5. RISK FACTORS 5. RISK FACTORS Before investing in our Shares, you should pay particular attention to the fact that, to a large extent, we are subject to the legal, regulatory and business environment in the countries in which we operate whether presently or in the future. Our business is subject to a number of factors, many of which are beyond our control. Before making an investment decision, you should carefUlly consider, along with the other matters in this Prospectus, the risks and investment considerations set out below. The risks and investment considerations set out below is not an exhaustive list of the risks and challenges that we currently face or that may develop in the future. These and other risks, whether known or unknown, may in the future have a material adverse effect on us or our Shares. 5.1 Risks relating to our industry 5.1.1 Our business is sUbject to risks in the automotive segment Our Group is sUbject to risks inherent in the automotive segment. These include, but are not limited to, changes in general economic conditions, changes in government regulations, inflation and changes in business conditions such as deterioration in prevailing market conditions, availability and rising cost of financing and fluctuating demand for motor vehicles. Our Group has taken steps to minimise such risks by providing a wide range of Mazda vehicles to cater for different market segments and responding qUickly to the change in consumer preferences and requirements. Although our Group seeks to mitigate these risks, there can be no assurance that any change to these factors would not have a material adverse effect on the business and financial performance of our Group. There can also be no assurance that the demand for Mazda vehicles can be sustained. 5.1.2 Our business is sUbject to regulations and policies governing the importation of CBU vehicles and CKD packs into Malaysia An AP is required for importation of CBU vehicles and CKD packs into Malaysia. A party who has obtained the MITl’s approval to operate locally assembled vehicles would automatically be an AP holder of CKD packs. To be an AP holder of CBU vehicles, the company must have at least 70% Bumiputera ownership. Prima Merdu is presently the sole AP holder for the importation of Mazda CBU vehicles into Malaysia. Pursuant to the Distributorship and Collaboration Agreement, Prima Merdu shall, amongst others, import specific models of Mazda CBU vehicles from Mazda Japan for supply to Bermaz and Bermaz in turn shall carry out the distribution activities in Malaysia. The growth of our business involving the distribution of Mazda CBU vehicles in Malaysia is limited by the maximum number of APs allocated by the MITI to Prima Merdu as the demand for Mazda CBU vehicles can only be met subject to the number of APs available to Prima Merdu to import such vehicles. Any reduction in the number of APs allocated by the MITI to Prima Merdu may affect our ability to meet the demand for Mazda CBU vehicles that we distribute, and hence, may affect our revenue. Any changes to the present regUlations governing the AP system and/or the NAP set by the Government would have an impact to the automotive segment and accordingly, our business operations and profitability. Our distributorship of CKD vehicles of Mazda enables us to mitigate such risk as regulations governing the AP system for CKD packs are generally less stringent. Please refer to Section 2.5 of the Industry Overview in Section 8 of this Prospectus for the details of the AP system and the NAP. 5. RISK FACTORS (Cont’d)
5.1.3 We face competition from other eXisting and new distributors as well as other brands in the markets in which we operate We face competition from both existing and new players in the automotive segments of the countries which we operate namely, Malaysia and the Philippines. Some car distributors in Malaysia and the Philippines 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 an automotive distributor is to maintain and increase its market share. Stiff competition from local and foreign car distributors 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 Mazda vehicles, improve after sales and customer services, nurture customer loyalty, ensuring prompt delivery, expansion of branches and dealers to penetrate new markets as well as offering high quality vehicles that meet the demand at competitive prices. Increase in competition may potentially cause us to lose market share and consequently, leave a negative impact on 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. Our Board believes that we are able to distinguish ourselves from our competitors as we have an experienced key management team with extensive industry knowledge and vast exposure in the automotive segment, an established business relationship with Mazda Japan as well as our position as the distributor of a well-recognised and internationally acclaimed brand, Mazda. Please refer to Section 7.3 of this Prospectus for further details on the abovementioned competitive strengths. Notwithstanding this, there can be no assurance that we can fully mitigate competition from our existing or new competitors.
