4. RISK FACTORS 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO ALL THE OTHER RELEVANT INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, BEFORE MAKING AN APPLICATION FOR OUR IPO SHARES. IF YOU ARE IN ANY DOUBT AS TO THE INFORMATION CONTAINED IN THIS SECTION, YOU SHOULD CONSULT YOUR STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR OTHER PROFESSIONAL ADVISERS. 4.1 RISKS RELATING TO THE INDUSTRIES IN WHICH OUR GROUP OPERATES 4.1.1 Inherent business risk associated with the commercial laundry equipment and medical devices industries in Malaysia Our Group is principally involved in the distribution of equipment specialising in the commercial laundry equipment and medical devices industries in Malaysia. As such, our Group is exposed to market fluctuations caused by economic cycles, political environment, inflation as well as fluctuations in foreign currencies, which could in turn, adversely affect our business, operations and financial performances. Thus, the viability of our business depends to a large extent on the current and future demand and supply conditions of both the commercial laundry equipment and medical devices industries in Malaysia. However, there can be no assurance that any changes in the market conditions impacting the commercial laundry equipment and medical devices industries in Malaysia caused by economic slowdown or shifts in demand, which are beyond our control will not occur. Specific examples of inherent business risk associated to the commercial laundry equipment and medical devices industries in lV1alaysia are as follows:(a) Commercial laundry equipment industry In the commercial laundry equipment industry, the level of demand can also be influenced by the performance of the general Malaysian economy which affects the decision by launderette operators to make investments to set-up new launderette outlets or replace their old commercial laundry equipment. In this regard, our Group will continue to monitor changes in market conditions as well as adopt prudent management and efficient operating procedures to adapt to any negative changes in the commercial laundry equipment industry. We have taken note that the commercial laundry equipment industry in Malaysia stood at RM201.1 million in 2015 and is expected to reach RM271.3 million in 2020. The commercial laundry equipment industry in Malaysia is projected to grow at a CAGR of 4.3% for the 2016 to 2020 period. The positive outlook on the demand for commercial laundry equipment in Malaysia is mainly attributed to the fundamental societal changes that drive demand for commercial laundry services. The commercial appeal of launderettes also drives investment in vended commercial laundry equipment. In addition, the increasing demand from the hospitality industry and healthcare sector also contributes to the growth of this industry. Besides that, the steady population growth, automation innovation (such as the introduction of tunnel or continuous batch washers that has led to the increase in productivity as well as reduction in the usage of water and energy by two-thirds as compared with old-style batch washers) and replacement of aging commercial laundry equipment are also expected to drive the future growth of the commercial laundry equipment industry. On the supply side, the push for greener commercial laundry equipment is also expected to have a positive impact on the commercial laundry equipment industry as it will appeal to modern consumers who are more inclined to adopt environmentally friendly practices, while also patronising businesses that boast eco-friendly products and services. 4. RISK FACTORS (Cont’d) (b) Medical devices business segment Growth in the medical devices industry depends on various factors, such demographic factors (which are driven by factors such as a rise in incidences in chronic diseases, growing ageing population, and increased accessibility to healthcare services due to growth in income levels) increases in public and private healthcare expenditure on healthcare products and services, as well as growth in medical tourism. Any changes in public and private healthcare expenditure may have an impact on the spending on medical devices and equipment. In private hospitals, the purchase of our products could be reduced due to lowering or tightening of hospital budgets. In addition, any reduction on public healthcare expenditure could negatively impact the sales of our products. In this regard, our Group will continue to monitor changes in market conditions as well as adopt prudent management and efficient operating procedures to adapt to any negative changes in the medical devices industry. We have taken note that the medical devices industry in Malaysia is valued at RIV,10.24 billion in 2015 and is expected to reach RM17.41 billion in 2020. The medical devices industry in Malaysia is projected to grow at a CAGR of 11.2% for the 2016 to 2020 period. The positive outlook on the demand for medical devices in Malaysia stems mainly from Malaysia’s growing and ageing population, the groWing prevalence of chronic lifestyle diseases and increasing healthcare expenditure on healthcare services, leading to greater demand for use of medical devices, the increasing number of healthcare proViders and a growing healthcare travel industry. On the supply side, the industry is expected to be boosted by strong government support and the presence of established supporting industries. The availability of more medical devices in the market is expected to further support the growth of distribution segment as authorised representatives and distributor remain vital in their role as an integral link between the manufacturers and end-users. 