YOU SHOULD EVALUATE AND CONSIDER CAREFULLY, ALONG WITH OTHER MATTERS IN THIS PROSPECTUS, THE RISKS (WHICH MAY NOT BE EXHAUSTIVE) BELOW. ADDITIONAL RISKS, WHETHER KNOWN OR UNKNOWN, MAY IN THE FUTURE HAVE A MATERIAL ADVERSE EFFECT ON US OR THE MARKET PRICES OF OUR SHARES
RISKS RELATING TO OUR BUSINESS AND OPERATIONS
Dependence on Directors and Key Management Personnel
The technology industry is a growing and fast changing sector and the management and operation of the business requires the employment of high skilled knowledge workers, whether in technology or non-technology related fields. Our Board recognizes and believes that our Group’s continuing success depends, to a significant extent, on the abilities and continuing efforts of our existing CEO, Executive Directors and key management personnel as disclosed in Section 8 of this Prospectus as well as the ability to attract new personnel and retain its existing skilled personnel. The labour market for skilled personnel in this field is competitive.
We have currently put in place a management succession plan which includes taking a proactive approach towards addressing talent management in order to ensure our Group is managed by personnel with the requisite experience and capability. Our key management personnel are constantly exposed to various aspects of our business activities to ensure they have adequate understanding on their respective responsibilities and decision-making process.
In addition to our key management personnel, our success and earnings growth are also substantially dependent on our skilled personnel particularly those from our R&D team. For the purpose of continuous motivation to Our skilled personnel, we have in place a competitive remuneration package to reward our performing personnel and to retain their services in our Group.
On top of the above, in conjunction with our IPO, our Company is also implementing a RSP to allow the Eligible Person(s) to participate in our future growth and to align their interests with our Group’s interests. We also believe that by enhancing our corporate profile as a listed issuer in Malaysia, we will be able to attract more qualified personnel to continuously play an active role in the growth and success of our Group. However, no assurance can be given that these reasonable measures would result in the successful retention and/or motivation of our employees.
Dependence on Suppliers
Our Group relies on our suppliers, with whom we work closely with to support our business activities. Any severance of these relationships will have a negative impact on our Group’s ability to supply our products to our customers. We have been dealing with our major suppliers for more than two (2) years and as at the LPD, we have not encountered any major problems in sourcing for our supplies and raw materials. Although our Group seeks to mitigate this risk by continuously maintaining good relationships with our suppliers to ensure minimal disruptions to our supply chain and operations, no assurance can be given that any future changes in the relationships with these will not have an impact on our business.
Dependence on Major Customers
Our major customers comprise mainly semiconductor manufacturers and OSAT companies who provide assembly and testing services to semiconductor chip manufacturers. The loss of these major customers may adversely impact our Group’s operating results.
However, our Group will continue to enhance our value-added service proposition such as provision of on-site technical assistance, improve our service levels and maintain our competitiveness including broadening our product range and developing a more diversified portfolio of customers and markets in the future, both locally and internationally. In addition, our Group has maintained and will continue to maintain close business relationships with our customers and will continuously strive to meet our customers’ expectations by paying closer attention to their feedback and working in tandem with their requirements to improve our product and service quality.
Nevertheless, notwithstanding that these measures have been our practice throughout our existence, there can be no assurance that these reasonable measures would continue to remain successful in securing continued business from to these major customers in the future.
Absence of Long Term Contractual Agreement With Customers
Our Group does not have any long term contracts with our customers. The absence of long-term contracts is an industry practice where end-user customers would purchase products by way of purchase order on project-to-project basis or as-needed basis.
Notwithstanding the absence of long-term contractual agreements with customers, we have established close working relationships with our customers, particularly our major customers with whom we have established more than three (3) years of working relationship. Our Group will continuously seek to establish long standing and stronger relationships with our customers in order to ensure business continuity and growth. However, no assurance can be given that these reasonable measures would successfully create long term working relationships with our existing and potential customers.