5.1.4 Our business is subject to changes in consumer preference and spending trend Demand for motor vehicles is significantly influenced by consumer preference and spending trend. Customers have shown a wide range of preference for motor vehicles and technologies that are relevant to today’s automotive segment such as driving dynamics, efficiency of performance, environmentally friendly features and low energy consumption. Demand is also influenced by external factors including, amongst others, the state· of the economy, the income level of customers, the consumers’ demographic profiles and also individuals’ environment awareness. These changing trends and demands may have a significant impact on the sales of our Mazda vehicles and the marketing strategies which we employ. Besides, a weak economic condition in general would lead to poor market sentiments, reSUlting in lower consumer spending. This may in turn lead to a lower demand for motor vehicles. Our Group’s prospects, financial position and profitability may be materially and adversely affected in the event that Mazda vehicles are unable to appeal to the changing requirements of our customers. Besides, consumers may also look at alternative modes of transportation available such as buses, taxis, light rail transits and monorails instead of owning a private car. The Government has been and is expected to introduce more measures to alleviate traffic congestion especially in the city area and this includes promoting and rationalising current public transportation system in the city centre. There is no assurance that such measures, if implemented successfully, could deter potential customers from purchasing new vehicles in the future. 34 5. RISK FACTORS (Cont’d) However, to minimise risk, we are working very closely with Mazda Japan to gain a good understanding and guidance on the latest or up-and-coming Mazda models to match our consumers’ preferences and trends. In addition, we have established effective marketing strategies to maintain and increase our customer base, to capture a bigger market share and increase our revenue. Pursuant to the Joint Venture Agreement, we are expecting more CKD vehicles of Mazda to be assembled locally which will enable CKD vehicles of Mazda to be competitively priced among other local or foreign vehicles’ brands. Notwithstanding the above, there is no assurance that any adverse change in the market sentiment of the automotive segment, consumer preferences and spending trends would not have a material impact on our financial performance. 5.1.5 Our business may be materially and adversely affected by unfavourable economic, social and political conditions, particularly in countries where we or Mazda Japan operate Our business, financial position, results of operations and prospects may be adversely affected by economic, social, political and other developments in Malaysia, Japan, Thailand and the Philippines. These developments, include but are not limited to, the risks of natural disasters, wars, terrorism, riots, expropriation, nationalisation, renegotiations or nullification of eXisting contracts, changes in law and regulations, changes in interest rates, foreign exchange control regulations and methods of taxation. For instance, the earthquake and tsunami in Japan and the flooding in Thailand which occurred in 2011 had severely impacted the automotive industry in the respective countries, and to a certain extent, countries which are dependent on supplies from Thailand and Japan. However, these events did not materially affect our business operations as we had adequate stock holdings to cater to the demand for Mazda vehicles. However, there can be no assurance that such event, if it occurs, will not materially and adversely affect our Group’s financial position or business in the future. 5.1.6 Global capital and credit market issues could negatively affect our liquidity, increase our costs of borrowing and disrupt the operations of our suppliers and customers Global capital and credit markets have experienced extreme volatility, disruption and decreased liquidity in recent years, making it more difficult for companies to access capital and credit markets. While there have been periods of stability in these markets, the environment has become more volatile and unpredictable. The deterioration in the markets for sovereign debt of several European countries, including Greece, Spain, Italy and Portugal has exacerbated the global economic crisis and raised a number of uncertainties regarding the stability and overall standing of the European Monetary Union and global capital as well as credit markets. The volatility in global financial markets has added to the uncertainty of the global economic outlook and a number of countries are experiencing the slowdown in the economic activities and may continue to adversely affect the Malaysian, Philippines and global economies. 5. RISK FACTORS (Cont’d) We depend on stable, liquid and well-functioning capital and credit markets to fund our operations. If market conditions continue to deteriorate due to economic, financial, political or other reasons, our ability to obtain bank financing and access the capital markets may be adversely affected and may be subject to higher costs. Our business could also be negatively impacted if our suppliers or customers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy. Any of these developments could have a material adverse effect on our business, financial condition, results of operations and prospects.