4.1.2 Competition from other industry players We face competition from both existing and new distributors and suppliers of commercial laundry eqUipment and medical devices who carry other competing brands of commercial laundry equipment and medical deVices, including imports. Some may have longer operating histories, international brand name recognition and greater financial, technical and marketing resources than what is available to us. Generally, the biggest challenge for a distributor is to maintain and increase its market share. Stiff competition from other new and existing distributors and suppliers may result in competitive pricing strategies that would affect our profit margin. Our continued success depends on numerous critical factors which include the ability to strategise the pricing and marketing for our range of products, spare parts, accessories and consumables, improved after-sales and customer services, nurture customer loyalty, ensuring prompt delivery, as well as offering high quality range of products that meet the demand at competitive prices. Increase in competition may potentially cause us to lose market share and consequently, a negative impact on our competitive strengths and pricing strategies. If we are unable to compete effectively with existing or future competitors and adapt qUickly to changing market conditions and trends, our business and financial performance could be materially and adversely affected. Failure to do so may negatively impact our Group’s track record and industry reputation, leading to a loss of business to our competitors and damage to our overall business performance. There can be no assurance that our Group will continue to be able to compete successfully with the other competitors and new entrants in the future, which could have a material adverse effect on our business, financial condition and results of operations. 4. RISK FACTORS (Cont’d) Nevertheless, we believe that our competitive advantages and key strengths, as disclosed under Section 6.2 of this Prospectus, would provide us with the platform to compete effectively within the industries we operate in and continue to grow our business. 4.1.3 Political, economic and regulatory risk in the Malaysian market Our financial and business prospects, and the prospects of the industries in which we operate, will depend to some degree on the developments of the political, economic and regulatory front in the Malaysian market. Amongst the political, economic and regulatory factors are changes in inflation rates, interest rates, foreign exchange rates, war, terrorism activities, riots, expropriations, changes in political leadership and unfavourable changes in government policies and regulations. Any adverse developments in the political, economic and regulatory conditions in Malaysia could materially affect the financial position and business prospects of our Group. Notwithstanding the above, we have not experienced any adverse political, economic and regulatory changes which have had a material adverse impact on our business operations in the past. However, there can be no assurance that adverse political, economic and regulatory changes, which are beyond our control, will not materially affect our Group’s businesses in the future. 4.1.4 Potential liability and/or disruption to our medical devices business segment in the event of non-renewal or revocation of the Establishment Licenses and failure to register medical devices under the MDA Act and MDR Act Under the MDA Act and MDR Act, we are required to obtain the Establishment License to carry on our business activities in importing, exporting and placing medical devices in Malaysia. In addition, we are also required to register each and every medical device which falls within the specific categories under the IVIDA, prior to its placement in the market. As at the LPD, although we have obtained Establishment Licenses for the operations of Best Contact and Maymedic, failure to fulfil the conditions attached thereto, as well as the relevant laws, rules and regulations that the Establishment Licences are subject to, may result in fines, penalties being imposed on us and/Qr the revocation of the Establishment Licences by the MDA. Additionally, upon expiry of the Establishment Licenses, there may also be a risk of non-renewal by the MDA. In such instances, our business, financial condition and results of operations may be adversely affected as we would no longer be legally permitted to act as importers and distributors of medical devices in Malaysia. We have also submitted various applications to register the medical devices that we are currently distributing with the IVIDA, within the timeframe stipulated under the MDA Act and the ministerial orders issued by the Minister of Health, Malaysia thereunder, which was by 30 June 2016. As at the LPD, we have submitted a total of one hundred and ten (110) applications in total to the MDA, of which fifteen (15) applications have been approved by the MDA. Pending the results of our application, we are permitted to continue distributing our medical devices for which submissions have been made on or before 30 June 2016. However, in the event any of our applications is rejected