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. THE RISKS AND INVESTMENT CONSIDERATIONS SET OUT BELOW ARE NOT AN EXHAUSTIVE OR EXCLUSIVE LIST OF THE CHALLENGES THAT WE CURRENTLY FACE OR THAT MAY DEVELOP IN THE FUTURE. ADDITIONAL RISKS, WHETHER KNOWN OR UNKNOWN, MAY IN THE FUTURE HAVE A MATERIAL ADVERSE EFFECT ON US OR OUR 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 INDUSTRY IN WHICH OUR GROUP OPERATES 4.1.1 Our Group’s business is dependent on the construction and property development industries Our Group is involved in the distribution and manufacturing of building materials to the construction and property development industries. As such, our Group is exposed to the vagaries of these industries caused by various factors which include political and economic stability, inflation, labour shortages, as well as increase in raw material costs. Any adverse changes to the construction and property development industries will adversely affect the business of our Group. 4.1.2 Competition risks The building materials industry in which our Group operate is highly competitive in nature. Although there is intense competition amongst the existing players (both new and existing) in the manufacturing of building materials industry, there are high barriers to entry such as high initial capital investment and working capital resources, which lessen the threat from more players entering the industry. On the other hand, the Malaysian building materials distribution industry is very fragmented, characterised by a host of small, medium and large players, which resulted in a very competitive market. Players survive and grow by adopting strategies that allow them to maintain their competitiveness. For larger players like us, our strategy is to continually leverage on our economies of scale, negotiating power, strong financial resources and wide distribution network which smaller market players do not have. 4.1.3 Political, regulatory and economic risks Our financial and business prospects, and the prospects of the industry in which we operate, will depend to some degree on the developments of the political, economic and regulatory front in the countries in which we operate. Amongst the political, economic and regulatory factors are changes in inflation rates, interest rates and 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 and other countries which we operate could materially and unfavourable affect the financial position and business prospects of our Group. 4. RISK FACTORS ( Cont’d)
4.2 RISKS RELATING TO OUR BUSINESS AND OUR OPERATIONS 4.2.1 We are dependent on our experienced management and key personnel We attribute our success to the leadership and contributions of our Deputy Group Executive Chairman, Group Managing Director and our key management team. The loss of these key management personnel without any suitable and timely replacement, and our inability to attract Or retain qualified and right personnel would have an unfavourable and material impact on our Group’s operations. 4.2.2 We do not have any long term contracts with our customers Our Group does not enter into any long term contracts with our customers. Our business is normaliy transacted via purchase orders, which is commonplace practice in the industry. There is no assurance on the continuity of purchase orders from our customers. Because of this, the financial results of our Group are dependent on our ability to secure new purchase orders on a timely basis. 4.2.3 We are subject to the credit risks of our customers Our financial performance and position are dependent, to a certain extent, on the creditworthiness of our customers. If our customers are unable to pay us on time or have difficulty in making payments to us, our cash flow will be affected. We generally grant our customers credit terms within the range of sixty (60) to ninety (90) days. We are exposed to credit risks arising from trade receivables which risks may increase during periods of economic uncertainty or market downturn, and which are beyond our control. 4.2.4 We are dependent on obtaining adequate financing to fund our operations There is an inherent timing difference between our trade collections from our customers and payments to our suppliers. Normally, we are granted trade credit facilities of between fourteen (14) to ninety (90) days by our suppliers, whereas our trade collections are between sixty (60) to ninety (90) days. As such, we are required to fund our purchases from our suppliers, either from internal resources or borrowings. If we are unabie to secure adequate financing, our cash flow, operations, growth and expansion plans will be adversely affected. Our total borrowings as at the LPD amounted to approximately RM395.86 million. Any significant increase in interest rates will adversely affect our profitabiiity. 