4. RISK FACTORS 4. RISK FACTORS You should evaluate and consider carefully, along with other matters in this Prospectus, the risks (which may not be exhaustive) below. Additional risks, whether known or unknown, may in the future have a material adverse effect on us or our Shares. 4.1 RISKS RELATING TO OUR BUSINESS AND INDUSTRY 4.1.1 We are affected by political, economic and market factors that are beyond our control We are not insulated from general business risks as well as certain risks inherent in the industry in which we operate. Some of the business risks which may affect us are a general downturn in the global, regional and Malaysian economy, the entry of new players in the palm oil milling machineries sector, constraints in labour supply and increase in labour costs, changes in law and tax legislation affecting the industry, changes in business and credit conditions and changes in technology. We will be affected by any changes in the political leadership and/or regulatory and government policies. Such political and/or regulatory changes or uncertainties include (but are not limited to) introduction of new laws and regulations which impose and/or increase restrictions on the palm oil industry, palm oil milling industry and palm oil milling machineries sector such as introduction of protectionist policies such as import/export control and changes in plantation and POM ownership laws. Any adverse development in the economic uncertainty in Malaysia and/or other countries which we have business links and/or operations in, directly or indirectly, could materially and adversely affect our financial performance. These economic uncertainties can be caused by, amongst others, include global economic downturn and any unfavourable changes in government policies and regulations such as changes in tax laws and foreign currency exchange controls. For the past four FYE 2011, 2012, 2013 and 2014, approximately 79.30%, 83.05%, 36.83% and 23.35% of our revenue contribution has been derived from the overseas market, mainly Indonesia. Please refer to Section 6.7 of this Prospectus for further information in relation to the revenue contribution from each of the said countries during the Period under Review. Hence, our business and financial performance may be affected should there be changes to the business environment in any of our overseas markets resulting in more stringent restrictions or unfavourable changes arising from trade restrictions or customs and tariffs. We seek to mitigate these political, economic and market risks through, amongst others, prudent management policies, upgrading our processes and keeping abreast with new technologies in the palm oil milling machineries sector, maintaining good business relationships with our customers and suppliers, expanding our client and supplier base and effective human resource management to reduce the rate of staff turnover However, no assurance can be given that changes in any of the abovementioned business risks will not have a material adverse effect on our business.
4.1.2 Dependence on the palm oil industry as our customers operate in the palm oil industry We are dependent on the palm oil industry as our Group’s core competency and competitive edge is having the technology and know-how in providing POMs with a wholly integrated and automated control system. All our revenue during the Period under Review is contributed from customers operating in the palm oil industry. Hence, our operations and financial performance may be adversely affected if the palm oil industry experiences a significant downturn which results in amongst others, lower palm oil production activities, fewer POMs being built, lack of growth in new plantation acreage and shrinking demand for our repairs and maintenance services. 4. RISK FACTORS (Cont’d) Notwithstanding the above, the Board believes that the prospects of the palm oil industry remain positive going forward as production activities and growth in the palm oil industry is supported by the global growth in demand for palm oil products and various government initiatives to promote sustainable palm oil development and biofuel energy. According to the IMR Report, it is stated that the Malaysian palm oil industry is valued at RM55.26 billion in 2014 and is expected to grow at a CAGR of 5.2% to RM71.17 billion in 2019 while the Indonesian palm oil induslry is valued at IDR258.17 trillion in 2014 and is expected to grow at a CAGR of 9.4% to IDR404.05 trillion in 2019. Nonetheless, there can be no assurance that any adverse change in the palm oil industry will not have a material adverse effect on our operations and financial performance. Some of the potential key drivers which may cause material adverse changes in the palm oil industry are the occurrence of an outbreak of diseases affecting oil palm trees, extreme changes in the climate and adverse fluctuations of CPO prices mainly caused by the existing overall stock levels of CPO and the price fluctuations of the substitutes of CPO, namely soybean oil and rapeseed oil. 4.1.3 Our products and technology solutions may become obsolete due to technological developments in the market and our R&D activities may not yield the benefits that we expect Although we continuously undertake R&D to improve on our existing products or develop and introduce new products for the improvement of the palm oil milling process, we may not be able to accurately anticipate trends in technological or product development and market demand. If the anticipated development trend or market demand does not materialise, our R&D efforts may not yield the anticipated level of economic benefits to our Group. Furthermore, should our R&D efforts prove successful, we may not be able to apply these newly developed technologies to our products that will be accepted by the market or apply them in a timely manner to take advantage of the opportunities presented in the market, which in turn may have an adverse impact on our business and financial performance. In addition, the level of economic benefits that can be derived from newly developed technology solutions or products may be affected by how quickly our competitors can replicate these products or develop newer or cheaper alternatives. As such, there is the potential risk that if the R&D of new or improved systems do not materialise, it may have an impact on the performance of our Group. However, we will still maintain our business operations through the marketing of our existing range of well proven products. Nevertheless, there is no assurance that our Group’s R&D activities will result in the commercialisation of new or improved products that will contribute to the performance of our Group. 4.1.4 We may not be able to adequately safeguard our intellectual property rights and potential trademark or copyright infringement Our commercial success is dependent to a certain degree on the ability to protect our intellectual property rights. As at the LPD, in order to protect against any infringement by unauthorised third parties, we have registered 3 patents and 13 trademarks for various products relating to the palm oil milling process as well as 1 copyright for our in-house developed centralised monitoring software platform and sterilisation control and monitoring software system with MyIPO. In addition, we have also submitted for registration 2 trademarks and 4 patents, for products relating to the palm oil milling process to be recognised in Malaysia and Indonesia. Further details of our trademarks, patents and copyright, including the respective country of recognition are set out in Section 6.21 of this Prospectus.