by the IVIDA, we will be forced to cease the distribution of such medical device (which application has been rejected) and this may adversely affect our revenue and sales as well as our business operations. We recognise the importance of obtaining the Establishment Licenses and the successful registrations of our medical devices as well as the timely renewal of these Establishment Licenses and registrations of medical devices upon its expiry. We will strive to fulfil all conditions imposed by the relevant authorities for the issuance and/or approval as well as the renewal of the aforesaid Establishment Licenses and registrations of medical devices. Whilst we continuously ensure compliance with the relevant regulatory requirements, there can be 4. RISK FACTORS (Cont’d) no assurance that any fines or penalties, if imposed, will not have a material adverse impact on our financial performance in the future. There can also be no assurance that an event will not arise in the future which will lead to the revocation of our Establishment Licences by the MDA. As at the LPD, we are awaiting the results of the remaining ninety (95) applications for the registration of our medical devices. There can be no assurance that the MDA will approve the registration of such medical devices to enable us to continue distributing and placing all of our products in the market. 4.1.5 Adoption of new technologies and anticipate changes in customer preferences Our products and services are subject to the evolving industry standards and new product introductions, improvements, innovations and enhancements. Demand for our products is influenced by customer preference and spending trend. For the commercial laundry equipment business segment, our customers have shown preference for products and technologies that feature new electronic controls facilitating ease of use, efficiency in terms of performance, have environmentally friendly features and require low energy and water consumption. For the medical devices business segment, our customers reqUires updated development on the medical devices including the material that it is made of, the design of the machine as well as its application in diagnosing, preventing, monitoring of illnesses and diseases, in order to keep up with the latest healthcare trend. Demand for our range of products and services are also affected by the technological advancement which may alter the demand for our range of products and services. Demand is also influenced by external factors including, amongst others, the state of the economy (i.e. Malaysia’s GDP), the income level of consumers (i.e. launderette outlets’ customers and hospital patients) and changes in the consumers’ demographic profiles (i.e. economic status, level of education, age and employment). As such, the industries that our Group participates in require us to continuously keep abreast with the latest models and brands introduced in the market as well as to keep updated with the latest customer preferences to remain relevant and in demand. Sales of our range of products and marketing strategies may be significantly impacted in the event our competitors introduce new products’ that has newer technologies resulting in better features. This may in turn lead to a lower demand for our range of products. Our Group’s prospects, financial position, operating results and profitability may be materially and adversely affected in the event that our range of products is unable to appeal to the changing requirements of our customers. Furthermore, the need for replacement, upgrading or maintenance of such product may result in an increase of the cost of prOViding, or reduce the demand for our products and services. Hence, our Group’s future growth and success would significantly depend on continuing market acceptance of the portfolio of our products and services to meet the needs of our customers. To minimise this risk, we are working very closely with our international brand manufacturers to gain a good understanding and gUidance on the latest or up-and-coming commercial laundry eqUipment and medical devices models as well as its related spare parts, accessories and consumables, to match our customers’ preferences and trends. In addition, we have established marketing strategies to maintain and increase our customer base, to capture a bigger market share and increase our revenue. Additionally, we will continuously seek to improve our customer service in order to obtain feedback from our customers for our service standards and marketing strategies. However, there can be no assurance that we will be able to successfully anticipate technological changes and to introduce new products and services in a timely and cost effective manner. Such circumstances may in turn adversely affect our business operations and financial performances. 4. RISK FACTORS (Cont’d) 4.1.6 Exposure to fluctuation in the foreign currency exchange rates A significant proportion of our purchases are transacted in foreign currencies such as the USD and ELlR, whilst our revenues are mainly denominated in RI’v1. Hence, our Group’s profitability will be affected by foreign currency exchange rates fluctuation. The following is the breakdown of our Group’s purchases made during the financial years/period under review:FPE 31 March FYE 2012 FYE 2013 FYE 2014 FYE 2015 2016 RM’OOO 0/0 RM’OOO 0/0 RM’OOO 0/0 RM’OOO 0/0 RM’OOO 0/0
