4. RISK FACTORS 4. RISK FACTORS You should pay particular attention to the fact that our Group, and to a large extent our activities, are governed by the legal, regulatory and business environment in Malaysia, Indonesia, Sri Lanka, Bangladesh and Cambodia as well as the other countries in which we have operations and investments, which differ from that which prevails in other countries. The business of our Group is subject to a number of risks, many of which are outside our control. The risks and investment considerations set out below are not an exhaustive list of the challenges currently facing our Group or that may develop in the future. Additional risks, whether known or unknown, may in the future have a material adverse effect on our Group or our Shares. Where indicated, statistical and certain other information relating to our industry and contained in this section is based on or derived from data prepared by Frost & Sullivan or such other industry sources as stated. The information has not been independently verified by us or any other person. Much of the available information is based on best estimates and should therefore be regarded as indicative only and treated with appropriate caution. This document also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks faced by us described below and elsewhere in this document. See “Forward-looking statements”. You should carefully consider, along with the other matters set out in this document, the risks and investment considerations set out below. 4.1 RISKS RELATING TO OUR GROUP AND OUR BUSINESSES 4.1.1 We face increasing competition in Malaysia, Indonesia, Sri Lanka, Bangladesh and Cambodia and in the other markets in which we operate. The Malaysian, Indonesian, Sri Lankan, Bangladeshi and Cambodian telecommunications sectors are Iiberalised and as a result, competition in these markets has been keen and has been increasing in recent years. The market for mobile services in many of the countries in which our Group operates is highly competitive. Increased competition from existing and new mobile operators has resulted in, and is expected to continue to result in, greater price competition in the mobile services industry, with operators lowering monthly subscription fees and tariffs, providing handset subsidies and offering more attractive product and service packages. Prices for the services offered by our international operations and ARPU have experienced significant decline in recent years and are anticipated to continue to decline as a result of capacity additions, new technologies, new market entrants and general price competition. The increased competition has also resulted in a higher churn rate, slower growth in total subscribers and increased subscriber acquisition costs. Competition could lead to a decline in our existing subscriber base if subscribers choose to receive mobile services from other providers, or result in lower revenues from competitive pricing policies, increased selling costs to attract or replace subscribers, or a decrease in the rate at which we attract new subscribers for our mobile telecommunications services, any of which could adversely affect our profitability. Our position in each of the markets in which we operate will also depend on effective marketing initiatives and our ability to anticipate and respond to various competitive factors affecting the industry, including new services, pricing strategies by competitors and changes in consumer preferences and economic, political and social conditions in the countries in which we operate. Any failure by us to compete effectively, including in terms of pricing of services, acquisition of new subscribers and retention of existing subscribers, could have a material adverse effect on our financial condition and the results of our operations. We may also be subject to competition from providers of new communications services as a result of technological development and the convergence of new communications services. The introduction of any such new services is likely to result in a decline in our market share and have an adverse effect on our financial condition, results of operations and prospects. 4. RISK FACTORS (cont’d) 4.1.2 Our international operations may not be successful and we face difficulties and risks when commencing businesses in new markets or expanding our operations in certain emerging markets. A key element of our business strategy involves the expansion of our mobile telecommunications operations in the South and Southeast Asian region. Given the limited size of the Malaysian telecommunications market, our future growth depends, to a large extent, on the success of the businesses of our subsidiaries and associates offshore and our ability to successfully carry out our expansion strategy. We have investments (including subsidiaries, associates and long term investments) in 10 countries, namely Malaysia, Indonesia, Sri Lanka, Bangladesh, Cambodia, India, Singapore, Iran, Pakistan and Thailand. The successful further expansion of our international network depends on our ability to identify suitable opportunities for investment or acquisition and in reaching agreement with potential overseas partners or sellers on satisfactory commercial and technical terms. There can be no assurance that such opportunities or agreements can be established or that any of our proposed acquisitions or agreements will be completed or completed on commercial terms favourable to us. There is no assurance that we will be successful in making further acquisitions due to limited investment opportunities, competition for available opportunities from other potential investors, foreign ownership restrictions, government and regulatory policies, political considerations and the specific preferences of sellers. In particular, other major telecommunications companies in the region are following similar strategies or attempting to penetrate the same markets. Furthermore, some of the markets we have entered are dominated by large incumbent telecommunications providers. In certain markets where regulatory and legal issues are major challenges, we may incur substantial expenses in connection with our international operations in these markets and this may adversely impact the return on our investment in these operations. Also, we will require additional licenses, spectrum assignments and/or other authorisations to expand our operations and there is no assurance that we will be able to secure the necessary regUlatory approvals for such expansion. Regulatory regimes and regUlations in certain of the markets in which we operate are also subject to change and interpretation by local authorities and governments and this may affect our expansion activities, for example, changes which impose greater barriers to entry or restrictions on our expansion plans. In addition, we may be unable to successfully transplant and adopt our business model developed in Malaysia and in other key markets into new or existing ventures due to differences in market structure and regulatory environments. The rapid development and establishment of mobile telecommunications businesses in new markets may also raise unanticipated operational, control or other risks. Our Group may be unable to profitably manage new ventures and may incur substantial costs and experience delays or other operational or financial problems in trying to do so, and we may incur additional debt or assume contingent liabilities as a result. We may also face changes in the regulations to be complied with in different countries, which may have a material adverse effect on our business, financial condition, results of operations and prospects. Furthermore, there can be no assurance that we will be able to generate synergies from these businesses and be successful in building a regional footprint. Any delay or failure to achieve these and other objectives may adversely affect our financial condition, results of operations and prospects. 4. RISK FACTORS (cont’d) 4.1.3 As our Group’s business activities are concentrated in the South and Southeast Asian region, including in emerging market countries, we are dependent on the growth of these economies as well as any political and social developments in these countries. Substantially all of our Group’s business activities are concentrated in the South and Southeast Asian region, and many of our operating companies and investments are located in emerging market countries in this region, including Indonesia, Sri Lanka, Bangladesh, India and Cambodia. As a result, our Group’s operating revenues and results of operations and future growth depend, to a large extent, on the growth of these economies as well as on the political and social developments in these countries. In the past, currency fluctuations, liquidity shortages, higher interest rates and other factors have materially and adversely affected the economies of many countries in the Asia-Pacific region in general, and in Southeast Asia in particular. Due to the effect that economic conditions in these markets have on our Group’s businesses, further economic decline in the South and Southeast Asian region could adversely affect our financial condition, results of operations and prospects. Further, some of the countries in the South and Southeast Asian region in which our Group operates and has investments have experienced or continue to experience political instability. The continuation or re-emergence of such political instability in the future could have a material adverse effect on economic or social conditions in those countries. This could lead to outbreaks of civil unrest in the affected areas, which could have an adverse effect on our Group’s financial condition and results of operations. Such political instability could have a material adverse effect on the ownership, control and condition of our Group’s assets in those areas. Laws and regulations, particularly fiscal policies affecting the economy as a whole and the telecommunications sector specifically, in these emerging markets also tend to be evolving and changing compared to mature markets and we may be adversely affected by any such change relating to telecommunications operators, licensing and services.
4.1.4 A worldwide economic downturn could adversely affect our Group’s operations and growth. Our Group, through our subsidiaries and associates, offers mobile telecommunications and related services to our subscribers throughout the South and Southeast Asian region, particularly to those in Malaysia, in addition to Indonesia, Sri Lanka and Bangladesh and other countries in the region. As the mobile telecommunications industry is predominantly a consumer-dependent industry, any economic slowdown experienced in any of our markets may adversely affect the financial health of our subscribers and consequently affect our operating revenues and profitability. Further, certain of the countries in which we operate are highly dependent on exports to other countries within the Asia-Pacific region and to other major markets worldwide, including the United States. Any economic slowdown experienced in the United States and in other major economies may lead to reduced demand for exports from these countries and may adversely affect the economies of these countries. Disasters such as the terrorist attacks on the United States on September 11, 2001, may also exacerbate such economic slowdown in the United States or other major economies and may lead to reduced or negative economic and trade growth levels globally and in Asia in particular. Any significant deterioration in the financial condition of businesses in the Asia-Pacific region as a result of a continuing worldwide economic downturn and, in particular, any decline in demand for telecommunications products or services, could adversely affect our financial condition, results of operations and prospects. 4. RISK FACTORS (cont’d) 4.1.5 Our existing operations and planned investments and. expansions require significant capital investment. Telecommunications service businesses are capital intensive in nature. We have made significant investments in our network infrastructure and technology to provide the services we offer. In fiscal 2005, fiscal 2006 and fiscal 2007, TMI Group’s capital expenditures were RM1,443.4 million, RM3,005.0 million and RM3,645.6 million, respectively and Celcom Group’s capital expenditures were RM938.8 million, RM858.2 million and RM745.7 million, respectively. Our planned capital expenditures for fiscal 2008 are RM4,570.2 million and we expect a similar level of capital expenditures in fiscal 2009. In order to remain competitive and continue providing technologically innovative and compatible services, we must also continue to expand and modernise our networks, which involves substantial capital investment. We also require significant amounts of capital to market and distribute our services and prOducts, to develop new services and prOducts, to develop and implement new mobile telecommunications technologies and potentially to acquire and invest in other telecommunications companies and spectrum rights. We anticipate that our Group’s capital investments in fiscal 2008 will be higher than in fiscal 2007 as a result of network expansion and expansion into new markets. We expect to require substantial financing to broaden the existing range of mobile telecommunications services we provide and to develop new services. In addition to investing in improvements and upgrades to our existing systems and network, our longer term strategy includes making investments in telecommunications-related businesses. Our ability to obtain additional financing will depend on a number of factors, including: • our future financial condition, results of operations and cash flows; • general market conditions for financing activities by mobile and fixed-line telecommunications companies; and
• economic, political and other conditions in the markets where we operate.
Adequate financing for the expansion and modernisation of our network, support systems and for telecommunications-related investments may not be available to our Group on acceptable terms, or at all. Accordingly, we cannot assure you that we will have sufficient capital resources or that we will not exceed the estimate of the necessary capital expenditures to improve or expand our mobile telecommunications infrastructure or update our other technology to the extent necessary to remain competitive. If adequate financing is not available, our Group’s business prospects may be adversely affected.