4.2.5 We are subject to our debt servicing obligations In general, the building materiais industry is capital intensive in nature. This is mainly due to high costs associated with the financing of purchases of building materials upfront before we are able to collect the amount owed by our customers. Our working capital and capital expenditure requirements are funded by internally generated funds and/or bank borrowings. As at the LPD, our total outstanding borrowings amounted to RM395.86 million of which RM312.99 million is short term borrowings and RM82.88 million is long term borrowings. As mentioned in section 4.2.4 above, there is an inherent timing difference between our collections from our customers and payments to our suppliers. The reason is that our Group leverages on the early payment rebates from our suppliers to enjoy cost savings by utilising trade line facilities to repay our suppiiers earlier than the due date. This has resulted in the high short term borrowings taken up by our Group. 4, RISK FACTORS (Cont’d) As we operate in a capital-intensive industry, we have historically required capital to finance purchases of bUilding materials. Our ability to meet our debt settlement serving obligation is dependent upon our ability to generate sufficient cash from the sales of these building materials. Our total finance costs and our interest coverage ratio for the past four (4) FYE 31 December 2011 to 2014 and FPE 2015 is as follows:Finance Profit before (i)Interest costs interest and tax coverage ratio RM’OOO RM’o.o.o. times f—-~—–‘—-‘—‘~”–‘–=~—-=~—–==””_1 FYE 2011 8,628 35,705 4.1 FYE 2012 11,513 52,710 4.6 FYE 2013 14,457 51,779 3.6 I FYE 2014 FPE 2015 18,702 13,455 61,917 39,643 ~.~ I ~
Note:(i) Computed based on profit before interest and tax divided by finance costs. Our Group’s current ratio for the past four (4) FYE 2011 to 2014 and FPE 2015 are as follows:398,833 378,989 429,451 488,525 497,100 578,433 519,616 508,840 546,378 494,051
Note:(i) Computed based on current asset divided by current liabilities. 4.2.6 Dependency on major suppliers Sales of cement consistently exceed 30% of our Group’s total revenue for the past four (4) financial years. As such, we are dependent on our major cement suppliers, as disclosed in Section 6.11 of this Prospectus. We have been dealing with our major suppliers for at least three (3) years. other than our cement suppliers, we are not dependent on any other major suppliers for our other products and raw materials. Our ready-mixed concrete business however is solely dependent on CPM for the production and mixing of ready-mixed concrete through an exclusivity agreement with them. In the event of sudden termination of the exclusivity agreement with CPM, the operations of our ready-mixed concrete product business segment may be disrupted while we source for other reliable contractors. Please refer to Section 18.104.22.168 of this Prospectus for further details of the arrangement with CPM. 4. RISK FACTORS (Cont’d) 4.2.7 We are exposed to product warranties and product liability claims by our customers We provide product warranties for our AAC products and metal roofing systems. Such product warranties are for ten (10) years from the date of purchase of the MC products or date of completion and installation of the metal roofing systems. If products manufactured by us prove to be defective and result in losses to our customers, we may be liable to product liability claims and any such claims could damage our relationships with our customers and business reputation. 4.2.8 Fluctuations in prices of raw materials We utilise various raw materials in our manufacturing processes, which include cement, sand, aggregates, steel bars and others. Hence, we are dependent on the supply of such raw materials which we source from a number of suppliers. Raw materials are price sensitive, and we face the risk of obtaining sufficient quantities of raw materials at competitive prices. Price fluctuations in the raw materials market caused by the price volatility of raw materials, which are beyond our control, could also result in increased costs and material adverse effect on our Group’s financial performance.