Purchases transacted in foreign currencies (mainly 7,109 59.6 21,226 72.2 26,641 75.2 36,410 75.2 7,612 81.8 USD and EUR) Purchases transacted in RM 4,819 40.4 8,170 27.8 8,774 24.8 12,035 24.8 1,694 18.2 Total purchases 11,928 100.0 29,396 100.0 35,415 100.0 48,445 100.0 9,306 100.0
A depreciation of the RM against these currencies has affected the cost of our purchases. This may adversely affect our financial performance as it would reduce our profit margin. Whilst we can pass on our foreign exchange risks by increasing the selling price of our products to maintain our profit margin, such action would result in our products becoming less competitive in the market and this in turn may affect our sales volume. At present, we do not use any financial instruments to hedge our exposure against transactions in foreign currencies. However, we will continue to monitor our exposure to foreign currency movements on a regular basis for our management’s assessment on the need to utilise financial instruments to hedge our currency exposure, taking into account factors such as the foreign currencies involved, exposure periods and transaction costs. There can be no assurance that increases in our product costs (to the extent we are unable to pass on such higher costs to customers) or future price fluctuations will not have a material adverse effect on our business, financial condition and results of operations. 4.2 RISKS RELATING TO OUR BUSINESS AND OUR OPERATIONS 4.2.1 Dependency on our experienced Executive Directors and key management personnel We attribute our success to the leadership and contributions of our experienced Executive Directors and key management personnel. Our Group’s success also depends on our ability to hire, train and retain qualified and competent personnel. The loss of any of our Executive Directors or key management simultaneously or within a short span of time without any suitable and timely replacement, and our inability to attract or retain qualified and competent personnel may adversely affect our continued ability to compete and grow in the industries. We recognise the importance of attracting and retaining our Directors and key management and have in place competitive remuneration packages and rewards schemes. At the management level, we have also initiated succession planning for our Group whereby we groom the younger members of our management team to gradually take on more responsibilities. We have also put in place various measures as set out in Section 8.12 of this Prospectus to ensure a smooth management succession plan. 4. RISK FACTORS (Cont’d) However, there can be no assurance that the above measures will always be successful in retaining our Directors and key management or ensuring a smooth succession should changes occur. If we are unable to retain our Directors and key management and ensuring a successful management succession plan, our business operations may be adversely affected. 4.2.2 Dependency on our major customers Our Group’s major customer for the commercial laundry equipment business segment, namely City Coin Laundry Sdn Bhd had contributed approximately 25.9% and 16.5% to our Group’s revenue for FYE 2014 and FYE 2015, respectively. Our Group’s major customer for the medical devices business segment, namely KPJ Healthcare Group had contributed approximately 27.7%, 14.0%, 11.6%, 7.7% and 10.0% to our Group’s total revenue for the past four (4) FYEs 2012 to 2015 as well as FPE 31 March 2016, respectively. The loss of any of these major customers, if not replaced, may adversely affect our financial condition and results of our operations. (a) Mitigating factors on our dependency on City Coin Laundry Sdn Bhd We expect to reduce our dependency on City Coin Laundry Sdn Bhd in view of the setting up of various chains of launderettes by our other customers using Speed Queen brand of vended commercial laundry. Our Group’s continuous marketing efforts since FYE 2013 to create better awareness and increasing market acceptance by the selfservice launderette operators for the Speed Queen brand of vended commercia/laundry equipment (both washers and dryers), has enabled our Group to increase our distribution of the Speed Queen brand of vended commercial laundry equipment. In order to mitigate our dependency on City Coin Laundry Sdn Bhd, we plan to sustain our growth in the commercial laundry equipment business via the following:(i) Potential increase in the sales of Speed Queen brand of vended commercial laundry equipment in Malaysia resulting from our future plans to set up eleven
(11) new Speed Queen self-service launderette outlets around Malaysia within the next twenty four (24) months from the date of our Listing. These new Speed Queen self-service launderette outlets will put us in a better position to increase our visibility as a distributor of Speed Queen brand of vended commercial laundry equipment, particularly targeting prospective investors seeking commercial opportunities in the investments of self-service launderettes in Malaysia.
(ii) Continuing our Group’s brand building, sales and marketing efforts to strengthen our market position by undertaking promotional, advertising and marketing activities of our range of products and services. These include campaigns, promotions, online advertisements, billboards and other target based marketing activities. We believe our efforts in expanding our existing sales and marketing activities would increase brand awareness of our range of products and services in Malaysia.