4.1.6 We are exposed to risks relating to the expansion of our networks. Our Group anticipates installing additional equipment to expand the capacity and improve the quality of our mobile networks. Our ability to continue to maintain or increase our subscriber base is dependent in part on our ability to expand and upgrade our networks on a timely basis. Any failure to rollout or enhance our networks to support new services in accordance with anticipated schedules may have a material and adverse effect on our business. The continued expansion and upgrading of our networks are also subject to risks and uncertainties, inclUding the ability to procure a sufficient number of suitably located BTS sites on commercially acceptable terms, obtain the requisite equipment in a timely manner and obtain required regulatory approvals from the relevant state and local governments. We may also incur higher operating expenses in such expansion. For example, we experienced higher operating expenses in the installation of new BTS sites and transmission towers as a result of increasing raw material prices and real estate prices in Malaysia. There is no assurance that our Group’s profitability will not be adversely affected by further increases in such operating expenses. 4. RISK FACTORS (cont’d) 4.1.7 We may not realise the benefits we expect from our investments in network infrastructure and new technologies, which may adversely impact our business and financial condition. In order to continue to develop our business and offer new services, we intend to continue to invest in our network infrastructure and technology as well as new technologies. In addition to the further development of our existing products and services, the launch of new and commercially viable products and services is important to the success of our business. We expect to incur substantial capital expenditure to further develop the existing as well as the new range of services and products. Commercial acceptance by consumers of new services we offer may not occur at the rate or level expected, and we may not be able to successfully adapt the new services effectively and economically to meet consumers’ demands thus impairing the return from our investments. We cannot assure you that services enabled by new technologies we implement in certain of our markets, such as 3G and HSDPA, will be accepted by the public to the extent required to generate an acceptable rate of return. In addition, we face the risk of unforeseen complications in the deployment of these new services and technologies, and we cannot assure you that our estimate of the necessary capital expenditures to offer such services will not be exceeded. New services and technologies may not be developed and/or deployed according to expected schedules or may not achieve commercial acceptance or be cost effective. The failure of any of our services to achieve commercial acceptance could result in additional capital expenditures or a reduction in profitability to the extent that we are required under the applicable accounting standards to recognise a charge for the impairment of assets. Any such charge could materially and adversely affect our financial condition and the results of operations. 4.1.8 Our Group relies on manufacturers of telecommunications equipment and network facility providers, as well as other external suppliers for our key technical support platforms and systems. We rely on manufacturers of telecommunications equipment for continued maintenance, service and supply, and continued cooperation on the part of these manufacturers is important for us to maintain our operations without disruption. Our subsidiaries in Malaysia, Indonesia, Sri Lanka, Bangladesh and Cambodia as well as our associates are dependent on imports for the majority of their network components as most of the network equipment cannot be sourced locally. The network equipment and facilities are for the provision and support of MSC, BSC, BTS and other network and IT equipment. The Celcom Group is also dependent on other network facility providers such as Fiberail Sdn Bhd, a subsidiary of TM, for the provision of its fiber optic network which forms part of its transmission backbone infrastructure. Any failure of these providers to maintain their networks will affect Celcom Group’s mobile network quality. We also rely on external suppliers for many of our key IT platforms, customer services systems and billings systems. On a Post Acquisition Proforma basis for fiscal 2007, the major supplier who individually contributed 10% or more of the purchases of network equipment and services for our Group was Ericsson. 4. RISK FACTORS (cont’d) We may experience delays and other problems in acquiring the necessary equipment, support and spare parts in the event that mobile equipment manufacturers run into financial difficulties which have led in some instances to their restructuring from time to time. Further consolidation of major telecommunications suppliers and other technology and systems providers will reduce the number of suppliers from whom we can purchase equipment and technology, and may result in higher pricing and increased costs for our Group either as a result of increased prices by market dominant suppliers or because existing equipment and technology used by our Group may no longer be supported by the new market players. 4.1.9 The telecommunications industry is subject to rapid technological changes and continued transformation, which may affect our Group’s competitive position if we are unable to develop new products and services and introduce them to our markets in a timely manner and at competitive prices. The telecommunications industry is subject to rapid, ongoing technological changes and has experienced significant changes in recent years, which we expect to continue. Wireless technology (such as WiMax, WiFi, WiBro, iBurst and other wireless technologies), satellite-based communications services, private and public radio networks, VolP and other communications services which have the technical capability to handle telephone calls compete with the businesses of our Group. Continued growth of such technologies, and emerging and future technological changes and new services may adversely affect the Viability or competitiveness of our businesses. Furthermore, changing market demand and consumer trends may require our Group to adopt new technologies that could render our existing technologies less competitive or obsolete. In order to compete effectively, we must continue to improve the speed and features of our existing products and services and develop attractive products and services for our subscribers. We may not have the necessary skills to adopt these new technologies and may require substantial capital expenditure and access to related and/or enabling technologies in order to integrate the new technologies with existing platforms in order to respond successfully to technological advances and emerging industry standards (such as WiMax and HSDPA). Our Group may also not succeed in developing or introducing new or improved products and services in an economical or timely manner and we may not be able to succeed in delivering new products and services to the market ahead of our competitors or at competitive prices. Further, we may adopt new technologies that may prove to be unprofitable, inadequate or incompatible with the technologies of our subscribers or other carriers. In addition, new technologies implemented by competitors may allow them to provide lower priced, enhanced or better quality services than our Group, which could have a material adverse effect on our Group’s ability to compete effectively. We may not be successful in enhancing our network infrastructure in a timely and cost-effective manner to facilitate integration, which could have a material adverse effect on our Group’s quality of services, business, prospects, results of operations and financial condition. If our Group is unable to compete because its products and services have not kept pace with the evolving industry, our Group’s competitive position may be adversely affected. 4. RISK FACTORS (cont’d)
4.1.10 Our success depends on the reliability of our network infrastructure and systems, which are vulnerable to damage orinterruption due to events outside our control. We provide mobile telecommunications services that rely to varying degrees on our Group’s key network infrastructure, including our mobile networks and our transmission networks which comprise optical fiber cable, microwave, submarine cable and satellite transmission links. The provision of services by our Group depends on the reliability of this integrated network which is, in turn, vulnerable to damage or interruptions in operation due to natural disasters, adverse weather conditions, fire, power loss, telecommunications failures, network software flaws, transmission cable cuts, acts of terrorism, breaches of security or similar events. Our STS and transmission sites may also be SUbject to vandalism and theft, which could interfere with our operations and cause network failures. Furthermore, parts of our Group’s network infrastructure and systems may suffer from obsolescence or may require significant enhancement to effectively service increasing capacity demand. In the event that we experience significant problems with our MSC, STS, SSC, network backbone, other system hardware or software, including problems outside our control, temporary service interruptions or quality of service problems could arise. Any failure of our Group’s integrated network to service increasing capacity demand or that result in an interruption to our operations or provision of any service, could damage our Group’s brand equity, reduce the confidence of our subscribers and consequently impair our ability to attract and retain subscribers, lead to a violation of the terms of our various licenses and could have a material adverse effect on our results of operations and financial condition.
4.1.11 Our mobile operations are dependent upon the availability ofspectrum. The size and capacity of our Group’s mobile networks are limited by the amount of radio spectrum allocated to us by the governments in the countries where we operate. The regUlatory authorities may recall and reassign or re-allocate any spectrum allocation or assignment previously granted where it is in their discretion to do so. Should our Group’s radio spectrum requirements prove inadequate in the future, the expansion of our Group’s businesses may be affected. Any failure by our Group to retain, extend the tenure and/or acquire additional radio spectrum on a timely basis, and on commercially acceptable terms, could have a material adverse effect on our Group’s business, financial condition, results of operations and prospects. For example, the spectrum allocated to TMIC was reduced by 3.2 MHz from the 900 MHz bandwidth on November 12, 2007 due to reasons of national defence and security. Further, in the event any of our competitors acquire greater spectrum allocations than us in the future, if we are not able to continue to utilise our spectrum capacity successfully or in a timely manner, or if we cannot finance the requisite incremental capital expenditure to utilise such spectrum capacity successfully as and when needed, or obtain additional spectrum from the regulatory authorities, we may experience difficulty in attracting and retaining subscribers, which could have a material adverse effect on our results of operations, financial condition and prospects. While we intend to pursue new technical innovations and improvements in our networks in an attempt to optimise our existing frequency spectrum, there can be no assurance that these efforts will continue to be sufficient to maintain and improve service quality, as further capital expenditures may be necessary. 4. RISK FACTORS (cont’d) 4.1.12 Our Group depends on interconnection agreements with our competitors’ networks and gateways and on domestic telephone networks. We are dependent on interconnection agreements with our competitors’ mobile and fixed-line networks and associated infrastructure for the successful operation of our business. If for any reason these interconnection arrangements are disrupted, whether because of a failure by a counterparty to perform its contractual obligations or for any other reason, or if there are any adverse changes in the terms of such interconnection agreements or failure to reach or renew agreements on commercially acceptable terms, one or more of our services may be delayed, interrupted or stopped, the quality of our services may be lowered, our average monthly churn rate may increase or our interconnection rates may increase, all of which could materially and adversely affect our business, financial condition, results of operations and prospects.