Failure to Meet Demand for Our Products
The growth in the global semiconductor market and subsequently for ATE is dependent on the global demand for electronic products. If the market for electronics and semiconductors were to suddenly expand, our Group would require significant increases in production capabilities, including personnel as well as supplies and raw materials, in order to fully capitalize on such expansions in demand. The failure to adjust to such unanticipated increases in demand for our products could result in our Group losing existing customers or losing the opportunity to establish strong relationships with potential customers with whom we currently have little or no business. Such failures may adversely affect our Group’s future financial results and market share.
Risk in Infringing Intellectual Property of Third Parties
Our Group may unknowingly infringe upon the intellectual property rights of third parties and may be held responsible for such infringements. As at the LPD, we have not been the subject of any intellectual property claims. However, any future litigation regarding patents or other intellectual property infringements could be costly and time consuming and divert our management and key personnel away from our core business operations. If our Group loses a claim, we may suffer significant liabilities, litigation costs or licensing expenses or be prevented from selling our products if the products infringe upon the intellectual property of third parties.
We will take reasonable measures to conduct white paper and literature searches to ensure that our product designs do not infringe the intellectual property of third party. In addition, we will engage qualified lawyers to assist us to file for the registration of our intellectual properties and to provide related searches and advisory services.
Adequacy of Insurance Coverage on Assets
Our Group believes that we have adequate coverage on our tangible assets. Although our Group reviews our insurance policies on a regular basis to ensure that there is adequate insurance coverage on our assets, there can be no assurance that the said coverage would be sufficient for the replacement cost of our assets or from any consequential losses arising therefrom.
Change or Loss of Our MSC-Malaysia Status
ACSB was granted the MSC-Malaysia status on 19 December 2007 by MDeC and was granted an extension of its pioneer status which expired on 7 September 2013 for an additional five (5) years up to and including 7 September 2018.
MDeC is the body responsible for monitoring all MSC-Malaysia status companies in Malaysia and has the right to revoke our MSC-Malaysia status at any time at its discretion. Presently, all MSC-Malaysia status are granted certain financial and non-financial incentives, rights and privileges provided for under the “Bill of Guarantee” issued by MDeC.
Although we mitigated this risk by fulfilling the conditions as disclosed in Section 9.1.4 of this Prospectus, there can be no assurance that we will be able to continue to retain our MSCMalaysia status or enjoy the benefits as an MSC-Malaysia status company.
If we lose our MSC-Malaysia status, we will cease to be entitled to the benefits associated with the MSC-Malaysia status, which may have an adverse effect on our business, operating results and financial conditions. In addition, there can also be no assurance that these MSC incentives inclUding the criteria for entitlement will not be changed or modified in any way in the future.
We grant our customers credit periods of between thirty (30) days and ninety (90) days and as such we are exposed to credit risks arising from our Group’s trade receivables which may arise from events and circumstances beyond our Group’s control. In the event of significant delays or defaults in payment by our customers or where our customers face significant financial difficulties, we will have to make allowance for impairment on uncollectible trade receivables or may be required to write-off uncollectible trade receivables as bad debts, which may adversely affect our financial performance.
During the past three (3) FYE 2012 to FYE 2014 and FPE 2015, our Group has written off bad debts amounting to RM280,880 and RM51,600 for the FYE 2012 and FYE 2013 respectively. We will continue to closely monitor the ageing of our trade receivables and to keep close relationships with our customers to ensure timely collection of our trade receivables.
Foreign Exchange Risk
We are exposed to foreign exchange risk as part of our sales and purchases are transacted in foreign currencies. Moving forward, we expect to derive more revenue denominated in USD in view of our growing presence in the overseas markets in the past three (3) FYE 2012 to FYE 2014 and FPE 2015, and our future plan to expand our geographical presence. Any significant fluctuations in exchange rates, particularly the USD, may have a significant impact, whether positively or negatively, on the revenue and earnings of our Group. At present, we do not use any financial instruments to hedge our exposure against transactions in foreign currencies. However, we will continue to assess the need to utilise financial instruments to hedge our currency exposure, taking into consideration factors such as the foreign currency involved, exposure periods and transaction costs. Our Group’s financial results in the past three (3) FYE 2012 to FYE 2014 and FPE 2015 have not been materially affected by the fluctuations in the exchange rate between RM and USD.