5.2 Risks relating to our business 5.2.1 We are dependent on the Malaysia CBU Agreement, the Philippines CBU Agreement and the Joint Venture Agreement Our Group’s distributorship of Mazda CBU vehicles, spare parts, accessories and tools in Malaysia and in the Philippines are governed by the Malaysia CBU Agreement and the Philippines CBU Agreement, respectively. We are dependent on these agreements for the continuous supply of Mazda CBU vehicles, spare parts, accessories and tools from Mazda Japan for distribution in Malaysia and the Philippines. There can be no assurance that the Malaysia CBU Agreement and the Philippines CBU Agreement will be renewed upon expiry or if renewed, such renewals would be on similar terms, or that they will not be terminated. Should any of these agreements not be renewed or be terminated, it will result in us losing the distributorship of Mazda CBU vehicles in the respective markets and our business operations and profitability may be materially and adversely affected. Pursuant to the Malaysia CBU Agreement, we are required to purchase a specified number of Mazda CBU vehicles to achieve a minimum market share during the 1st year (from 1 April 2011 to 31 March 2012) of the agreement and the minimum purchase quotas for Mazda CBU vehicles for the 2nd year (from 1 April 2012 to 31 March 2013) and 3rd year (from 1 April 2013 to 31 March 2014) of the agreement shall be mutually agreed upon between Mazda Japan and us. Mazda Japan had, via its letter dated 14 January 2013, agreed to further extend the Malaysia CBU Agreement upon the expiry of the said agreement on 31 March 2014, for another 5 years expiring on 31 March 2019, subject .to an annual minimum purchase quota of Mazda CBU vehicles to be mutually agreed upon. . Likewise, the Philippines CBU Agreement also stipulates the annual minimum purchase quotas to be met during the term of the said agreement. Based on the terms of the Malaysia CBU Agreement and the Philippines CBU Agreement, if we fail to meet the annual minimum purchase quotas, Mazda Japan has the right to terminate the said agreements which will result in us losing the distributorship of Mazda CBU vehicles in the respective markets. Due to the earthquake and tsunami in Japan and flooding in Thailand in 2011, Mazda Japan was unable to supply sufficient Mazda CBU vehicles to Bermaz. As a result, Mazda Japan revised downwards the minimum purchase quota for the 1st year from that set out in the Malaysia CBU Agreement which in turn, enabled Bermaz to meet. 5. RISK FACTORS (Cont’d) Bermaz has also met the minimum purchase quota for Mazda CBU vehicles for the 2nd year of the Malaysia CBU Agreement. We expect to be able to meet the minimum purchase quota for the 3rd year of the Malaysia CBU Agreement which is to be mutually agreed upon between Mazda Japan and us as any decision by us on the quota would have taken into consideration the expected market and demand conditions in Malaysia for Mazda vehicles, and consequently, the anticipated sales of Mazda vehicles unless events beyond our control occurs. Notwithstanding, as a result of the established business relationship between Mazda Japan and ourselves, Mazda Japan has thus far been supportive in the determination of the annual minimum purchase quotas which we are required to meet. On the other hand, our Group’s distributorship of CKD vehicles of Mazda, spare parts, accessories and tools in Malaysia is dependent on the Joint Venture Agreement for the continuous supply of CKD vehicles of Mazda, spare parts, accessories and tools. There can be no assurance that the Joint Venture Agreement will not be terminated. Should the Joint Venture Agreement be terminated, our business operations and profitability may be materially and adversely affected. In addition, the Malaysia CBU Agreement, the Philippines CBU Agreement and the Joint Venture Agreement (collectively referred to as “Highly Dependent Agreements”) are governed by laws of Japan, which in turn, create certain legal risks in the event we need to exercise our rights under these agreements. There may be a certain degree of uncertainty as to how the laws of Japan would apply under certain circumstances/events affecting our Group and such uncertainty also extends to the interpretation, implementation and enforcement thereof. However, we have maintained a good business relationship with Mazda Japan since 2008 and it has proven to be a strong and reliable partner of our Group. In fact, we believe the Joint Venture Agreement, a collaboration which requires increased participation and commitment from Mazda Japan, is the outcome of a successful working relationship and a testament of a relationship which we have nurtured throughout the years. Please refer to Section 7.13 of this Prospectus for the salient terms (including termination events) of the Highly Dependent Agreements.
