected breakdowns of our machinery and equipment during the course of construction works and there is no assurance that such occurrence will not happen and result in delay to our project timeline and affect the quality of the deliverable.
Our Group is exposed to borrowings and financing risks Our Group’s ability to expand our business operation is dependent upon continued capital expenditures, which include the purchase of heavy machinery and equipment. As such, we will need to raise sufficient financing, either in the form of external debt financing, equity financing and/ or internally generated cash flows. Although we have not encountered any difficulties with the financial institutions nor default in any of our borrowings repayment, there can be no assurance that we will not be exposed to financing risks in which the loans are not made available to us, and if available, such financing terms are favourable to us. As at FYE 31 December 2016, our total borrowings amounted to approximately RM85.35 million, translating to gearing ratio of 0.81 times. These banking facilities consist of, amongst others, term loans, hire purchase credit facilities, revolving credits, bank overdrafts, invoice financing and bankers’ acceptances, which are all interest bearing, denominated in RM and borrowed from locally-based financial institutions. Any additional borrowings and/ or unexpected increase in interest rates may result in an increase in interest expense, which may affect our profitability and debt repayment obligations. There can be no assurance that we are able to meet our borrowing commitments imposed by the financial institutions in the event of any unexpected increase in interest rates in the future. 4. RISK FACTORS (CONT’D) 4.1.12 In July 2016, Bank Negara Malaysia reduced the Overnight Policy Rate (“aPR”) by 25 basis points to three percent (3.0%). As at 31 December 2016, our Group had approximately RM50.86 million of floating rate borrowings. As such, the neWly effective aPR could reduce our costs of borrowings and may not adversely impact our Group’s financial position, cash flow and profitability. Our credit facilities may also be subject to review by the financial institutions and contain certain covenants, which may limit our operating and financing flexibility. Such covenants include the review of management accounts as and when requested by the financial institutions, consents and approvals by the financial institutions regarding any management structure change in the board or major shareholders and to maintain gearing ratio as specified by the financial institutions. Any act or omission by us that breaches such covenants may give the financial institutions the rights to withdraw or terminate the relevant credit facilities. This may in turn result in a cross default of other credit facility agreements. We have neither breached such covenants of any of our facility agreements in the past nor experienced any increase in interest rates, which has an adverse impact on our financial performance in the past. Nevertheless, there can be no assurance that our performance will not be adversely affected should we breach such covenants of any of our facility agreements. Our Group may suffer inadequate insurance coverage on our assets, construction projects and employees Due to the nature of our business which entails risks such as mechanical or vehicular failure, exposure to accidents incurred by our entities and employees as well as theft of our machinery and equipment, we seek insurance coverage for our construction projects, assets and our employees. Our insurance policies provide coverage against burglary, fire, theft, mobile and heavy equipment, workmen’s compensation and contractors’ all risks. As at the LPD, the sum insured of our insurance policies that we have taken up amounting to approximately RM1 ,070.32 million. There can be no assurance that our insurance coverage is sufficient to cover all the liabilities incurred and as such, claims for damages arising from our Group’s operations may have an adverse impact on our Group’s financial condition or results of operations. Furthermore, there is no assurance that our insurance premiums payable in relation to the above insurance policies or additional insurance required by specific project will not increase. Such increase or mandatory imposition in insurance premium costs may affect our financial results. We have in the past, made several insurance claims due to machinery theft as well as damages to third party property and machinery and equipment resulted from inclement weather as set out in Section 4.2.5 of this Prospectus at our construction sites of which, were fully or partially reimbursed by our insurers, hence do not result in an adverse impact on our financial performance. Please refer to Section 11.3 of this Prospectus for further details of our past insurance claims. Notwithstanding the above, there is no assurance that all liabilities suffered will be sufficiently covered by insurance and as such, claims for damages arising from our Group’s operations which are not adequately covered by our insurance coverage may have an adverse impact on our Group’s financial condition or operations. 50 4. RISK FACTORS (CONT’D) 4.1.13