4.1.13 We are subject to licensing requirements and operate in a regulated industry. Our operation of mobile telecommunications networks and the provision of related services are sUbject to statutory licensing requirements and regulated to varying degrees by national, state, regional or local governmental and/or regUlatory authorities in each of the countries in which we operate. See “Section 11.19 -Regulations and licenses” for a further discussion regarding the regulations applicable to our Group and licenses held by our Group. Our operating licenses specify the services we can offer. These licenses are sUbject to review, interpretation, modification or termination by the relevant authorities. New conditions and obligations may be imposed for new licenses and upon renewal of licenses. We cannot assure you that the relevant authorities will not take any action that could materially and adversely affect us. Certain of our operating licenses also contain obligations with respect to network rollout and population coverage. Failure to meet such obligations as stipulated in the relevant operating licenses may result in such licenses being revoked and/or financial penalties. There can be no assurance that we will be able to identify every breach when such a breach occurs due to the scale of our Group’s operations. Our operating licenses are generally renewable upon expiry. However, we cannot assure you that they will be renewed or that any renewal on new terms will be commercially acceptable to us. If we fail to renew any of our licenses, we may lose the ability to continue to operate the affected business, and the realisable value of our relevant network infrastructure and related assets may be materially and adversely affected. Changes in laws, regUlations or government policy in the countries where we have licenses to operate, or which we have an interest in a business holding such a license, or changes in the licenses held by our competitors, could also adversely affect our business, results of operations and prospects, particularly if any such changes result in adjustments to tariff structures, or require our operating companies to open up their access networks and/or infrastructure to our competitors. For example, in Malaysia, the Celcom Group is required to share its network infrastructure including BTS and transmission sites with its competitors. Although revenues are received from competitors seeking access to cover costs, such regulations would enable competitors, in particular, new market entrants, to gain easier access to the market. In certain of the countries in which we operate, we may be required to provide domestic roaming services to new market entrants. Currently most of our domestic roaming pricing and terms are commercially negotiated but there is no assurance that such rates and terms will not be mandated in future. 4. RISK FACTORS (cant’d)
4.1.14 Our Group may face substantially higher insurance premiums. The TMI Group’s operating costs associated with the acquisition of insurance and the payment of related premiums to insure our properties, assets and projects, BTS, earth stations and employees have increased from RM4.6 million in 2005 to RM17.5 million in 2007. Further, as some of the insurance policies such as those relating to comprehensive general liability, fidelity guarantees and money-in-transit, are maintained by the TM Group, following the Pre-Listing Restructuring, we will have to obtain insurance policies for our Group for areas previously covered by such TM Group’s insurance policies and this may result in an increased insurance cost. Since the terrorist attacks on the United States on September 11, 2001, many insurance companies have substantially increased their premiums and also specifically exclude insurance claims related to terrorism or related activities. In addition, insurance for certain of our Group’s operations may be more difficult to obtain due to insurance companies’ uncertainty about their ability to assess risk levels in certain commercial activities. As a result of the foregoing, there can be no assurance that we will be able to obtain appropriate insurance on commercially reasonable terms, if at all. Failure to obtain insurance could reduce our Group’s ability to obtain bank loans and other financing for future construction projects and other commercial activities and may subject us to potentially significant financial loss upon the occurrence of a large uninsurable event. The inability of our Group to obtain or renew insurance coverage at a reasonable cost, or at all, may cause our operating costs to increase and may have an adverse effect on the financial condition and results of operations of our Group. 4.1.15 We may not be able to adequately protect our intellectual property, which could harm the value of our Group’s brands and products and adversely affect our businesses; we may also be subject to infringement actions in connection with our use of third party intellectual property. We depend on our brands and believe that they are important to our business. We rely primarily on trademarks and similar intellectual property rights to protect our brands and branded products. The success of our business depends on our continued ability to use our existing trademarks in order to increase brand awareness and further develop our branded products. We have registered certain trademarks and have other trademark registrations pending. We seek to register all of our trademarks though in many cases we cannot be certain that these trademarks have not been registered by another party in the past. We may not be able to adequately protect our trademarks and our use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. As the telecommunications industry is highly competitive, we must also ensure that our know-how and commercially sensitive information is kept confidential. Any leak of this information may adversely affect our competitive position and results of operations. Further, in the course of our business, we are licensed from time to time to use intellectual property belonging to third parties including content and software providers. We and our business partners to whom we outsource certain of our services may from time to time unknowingly infringe the rights of such third parties or may fail to pay royalties to such third parties which may result in claims being made against us. Any significant resulting damages may adversely affect our business and results of operations. 4. RISK FACTORS (cont’d) 4.1.16 Our business relies on sophisticated billing and credit control systems, and any problems with these systems could inte”upt our operations. Sophisticated billing and credit control systems are critical to our ability to increase revenue streams, avoid revenue losses, monitor costs and potential credit problems and bill our subscribers properly and in a timely manner. We expect new technologies and applications to create increasing demands on our billing and credit control systems. Further, we rely on third parties to provide these billing and credit control systems. If adequate billing and credit control systems and software programmes are unavailable or if upgrades are delayed or not introduced in a timely manner or if we are unable to integrate such systems and software programmes into our existing billing and credit systems, our Group may be unable to offer certain services to our subscribers. Any damage or interruptions in operation or failure of our servers, which are used for the billing and credit control systems, could result in an interruption in our operations, and this in turn could materially and adversely affect our financial condition, results of operations and prospects. 4.1.17 Our Group depends on key management for the growth and successful implementation of its strategy. We believe that the growth our Group has achieved to date, as well as our position as one of the key mobile telecommunications services providers in the South and Southeast Asian region, are to a large extent attributable to a strong and experienced senior management team and a skilled workforce. Our Group believes that the continued growth of our business and the successful implementation of our strategy depend on senior management and key personnel. While we intend to enter into employment contracts with all members of our key management following the restructuring of our Group, there can be no assurance that members of the senior management team will remain in our Group for the foreseeable future. Competition for key personnel in the telecommunications industry is intense, and there is limited availability of individuals with the requisite knowledge of the telecommunications industry and relevant experience in the markets in which we operate. We may not be able to successfully recruit, train or retain the necessary qualified and skilled personnel in the future. Any failure to manage our personnel needs successfully could have a material adverse effect on our business, results of operations and prospects. 4.1.18 Our Group depends significantly on our network of dealers and distributors for sales of its products and services. Our Group sells its prepaid and postpaid services principally through a network of dealers and distributors. As such, we are highly dependent on our dealers and distributors for our prepaid and postpaid product sales. Any dispute with such dealers may disrupt sales and have an adverse effect on our Group’s revenues and profitability. 4.1.19 While we have significant investments in certain of our associates and jointly-controlled entities, we do not have control of all of such companies, which may limit our ability to cause these companies to take actions which we believe would be beneficial to our shareholders. Our ownership interests in certain of our associates and jointly-controlled entities, particularly Spice and M1 where we have less than a majority interest, do not provide us with the ability to control the actions of these companies. On a Post Acquisition Proforma basis, the total profits after taxation and minority interests contributed by Spice and M1 accounted for 15.7% of our consolidated PATAMI in fiscal 2007. In addition, our representatives on the boards of directors of these associates and jointly-controlled entities do not constitute a majority of those boards. As a result, we may not have the ability to prevent them from engaging in activities or pursuing strategic objectives that may conflict with our interests or overall strategic objectives and our ability to cause such associates to take actions which we believe would be beneficial to our shareholders may be limited. 4. RISK FACTORS (cont’d) 4.1.20 The transitional services the TM Group Post Restructuring has agreed to provide to us may not be sufficient to meet our needs and our ability to operate our business effectively may suffer if we do not quickly and cost-effectively establish our own support systems in order to operate as a stand-alone company As a wholly-owned subsidiary of TM prior to the Pre-Listing Restructuring, we have relied on the financial resources and the administrative and operational support systems of the TM Group to operate our business. Some of these systems include sales and marketing, IT resources and infrastructure, human resource related services and insurance coverage and R&D activities. Many of these systems are complex and either highly customised or proprietary. In conjunction with the Pre-Listing Restructuring, we are in the process of separating our assets from those of the TM Group Post Restructuring and creating our own financial, administrative, operational and other support systems or contract with third parties to replace the systems of the TM Group Post Restructuring. Many of the new systems will be in effect only from the completion date of the PreListing Restructuring and it may take additional time to fUlly implement and stabilise these systems. In order to successfully implement our own systems and operate as a stand-alone business, we must be able to attract and retain a number of highly skilled employees. We have entered into several agreements that are ancillary to the Framework Agreement (the details of which are set out in “Section 5.1 -Pre-Listing Restructuring”) which govern the arrangements under which the TM Group Post Restructuring will provide certain support services for a specified period of time after the completion of the Pre-Listing Restructuring. These services may not compare favourably with those we received as a wholly-owned subsidiary of TM, and we may not be able to obtain the same benefits when the Pre-Listing Restructuring is completed. These arrangements generally have a term of less than 3 years after the Pre-Listing Restructuring, after which the TM Group Post Restructuring may cease to provide these services to us. These services may not be sufficient to meet our needs and, after our agreements with the TM Group Post Restructuring expire, we may not be able to replace these services or facilities at favourable costs and on favourable terms, if at all. Any failure or significant downtime in our own financial or administrative systems or in the financial or administrative systems of the TM Group Post Restructuring during the validity period of the agreements, and any difficulty in separating our operations and businesses from the operations and businesses of the TM Group Post Restructuring, could result in unexpected costs, impact our results and/or prevent us from paying our suppliers and employees and performing other administrative services on a timely basis and could materially harm our business, financial condition, results of operations and cash flows.
4.1.21 We may experience difficulties in integrating the operations and businesses of our operating companies. One of our strategies is to take advantage of financial, strategic and operational synergies arising from the combination of the mobile businesses of the Celcom Group, XL, Dialog, TMIB, TMIC and our other operations and investments. In order to successfully exploit and leverage such synergies, we will be required to streamline and integrate some of the operations and systems of our various operating companies, which have historically operated as individual entities. The process of effectively integrating these operations and systems presents significant management, operational and technical challenges. The management of the integration of the various management, operating and IT systems with those of our Group, to the extent considered necessary, will require the continued development of management, operational and technical controls, in particular, IT and training of personnel, all of which could lead to the loss of key members of the various management teams or require significant expenditures. Further, if these synergies do not materialise as we have expected, the growth strategy, financial condition and results of operations of our Group could be adversely affected. 4. RISK FACTORS (cont’d) As part of the Pre-Listing Restructuring, the Celcom Group will become one of our key subsidiaries. We intend to continue to operate and manage most of the Celcom Group’s businesses independently but certain aspects of the Celcom Group’s management and IT systems are intended to be integrated with those of our Group after the Pre-Listing Restructuring. We may have difficulty fUlly integrating our systems with the Celcom Group’s or assimilating the Celcom Group’s operations and personnel or may fail to incorporate licensed or acquired technology into the Celcom Group’s network and products in a successful manner.
4.1.22 The proforma consolidated financial information included herein may not reflect actual results. We have included the Post Restructuring Proforma and Post Acquisition Proforma consolidated financial information in Sections 8.1 and 17 of this document because we believe that such information is important to your understanding of the future of our results of operations after completion of the Pre-Listing Restructuring and Acquisition. However, the Post Restructuring Proforma and Post Acquisition Proforma financial information included in this document is based on certain assumptions. See “Section 8.1 -Proforma consolidated financial information”. Such information is not necessarily indicative of the financial condition or results of operations that would have been achieved had the Pre-Listing Restructuring and Acquisition been completed in a prior period, nor is it necessarily indicative of our future financial condition or results of operations. There can be no assurance that the Post Restructuring Proforma and Post Acquisition Proforma consolidated financial information presented herein is indicative of the results of operations that would have been attained had the Pre-Listing Restructuring and Acquisition actually occurred earlier or if our Group had operated as a separate group of companies during the periods presented. In addition, there can be no assurance that the Post Restructuring Proforma and Post Acquisition Proforma consolidated financial information included will be indicative of our consolidated financial statements for the financial year ending December 31, 2008, which will be our first financial statements which will reflect our results of operations and financial condition after completion of the Pre-Listing Restructuring and Acquisition.
