4. RISK FACTORS 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFllLLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS BEFORE INVESTING IN OUR SHARES. The following are potential risks which our Board views as having a possible material adverse impact on the future performance of our Group or on the market price of our Shares. Some of these risks can be mitigated by deploying contingency plans and/or safeguards. Other risks however are inherent or beyond our control and cannot be mitigated. If you are in any doubt as to the information contained in this section, you should consult your stockbroker, bank manager, solicitors, accountants or other professional adviser. 4.1 RISKS RELATING TO OUR OPERATION AND BUSINESS 4.1.1 Dependency on major customers For the past financial years under review (FYE 2012 to 2015) and up to LPD, our mqjor customers accounted for approximately 10.42%,29.56%, 18.90%, 15.24% and 6.51 % of our total revenue. There is no assurance that these major customers will continue to purchase from our Group. In the event that our Group is unable to retain these customers, or seek replacement customers, our business, results of operations, profitability and liquidity may be affected.
4.1.2 Dependency on major third party suppliers As disclosed in Section 6.11, our Group has three (3) major third party suppliers and they collectively accounted for 36.63%, 41.56%, 43.39%, 33.76% and 30.54% of our total purchases for the past financial years under review (FYE 2012 to 2015) and up to LPD. The products supplied by the major third pmty suppliers are generally generic in nature and our customers generally do not require specific product from any specific supplier. However, customers who are involved in certain projects in the oil and gas industry may require products of certain specifications and requirements. Hence, for these instances where the specifications and requirements of the customers could not be met by other suppliers who supply generic products, we would have dependency towards certain third pmty suppliers. Accordingly, any termination of, withdrawal of or disruption to our business relationships with any of our major third pmty suppliers may have a negative impact on our Group’s ability to supply their products to our customers and consequently, adversely affect our business and financial performance. [The rest of this page has been intentionally left blank) 4. RISK FACTORS (Col1f’dj
4.1.3 Credit risk Our financial performance and position are dependent, to a certain extent, on the creditwOIthiness of our customers. We generally grant our customers credit periods of between 30 days and 90 days. We are exposed to credit risks arising from trade receivables which may arise from events and circumstances beyond our control or events which are difficult to anticipate or detect, such as economic downturn or deterioration. In the event of significant delay or default in payment by our customers or where our customers face significant financial difficulties, we will have to provide for doubtful debts or write off trade receivable as bad debts, which may adversely affect our financial performance. For the past financial years under review (FYE 2012 to 20 IS) and up to LPD, Dancomech Engineering, Dancomech JB and Optimis have not written off any bad debts save and except for the FYE 2013, FYE 2014 and the financial period up to LPD, where we had written off RMI7,600, RM53,621, and RM18,660 as bad debts, respectively. For the periods of the FYE 2012 to 2015, the balance provision for doubtful debts amounted to approximately RM376,000, RM38,000, RM442,000, and RM318,000 respectively. There are no changes to the provision for doubtful debts in the financial period up to LPD. The decrease in provision for doubtful debts from FYE 2012 to FYE 2013 was due to the reversal of the provision for doubtful debts which amounted to RM157,610 arising from the subsequent collection of the debts, and the written-off provision for doubtful debts for FYE 2012 which amounted to RM218,044. Our usual procedures to follow-up with customers on long overdue debts contributed to the decrease in provision for doubtful debts for FYE 2013. Such procedures include sending out reminder letters and emails, calls, field visits, as well as taking legal actions on a case-by-case basis. There was an increase in provision for doubtful debts from FYE 2013 to FYE 2014 mainly due to slow collection in FYE 2014. Provision for doubtful debts decreased to RM318,000 in FYE 20 IS due to the net reversal of the provision for doubtful debts which amounted to approximately RM125,000 arising from the subsequent collection of the debts.