(iii) According to IMR Report, the size (revenue) of the commercial laundry equipment industry in Malaysia is projected to grow at a CAGR of 4.3% for the 2016 to 2020 period and reach RM271.3 million in 2020. Based on the above, our management are of the view that the prospects of our Group in the commercial laundry equipment business segment would remain favourable. Furthermore, our competitive strengths and advantages are expected to ensure our business sustainability as well as providing a sound platform for our continued business growth. 4. RISK FACTORS (Cont’d) (b) Mitigating factors on our dependency on KPJ Healthcare Group According to the IMR Report, the number of hospitals and medical centres in Malaysia is expected to continue to increase steadily. The increasing number of these healthcare providers can only lead to an increasing pool of potential demand for medical devices. Under the 11th Malaysian Plan, the Malaysian Government has planned for the construction of six (6) new hospitals in Kemaman, Bentong, Pendang, Pasir Gudang and Maran in the Peninsular Malaysia. Upgrading works are expected to be implemented for three (3) existing hospitals, namely Hospital Tawau and Hospital Kota Marudu in Sabah and Hospital Miri in Sarawak. The Malaysian Government is also committed to the construction of the Sri Aman Hospital in Sarawak which is expected to be completed by 2018. Furthermore, Khazanah Nasional Berhad, the strategic investment fund of the Malaysian Government, also announced in September 2015, to committing a capital expenditure of RIVJ670 million between 2015 and 2017 through IHH Healthcare Berhad, for the expansion of existing private hospitals and construction of new hospitals in IVJedini Iskandar Johor, Johor, Kuala Lumpur, Wi/ayah Persekutuan, Klang, Selangor, Malacca and Kota Kinabalu. Khazanah I\lasional Berhad also announced its intention to invest approximately RM100 million in a new in-patient rehabilitation hospital over the next two years. The inpatient rehabilitation hospital business will be collaboration between Khazanah Nasional Berhad and a foreign technical operator and equity partner. Additionally, KPJ Healthcare Group has also planned to establish a minimum of two (2) new private hospitals per annum for the next five (5) years from 2016 to 2020, as part of their strategy for continued growth. In addition, the medical device industry in IVJalaysia has relatively high barriers to entry. A huge capital outlay is required to enter the medical devices industry largely due to the need to invest in manufacturing facility, high-end production equipment and machinery, technology licensing, marketing and branding activities, storage facility and manpower. I\lew entrants in all segments of the Malaysian medical devices industry are likely to encounter difficulties competing with incumbent market players. A medical devices industry requires technicallyskilled personnel and expertise from medicine and engineering background as well as from other related disciplines such as legal, regulatory, intellectual property and marketing. These specific expertise in relation to medical devices are required to develop a product, construct a medical facility for research and development and for use in hospitals and medical centres, to build network of suppliers and customers and to run a medical devices company. The medical devices industry in Malaysia is regulated by the IVJalaysia Government, and it is mandatory for all manufacturers, authorised representatives, importers and distributors whether local or foreign to register with the MDA as an establishment before they can undertake activities involve manufacturing, import, distribution and/or advertising of medical devices in Malaysia. (Source: IMR Report) Based on the above developments, our management is of the opinion that these developments are favourable for our Group and stand to provide the impetus for further revenue growth in our medical devices business segment. Our Group plans to capitalise on our competitive strengths to secure potential new business 4. RISK FACTORS ( Cont’d) from the latest industry developments in order to sustain our growth in the medical device industry. 4.2.3 Non-existence of long-term sales contracts with our customers We have not entered into long-term sales contracts with our customers, which are considered a normal practice in the industries that we participate in and prevailing customer practices. The absence of long-term sales contracts may result in the fluctuation of our Group’s sales and overall business performance. Separately, we rely on a key customer in our commercial laundry equipment business segment, namely City Coin Laundry Sdn Bhd which had contributed to approximately 25.9% and 16.5% to our Group’s total revenue for FYE 2014 and FYE 2015, respectively. The decision of City Coin Laundry Sdn Bhd to cease their product purchase from us may adversely affect our operating results. Over the years, our Group has established good working relationships with our customers which provide us with the platform for sustained business continuity and growth. Our Group will continue to enhance our value-added service proposition such as provision of on-site technical assistance, improve our after-sales service levels and maintain our competitiveness including broadening our product range and services as well as developing a more diversified portfolio of customers and markets in the future, both locally and internationally. In addition, our Group has maintained and will continue to maintain close business relationships with our customers and will continuously strive to meet our customers’ expectations by paying closer attention to their feedbacks and working in tandem with their requirements to improve our product and service quality. Notwithstanding the above, there can be no assurance that the absence of any long-term sales contracts with customers will not have an adverse effect on the business and financial performance of our Group in the long term. 4.2.4 Dependency on international brand manufacturers Our Group’s inventory consists of a comprehensive range of commercial laundry equipment and medical devices products. As at the LPD, our Group has been appointed as an exclusive distributor in Malaysia for a total of five (5) brands of medical devices, namely STERIS, Albert Browne, Hitachi, Medifa and Ziehm. As an exclusive distributor, our Group has secured a market for itself by ensuring that all retailers in Malaysia who want to purchase branded medical devices which are manufactured by the abovementioned international brand manufacturers, are reqUired to purchase them from us. We have also been appointed as the non-exclusive distributor in the Malaysian market for a total of ten (10) brands of commercial laundry eqUipment, namely Speed Queen, Huebsch, Lapauw, MaXi, Forenta, Renzacci, Jensen, Sen king, Domus and Sea Lion as well as seven (7) brands of medical deVices, namely Trilux Medical, CareStream, Quantum, MinXray, Newmed, General Electric and Elma. Although we have not obtained:(a) the exclusive distributorship rights for all ten (10) brands of commercial laundry eqUipment; and