5.2.2 We are dependent on Mazda Japan for supply of Mazda vehicles Our supply of Mazda CBU vehicles for distribution in Malaysia is sourced from Mazda Japan via Prima Merdu whereas our supply of spare parts, accessories and tools for distribution in Malaysia is directly sourced from Mazda Japan. Our supply of Mazda CBU vehicles, spare parts, accessories and tools for distribution in Philippines are also directly sourced from Mazda Japan via BAP. The supply of CKD packs, spare parts, accessories and tools for the assembly of CKD vehicles of Mazda by MMSB are also sourced from Mazda Japan. The inability of Mazda Japan to meet its production schedules would affect its supply of Mazda vehicles, spare parts, accessories and tools to us. The Mazda CBU vehicles, spare parts, accessories and tools that we distribute in Malaysia and the Philippines, and the CKD packs, spare parts, accessories and tools used in the assembly of the CKD vehicles of Mazda by MMSB for our distribution in Malaysia are mainly produced in Japan and Thailand. Accordingly, any adverse change in the political, economic and regulatory environment, disruption due to labour shortages as well as recurrence of major disasters such as the earthquake, tsunami and nuclear disaster in Japan, and floods in Thailand or any other untoward events would have an unfavourable effect on Mazda Japan, in particular in terms of the production and supply of Mazda CBU vehicles, CKD packs, spare parts, accessories and tools. 5. RISK FACTORS (Cont’d) Delays in the delivery of shipments would cause us to place potential customers on the waiting list, which in turn could dissuade them from placing orders if they prefer not to wait for delivery. Delay in the supply of spare parts, accessories and tools may affect our ability to provide maintenance services to Mazda vehicles serviced at our branches or dealers’ service centres. Continued late deliveries and long waiting list would ultimately affect customers’ confidence in us and as a result, our revenue and profitability may be materially and adversely affected. As the distributor of Mazda CBU vehicles in Malaysia and the Philippines and the distributor of CKD vehicles of Mazda in Malaysia, we are also dependent upon the current models offered and also future models or variants as dictated by Mazda Japan. Changes to their vehicle line-up may not be well accepted in the Malaysian and Philippines markets, which could affect our overall market share and profitability. In addition, any adverse development and/or circumstance affecting Mazda Japan such as take-over of Mazda Japan may also have a material and adverse effect on our distributorship and consequently, our business as a result of a change in the business strategy of Mazda Japan with the introduction of a new controlling shareholder of Mazda Japan as a consequence of the take-over.
5.2.3 We are sUbject to interruption of supply of Mazda CKD Vehicles Inokom is the contract assembler for Mazda CKD Vehicles. The relationship between our Company and Inokom is via our 30% equity interest in MMSB. Inokom undertakes the assembly of Mazda CKD Vehicles in Malaysia at its plant in Kulim, Kedah. As Bermaz is the distributor of Mazda CKD Vehicles in Malaysia, our business operations, profitability and reputation will be adversely affected if Inokom fails to meet its production schedules or if Inokom’s operations are interrupted due to nonrenewal of contracts, technical difficulties or labour shortages which in turn would cause a delay or shortage in the supply of Mazda CKD Vehicles.