4.1.4 Dependency on Directors and key management personnel We believe that human capital is one of our key factors for success. Our Managing Director, Aik Swee Tong and our Executive Director, Aik Cwo Shing possess years of experience respectively and are vital to our Group’s success. Over the years, we have also built a strong management and operation team that has vast experience in the process equipment and Measurement Instrument products industry and knowledge of our business as well as understanding of our customers’ needs and requirements. As such, any loss of our Managing Director, Executive Director or key management personnel without a suitable and timely replacement may have a material adverse impact on our business and our continuing ability to compete effectively. The profiles of our Managing Director, Executive Director and key management personnel are set out in Sections 8.2.1 and 8.4.1. [The rest of this page has been intentionally left blank] 4. RISK FACTORS (Cont’d) 4.1.5 Exposure to exchange rate fluctuations As at LPD, approximately 19.67% of our sales are international sales and approximately 82.16% of our purchases of impOlied stocks are in the foreign currencies of USD, Euro, GBP, RMB, and SGD. As such, we are exposed to foreign exchange risks, with the majority of our purchases transacted in USD. Any unfavourable foreign exchange movement against the RM, especially with the weakening of the RM against the USD, may have an adverse impact on our financial performance.
4.1.6 Absence of long term contract with customers We do not have long term contracts with our customers. Some of our sales are based on planned purchase orders, which relate to arrangements with our customers who commit to buy our products based on a delivery schedule. Such purchase orders usually exceed RMl.OO million per order. However, the majority of our sales come from customers (including our major customers) who purchase as and when the need arises, with the purchase orders being not more than RMl.OO million per order. As such, the uncertainty in sales may impact our Group’s business performance.
4.1.7 Shipping disruptions and fluctuation in shipping costs We may experience shipping disruptions and fluctuations in shipping costs for the impOli of our products and for the sale of our goods. As at LPD, 82.16% of our products are imported from our suppliers outside of Malaysia. In addition, as at LPD, approximately 19.67% of our sales are international sales whilst approximately 80.33% of our sales are domestic sales. As such, we are exposed to: shipping disruptions that may arise due to weather conditions, political turmoil, pirate attacks, social unrest, pOli strikes, oil spills, delayed or lost shipments, which may have an adverse impact on our business; and/or major fluctuation, if any, in chmiel’ and freight rates which may have a material impact on our cost. Our ability to pass the cost increase to our customers is, to a large extent, subject to the intensity of market competition, spending power of the end users of our customers and the general economic condition in Malaysia. Ifwe are unable to pass on the increase in such costs to our customers, our profitability may be adversely affected.
4.1.8 Inadequate insurance coverage (;eneral insurance We are aware of the adverse consequences ansmg from inadequate insurance coverage for the accidents and outbreaks that could disrupt our business operations and ensure continuity of our insurance by renewing all our insurances annually. As at LPD, our headquarters at Jalan Pelukis has been insured for the amount of RM8.00 million, whereas our equipment, machinery, stocks and inventories have been insured for the amount of RM20.00 million, against the NBV of our stocks of RM20.97 million as at LPD. No assurance can be given that the insurance coverage will be sufficient to compensate for the replacement cost of our assets or any consequential loss arising thereof. [The rest of this page has been intentionally left blank] 4. RISK FACTORS (Conf’d)
4.2 RISKS AFFECTING OUR INDUSTRY 4.2.1 Fluctuations in raw materials prices The PCE and Measurement Instruments market is subjected to constant price fluctuations on iron ore, natural gas and clUde oil, the three (3) being the raw materials to steel and plastic resins for the manufacture of PCE and Measurement Instruments. A combination of extemal factors such as geopolitical instability, economic cycle, catastrophic risk and global demand for these natural resources impacts the volatility of the prices, (Source: lMR report) Due to the nature of our business, we purchase a range of PCE and Measurement Instruments. Fluctuations in raw material prices could result in higher prices and accordingly, lead to increased costs which will affect all market players. If we are unable to continue passing on increased cost to our customers, there may be an adverse effect on Dancomech Group’s financial performance.