We are subject to property investment risk In April 2013, we commenced a new business segment, namely property investment due to our working relationship with our clients, who are property developers, whereby we were offered to acquire the properties from the respective property developers at various discounted prices. As disclosed in Section 6.1.2 of this Prospectus, it is our Group’s intention to hold the investment properties for a period of three (3) to five (5) years for the purpose of capital appreciation of approximately 10.0% (which translates to an average capital gain of approximately two percent (2.0%) per annum over a period of five (5) years) and then dispose for capital gain once the investment properties have achieved our investment objective on a case to case basis, where possible and in the best interest of our Company. Notwithstanding the above, our Group will exercise caution in managing property investment business segment moving forward. Such intention has been enforced by our Board via our investment policy to ensure that the total asset value (i.e. cost) of our property investment business segment does not exceed 20.0% of the Group’s total asset. Furthermore, pursuant to our Listing, our Board will also ensure that the total asset value (i.e. cost) of our property investment business segment does not exceed 30.0% of the Group’s total enlarged NA upon Listing. As at the FYE 31 December 2016, none of our investment properties is located overseas. For the past three (3) financial years under review, the total asset value of the investment properties stood at approximately RM8.12 million, RM37.65 million and RM31.60 million, accounting for approximately 3.7%, 14.1 % and 10.7% of the audited total asset, respectively and approximately 12.7% and 40.2% of the total NA for the FYE 31 December 2014 and FYE 31 December 2015, respectively and 19.9% of the total NA of RM158.52 million based on our Group’s enlarged issued share capital upon Listing and after the proposed utilisation of proceeds. The increase in the percentage of the total asset value of the investment properties against the total NA in 2015 was mainly attributable to the progress billings made for the investment properties of which mainly were acquired in 2014 and 2015. The list of our investment properties is set out in Section 6.16.3 of this Prospectus. Our Group’s ability to realise the capital gains from our investment properties is dependent upon the prevailing market conditions in the local property market as well as the marketability of the properties invested. The local property market can be affected by various factors such as an increase in property overhang, economic downturns, and difficulty in obtaining financing from the financial institutions, interest rate trend and other unfavourable market conditions. Such external market conditions may also deter us from selling our investment properties at favourable prices or at all. Property is also considered as an illiquid asset that cannot be easily converted into cash. In the event our investment properties are not able to be liquidated for a long period of time, it may negatively affect our cash flows position and financial performance. As mentioned above, it is our Group’s intention to hold the investment properties for a period of three (3) to five (5) years for the purpose of capital appreciation of approximately 10.0%. This works out to an average capital gain of approximately two percent (2.0%) per annum over a period of five (5) years. Further, by venturing into the property investment business segment, our Group would have to allocate certain portions of our financial resources towards this business segment. 4. RISK FACTORS (CONT’O) This results in possible opportunity cost to our Group should such financial resources be reinvested in our existing primary business operations of earthworks and civil engineering services which historically recorded gross profit margins of 24.8%,22.3 and 27.3% for the past three (3) financial years under review, respectively. In addition, our Group may also forgo a potential return of approximately three percent (3.0%) to four percent (4.0%) per annum should the financial resources be placed as fixed deposit with financial institutions for a tenure of one (1) year. As set out in Section 11.8 of this Prospectus, it is the intention of our Board’s policy to recommend and distribute minimum dividends of 20.0% of our annual PAT attributable to the shareholders of our Company. The allocation of our financial resources for the acquisition of investment properties has also resulted in possible opportunity cost to our Group, which is the additional dividends that could have been possibly paid by our Group should such financial resources have not been allocated towards property investment business segment. Although our Group has not encountered any difficulties from bearing the interest payment of the bank borrowings taken to finance the purchase of our investment properties, there is no assurance that our Group will be able to realise capital gains in the long term or generate any form of rental income from the investment properties. 4.1.14 There is no assurance that our business strategies and future plans can be successfully implemented Our Group intends to utilise approximately 71.3% of the proceeds from our Public Issue for our current operations and future development plan, which include to further expand our business reach in the earthworks and civil engineering services market by exploring the opportunities of tendering new projects, enhance our assets capacities such as machinery and equipment, upgrading internal capabilities in human resources and to improve our operational management system plans as disclosed in Sections 3.12 and 6.17 of this Prospectus. The success of achieving our business strategies and implementing our future plans relies on market conditions, sufficient financing resources, our ability to continuously secure new projects and the efficiency of our business operations. However, there is no assurance that all our business strategies and future plans will be successful. Furthermore, there is no assurance that the successful implementation of our future plans will improve our earnings given the anticipation of additional resources or costs to be incurred to facilitate the implementation of our business strategies. In the event we are unable to maintain and improve our operations in tandem with the growth of our Company or if we fail to effectively manage our future investments or strategic alliances, our operations and financial position may be adversely affected.