4.1.23 Our substantial leverage could adversely affect our general financial condition and ability to declare dividends. We have a substantial amount of indebtedness. As of December 31, 2007, on a Post Acquisition proforma basis, our Group had total interest-bearing indebtedness of RM10,218.8 million. In order to fund future operations and expansion, we expect to continue to incur additional indebtedness. Our indebtedness could restrict our operations. Amongst other things, our indebtedness may limit our ability to obtain additional financing for working capital, capital expenditure, strategic acquisitions and general corporate purposes, and require us to dedicate a substantial portion of our cash flow to service our debt, which will reduce funds available for other business purposes, limit our flexibility in planning for or reacting to changes in the markets in which we compete, place us at a competitive disadvantage relative to our competitors with less indebtedness, render us more vulnerable to general adverse economic and industry conditions, make it more difficult for us to satisfy our financial obligations or be able to refinance maturing indebtedness and affect our ability to declare dividends. We may also be exposed to fluctuations in interest rates and exchange rates as a result of our borrowings. See also “Section 9.9.1 Foreign currency exchange rate risk”. Our ability to meet our payment obligations will depend on the success of our business strategy and our ability to generate sufficient revenues to meet our obligations, which are subject to uncertainties and contingencies beyond our control. 4. RISK FACTORS (cont’d) 4.1.24 We may be required to record significant impairment charges to our earnings in the future when we review our goodwill or other intangible assets for potential impairment. We have in the past expanded our mobile telecommunications business through various mergers and acquisitions and intend to continue to do so in the future. We account for such acquisitions using the purchase accounting method, which requires us to record goodwill and other intangible assets in our consolidated financial statements from time to time. Upon the completion of the Acquisition, we are expected to recognise additional goodwill upon the consolidation pursuant to the purchase accounting method. Under Malaysian GAAP. we are required to review our goodwill and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. In addition, goodwill and other intangible assets with indefinite lives are required to be tested for impairment at least annually. We may be required in the future to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or other intangible assets is determined. There is no assurance that the additional goodwill expected to be recognised by our Group arising from the Acquisition will not be SUbject to impairment in the future. Any impairment of goodWill will result in a charge to the consolidated earnings of TMI, which may have a material adverse effect on our Group’s financial results.
4.1.25 Certain of our subsidiaries are defendants to legal proceedings. Certain of our subsidiaries are parties to legal proceedings, many of which involve our subsidiaries defending claims by other parties. For instance, Celcom is the defendant in ongoing legal proceedings concerning an alleged breach of an agreement, and XL, together with 7 other Indonesian telecommunications companies, are the SUbjects of an ongoing investigation by Indonesian competition authorities involving allegations of price fixing. See “Section 11.17 Legal proceedings and disputes”. There can be no assurance that the relevant subsidiaries will be able to successfully defend such proceedings or that judgments will not be entered against the relevant subsidiaries. In the absence of provisions for such claims, any judgment entered against the relevant subsidiaries or any requirement for the subsidiaries to pay damages and/or costs could have a material adverse effect on our Group’s business, financial condition, results of operations and prospects. Furthermore, there can be no assurance that further material litigation will not be brought against our Group in the future, in respect of which any failure to successfully defend such claims could also have a material adverse effect on our business, financial condition, results of operations and prospects. 4.1.26 The Government will be a substantial shareholder in our Company and there is no assurance that it will continue to maintain its shareholdings in us. Assuming the Pre-Listing Restructuring and Acquisition have occurred, based on the Register of Substantial Shareholders of TM as of Latest Practicable Date, Khazanah (which, save for 1 share owned by Pesuruhjaya Tanah Persekutuan (the Federal Land Commissioner), is wholly-owned owned by MoF Inc) will directly own 37.8% of our Shares after the Pre-Listing Restructuring and Acquisition. Khazanah also has 2 nominees on our Board of Directors. See “Section 14 Substantial Shareholders”. There is no assurance that Khazanah will remain our substantial shareholder or that there will not be an entry of another substantial shareholder with the ability to exert significant influence on the direction or operations of our Group, nor that our Group’s business, financial condition and results of operations would not be adversely affected by such a change in influence. 4. RISK FACTORS (cant’d) Any substantial shareholder in our Company, including Khazanah, immediately after the Listing, may be able to have significant influence on the outcome over many matters requiring approval by our shareholders, including the election of our Directors and the approval of significant corporate transactions. There is no assurance that the interests of such substantial shareholders will be aligned with that of our shareholders and as they will own a significant portion of our Shares, they could delay or prevent a change of control of our Company or other transactions, even if such transactions would be beneficial to our other shareholders.
4.1.27 Concerns about alleged mobile telecommunications health risk. Certain reports have suggested that radio emission from mobile handsets and other mobile equipment (including STS and towers) might have an adverse effect on the health of mobile telephone users and others. Such concerns have adversely affected share prices of certain mobile telecommunications companies in the United States in the past. Although the findings in such reports are disputed, the issuances of such reports in the future could adversely affect the market price of the shares of mobile telecommunications service providers including our Group, and the actual or perceived risk of wireless telecommunications devices could adversely affect mobile operators such as our Group through reduced subscriber growth, reduction in subscribers, reduced usage per subscriber or increased costs arising from the location or relocation of STS.
4.2 RISKS RELATING TO OUR KEY OPERATING SUBSIDIARIES 4.2.1 Celcom Group (i) High penetration rates for mobile phone subscribers in Malaysia may limit the Ce/com Group’s ability to grow its business and increase its subscriber base. The mobile telecommunications market in Malaysia has experienced rapid growth in recent years. According to Frost & Sullivan, the mobile penetration rate in Malaysia as of December 31, 2007 was 85.9%, compared to 74.7% as of December 31, 2005. As the Malaysian mobile telecommunications market is a more developed market, mobile penetration rates are unlikely to continue to grow at rates previously experienced. The Celcom Group may not be able to increase its subscriber base as a result of competition and high penetration rates in the Malaysian mobile market. The inability of the mobile telecommunications market in Malaysia to continue to grow in accordance with past trends or at all or the Celcom Group’s inability to maintain or increase its share of the mobile telecommunications market in Malaysia could materially and adversely affect its results of operations, profitability and prospects. (ii) The Celcom Group is exposed to risks relating to the legalisation and relocation of its existing BTS and transmission sites. In order to support its mobile networks, the Celcom Group has established various network infrastructure, including physical structures for both transmission towers and rooftop sites (“Outdoor Structures”) on which transmission equipment (2G STS, 3G transceiver stations and microwave links) are located. These Outdoor Structures require the approval of the local authorities. Given the rapid deployment of the Outdoor Structures required to support its network growth in the past, the Celcom Group has a significant number of Outdoor Structures which have been installed while pending submission to or approval from the local authorities. We believe that this has been in line with the common practice among mobile operators in Malaysia. The lack of approvals has in certain cases resulted in the local authorities issuing notices to dismantle the Outdoor Structures which were then relocated. The Celcom Group is also required to obtain the approval of the MCMC prior to the commissioning of its mobile and transmission equipment. Given the long lead time generally required for such approvals, many of such sites have commenced operations prior to the relevant approvals being obtained. There is no assurance that the MCMC and/or local authorities would not take any action to shut down such sites and impose penalties on the Celcom Group for such non-compliance. 4. RISK FACTORS (cont’d) Further, as many state and local government laws and regulations relating to the establishment of such sites were generally unclear and subject to interpretation in the past, the increasing establishment and adoption of new policies and guidelines by state and/or local governments to regulate the establishment of the Outdoor Structures may result in the Celcom Group being required to pay fines or to dismantle or relocate certain sites which do not comply with the new policies and guidelines. The enforcement of such policies and guidelines may also require the Celcom Group to regularise all its existing Outdoor Structures. The Celcom Group has also experienced local opposition to the building of certain Outdoor Structures because of concerns about alleged health risks. As a result of such opposition, the Celcom Group has in some instances been required, and may in the future be required by the local authorities to remove and relocate certain Outdoor Structures. Apart from the significant costs involved in dismantling existing Outdoor Structures and establishing new Outdoor Structures, new regulations such as tower site sharing arrangements may also result in increased site operating costs for the Celcom Group or provide low entry costs for competing operators to establish their presence in certain areas. Such regulations require the establishment of new Outdoor Structures to be carried out only by certain companies approved by the relevant state authorities and from whom mobile operators lease the BTS and transmission sites. Any action by the local authorities requiring the dismantling of Outdoor Structures may cause interruptions to the Celcom Group’s operations and increased costs, which could have an adverse effect on the Celcom Group’s business and operations. In addition, the Celcom Group may be required to relocate existing MSC and/or data centres upon the expiration of tenancies for such sites, if it is unable to obtain renewals of such tenancies or if such renewals are at unfavourable rates. Such relocation could also involve significant costs. (iii) The Celcom Group is exposed to risks relating to the approvals of the MCMC of apparatus assignment for 2G BTS and microwave links. Apparatus assignments are required from the MCMC for 2G BTS and microwave links. As of Latest Practicable Date, the approval of the MCMC for 190 of the Celcom Group’s 2G BTS out of a total of 5,969 2G BTS are pending. As of Latest Practicable Date, the approval of the MCMC for 1,652 of the Celcom Group’s microwave links out of a total of 7,924 microwave links is pending. If such approval from the MCMC is not obtained, this may affect the Celcom Group’s ability to provide services and coverage to its customers and may adversely affect the Celcom Group’s results of operations and financial condition. 