Political, Economic and Regulatory Risk
Our business is subject to risks associated with conducting business internationally as we sell our products overseas and purchase some supplies and raw materials from foreign suppliers. We are therefore susceptible to changes in legal, regulatory, political and economic conditions as well as operational risks in the countries where we have business dealings with these parties.
As we continue to expand our business in foreign markets, our financial condition and results of operations could be affected by a variety of factors, including:
• Political and economic instability, including global and regional macroeconomic disruptions, natural calamities, epidemics or other such risks;
• Trade protection measures and import or export licensing requirements;
• Changes in import and/or export duties;
• Difficulty in staffing and managing widespread operations and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
• Differences in intellectual property laws;
• Difficulties in enforcing contracts and collecting trade receivables as a result of physical distance and different legal rules; and
• Risks with respect to social and political crises reSUlting from terrorism and war, amongst others.
Notwithstanding that our Group will continue to adopt prudent management and efficient operating procedures to mitigate these factors, there can be no assurance that any adverse economic, political and regulatory factors will not materially affect our Group’s future financial results.
RISKS RELATING TO THE INDUSTRY IN WHICH OUR GROUP OPERATES
Failure to Adopt New Technologies
Our Group operates in a dynamic market where our products and services are prone to evolving industry standards and frequent new product introductions and enhancements. Our Group’s future growth and success would significantly depend on continuing market acceptance of the portfolio of our products and services and our ability to develop new products and services to meet the needs of our customers.
Our products have an average life span of between 2.5 years to 5 years. In the event where our products become outdated or obsolete, these products will be upgraded or a new product with enhanced functionalities will be developed to cater for the market demand. The development of new or enhanced products and services is a complex and uncertain process. Furthermore, we may also experience design, marketing and other operational difficulties that could delay or prevent the development of our new products and services and the introduction and marketing of our products and services.
Our Group seeks to limit these risks through our continuous investment in R&D activities and to actively engage in the industry’s corporate and marketing activities in order to remain technologically relevant and to gauge and project market expectations. Additionally, we will constantly seek to improve our customer service in order to obtain feedback from our customers for our R&D initiation and marketing strategies.
However, there can be no assurance that we will be able to successfully anticipate technological changes and to develop new products and services in a timely manner and/or cost effectively. Such circumstances may in turn adversely affect our business operations and financial performance. Additionally, there can be no assurance that our R&D activities will be successful. Unsuccessful R&D activities may have a negative impact on our financial performance as the R&D expenses incurred may be substantial vis-a-vis our revenue for the relevant financial years.
Inability to Anticipate Changes in Consumer Preferences
Our Group’s continued success is dependent to a certain extent, on our ability to anticipate and to rapidly design and develop ATE for our targeted market segments, particularly the wireless application market, specifically in mobile wireless communications, that is characterized by fast changing consumer preferences and demands. Should our Group be unable to anticipate and identify new consumer trends and development in wireless application products, the demand for our products may be affected which will then have an impact on our Group’s operating results.
Additionally, our Group may incur significant costs relating to the development and marketing of new products, or improving or improvising existing products in response to what our Group perceives to be consumer preferences and demands. Such development or marketing efforts may not necessarily result in the desired level of market acceptance, volume of sales or profitability as anticipated by our Group.
Infringement of Our Intellectual Property Rights
Our commercial success is dependent to a certain degree on our ability to protect our intellectual property rights. Whilst relying on certain trade secrets pertaining to our products and services, as at the LPD, we have registered certain trade marks and industrial designs with the Intellectual Property Corporation of Malaysia with the details as set out in Section 6.11 of this Prospectus. The registration of our trade marks and industrial designs will confer instant protection for our Group such that subsequent third party users are prevented from using trade marks or industrial designs that are similar to ours. As an owner/assignee of registered trade marks and industrial designs, we may commence legal proceedings for any infringements under the Trade Marks Act 1976 against third party users of trade marks or industrial designs that are similar to ours and which may be confusing and misleading.