4.2 Risks relating to our industry 4.2.1 The construction activity is dependent on the Malaysian property sector Our business operations are dependent on the performance of the Malaysian property sector and the government infrastructure development plan as these developments create demand for earthworks and civil engineering services. All our construction projects and customers are concentrated in Malaysia. 4. RISK FACTORS (CONT’D) 4.2.2 The outlook of the Malaysian property sector may be affected by market risks such as the political and economic stability of the country, shortage of labour supply as well as increase in labour and raw material costs. Furthermore, the Malaysian property sector is susceptible to risks such as an increase in financing cost and fluctuating demand for real estate properties. As such, any movement and development in the local property sector and national fiscal policy will have a direct impact on our Group’s performance and operations. In addition, the Government has given priority to increase the country’s infrastructure development projects, which include public transport networks in urban areas and infrastructural development in rural areas to strengthen the economic resilience of our country as presented in Budget 2016. Such infrastructure development projects have led to the increase in upcoming residential and commercial development projects that are located near to the public transport networks by property developers. As such, the demand for earthworks and civil engineering services is expected to increase correspondingly. The Malaysian economy has registered a commendable GOP growth of 4.2% in 2016 against an estimated global growth of 3.1 %. The construction industry in Malaysia is expected to benefit from government-led initiatives and spending, a favourable interest rate environment, the push by property developers to boost the sales of properties, a sustained economic growth boosting spending and investment in properties as well as steady population growth. However, there is no assurance that there will be no adverse condition affecting the performance of the local property market that can lead to instability in the construction industry in Malaysia. The construction industry is exposed to political, economic and regulatory risks The nature of our business and the local construction industry, are subject to prevailing political, economic and regulatory conditions in Malaysia. Any adverse changes in political, economic and regulatory conditions such as political uncertainties, changes in the government’s policies and regulations in relation to the construction industry, prolonged and/ or widespread economic slowdown in Malaysia, weak investment sentiment in Malaysia, war, terrorism activities and riots could adversely affect our Group’s operations and financial prospects. As stated in Section 4.1.1 of this Prospectus, our construction activities are governed by several government bodies which include, but are not limited to, the CIOB and the NWSC whilst our rock blasting activities, which involve the handling and use of explosives, are governed under the Explosives Act 1957 that requires the blasting approval from the Royal Malaysia Police and the relevant state authorities. As at the LPO, we have not experienced any adverse political, economic and regulatory changes which have an adverse impact on our business operations. Notwithstanding the above, there is no assurance that adverse political condition, cyclical change in the Malaysian economy and regulatory changes, which are beyond our control, will not adversely affect our Group’s business. 4. RISK FACTORS (CONT’D) 4.2.3 The construction industry is dependent on general workers Our earthworks services are dependent on the employment of general workers which consist of both local and foreign workers. For the past three (3) years up to 31 December 2016, our general workers stood at 113, 151 and 233, representing 55.1 %, 48.9% and 55.7% of our total workforce, respectively, of which 20, 45 and 99 are foreign workers. These general workers are mainly working as our machinery operators, lorries and trucks drivers, chainmen, storekeepers and general construction workers, who own valid permits and licences to perform our construction activities. As our Group’s operations are dependent on the supply of these general workers, any shortage in its supply would adversely affect our operations. The employment of foreign workers are sourced from specific countries as determined by the Immigration Department of Malaysia, which include, amongst others, Indonesia, Nepal, Myanmar and Cambodia in the construction industry. Should the Government amend their policies and impose any restriction or limit on the number of foreign workers to be employed for construction projects, the completion of projects may be delayed, hence affecting our business operations and financial performance. Such employment risk is also extended to the home countries of the foreign workers should there be changes in their employment policies. Furthermore, any increase in the levy for the employment of foreign workers by the Government would increase our overhead costs and affect our financial performance. In February 2016, the Government announced the increase in foreign workers’ levy from the previous rate of RM1,250 per worker to RM2,500 per worker for the local construction industry. Subsequent to the feedback given by the relevant agencies in the construction industry, in March 2016, the Government has revised downward the levy from RM2,500 to RM 1,850 and enforced such rate thereon. For illustration purposes, such levy hike has caused the Company to incur an additional cost of RM60,OOO for a total of 100 foreign workers of our Group as at the LPD, which represents approximately 0.23% of the net profit for the FYE 31 December 2016. Similarly, any increase in the minimum wage for the employment of local workers by the Government would increase our overhead costs and affect our financial performance. In 1 July 2016, the Government announced the new monthly minimum wage of RM1,000 per employee employed in Peninsular Malaysia from the previous monthly minimum wage of RM900 per employee. This new Minimum Wages Order 2016 however, does not impact our business operations and financial positions as all our local workers are paid more than the new monthly minimum wage. As at the LPD, our Group has not encountered any of the rules enforcement, levy hike and/ or new minimum wage effected which have an adverse effect to our business operations and financial results. Nevertheless, there can be no assurance that we will continue to have adequate supply of general workers and any rule enforcement in relation to the employment of general workers which may not have an adverse impact on our business operations and financial results. 