4. RISK FACTORS (cont’d) (iv) Malaysian mobile operators will in 2008 be required to provide their customers with number portability. Mobile operators in Malaysia have yet to provide their subscribers with number portability, which allows subscribers of mobile services to retain their existing numbers when changing from one mobile operator to the other. However, Malaysian authorities have indicated that Malaysian mobile operators will be required to provide number portability in August 2008. The introduction of number portability is expected to intensify competition among mobile operators in Malaysia and may lead to price competition as mobile operators attempt to attract subscribers from their competitors, which will affect profitability. Number portability will also reduce the hurdle for mobile subscribers to switch to another operator and may lead to increased churn rates, loss of subscribers, increased subscribers acquisition costs as well as increased operating and marketing costs. The Celcom Group may be required to make additional capital investments and incur costs in order to address initial network or operational issues. Further, in order to implement number portability, IT and billing systems of the mobile operators as well as their respective networks and infrastructure will be required to be integrated and partially co-dependent for such purpose with each other as well as with the clearing systems operated by third parties appointed by the MCMC. There is no assurance that such integration will be smoothly carried out or that there will not be interruptions to, or additional costs incurred by, the Celcom Group’s business, networks and systems as a result of the failure of integration or the failure of another operator’s systems. The introduction of number portability in Malaysia could have a material adverse effect on the Celcom Group’s results of operations and financial condition. (v) The Celcom Group is subject to universal service provision (“USP”) obligations. In Malaysia, all licensed network facilities providers, network service providers and applications service providers are subject to USP obligations under relevant USP regulations. Generally, the objective of USP is the provision of access to basic telephony and internet access services in areas designated as USP areas by the authorities, which are typically rural areas. Under the USP regulations, operators are required to contribute to a USP fund at a rate of 6% of their annual weighted net revenue unless their total net revenue for the previous calendar year derived from designated services was less than RM2 million. Despite the prescribed formula, the calculation of USP fees has been subject to dispute in the past between operators and the MCMC. Any future decision by the MCMC on the net revenue calculation methodologies may result in the Celcom Group having to pay retrospective fees. (vi) The ownership rights of the Celcom Group in respect of the ducts and cables that it lays and installs on public roads and highways are uncertain. In the course of building its network, the Celcom Group has laid ducts, fiber and other equipment throughout Malaysia pursuant to approvals obtained from local authorities. However, legal uncertainty arises because the issue of ownership of the ducts and trunk fiber laid on or under the land is not specifically addressed in the Telecommunications Act, 1950 (now repealed) nor in the current CMA. There can be no assurance that the question of the ownership of such ducts, fiber and other equipment, if submitted to the courts, would not be decided against Celcom Group. Any adverse jUdgment against the Celcom Group may result in a disruption to its operations, loss of investment, increased cost due to charges to be paid to the owner for the use of such ducts and fiber and adversely affect its results of operations. This is an industry risk faced by Malaysian mobile operators, including the Celcom Group. 4. RISK FACTORS (cont’d) (vii) The Celcom Group depends significantly on its network of dealers and distributors for sales of its products and services. As the Celcom Group’s distributors are third parties, the Celcom Group has no control over their operations but may be held accountable for their actions as they may be deemed to be agents or representatives of the Celcom Group in their sales activities. Currently, liability for agent actions is limited to prepaid registration where, under the Guidelines on Registration of End-Users of Prepaid Public Cellular Services (No. 1 and No.2) and the Guidelines on Prepaid Registration (collectively, “Prepaid Guidelines”) issued by the MCMC which all public mobile operators and their representatives must comply with, a service provider shall not provide any prepaid public mobile service to any end-user that fails to register with the service provider. Also the service provider and its representatives are required to ensure that certain verification procedures are complied with. Failure to comply with these Prepaid Guidelines is a breach of the service provider’s applications service provider class license condition and may also lead to a maximum fine of RM100,OOO or to 2 years imprisonment or both. There is no guarantee that liabilities for agent actions will not be extended to other areas since the MEWC has the power to impose additional conditions. (viii) The Celcom Group has entered into a number of memoranda of understanding, strategic alliances and partnerships with various corporate and telecommunications leaders, and the termination ofany such alliances orpartnerships may result in negative publicity. The Celcom Group has a number of memoranda of understanding, strategic alliances, equity partnerships and collaborations with various global, regional and local corporate and telecommunications leaders, including Vodafone Marketing Sari (“Vodafone”), Asia Mobility Initiative (“AMI”), Google Ireland Ltd (“Google”), Tune Money Sdn Bhd (“Tune Money”), Tune Talk Sdn Bhd (“Tune Talk”), Samart I-Mobile (Malaysia) Sdn Bhd (“Samart I-Mobile (Malaysia)”), MiTV Corporation Sdn Bhd (now known as U Telecom Media Holdings Sdn Bhd (“U Mobile”», Redtone International Berhad (“Redtone”) and Merchantrade Sdn Bhd (“Merchantrade”). See “Section 11 -Business -Our key mobile telecommunications operations -Celcom Group Strategic alliances”. The continuation of such arrangements is subject to review based on strategic benefits attained by the relevant parties from time to time and there is no assurance that such alliances, partnerships or collaborations will not be terminated by any party, or that such termination will be mutually agreed. The termination of any of the Celcom Group’s well publicised strategic alliances, partnerships or collaborations could result in negative pUblicity and damage to Celcom Group’s branding and reputation, which may adversely affect the Celcom Group’s results of operations, business and prospects. Any such termination may also have an adverse financial impact. In addition, any negative pUblicity or adverse brand image suffered by such strategic partners may adversely affect the Celcom Group’s brand image and reputation. 4. RISK FACTORS (cont’d)
4.2.2 XL (i) XL faces competition from well-established Indonesian telecommunications industry incumbents and may face competition from new market entrants that may adversely affect its business, results of operations, financial condition and prospects. The Indonesian telecommunications market is highly competitive with 8 mobile operators and 3 fixed wireless operators according to Frost & Sullivan. Competition in the mobile telecommunications industry is based mainly on factors such as network coverage, quality, price and customer service. XL’s most prominent competitors are PT Telekomunikasi Selular (”Telkomsel”) and Indosat. Increasing competition may arise from other new mobile telecommunications operators in Indonesia. In addition to the current service providers, the Ministry of Communications and Information of Indonesia may license additional telecommunications service providers in the future, which may compete with XL. Along with its competitors, XL may also be subject to competition from providers of new telecommunication services as a result of technological developments and the convergence of various telecommunication services. New and existing mobile telecommunications service providers may significantly increase subscriber acquisition costs by offering more attractive product and service packages, resulting in higher average monthly churn, lower ARPU or a reduction, or slower growth, in XL’s subscriber base. In addition, the Ministry of Communications and Information of Indonesia has allocated almost all available GSM 900 and GSM 1800 mobile spectrum. Additional spectrum may become available in the future or the government of Indonesia may re-allocate existing spectrum, resulting in more competition. The Indonesian government has granted 3G licenses to 5 operators, i.e. XL, Telkomsel, Indosat, PT Hutchison CP Telekomunikasi (“Hutchison Telecom Indonesia”) and PT Natrindo Telepon Seluler. In recent years, Indonesia has seen the entry of a number of large foreign operations such as Maxis, Saudi Telecom Company and Hutchison Telecom Indonesia, who have invested in other mobile telecommunications service providers in Indonesia, which may result in increased level of competition in the market. (ii) Mobile network congestion and limited spectrum availability could limit XL’s mobile subscriber growth and cause a reduction in its mobile service quality. The rapid growth of Indonesia’s mobile subscriber base, together with increasing demand, has led to high mobile usage, particularly in dense urban areas of Indonesia. The available spectrum for use by a mobile network effectively limits its capacity. As a result, radio frequency engineering techniques, including a combination of macro, micro and in-building mobile designs, are needed to increase the average traffic density on XL’s mobile network and to maintain mobile network quality. Such radio frequency techniques have been deployed in dense urban environments such as Hong Kong, and XL intends to use them when the per square kilometre threshold approaches such a usage profile. However, if XL’s mobile subscriber base should grow significantly larger in high-density areas, no assurance can be given that these efforts will be sufficient to maintain and improve service quality, and XL may be required to make significant capital expenditures to maintain and improve mobile service quality based on its current spectrum allocation. XL’s growth plans anticipate substantial expansion of its mobile network and a corresponding increase in XL’s total number of mobile subscribers. No assurances can be given that such expansion plans will materialise or, if they do materialise, that XL will be able to integrate additional mobile subscribers successfully. Failure to activate new mobile subscribers on a timely basis and to scale existing operational units to handle increased mobile traffic may adversely affect XL’s reputation, increase average monthly churn and adversely affect its business, financial condition, results of operations and prospects. 4. RISK FACTORS (cont’d) (iii) XL faces competition from recently introduced technologies in Indonesia that may adversely affect its business, results of operations, financial condition and prospects. The introduction and availability of new services offering mobility such as COMA based cellular services as well as fixed wireless access have increased competition based on prices, product and service packages among mobile service providers. These operators who are paying lower regulatory/frequency fees than GSM mobile operators are offering their services at lower tariffs and their service quality may also exceed GSM-based mobile services due to more efficient spectrum usage. Fixed wireless services, particularly those offered without significant regulatory restrictions regarding mobility, are able to be more competitive (through savings from lower frequency fees which can be passed on to consumers in the form of cheaper tariffs). Currently, XL does not offer COMA-based cellular services or fixed wireless services. This may have a material adverse effect on XL’s business, resulting in, among other things, higher average monthly churn, lower ARPU, slower growth in total subscribers and increased subscriber acquisition cost. (iv) Non-compliance with Indonesian foreign ownership restrictions could result in unknown penalties, administrative sanctions, revocation oflicenses or require foreign shareholders ofXL to divest their holdings. Indonesia enacted Presidential Regulation No. 77 of 2007 in July 2007, which restricts foreign ownership in Indonesian telecommunications companies depending on the line of business of the relevant company. There are a number of different restriction thresholds applicable to XL’s various services, with the most stringent restriction being 49.0% maximum allowable foreign ownership applicable to companies providing VolP services. Although the foreign ownership restriction is 65.0% for mobile operators, the regulations are unclear on the restrictions applicable to companies such as XL that are licensed to provide multiple telecommunications services. XL has been advised by its legal counsel that it is likely that the regulators will impose the more stringent restriction of 49%. Although pUblicly-listed companies, such as XL, have in practice not been prosecuted under similar foreign ownership restrictions, no exemption is officially recognised in any legislation or rUling. Although no Indonesian regulatory authority has indicated that XL is in breach of the regulations, there is a continued risk to XL as a result of the unclear interpretation and implementation of the regulations especially because these regulations have only been recently enacted in July 2007. If XL is found to be in breach of such regulations, it may be subject to administrative sanctions in the form of warning letters, limitation or suspension of its business activities, or revocation of its licenses pursuant to which XL may be required to cease its business activities. In addition, the authorities may also require existing foreign shareholders of XL to divest their holdings. This may result in a breach of the loan facilities governing XL’s significant indebtedness. See “Section 4.2.2 (vii) -XL’s significant indebtedness could adversely affect its financial health, and the restrictions imposed by the terms of its debt instruments may limit XL’s ability to plan for or respond to changes in XL’s business”. As of Latest Practicable Date, XL is 99.8% held by foreign investors, with our Group holding 67.0%. After the Acquisition, our Group will hold 83.8% of XL’s issued shares. Any sell down required of us will adversely affect our financial condition, business and prospects, as we could cease to be the controlling shareholder of XL. Furthermore, there may be a limited market for such shares and there is no assurance that we will be able to sell our shares in XL at commercially acceptable prices. 