5.2.4 We are dependent on our key management team Our Group’s continued success depends significantly on the abilities and continued services of our key management team. Our key management team comprises experienced managers with extensive industry knOWledge and vast exposure in the automotive segment. Our Chief Executive Officer/Executive Director, Dato’ Yeoh Choon San has over 40 years of experience in the automotive segment, encompassing the various fields of retail, distribution and manufacturing. Any inability by us to attract, recruit and retain appropriate replacement employees and. successors, may lead to operating challenges and may affect our competitiveness in the industry. These challenges include lack of resources, loss of knowledge and a lengthy time period associated with skill development. We have made concerted efforts to identify and groom middle management in all key areas as an integral part of our management succession plan. The plan includes offering a competitive remuneration package and prOViding training and career development opportunities for our employees in all key functions of our operations. We also have key initiatives to groom young talent for future succession via the Mazda Apprenticeship Programme and Retail Management Trainee Programme. In conjunction with our Listing, our Board has allocated certain number of Issue Shares under the Pink Form Allocation and ESOS Options under the ESOS, to our eligible Directors and employees, which include key management personnel. Should these employees subscribe for our Shares and/or exercised their ESOS Options, they will become our shareholders and participate in the equity of our Company which is expected to motivate them to strive harder to ensure the continued success of our Group. 38 5. RISK FACTORS (Cont’d) However, there can be no assurance that we will be able to continue to retain our key management team with the aforementioned measures being undertaken. In addition, Mazda Japan also has the right to terminate the Highly Dependent Agreements at any time in the event Mazda Japan is of the opinion it is impossible to continue doing business transactions with us due to change in our management. 5.2.5 We are exposed to foreign exchange fluctuations which would impact the cost of Mazda vehicles Our Group’s profitability will, to a certain extent,depend on foreign exchange movements as it will ultimately affect the cost of Mazda vehicles, spare parts, accessories and tools. Any appreciation of Yen against the RM and Peso may adversely affect our financial performance as it would reduce our profit margin. Whilst we can increase the selling price of Mazda vehicles, spare parts, accessories and tools which we distribute to maintain our profit margin, such action would result in these Mazda vehicles, spare parts, accessories and tools becoming less competitive in the market and this in turn may affect our sales volume. Conversely, our profit margin is expected to improve if the RM and Peso strengthen against Yen which in turn could increase our profitability. Based on our Group’s policy, we do not undertake any derivatives except as hedging instruments where deemed appropriate and cost efficient. To mitigate our foreign exchange risk, we will enter into forward contracts after a purchase order has been placed, directly or indirectly, with Mazda Japan and/or when the exchange rate of Yen to RM is within our budgeted rate. However, when the exchange rate between Yen and RM is very unfavourable and volatile, our policy is to hedge our foreign currency requirement in tranches, where we will enter into forward contracts for only 50% of our foreign currency requirement and the remaining 50% will be paid based on spot rate on the actual payment date. This will enable us to spread the foreign exchange risks and to further mitigate our foreign exchange exposure. Please refer to Section 12.2.6 of this Prospectus and Section 12.3(f) of the Accountants’ Report for further details of the impact of foreign exchange rates on our Group.
5.2.6 Our business is subject to the availability of financing facilities to customers Purchases of motor vehicles are usually financed via hire purchase arrangements. Accordingly, higher interest rates charged by financial institutions would result in higher finance cost for customers. When the finance cost is high, consumers tend to find cheaper alternatives or substitutes and this could result in lower sales volume for motor vehicles, including Mazda. In addition, any future amendment to the laws and requirements which relate to the provision of financing facilities for motor vehicles, inclUding any amendment to the Hire Purchase Act, 1967, may affect the sales and financial performance of our Group.
5.2.7 We are exposed to financing cost and breach of debt covenants We finance our operations through our internally generated funds and bank borrowings. All our bank borrowings are interest bearing. As such, any increase in the interest rates will increase our finance costs with regards to the interest payments on the bank borrOWings. Therefore, there can be no assurance that our perfonnance will not be affected in the event of a significant increase in interest rates. 39 5. RISK FACTORS (Cont’d) Furthermore, pursuant to facility or loan agreements entered into with financial institutions, we are bound by certain covenants which may limit our operating and financial flexibility. These covenants are commonly contained in facility or loan agreements pertaining to bank borrowings. Any breach of compliance with any of the covenants may lead to the bank withdrawing such facilities and force outstanding amounts to become immediately due. Such an event will materially impact the liquidity situation of our Group. .Nevertheless, since commencement of operations in April 2008, we have not been in default of any repayment obligation of facility or loan agreements. Our Board and management would continue to observe and comply with the terms and conditions of such facility agreements and loan covenants. We will negotiate with the financial institutions for the best interest rate in the event of a hike in interest rates. Please refer to Section 12.2.3(vi) of this Prospectus and Section 13.17 of the Accountants’ Report for further details of our financing cost.