(b) the exclusive distributorship rights for other brands of medical deVices, namely Trilux IVledical, CareStream, Quantum, MinXray, Newmed, General Electric and Elma
in the Malaysian market, we face reduced competition in distributing these brands as typically only a limited number of distributors are appointed for the Malaysian market. 4. RISK FACTORS (Cont’d) The loss of one or more of these distributorship arrangements could cause a reduction in the range of products distributed by our Group resulting in an adverse effect on our Group’s business. We face a risk of termination or withdrawal of our distributorship rights (exclusive and nonexclusive) from our international brand manufacturers. In the event that our distributorship rights (exclusive and non-exclusive) are being withdrawn for any reasons, there may be a negative impact on our Group’s financial performance. To mitigate the dependence on our international brand manufacturers, we have embarked on several initiatives such as hosting/making regular visits to their operation sites overseas. This would enable us to strengthen long-term relationship with our international brand manufacturers by creating close working relationship, understanding, cooperation and communications together in order to achieve fruitful and cordial manufacturer-distributor relationship in the long run. The strengthening of long-term relationship with our international brand manufacturers can help to raise the profile of our Group and provide valuable testimonials that underline our long-term commitment towards operating in the distribution of commercial laundry equipment and medical devices business segments. We also stand to be in a better position to secure new distributorships from new distributors given our established profile and operating track record as an established distributor of various brands of equipment specialising in commercial laundry equipment and medical devices. This would translate into broadening our manufacturer base and potential dilution in the dependency on a single manufacturer. From the date that our Group has been appointed as a distributor, we have not received any termination of our distributorship rights. Our Group has also established long-term working relationships with our distributors, with more than half of our existing international brand manufacturers maintaining more than five (5) years business relationship with our Group and we have not encountered any major problems in sourcing for our supplies. Nevertheless, we recognise the importance of not only relying on a limited base of manufacturers and will continually seek to diversify our manufacturer base. In addition, we are highly dependent on Alliance Laundry, which is one of our major international brand manufacturers for our commercial laundry equipment business segment. Alliance Laundry has accounted for 8.7%, 19.7%, 46.3%, 54.2% and 47.9% of our Group’s total purchases during FYE 2012, FYE 2013, FYE 2014, FYE 2015 and FPE 31 March 2016, respectively. The continued distribution of Speed Queen brand of vended commercial laundry equipment from Alliance Laundry is important to our future as we embark on an expansion drive to grow our commercial laundry equipment business segment. Any termination of business relationship with Alliance Laundry would have a negative impact on our Group’s future performance and prospects. However, our Group’s performance and relationship with Alliance Laundry have been strong and positive, whereby we have received various sales awards and recognitions from Alliance Laundry for the outstanding contribution to the sales volume of various brands of commercial laundry equipment in Malaysia. Kindly refer to Section 6.5.2 of this Prospectus of the various awards and recognitions received from Alliance Laundry. While our Group has endeavoured to diversify our manufacturer base in order to reduce the risk of an interruption in supplies, there can be no assurance that such endeavours will be successful and that any disruption in distribution would not have a material adverse impact on the operations of our Group. 4. RISK FACTORS (Cont’d) 4.2.5 Exposure to product warranty and liability claims We are involved in the distribution of third party brands of commercial laundry equipment and medical devices, spare parts accessories and consumables. As such, we are potentially exposed to the risk of product warranty and liability claims from our customers or by third parties for manufacturing defect and product liability claims for losses or damages suffered as a result of manufacturing defects, design defects or defective warnings or instructions, product contamination, inadvertent use of unsafe materials, sabotage and mechanical damages. Any substantial claims relating to our commercial laundry equipment and medical devices could have an adverse impact on our business operation and financial performance. Should there be a manufacturing and/or design defect, our Group will have the recourse to claim any liabilities made by our customers from the respective international brand manufacturers of the products. It is a common practice for the international brand manufacturers to recall these products, should there be a manufacturing and/or design defect, without any liability to be incurred by our Group. As such, our Group’s risk in relation to the product liabilities claims, defects, accidents and malfunctions is mitigated. As at the LPD, our Group has not been subjected to any material product warranty and liabilities claims which had adversely impacted our financial performance. The range of products, spare parts and consumables that we distribute must meet our customers’ requirements in terms of specifications and functionalities. Product warranties are given to our customers provided that similar warranties are obtained on a back-to-back basis from our international brand manufacturers, details of which are as follows:(a) Product warranty period for commercial laundry equipment generally cover up to twelve (12) months;
(b) Product warranty period for medical imaging equipment ranged up to twelve (12) months (depending of the type of equipment, spare parts or accessories); and
(c) Product warranty period for disinfection, sterilisation and surgical room equipment ranged up to twelve (12) months (depending of the type of equipment, spare parts or accessories).