4. RISK FACTORS (cont’d) (v) XL depends on certain licenses to provide its services which could be cancelled if it fails to comply with certain terms and conditions. XL relies on licenses issued by the Ministry of Communications and Information of Indonesia for the provision of its mobile telecommunications services as well as for the utilisation of its allocated spectrum frequencies. Certain of XL’s licenses contain obligations with respect to network rollout and population coverage as well as the submission of reports to the Ministry of Communications and Information of Indonesia. The Ministry of Communications and Information of Indonesia, with due regard to prevailing laws and regulations, may amend the terms of XL’s licenses at its discretion. Any breach of the terms and conditions of XL’s licenses or failure to comply with applicable regulations could result in fines being imposed on it or its licenses being cancelled by the government of Indonesia. Any revocation or unfavourable amendment of the terms of the licenses, or any failure to renew them on comparable terms, could have a material adverse effect on XL’s business, financial condition, results of operations and prospects. (vi) A change in the tariff guidelines by the government of Indonesia may have an adverse effect on XL’s business, financial condition, results of operations and prospects. The Ministry of Communications and Information of Indonesia is the principal policy maker and regUlator of the telecommunications industry in Indonesia and is responsible for the selling and adjustment of tariff guidelines. Operators set their own tariffs for their telecommunications and value-added services, subject to such tariff guidelines. These tariffs include, amongst others, activation fees, monthly fees and usage fees. In 2006, the government of Indonesia issued Ministry RegUlation No. 12/PER/M.KOMINFO/02/2006 regarding Procedure of Tariff Revision on Telephony Services Provided by Mobile Network Operator (“Ministry RegUlation 2006”) which stipulated that revision of current tariffs shall be reported to Indonesian telecommunications regulatory bodies (“ITRB”). Under the Ministry Regulation 2006, the government of Indonesia stipulated that the lowest floor price tariff formula must be equal to call originating costs plus call terminating costs. Currently, the government of Indonesia is considering new tariff regulations imposing a maximum tariff formula, and is conducting public consultation regarding the new tariff regUlations. Since a significant portion of XL’s revenues is dependent upon tariff guidelines formulated by the government of Indonesia, any change in the government of Indonesia’s tariff guidelines could adversely affect XL’s business, financial condition, results of operations and prospects. (vii) XL’s significant indebtedness could adversely affect its financial health, and the restrictions imposed by the terms of its debt instruments may limit XL’s ability to plan for or respond to changes in XL’s business. XL has and will continue to have substantial indebtedness and will continue to incur additional indebtedness. As of December 31, 2007, XL had borrowings of IDR9,663.9 billion. Under the loan facilities, XL has to ensure that TMI or any successor entity of TMI must indirectly or directly maintain an aggregate shareholding of not less than 51.0% in XL. Its substantial indebtedness will have important consequences for our Group. As a result of this substantial indebtedness, XL will require substantial cash flow to meet its obligations under its current and future indebtedness. Therefore, a substantial part of its cash flow from operations will not be available for its business. We cannot assure you that XL’s substantial indebtedness and these restrictions will not materially and adversely affect XL’s ability to finance its future operations or capital needs or to engage in other business activities, or otherwise adversely affect its business, financial condition, results of operations and prospects and consequently any dividends or distributions to our Company. 4. RISK FACTORS (cont’d) (viii) The government ofIndonesia may have objectives that are not necessarily consistent with the maximisation of profits by industry participants and may implement policies that may be disadvantageous to XL. The government of Indonesia, through its Ministry of Communications and Information, exercises regulatory power over the Indonesian telecommunications industry and may have objectives that are not necessarily consistent with the maximisation of profits by industry participants. Certain government of Indonesia’s policies or objectives may have a material adverse impact on XL’s business, financial condition and results of operations. We cannot assure you that the policies and plans of the government of Indonesia will not prejudice XL’s business. Similarly, we cannot assure you that the government of Indonesia will not implement future decisions or exercise regulatory power over the Indonesian telecommunications industry that may be disadvantageous to XL. (ix) A significant increase in frequency fees could adversely affect XL’s business, financial condition and result of operations. XL is currently required to pay a frequency fee based principally on the number of its STS. However, in October 2005, the Minister of Communications and Information of Indonesia issued the Decree No. 17/PER/M.KOMINFO/1 0/2005 which requires XL to pay the frequency fee for the radio frequency spectrum utilised in its operations based on bandwidth frequency spectrum. The new formula to calculate the frequency fee based on bandwidth will be determined in a separate ministerial decree which has not yet been enacted and is expected to be a lump-sum amount payable annually in advance irrespective of the number of STS owned by XL. We cannot assure you that the amount of the new frequency fee will be less than or equal to the frequency fee currentiy paid. If the new frequency fee is significantly higher than the current fee amount, it would increase XL’s operating costs and could have a material adverse effect on its business, financial condition and results of operation. (x) XL is exposed to risks relating to the legalisation and relocation of its existing BTS and transmission sites. XL’s development of its network infrastructure, which inciudes STS, network transmission towers and rooftop microwaves, requires site acqUisition, tower and equipment installation supported by approvals and licenses from local authorities. Given the long lead time generally required for such approvals and licenses, we believe that it is a common practice in Indonesia that approvals and licenses from local authorities are received after the site is ready. If approvals and licenses are not obtained, the local authorities may issue notices for the network infrastructure sites to be dismantled. These sites may then have to be relocated. There is no assurance that local authorities will not shut down such sites and impose penalties for such non-compliance. XL has also experienced local opposition to the bUilding of certain sites because of concerns about alleged health risks. As a result of such opposition, XL, in some instances, has been required, and may in the future be required, by the local authorities to remove and relocate certain network sites. 4. RISK FACTORS (cont’d) (xi) If the investigation by the Indonesian Anti-Monopoly Committee leads to XL being found liable for price fixing, this may lead to a decrease in XL’s revenue and affect its profitability. On November 1, 2007, the Commissioner for the Supervision of Business Competition (“KPPU”) issued a decision regarding a preliminary investigation of XL and 7 other telecommunication companies upon allegations of price-fixing of SMS and therefore breaching Article 5 of the Antimonopoly Law (Law No.5/1999). Following the preliminary investigation conducted by the KPPU, the KPPU sent a summons letter to the President Director of XL as well as the 7 other telecommunication companies for a hearing session. On December 14, 2007, the KPPU decided to proceed with the second stage of investigation against all operators and if the KPPU believes that it requires further information from XL, XL may be summoned to appear before the KPPU or requested to provide such information. Under Indonesian law, the KPPU is required to complete the second stage of the investigation within 60 business days, to be followed by a 30-business day decision-making period. We expect a decision to be rendered in May 2008. If XL and the other operators are found liable for price-fixing, they may be ordered to terminate or abandon the perceived minimum price arrangement and to pay fines of up to IDR25.0 billion. Such a decision may also force Indonesian mobile operators to lower tariffs for SMS and may lead to a decrease in XL’s revenue generated from SMS and affect its profitability.
4.2.3 Dialog (i) Dialog’s operational activities have been and may continue to be affected by political instability and armed conflict. The government of Sri Lanka (“GoSL”) was engaged in a protracted civil war since 1983, primarily in the Northern and Eastern provinces of the country, with the Liberation Tigers of Tamil Eelam (“LTTE”). On February 22, 2002, the GoSL and the LTTE signed a Norwegian facilitated cease-fire agreement, leading to a cessation of hostilities. In April 2003, the LTTE suspended their participation in peace talks. The peace talks were resumed in 2006 following the election of a new president. However, the negotiations only lasted for a few months. In the third quarter of 2007, the GoSL succeeded in liberating the Eastern province from the LTTE and was working to reach a consensus with all political parties for a negotiated settlement. However, the ceasefire formally ended on January 16, 2008. Dialog intermittently suspended its services in certain parts of the Northern and Eastern provinces of Sri Lanka during the first half of fiscal 2007 as a result of hostilities between the GoSL and the LTTE. As a result of the conflict, Dialog’s plans for the expansion of its services in the Northern and Eastern provinces of Sri Lanka could be cancelled or suspended, resulting in a loss of revenue and investments in those regions. Although Dialog’s revenue, subscribers and capital investments are presently largely concentrated outside the Northern and Eastern provinces, the conflict would also be expected to reduce aggregate economic activity in other parts of the country and may adversely affect Dialog’s business and financial condition. The net impact of the conflict is expected to be one of loss of assets in the Northern and Eastern provinces of Sri Lanka, and slower earnings growth rates. The resulting reduction in GDP and per capita income growth levels may reduce Dialog’s profitability and prospects. 4. RISK FACTORS (cant’d) (N) Dialog faces competition from other operators and may face competition from new market entrants that may adversely affect its business, results of operations, financial condition and prospects. Dialog faces competition from Mobitel (Pvt) Ltd., Celltel Lanka (Pvt) Ltd (“Celltel LankafTigo”) and Hutchison Telecommunications Lanka (Pvt) Limited (“Hutch Sri Lanka”) as well as a new entrant, Bharti Airtel, in terms of coverage, service portfolios and price. Increasing competition may also arise from other new mobile telecommunications operators in Sri Lanka. In addition to the current service providers, the Minister in charge of telecommunications in Sri Lanka may license additional telecommunications service providers in the future, who may compete with Dialog. The price pressure, cost of acquisition and reducing margins may adversely affect Dialog’s business, results of operations, financial condition and prospects.