4.2.2 Dependency on the performance of end user markets Our Group currently supplies a diverse range of PCE and Measurement InstlUments to a variety of customers, for use within various industries including the oil and gas and palm oil and oleochemicals industries. Therefore, we are dependent on the performance of the industries which are affected by the fluctuations in the market price of hydrocarbons (including clUde oil and natural gas) and clUde palm oil. Prices of crude oil generally hovered above USD 100 per barrel from 2011 to 2013 alongside a stable global economic growth. In 2014, clUde oil prices dropped to an average of USD96.2 per barrel. In terms of monthly price movements for 2014, crude oil prices increased from an average of USD 102.3 per barrel in January to USDl08.4 per barrel in June before slumping from an average of USDl05.2 per banel in July to an average ofUSD60.6 per banel in December. The downward pricing trend persisted in 2015 as crude oil prices dropped to an average of USD50. 8 per bane!. Lower oil prices adversely affect the business profitability of oil companies thus forcing them to reassess their development projects and focus on driving plUdent cost management. In Malaysia, Petroliam Nasional Berhad (“PETRONAS”) expects oil prices to remain low in 2016 and accordingly has announced a cut in its operational expenditure and capital expenditure for 2016 by between RM 15 billion to RM20 billion. The reduction is also part of PETRONAS’ move to reduce the capital expenditure and operational expenditure by RM50 billion over the next four (4) years. Therefore, demand for products and services from the PCE and Measurement Instruments market could be adversely affected in the medium term (2015 to 2018) -particularly for market participants supplying to oil and gas customers who are focused on activities related to exploration and production expansions. Likewise in the palm oil indusuy, clUde palm oil prices generally trended downward in 2015. The declining pricing trend may pressure on the business profitability of the market players, resulting in cuts or deferments of investment decision for capacity expansion and equipment maintenance and upgrade. As such, demand for PCE and Measurement Insu’uments from palm oil and oleochemicals industry may be affected ifthe downward pricing u’end prolongs. (Source: lMR report) [The rest of this page has been intentionally left blank] 4. RISK FACTORS (Cont’d) 4.2.3 Changes in general economic, business, competitive and credit conditions, policies and regulations, etc. We are subject to business risks inherent to the industry that we are cUITently operating in. These include amongst others, fluctuation in raw material prices of PCE and Measurement Instruments, fluctuation in the demand for our products, changes in general economic, business, competitive and credit conditions, changes in government and international policies and regulations and other business risks common to our Group’s business. Our business may be adversely affected by any increase in our operational cost. An example which may result in such increase is an increase in raw material prices which will in turn increase our suppliers’ production cost and ultimately leading to a hike in prices of the products supplied to us. In addition, as our Group’s business caters to a wide range of industries including the palm oil and oleochemical, oil and gas and petrochemical and water treatment and sewerage industries, any slowdown in the said industries may decrease demand for our products.
4.2.4 Competition risk We face competition from our competitors and we expect competition to intensifY, especially with the growing market demand for the PCE and Measurement Instruments for industrial piping system in Malaysia. According to the IMR Report, our market share in the provision of PCE and Measmement Instruments for industrial piping system market in Malaysia in 2014 and 2015 was approximately 2.9% and 2.5% respectively. Some of our competitors may have greater financial, marketing, management and other resources than us. These competitors may be better positioned to attract more customers by being able to offer a wider range of products.
4.2.5 Political, economic and regulatory uncertainties Any adverse development in the political, economic and regulatory environment in Malaysia as well as in countries where our Group sources our supplies or sells our products could materially or adversely affect our operations and financial performance. Political and economic uncertainties include changes in general economic and business conditions, government legislations and policies affecting our industry, inflation, fluctuation in foreign exchange rates and interest rates, political or social development, risks of war, expropriation, nationalisation, renegotiation or nullification of existing contracts, methods of taxation and currency exchange controls. [The rest of this page has been intentionally left blank]