Our technical team has the necessary qualification and experiences and has received training from our international brand manufacturers to provide technical support and maintenance services for the range of products to our customers. We have not purchased insurance coverage for product liability and we are thus not covered or compensated by insurance in respect of losses, claims and liability arising from or in connection with product liability. Should these events occur, our financial performance and position could be adversely affected. We firmly believe that with the experience and expertise of our Group and by working closely with our international brand manufacturers to ensure that prescribed prescription of our range of products are met, any defects in these products distributed is minimised. To mitigate the risk of defects occurring, our Group seeks to ensure that all international brand manufacturers which we deal with are trustworthy and reliable and have a good track record of its quality. However, there is no assurance that any repair or replacement works to be carried out during the specified defects liability period will not have a material and adverse impact on our Group’s financial performances. 4. RISK FACTORS (Cont’d) 4.2.6 Dependency on obtaining adequate financing to fund our operations There may be timing differences between our trade collections from our customers and payments to our international brand manufacturers. Normally, we are granted trade credit facilities of between 30 to 90 days by our international brand manufacturers, whereas our trade collections are between collections on delivery to 90 days. In the event that there are timing differences between the collection from our customers and payment to our international brand manufacturers, we are required to fund our purchases from our international brand manufacturers, either from internal resources or borrowings. If we are unable to secure adequate financing, our cash flows, operations, growth and expansion plans will be adversely affected. Our total borrowings as at LPD amounted to approximately RM5.29 million. Any increase in interest rates will adversely affect our profitability and financial position. We have not experienced any significant increase in interest rates levels which has resulted in a material adverse impact on our financial performance in the past. Although we strive to mitigate this risk through careful cash flow management and stringent credit control, there can be no assurance that this risk would not have an adverse impact on our operations and financial performances. 4.2.7 Credit risks of our customers Our financial performance and position are dependent, to a certain extent, on the creditworthiness of our customers. If circumstances arise that affect our customer’s ability or willingness to pay us, we may experience payment delays or in more severe cases, we may not be able to collect payment from our customers. Accordingly, we would have to make provisions for doubtful debts, or incur debt write-offs, which may have an adverse impact on our profitability. We generally grant our customers credit terms of 30 to 90 days for commercial laundry equipment and medical devices. We have in the past faced certain credit risk whereby our customers did not make payment within the credit period given to them. Details are as follows:FPE 31 March 2016
Business segments SteriIisation, Commercial Medical disinfection and laundry imaging surgical room Details equipment equipment equipment Total RM’OOO RM’OOO RM’OOO RM’OOO Amount owing beyond credit period (> 90 days) comprising: -Impaired -Not impaired 723 910 145 1,778 Subsequent collections up to LPD 297 810 59 1,166 As at LPD 426 100 86 612
Our trade receivables exceeding the credit period of more than 90 days, but not impaired, amounted to approximately RM1.8 million as at 31 March 2016. Such balances were mainly due to our customer’s inability to obtain payments from their respective customers, thus they were unable to make payment to our Group on a timely basis. As at the LPD, approximately RM1.1 million (representing 63.3% of the unimpaired balances as at 31 March 2016) have 44 4. RISK FACTORS ( Cont’d) been repaid by our customers, whilst the balance of approximately RMO.7 million which remains outstanding are trade receivables mainly from the distribution of on-premise commercial laundry equipment and medical imaging equipment to Government hospitals. We expect to continue our business dealings with these customers as they have been dealing with our Group for at least two (2) years. There is no assurance that we will be able to collect our debts on time, or at all. If our customers experience cash flow difficulties or a decline in their business performance, they may default in their payments to us. As a result, we may experience payment delays or in more severe cases, non-recovery of debts from our customers. We would then have to make provisions for doubtful debts, or incur debt write-offs, which may have a material adverse impact on our financial results. In mitigating our exposure to credit risk, we will assess the credit standing of the existing and prospective customers prior to accepting their orders. In addition, we regularly review our trade receivable ageing and monitor subsequent collection of debts. Our Group maintains proper follow up procedures which include sending out reminder letters, calls and field visits to recover the long outstanding debts. Although we strive to reduce this risk through our credit evaluation process, there can be no assurance that our customer’s credit risk will not have an adverse impact on our Group’s future financial performance. 