4.2.4 TMIB (i) TMIB operates in a highly competitive environment. TMIB operates in a highly competitive environment with 5 other mobile competitors Grameenphone Ltd (“Grameenphone”), Banglalink, Pacific Bangladesh Telecom Limited (“Citycell”), Teletalk Bangladesh Limited (“Teletalk”, the mobile arm of an incumbent operator) and Warid Telecom International Ltd (“Warid Telecom”). In addition, new entrants in the form of regional PSTN operators have emerged. This has increased the pressure on mobile tariffs. TMIB’s market share has also declined to 20.4% as of December 31, 2007 from 31.6% as of December 31,2005, according to Frost & Sullivan. (N) TMIB operates in a highly regulated telecommunications market with increasingly stringent oversight by the regulator. Changes in laws, regulations or governmental policy affecting its business activities could adversely affect its financial condition, results of operations and prospects. The telecommunications business in Bangladesh is SUbject to governmental regulation regarding licensing, competition, frequency allocation and costs and arrangements pertaining to interconnection and leased lines. Those regUlations may adversely affect TMIB’s opportunities in Bangladesh. The government of Bangladesh has not yet enacted policies on 3G and WiMax. Changes in laws, regulations or governmental policy affecting TMIB’s business activities could adversely affect its financial condition, results of operations and prospects. In Bangladesh, local regUlators have significant latitude in the administration and interpretation of telecommunications licenses and recently the local regulator has taken an increasingly stringent approach to regulation. The BTRC had in the past alleged that TMIB had been involved in the illegal operation of Vol P services in violation of the terms of its license as well as certain statutory provisions. Following a series of meetings between the BTRC and TMIB, the parties agreed to a settlement of the matter by execution of an agreement with a provision for payment of an administrative fine of BDT1.45 billion by TMIB under the BTA, which was expensed and fully paid in 2007. Any future unfavourable decisions by Bangladeshi regUlators, including the amendment or revocation of any existing licenses, could adversely affect TMIB’s financial condition, results of operations and prospects. 4. RISK FACTORS (cont’d) (iii) TMIB is in the process of applying for approvals for most ofits BTS. In the course of building and expanding its network, TMIB constructed BTS throughout Bangladesh. The approvals of local council, the Civil Aviation Authority (if such construction is in the vicinity of an airport) and the Department of Environment are required for the erection of any installation and its use by any person or authority. As of Latest Practicable Date, TMIB had 4,005 BTS located throughout Bangladesh, of which most currently do not have the full approvals required. TMIB is in the process of applying for approvals for all of these sites. It has been recently reported that in an industry-wide move, the relevant authorities have begun to enforce the requirement that all operators in Bangladesh must obtain the necessary approvals and have issued notices to demolish structures that do not have such approvals. While TMIB is in the process of applying for approvals together with the other operators, there can be no assurance that the relevant authorities will grant approvals for all its sites. If such approvals are not obtained, the relevant towers may have to be relocated, which may cause significant disruption to TMIB’s operations and adversely affect TMIB’s financial condition and results of operations.
4.2.5 TMIC (i) Legal and economic reforms in Cambodia may adversely affect TMIC. Cambodia is an emerging market, with its economy, laws and regulatory regimes in a relatively early stage of development and not as well established as those of other more developed countries. Cambodia is in the process of implementing economic and legal reforms. Furthermore, it is difficult to predict or anticipate future developments, as the Cambodian legal system is undergoing and expected to continue to undergo substantial change. As the legal system of Cambodia develops, there remain inconsistencies in laws and regulations, difficulties in implementation of laws and time delays before prior laws are updated to accord with newer regulations and laws. Further, Cambodia officially joined the World Trade Organisation (“WTO”) in October 2004 and in conjunction with the accession to the WTO, the Cambodian government has been in the process of preparing and submitting to its National Assembly laws covering a wide range of areas from judicial systems and law making to private business, foreign direct investment, capital markets regulation and international trade that will re-write Cambodia’s legislative and regUlatory infrastructure. We are unable to ascertain the impact of such new laws and regUlations on TMIC’s results of operations and financial condition. Any unfavourable new laws and regulations or implementation thereof may result in an adverse effect on TMIC’s results of operations, business and prospects. Although current foreign investment laws in Cambodia prohibit the nationalisation of foreign investments without full compensation and allow for repatriation of investment profits, there is no assurance that mandatory nationalisation or restrictions on foreign currency repatriation will not be implemented in the future, whether due to changes in economic or political agendas or whether motivated by national interests. In such an event, there is no assurance that our investment in TMIC will not be adversely affected. 4. RISK FACTORS (cont’d) (ii) The telecommunications law of Cambodia is in the process ofbeing adopted. Currently, the Ministry of Posts and Telecommunications of Cambodia (“MPTC”) is responsible for the regulation, administration and management as well as licensing of telecommunications services. The Cambodian government is in the process of deveioping and implementing policy reforms to the telecommunications sector. In connection with such reforms, the telecommunications law of Cambodia (“Law on Telecommunications”) is in the process of being adopted. There is no known timetabie as to when the Law on Telecommunications will be passed. Once the Law on Telecommunications is passed, a regulatory authority is expected to be established. The regulatory authority will be responsible for implementing and enforcing the Law on Telecommunications as well as telecommunications regulations. However we are unable to predict how it will be impiemented and interpreted. The administration of laws and regulations by Cambodian government agencies is SUbject to considerable discretion and, in many areas, the legal framework is vague, contradictory, not comprehensive and subject to varying interpretation. There can be no assurance that the adoption and implementation of the Cambodia Telecommunications Law against the broad telecommunications sector reforms will not have an adverse effect on TMIC’s results of operations, financial condition and prospects. (iii) TMIC faces competition from well-established Cambodian mobile telecommunications industry incumbents and may face competition from new market entrants that may adversely affect its business, results ofoperations, financial condition and prospects. The Cambodian mobile telecommunications market is competitive. According to Frost & Sullivan, TMIC’s most prominent competitors are Mobitel, the country’s largest mobile telecommunications service provider with a market share of 67.3% as of December 31, 2007, and Camshin, a joint venture owned by Thailand’s Shin Satellite Pic of Shinawatra Corporation and Asia Mobile Holdings Pte Ltd, with a market share of 19.1% as of December 31,2007. As of December 31, 2007, TMIC had a market share of 12.7%, according to Frost & Sullivan. Increasing competition is anticipated to arise from other new mobile telecommunications operators in Cambodia. In addition to the current service prOViders, the independent regulatory authority which will be established after the Cambodia Telecommunications Law is passed, may also license additional telecommunications service providers in the future, which may compete with TMIC. New and existing mobile telecommunications service providers may significantly increase subscriber acquisition costs by offering more attractive product and service packages, resulting in higher average monthly churn, lower ARPU or a reduction, or slower growth, in TMIC’s subscriber base. There is no assurance that TMIC’s business, results of operations, financial condition and prospects may not be adversely affected. (iv) TMIC may not be able to obtain financing from financial institutions in Cambodia, if necessary, to fund its capital expenditure requirements due to the “Single Customer Limit” policy imposed by the National Bank of Cambodia on all banks in Cambodia. TMIC is currently expanding its networks, operations and services, all of which will reqUire significant capital expenditures. It also requires capital to service license fee payments and other expenditures. Financial institutions in Cambodia are subject to legal lending limitations based on their capital base which only allow each bank to lend a maximum of 20% of its net tangible assets to a single customer. As many of such financial institutions have relatively small capital bases, TMIC may not be able to obtain sufficient funding locally. Cambodia also imposes a withholding tax of 14.0% on interest payments to foreign lenders, thereby further restricting TMIC’s ability to obtain additional financing. We cannot assure you that TMIC will be able to obtain financing in Cambodia and TMIC may be required to obtain financing from foreign lenders. 4. RISK FACTORS (cont’d)
4.3 RISKS RELATING TO MALAYSIA AND THE ASIAN REGION 4.3.1 Political, economic and social developments in Malaysia and other Asian countries may adversely affect our Group. As a substantial portion of our Group’s operating revenues are derived from activities in Asia, in particular Malaysia, Indonesia and Sri Lanka, our Group’s business, prospects, financial condition and results of operations may be adversely affected by political, economic and social developments in the Asian countries in which we operate. In mid-1997, following the substantial depreciation of the THB, many countries in Asia, including Malaysia, experienced a significant economic downturn and related economic, financial and social difficulties. As a result of the decline in value of a number of the region’s currencies, many Asian governments and companies had difficulty in servicing foreign-currency denominated debt and many corporate customers defaulted on their debt repayments. As the economic crisis spread across the region, governments raised interest rates to defend weakening currencies, which adversely impacted domestic growth rates. In addition, liqUidity was substantially reduced as foreign investors withdrew or reduced investment in the region and domestic banks restricted additional lending activity. The currency fluctuations, as well as higher interest rates and other factors, materially and adversely affected the economies of many countries in Asia. A recurrence of similar adverse economic developments in Asia could have a material adverse effect on Malaysia and its economy and consequently on our Group’s financial condition and results of operations. In addition, any other adverse change in trends or a general economic slowdown as a result of changes in labour costs, inflation, interest rates, taxation or other political or economic developments in the key markets in Asia in which our Group operates could materially affect the financial condition or results of operations of our Group and the ability of our Company to pay dividends on our Shares. Any change in government policy or any political instability arising from these changes, may have a material adverse effect on our Group, its business, operations, financial condition and prospects. Furthermore, any changes in the composition of governments could result in a change in policies, including with respect to the telecommunications industry in the Asian markets in which we operate, which may result in increasing competition and/or increasing regulation of our Group’s activities. For example, in Malaysia’S general election held on March 8, 2008, the Barisan Nasional coalition secured 62% of the seats in parliament, slightly short of the two-thirds majority required for any changes to the constitution of Malaysia to be passed. The opposition was able to form the state government in 5 of Malaysia’s 13 states, up from only 1 state previously. It is unclear whether or how this may impact Malaysia’s economic growth investment prospects and telecommunications regulations. Any change to the regulation of our Group’s telecommunications, activities may have a material adverse effect on our Group’s business results of operations and financial condition. Other political and economic uncertainties include but are not limited to the risks of war, terrorism, riots, expropriation, nationalism, renegotiations or nullifications of existing contracts, changes in interest rates and methods of taxation.