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, and the market value of our assets. There can be no assurance that our IPO 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 upon or subsequent to our Listing. The price at which our Shares will trade on the Main 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 2S% of our enlarged issued and paid-up share capital for which listing is sought must be held by a minimum number of 1,000 public shareholders, each holding not less than 100 Shares at the point of our Listing; and
4. RISK FACTORS (Cant'(/) (c) The revocation of approvals from the relevant authorities for our Listing and/or admission to the Official List of the Main Market of Bursa Securities for whatever reason, In this respect, we will exercise OUr best endeavour to comply with the various regulatory requirements, including, inter-alia, the public shareholding spread requirement in paragraph (b) above for our successful Listing. However, there can be no assurance that the abovementioned factors/events will not cause a delay in or non-implementation of our Listing. Upon the occurrence of any of these events, investors will not receive any Shares and our Offerors and us will return in full, without interest, all monies paid in respect of any application for our Shares within fourteen (14) days, failing which the provisions of subsections 243(2) and 243(6) of the CMSA will apply accordingly and we will be liable to repay the monies with interest at the rate of 10.0% per annum or such other rate as may be prescribed by the SC upon expiration of that period until full refund is made. In the event our Listing is aborted and/or terminated, and our Shares have been allotted to the shareholders, a return of monies to all of our shareholders could only be achieved by way of cancellation of share capital as prOVided under the Act and its related rules. Such cancellation requires the sanction of our shareholders by special resolution in a general meeting, consent of our creditors (unless dispensation with such consent has been granted by the High Court of Malaysia) and the confirmation of the High Court of Malaysia. There can be no assurance that such monies can be recovered within a short period of time Or at all in such circumstances. 4.3.3 Dividend payment is not assured Our Company, an investment holding company, derives its income mainly from dividends received from our subsidiaries. Hence, our ability to pay future dividend and our ability to sustain our dividend policy in the future are largely dependent on the performance of our subsidiaries. In determining the size of any diVidend recommendation, we will also take into consideration a number of factors, including but not limited to our financial performance, cash flow requirements, debt servicing and financing commitments, availability of distributabie reserves and tax-exempt profit/tax credits, future expansion plans, loan covenants and compliance with regulatory requirements. 4.3.4 Trading prices and volume of our Shares The trading prices and volume of our Shares could be subject to fiuctuations in response to various factors, some of which are not within our control and may be 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. In addition, the performance of Bursa Securities is very much dependent on external factors such as the performance of the regional and world bourses and the inflow or outflow of foreign funds. Sentiments are also largely driven by internal factors such as economic and political conditions of the country as well as the growth potential of the various sectors of the economy. These factors invariably contribute to the volatility of trading volumes witnessed on Bursa Securities, thus adding risks to the market price of our listed Shares. 4. RISK FACTORS (Cont’d) 4.4 OTHER RISKS 4.4.1 Continued control by our Promoters/substantial shareholders Upon our Listing, our Promoters, as set out in Section 8.1 of this Prospectus will collectively control 74.6% of our Group’s enlarged issued and paid-up share capital. Thus, our Promoters will be abie to exercise some influence over the business direction and matters governing our Group requiring the vote of our Company’s shareholders unless they are required to abstain from voting by law and/or by the relevant guideiines or regulations. The interests of our Promoters may differ from or have conflict with the interests of other shareholders of our Company. 4.4.2 Future fund raising may dilute shareholders’ equity or restrict our operations We may require additional funding for our future growth. This may result in dilution of our shareholders’ equity, or restrictions imposed by additional debt funding such as, amongst others, maintenance of a certain level of current ratio, gearing ratio and/or diVidend payouts. Our capital requirements are dependent on, amongst others, our business, the availability of our resources for attracting, maintaining and enlarging our customer base and the need to maintain and expand our building materials supply business activities. Thus, we may need additional capital expenditure for mergers and acquisitions or investments. An issue of Shares or other securities to raise funds will dilute shareholders’ equity interest and may, in case of a rights issue, require additional investment by shareholders. 4.4.3 Forward-looking/prospective statements Certain statements in this Prospectus are based on historical data of our Group which may not be reflective of future results and others are forward-looking in nature that are based on assumptions and subject to uncertainties and contingencies which mayor may not be achievable. Whether such statements would ultimately prove to be accurate depends upon a variety of factors that may affect our businesses and operations, and such forward-looking statements also involve known and unknown risks, uncertainties and other factors which may cause our actuai results, performance and achievements, or industry results, to be materially different from any future results, plans, performances and achievements, expressed or impiied, by such prospective statements. Although we beiieve that the expectations reflected in such future statements are reasonable at this time, there can be no assurance that such prospective statements or expectations will prove to be correct in the future. Any deviation from the expectations may have a material adverse effect on our business and financial performance. The above is not an exhaustive iist of challenges we are currently facing or that may develop in the future. Additional risks whether known or unknown, may in the future have a material adverse effect on us and/or our IPa Shares. [ The rest of this page is intentionally left blank 1 44