In addition, we may also file applications for our trade marks and patents, if necessary, in the countries in which we intend to expand our business presence to in the future. However, existing copyright, trade marks, trade secret laws and other intellectual and industrial property laws can only offer limited practical protection. There may also be delays in the trade marks and patent registration process and there can be no assurance that such applications will be successful. Even if successfully registered, there can be no assurance that our Company will be able to effectively and expeditiously protect our intellectual property rights against unauthorised third party copying, use or exploitation, any of which could have a material adverse effect on our Company’s business and financial conditions.
Further thereto, our Group employs modularised design and development frameworks as the additional way to protect our intellectual property rights, which means that during the R&D, supply chain and production processes, the respective teams will only have access to certain parts of the data and analyses, blueprints and security codes as to minimize the risk of misappropriation.
In addition, our Group has implemented and will continue to enforce our current policy of requiring our employees to enter into confidentiality and non-disclosure agreements relating to the distribution of our proprietary information and information of our customers, to further mitigate the risk of misappropriation.
Consolidation of Businesses Within the Semiconductor Industry
The global ATE industry is concentrated, with a relatively small number of large semiconductor manufacturers and OSAT companies accounting for a large portion of total semiconductor sales. This market concentration could become even more acute in the future if further industry consolidations take place, as larger semiconductor manufacturers and OSAT companies acquire smaller industry participants and as corporate restructuring such as elimination and consolidation of businesses progress.
Any consolidation in the industry may impact the business processes of the affected companies, and as a result, affect our position as a supplier to these customers. As our Group’s ability to increase sales will depend mainly upon our ability to obtain or increase orders from these customers, we face additional risks of losing sales opportunities should business conditions change in the event of industry consolidations.
Notwithstanding our competitive strengths, we continue to face competition from existing and prospective competitors which may be capable of offering similar products and services. Additionally, consolidation of market players within the ATE industry may heighten competition.
Nevertheless, we will leverage on our investments in our R&D activities to enhance our competitiveness. Our past and on-going R&D activities will provide us with the necessary knowledge base and the technology know-how for the design and development of new or enhanced test solutions.
Additionally, through our IPO, we expect to establish a stronger corporate profile and enhanced market presence in the industry both locally and internationally, through our enhanced marketing, branding and promotional activities.
Whilst we strive to remain competitive, there can be no assurance that any changes in the competitive environment would not have any material and adverse impact on our business and financial performance.
Notwithstanding the foregoing, our business and financial results depend, in significant part, upon capital expenditures of manufacturers of semiconductors and OSAT companies, which in turn depend upon the current and anticipated market demand for our products. Disruption or deterioration in economic conditions may reduce customer purchases of our products, thereby reducing our revenues and earnings. In addition, such adverse changes in economic conditions, and resulting slowdowns in the market for our products, may, among other things, result in increased price competition for our products, increased risk in the collectability of our accounts receivable from our customers, potential reserves for doubtful accounts and writeoffs of accounts receivable, increased risk of restructuring charges and higher operating costs as a percentage of revenues, which, in each case and together, adversely affect our operating results.
Our Group’s business is subject to the cyclicality of the semiconductor industry and we had been adversely affected by slowdowns in semiconductor sales in the past. Our Group’s revenue decreased by 17.32% or RM2.31 million to RM11.03 million in FYE 2012 from RM13.34 million in FYE 2011 which was in tandem with the impact of the slowdown in the overall Semiconductor Industry in 2012 whereby the global semiconductor sales decreased by 2.64% during the corresponding period (Source: Independent Market Research Report by Smith Zander). Nevertheless, we believe that our Group’s continuous R&D efforts will be able to support our growth and demand for our products and services in the future.
We have taken actions to address the effects of general economic variability and recurring industry cyclicality, including implementing cost control and reduction measures. If our businesses experience downturns in the future, whether due to a deterioration in global economic conditions or slowdowns in specific markets we serve, we may need to take further cost control and reduction measures. However, no assurance can be given whether these measures will be sufficient to offset global or market-specific disruptions that might affect our business and profits.