4.3.2 The outbreak of an infectious disease in Asia may negatively impact our Group’s business, financial condition and results ofoperations. Demand for much of our Group’s products may be affected by, among other things, the strength or weakness of the Malaysian economy as well as the economies of other Asian countries. An infectious disease outbreak in Malaysia or other parts of Asia could have a significant impact on the Malaysian economy as well as the economies of other Asian countries which could lead to a decline in the Malaysian economy or the economies of other Asian countries, as the case may be, which may have a material adverse effect on our Group’s business, financial condition and results of operations. An epidemic or outbreak could also require quarantine and other safeguard measures resulting in temporary closures or work stoppages at our Group’s main office and branches, which may also have a material adverse effect on our Group’s business, financial condition and results of operations. 4. RISK FACTORS (cont’d)
4.3.3 Natural disasters in certain of the Asian countries in which we operate could disrupt the economy ofsuch countries and our business. We have significant operations in Indonesia through XL. The Indonesian archipelago is one of the most volcanically active regions in the world. As Indonesia is located in the convergence zone of 3 major lithospheric plates, it is subject to significant seismic activity that can lead to destructive earthquakes, tsunamis, tidal waves and volcanic eruptions. In December 2004, an underwater earthquake off the coast of Sumatra caused a tsunami that devastated coastal communities in Indonesia, Thailand and Sri Lanka. In Indonesia, more than 220,000 people died or were recorded as missing in the disaster. Aftershocks from the December 2004 tsunami also claimed casualties. Indonesia has also experienced major earthquakes in 2006 and 2007. On September 12, 2007, a strong tremor measuring 8.4 magnitude struck Bengkulu, southern Sumatra, resulting in more casualties. Most recently, a 7.2 magnitude earthquake struck Sumatra on February 25, 2008. A significant earthquake or other geological disturbance in any of Indonesia’s more populated cities and financial centres could severely disrupt the Indonesian economy and undermine investor confidence and have a material adverse effect on our business, financial condition, results of operations and prospects. Our operations in other countries may also be subject to severe local weather conditions such as floods and lightning strikes which may cause damage to our networks and disrupt our operations and services. For example, in Malaysia, Johor and Kuala Lumpur were hit by severe flash floods in January and June 2007, respectively and in Bangladesh, Chittagong had floods and mudslides in June 2007. Other parts of Bangladesh also experienced floods in August and September 2007 and was hit by Cyclone Sidr on November 15, 2007, which caused over 2,000 deaths and severe damage. 4.3.4 Depreciation of the currencies in which we conduct operations and exchange rate fluctuations as well as changes in fiscal policies in the countries in which we operate may adversely affect our Group. BNM, Malaysia’s Central Bank, has in the past intervened in the foreign exchange market to stabilise the Ringgit Malaysia and on September 1, 1998, fixed the exchange rate of the Ringgit Malaysia to the USD at RM3.80 to USD1.00. On july 21, 2005, BNM announced that the exchange rate of the Ringgit Malaysia will be allowed to operate in a managed float, with its value being determined by various economic factors. BNM had stated that it would monitor the exchange rate against a currency basket to ensure that the exchange rate will not deviate significantly from the current exchange rate, which may result in significantly higher domestic interest rates, liquidity shortages or other exchange controls. However, there is no assurance that BNM will continue this policy in the future or that it will be successful in doing so. There can be no assurance that the Government will not impose more restrictive or other foreign exchange controls. If the currencies of various countries in which we conduct our operations fluctuate relative to the Ringgit Malaysia, which we use as our reporting currency in our financial statements, these fluctuations may result in higher or lower financial numbers after translation into Ringgit Malaysia. Major devaluation or depreciation of any such currencies may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert such currencies into Ringgit Malaysia and other currencies. In addition, the governments of certain countries in which we operate, such as India, have instituted, and other countries may in the future institute, restrictive exchange rate policies that limit or restrict our ability to convert their respective currencies into other currencies or to transfer other currencies out of their jurisdictions. We cannot assure you that currency fluctuations or limitations on our ability to convert or transfer currencies would not have a material adverse effect on our financial condition and the results of our operations. 4. RISK FACTORS (cont’d) Further, the value of certain of the currencies in which we conduct our operations such as IDR have historically been subject to depreciation against the USD and the currencies of other developed countries. Fluctuations in exchange rates may adversely affect our business, financial condition, results of operations and prospects in various ways. For example, as of December 31, 2007, on a Post Acquisition Proforma basis, 33.7% of our indebtedness is denominated in USD and substantially all of our capital expenditures are either denominated in USD or denominated in local currencies that are affected by international USD prices. In particular, the prices of most of our network equipment are based on international USD prices. However, a substantial portion of our other operating expenses and revenues are denominated in local currencies. Thus, fluctuations in exchange rates, especially in the relative values of the USD and the RM, IDR or SLR, will affect our costs and our net operating profits.
4.3.5 Non-compliance with policies and rules pertaining to foreign ownership in Malaysian telecommunications business may result in sanctions. The foreign equity restrictions stipulated under the Guideline on the AcqUisition of Interest, Mergers and Take-Overs by Local and Foreign Interests issued by the FIC apply to our Company whereby the FIC’s approval is required for, amongst others, any proposed acquisition of shares in our Company which is RM10 million or more in value or which results in a single foreign shareholder holding 15% or more of our total issued capital or the aggregate foreign shareholding of our total issued capital increasing to 30% or more, with the exception of open market acquisitions on Bursa Securities meant for short term holding, which only requires notification to the FIC. Approval to hold foreign shareholding beyond the thresholds stated above is at the discretion of the FIC. Based on the Record of Depositors and Register of Members of TM as of Latest Practicable Date at Listing, the Malaysian local direct ownership in our Company is expected to represent approximately 78.0% of our total issued Shares. However, once our Shares are listed, it would not be possible to restrict any transfer of Shares to ensure compliance with any policy limiting foreign ownership in our Company. We are unable to ascertain the risks we may be subject to in the event the Government chooses to enforce any foreign ownership restriction policy. It is also not known if any penalties or requirements (if any) would be imposed by the Government to sanction or remedy non-compliance with any such policy. In addition, any limitation on foreign beneficial ownership of our Company may adversely affect our ability to raise additional foreign equity or convertible debt financing in the future. The MCMC has indicated that foreign equity restrictions applicable to our Malaysian subsidiaries holding individual licenses issued under the CMA are as follows: (i) the maximum foreign shareholding for a network facilities provider individual licensee and a content applications service provider individual licensee is 30%; and
(ii) the foreign shareholding limit for a network service provider individual licensee is generally 49%. However, the MEWC may, on a case to case basis, permit foreign shareholding up to a maximum of 61 % to be reduced to 49% within 5 years.
Individual licenses: (i) have license conditions which stipulate the maximum foreign shareholding allowed in the licensee; or
(ii) have a general condition only that requires the licensee to comply with relevant laws and guidelines pertaining to restrictions on foreign shareholding in the licensee. However, the MCMC has indicated that these licensees will need to comply with the policy mentioned above even though there is no specific foreign shareholding limit stipUlated in the license.
4. RISK FACTORS (cont’d) It is unclear whether foreign shareholding refers only to direct foreign shareholding only or also to the ultimate foreign beneficial ownership. In the event that the Malaysian authorities deem foreign shareholding to include ultimate foreign beneficial ownership, an increase in foreign shareholding in our Company may also result in the foreign shareholding limits in our Malaysian subsidiaries holding individual licenses being exceeded, which in turn would result in a breach of their license conditions. Non-compliance with any individual license condition, including those pertaining to foreign shareholding restrictions, may result in the suspension or cancellation of the individual licenses.
4.4 RISKS RELATING TO OUR SHARES 4.4.1 There has been no prior market for our Shares. There has been no prior trading market for our Shares. There can be no assurance as to the liquidity of any market that may develop for the Shares, the ability of holders to sell their Shares or the prices at which holders would be able to sell their Shares. 4.4.2 Any future equity offerings by us could lead to dilution of your shareholding or adversely affect the market price of our Shares. Subsequent to our Listing, we may fund our operations, expansion and/or capital expenditure through the issuance of equity and equity-linked securities in our Company. At the same time, our management will also monitor market conditions and plan our fund raising programmes accordingly. Any equity issued by our Company will dilute the shareholdings of existing shareholders and could also have a material adverse impact on our market share price.
4.4.3 Our Company’s share price may be volatile. The price of the Shares may fluctuate as a result of variations in operating results. If the trading volume of the Shares is low, the price fluctuations may be exacerbated. Since our Group’s prospects are linked with technology, and our Group and our businesses are to a great extent driven by technology, the price of the Shares may rise and fall in tandem with announcements of technological or competitive developments, acquisitions or strategic alliances by our Group or our competitors. The price of the Shares, as are typical of those of companies in telecommunications sectors, are also prone to news regarding the gain or loss of significant subscribers or key personnel, as well as changes in securities analysts’ estimates of its financial results or recommendations. 4.4.4 As a holding company, we rely on the ability of our operating companies to generate earnings and pay dividends to us, and any decline in the earnings of our operating companies or their ability to pay dividends to us would materially and adversely affect our performance and operational flexibility. Our Company conducts all of our operations directly or indirectly through our operating companies and we have no significant operations of our own. Most of our assets are held by, and SUbstantially all of our earnings and operating cash flows are attributable to, our operating companies. Accordingly, an important source of our Company’s income, and consequently an important factor in our Company’s ability to pay dividends on the Shares, is dividends and other distributions received from our subsidiaries and associates. Each of our operating companies’ ability to pay dividends or make other distributions to our Company are subject to any restrictions contained in any financing arrangements or loan agreements which may limit dividends unless the prior written consent of the lenders is obtained, as well as to it having sufficient funds which are not needed to fund its operations, other obligations or business plans. We cannot assure you that our operating companies will generate sufficient earnings and cash flows to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends. Restrictions on the ability of our operating companies to pay dividends to us may adversely impact our operational flexibility and growth prospects. 4. RISK FACTORS (cont’d) Further, as our Company is a shareholder in our operating companies, our claims as such will generally rank junior to all other creditors and claimants against our operating companies. In the event of an operating company’s liquidation, there may not be sufficient assets for our Company to recover our investment. For a description of our Company’s dividend policy, see “Section 7 Dividend policy”. 4.4.5 The sale or the possible sale of a substantial number of our Shares in the public market following the Listing could adversely affect the price ofour Shares. Any future sale or availability of our Shares in the public market can have a downward pressure on our market share price. The sale of a significant amount of our Shares in the public market after the Listing, or the perception that such sale may occur, could materially and adversely affect the market price of our Shares. These factors may also restrict our opportunities to issue additional equity securities. (The rest of this page has been intentionally left blank)