4.2.8 No assurance that our future plans will be commercially successful In order to achieve our future plans as set out in Section 6.3 of this Prospectus, we rely on the availability and sustainability of human capital, financial, customer support, operational and other resources. The success of our future plans will be dependent upon, amongst others, our ability to successfully expand our products and services in the target markets that we intend to expand into, to successfully monitor the effectiveness of our Speed Queen concept stores, to hire and retain skilled management, as well as to obtain adequate financing when needed. However, there is no assurance that we will be successful in increasing our revenue through such future plans. Any failure to do so may lead to a material adverse effect on our financial performance and business operations. Further, to manage any future growth of our operations and personnel resulting from our future plans, we will be required to improve and effectively utilise our existing operational, management, marketing and financial systems as well as to hire, train and manage additional personnel. Specifically, in relation to our future plans to establish eleven (11) Speed Queen concept stores, we have only successfully set-up and operated one (1) concept store as at the LPD. As such, there is no proven track record on the effectiveness of these concept stores in increasing our revenue. There is also no assurance that we will be able successfully set-up the eleven (11) Speed Queen concept stores within our targeted cost and timeframe. 4.2.9 Our chain of Speed Queen concept stores may compete directly with our existing customers’ self-service launderette outlets As part of our future plans, we intend to establish eleven (11) new Speed Queen concept stores. These stores may compete directly with our customer’s self-service launderette outlets in the areas where we set up our Speed Queen concept stores. Such competition may discourage our existing or new customers from expanding or setting up their self-service laundrette outlets, which in turn may affect our revenue. 4. RISK FACTORS (Cont’d) However, we only intend to establish and set up our new Speed Queen concept stores in major townships in several states such as the Klang Valley, Johor, Penang, IVJelaka, Negeri Sembilan, Terengganu and Kelantan. Hence, the abovesaid competition effect of each Speed Queen concept store is only limited to the said vicinity area of the township where our stores are set up. We also took note that the eleven (11) Speed Queen concept stores that we are planning to establish only represent less than 2.0% of the 900 self-service launderettes in Malaysia, as estimated in 2015 by the IMR. In addition, our Group have supplied the Speed Queen brand of vended commercial laundry equipment to approximately 486 self-service launderette outlets in Malaysia. Furthermore, our Speed Queen concept stores is set up with the primary purpose of show casing and promoting the Speed Queen brand of vended commercial laundry equipment. However, there is no assurance that our chain of Speed Queen concept stores would not result in direct competition with our customers’ existing and new self-service launderette outlets. Such competition may have a negative impact on our revenue growth. 4.3 RISKS RELATING TO THE INVESTMENT IN OUR SHARES 4.3.1 No prior market for our Shares Prior to our Listing, there has been no public trading for our Shares on any stock market. Accordingly, there can be no assurance that an active market for our Shares will develop and continue to develop upon our Listing or, if developed, that such a market will be sustained. Our IPO Price was determined after taking into consideration a number of factors including but not limited to our Group’s historical earnings, prospects and future plans, our financial and operating history and conditions. There can be no assurance that our IPO Price will correspond to the price at which our Shares will be traded on the ACE Market of Bursa Securities upon or subsequent to our Listing or that an active market for our Shares will develop and continue upon or subsequent to our Listing. The price at which our Shares will trade on the ACE Market of Bursa Securities after our IPO may be influenced by a number of factors including, amongst others, the depth and liquidity of the market for our Shares, investors’ individual perceptions of our Group, market and economic conditions. There is no assurance that the market price may not decline below our IPO Price. Hence, there can be no assurance of the ability of the shareholders or the prices at which they would be able to sell their shares. 4.3.2 Failure/delay in or termination/abortion of our Listing Our Listing is exposed to the risk that it may be aborted or delayed on the occurrence of any one or more of the following events:(a) Our Underwriter exercising its rights pursuant to the Underwriting Agreement discharging itself from their obligations therein;
(b) We are unable to meet the public shareholding spread requirement as determined by Bursa Securities, whereby at least 25.0% of our enlarged issued and paid-up share capital for which listing is sought must be held by a minimum number of 200 public shareholders, each holding not less than 100 Shares at the point of our Listing; and
(c) The revocation of approvals from the relevant authorities for our Listing and/or admission to the Official List of the ACE Market of Bursa Securities for whatever reason.