5.2.8 We may not be able to achieve our future plans Our future plans are set out in Section 7.4 of this Prospectus. Among these plans are the expansion of our range of CKD vehicles of Mazda models and the increase of utilisation of local content with the potential for export to overseas markets via MMSB. Pursuant to the Joint Venture Agreement, MMSB will focus on the assembly activities of CKD vehicles of Mazda and to support the localisation programme in Malaysia as well as the cost improvement activities to enable CKD vehicles of Mazda to gain more competitive advantage among the local car assemblers in Malaysia,. which is in line with the sales and marketing efforts of our Group. In addition, as disclosed in Section 7.4(ii) of this Prospectus, we intend to increase our existing distribution and servicing networks by setting up more showrooms or new service centres in Malaysia, improve customer service, diversify our customer base and place greater emphasis and focus on our brand. Our growth and future success will be dependent on, amongst others, the successful implementation of such expansion projects without incurring any significant increase in costs, the sufficiency of demand for our new vehicles as well as successful venture into new markets. There can be no assurance that our strategies and future plans can be implemented successfully. Any failure or delay in the implementation of any or all of these strategies and future plans may have a material and adverse effect on our business, financial results and prospects.
5.2.9 Control by substantial shareholders Upon completion of the Public Issue, BCorporation, via BGroup, will become the single largest shareholder of our Company, holding 67.63% of our enlarged issued and paid-up share capital and thus will be able to exercise control over more than 33% of our Company. The direct and indirect substantial shareholders of BCorporation are set out in Section 9.2.2(iii) of this Prospectus. As our ultimate holding company, other than in respect of certain votes regarding matters in which it is an interested party and must abstain from voting under the Listing Requirements, BCorporation will be able to influence the election of our Directors and the approval of any corporate proposals or transactions requiring the approval from our shareholders. 5. RISK FACTORS (Cont’dj To facilitate good corporate governance and promote transparency, our Company has 3 independent non-executive directors on our Board, which is more than the one-third requirement under the Listing Requirements. Our Audit Committee also reviews any related party transactions entered into by our Group and any conflict of interest situations that may arise within our Group. This includes ensuring that, amongst others, all future transactions involving related parties are entered into on arm’s length basis and on normal commercial terms that are not more favourable to the related parties than those generally available to third parties and are not to the detriment of our minority shareholders.
5.3 Risks relating to our Shares 5.3.1 There has been no public market for our Shares Prior to our Listing, there was nO pUblic trading for our Shares. Accordingly, there can be nO assurance that an active market for our Shares will develop upon our Listing or, if developed, that such market will sustain. The Issue Price was determined after taking into consideration, amongst others, competitive strengths, business strategies and future plans, our operating history and financial performance and the future outlook of the industry in which we operate. There can be no assurance that the Issue Price will correspond to the price at which our Shares will be traded on the Main Market of Bursa Securities upon or subsequent to our Listing or that an active market for our Shares will develop and continue to develop upon or subsequent to our Listing. The price at which our Shares will trade On the Main Market of Bursa Securities after the Public Issue 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. The trading price and volume of our Shares could be sUbject to fluctuations in response to various factors, some of which are not within our control and maybe unrelated or disproportionate to our operating results. These factors may include variatiOns in the results of our operations, changes in analysts’ recommendations or projections, changes in general market conditions and broad market fluctuations. The performance of Bursa Securities is very dependent On external factors such as performance of the regional and world bourses and the inflow and outflow of foreign funds. Sentiments are also largely driven by internal factors such as the economic and political conditions of the country as well as the potential growth of various sectors of the economy. These factors invariably contribute to the volatility of trading volumes on Bursa Securities, thus adding the risk to the market price of the listed securities. Nevertheless, our profitability is not dependent on the performance of Bursa Securities as our business activities have no direct correlation with the performance of Bursa Securities.