4. RISK FACTORS (CONT’D) 4.2.4 4.2.5 The construction activities are exposed to risks relating to workplace HSE The local construction industry is bound by the laws and regulations relating to workplace safety and workers’ health enacted or issued by the government bodies. The primary legislation and regulations that are applicable to our daily earthworks and civil engineering works are the Occupational Safety and Health Act 1994 (Act 514), the Factories and Machinery Act 1967 (Act 139), the Environmental Quality Act 1974 and the LPI PAct 1994. As a construction player, we are obliged to ensure that a healthy and safe working environment is provided especially at our construction sites. The HSE risks include dust, waste and noise pollutions during rock blasting activity and any accidents as well as injury caused during the course of construction activities. Any failure to comply with the relevant HSE laws and regulations may result in penalties and closure of construction sites. Our earthworks may be exposed to the risk of environmental damages should the erosion and sediment control plan is not properly in place. Earthworks may expose the soil to wind, rain or water which may accelerate natural erosion processes, which may lead to the erosion of mineral or organic material. Such sediments will then flow into water and causes environmental damages such as flooding and may adversely affect the freshwater ecology. As such, a proper erosion and sediment control plan are important at construction sites to prevent the occurrence of environmental damages effectively. As at the LPD, our Group has not breached any workplace HSE matters and our existing operations are in compliance with the relevant laws and regulations. We have not experienced any incidents at our construction worksites that resulted in stop-work orders being imposed by the Occupational Safety and Health Act 1994 and any other regulatory bodies as mentioned above, which have adversely impacted our business operations. Nevertheless, there can be no assurance that we will not be exposed to potential workplace HSE liabilities in the future. In the event of severe environment occurrence or accidents, it may lead to negative publicity and/ or suspension of our relevant licences in which, will adversely impact our reputation, business operations and financial position. There can be no assurance that our operations may not be affected due to the changes in HSE laws and regulations and the compliance with new laws and regulations may impose a significant cost to our Group. Our operations may be affected by any occurrence of force majeure events such as inclement weather conditions, natural disasters and other unavoidable accidents The nature of our business operations is susceptible to inclement weather and natural disasters which lead to the risk of site flooding, occurrence of landslide and extreme weather condition such as haze due to the fact that our operations are conducted at the construction sites. Any occurrence of force majeure events as mentioned above may prohibit us from performing our construction works and as a result, we may not be able to meet the specified timeline as set out in our project schedule. This may lead to delay in the completion of our projects and accordingly, we may be liable for the LAD penalties imposed by our customers which could lead to an adverse impact on our business operations and financial performance. 55 4. RISK FACTORS (CONT’O) 4.2.6 In the event that we have to halt our operations during adverse weather conditions or natural disasters, we are still required to incur operating expenses such as labour cost. In addition, as mentioned in Section 4.1.5 of this Prospectus, we will be liable to LAD penalties if we fail to obtain the approval for extension of time for the completion of our project from our customers. Our Group’s operations and financial position may be affected should such events occurring and there is also no assurance that we will be able to record profits and have sufficient funds for our operations to recover the damages caused by such events. Our Group had in the past encountered site flooding which resulted in damages to third party property at Setia Ecohill, Semenyih, Selangor and landslide which caused damage to our machinery and equipment at our construction site located in Nilai Impian 2, Negeri Sembilan. However, we were able to reimburse the costs incurred from these incidents by our insurers. Further details are set out in Section 11 of this Prospectus. Save as disclosed above, we have not experienced any occurrence of force majeure events that adversely affect our business operations and financial performance in the past. Notwithstanding the above, there is no assurance we will not encounter such event and our business operations and financial performance will not be adversely affected should such events occur in the future.
The construction industry is highly competitive Our Group operates in a highly competitive industry consists of local and overseas construction companies that carries the profiles of listed and nonlisted companies. Competitors with significant global market presence and strong financial resources base may enter into the local construction industry should they obtain the necessary licenses and permits with relevant human capital, in which it will intensify the competition. Competitions from other players may reduce our market shares thereby affecting our market position and financial performance. As at 31 December 2016, there were a total of 79,883 contractors registered with the CIDB, of which 6,868 were registered with Grade “7” reported by the Construction Statistic Quarterly Bulletin -2016 by CIDB Malaysia. Generally, the barrier to entry into the earthworks and civil engineering services market in Malaysia is relatively high as it requires high capital investment to purchase heavy machinery and equipment for instance, excavators, trucks, bulldozers and other related machinery in order to undertake large-scale projects. In addition, the earthworks and civil engineering services requires technical skillsets and investment in specialised machinery and equipment whereby main contractors may not necessary possess the relevant technical skillset and the necessary machinery and equipment. We have not experienced any major competitions from our competitors which have resulted in an adverse effect on our financial performance in the past. Nevertheless, there can be no assurance that we will be able to compete effectively with current and new entrants into the construction industry in the future and the competition in the tendering process will not intensify in the future.