4. RISK FACTORS (Cont’d) We may also file applications for our trademarks, patents and copyrights, if necessary, in other countries in which we have a business presence and countries which we intend to expand our business presence in the future. However, existing intellectual property laws can only offer limited practical protection. There may also be delays in the trademark, patent and copyright registration process and there can be no assurance that such applications will be successful. Notwithstanding that we have applied for the registration of our trademarks and copyright, it may be possible for competitors to unlawfully pass-off their products as ours or to infringe our trademarks in the design of their marks and/or branding of their products even upon such registration. In the event that third parties infringe our trademarks or copyright by unlawfully passing off their products as our products, imitating· or using our trademark without authorisation from us, we may face considerable difficulties and costly litigation which may affect our reputation, businesses and financial performance. In addition, upon registration, there is no assurance that we can renew the registration of our trademarks, patents and copyright upon their expiry. However, we may still be able to enforce our rights notwithstanding the expiry of such registration if it can be proven that, amongst other factors there is a reasonable degree of goodwill in our use of these trademarks, patents and copyright. Further, there can be no assurance that our products unWillingly infringe or will infringe other registered trademarks or intellectual property rights belonging to third parties. Although applications have been made to MylPO for the registration of our trademarks and patents, as at the t.PD, our applications for the 2 trademarks and 4 patents as mentioned above have yet to be registered. Further, we may develop other marks or products in the future that may infringe other intellectual property rights and may be subject to legal proceedings and claims relating to such infringement. The occurrence of any claims or litigation involving the infringement of the intellectual property rights of third parties, whether with or without merit, could result in a diversion of our management’s time and resources, and our business operations may be materially and adversely affected. In addition, any successful claim against us arising out of such proceedings could result in substantial monetary liability and will materially affect our reputation and the continued sale of the affected products and consequently, our financial performance. In mitigation, should there be any infringement of our trademarks, patents or copyright after its successful registration, our Group would pursue legal action and seek the necessary recourse. In addition, our Group’s proprietary software products are encoded with unique executable codes which are retained by us to mitigate the risk of piracy. Furthermore, the said unique executable codes are unique to a particular POM which is installed with our Group’s software application and cannot be reused by any other software system. As such, without the source codes owned and controlled by us, it is virtually impossible for competitors to use illegally obtained software to their advantage. Up to the t.PD, we have not been involved in any litigation in relation to infringement of intellectual property rights. 4. RISK FACTORS (Cont’d) 4.1.5 Dependence on the services of contractors for certain fabrication and labour intensive mechanical engineering and civil engineering works We engage the services of external contractors for purposes of fabricating certain product components and parts for the hardware of our products as well as certain mechanical engineering works and civil engineering works, which are generally labour intensive. We outsource the abovementioned fabrication and installation works to our contractors as we believe it would be cost ineffective to maintain a large workforce and premises as the revenue generated by our Group is pre-dominantly project-based in nature. By outsourcing these functions, we have the flexibility to macro manage our contractors and the works undertaken by them without having to employ a large number of workers. We also outsource all civil engineering works to specialised contractors as we do not have the necessary skills and expertise to undertake such works. Our criteria for the appointment of contractors include a satisfactory prior working experience with them and the competitiveness of their terms of engagement. Once appointed, the contractor enters into a formal contractual relationship with us in respect of the project and production assignment. Notwithstanding this formal contractual relationship, any failure by a contractor to provide its contracted services may result in damages and penalties against us in favour of the customer who awarded us the construction or product supply contract. In the event that we are unable to claim such penalties from our contractors, we may have to fully bear such costs and this may result in an adverse effect on our financial performance and business operations. However, we believe that the dependence on the services of contractors is mitigated by the following: (i) We have established long term relationships with our contractors, who are reliable, have an established track record and are experienced. We also conduct periodic assessment of our contractors as to their ability to deliver their services timely and satisfactorily as well as an assessment of their financial strength;
(ii) There are numerous suitably qualified contractors in the market; and
(iii) The contractors are monitored and supervised by our quality control inspectors and project engineers. In addition, we also undertake continuous review, evaluation and discussion to monitor and improve the work progress for each project to ensure timely completion and high quality delivery of projects. Although we have not previously experienced any major disruption to our operation as a result of our dependence on contractors, no assurance can be given that our Group will be able to procure such services and/or components in a timely manner for our future projects. 4.1.6 The continuous employment and performance of our experienced Directors, key management personnel and skilled personnel are pivotal to our success We attribute our success to the leadership and contributions of our Executive Directors, key management personnel and skilled personnel. We believe that our continued success will depend, to a significant extent, upon the continued employment and performance of our Executive Directors, key management personnel and skilled personnel. Further, due to the specialised and technical nature of the palm oil milling machineries sector, we are also dependent on our key personnel who possess the relevant technical knowledge such as our engineers. The loss of any of our key Directors and members of our senior management team, the profiles of which are set out in Sections 7.1.2,7.2.2 and 7.3.2 of this Prospectus, without suitable and timely replacement could adversely affect our continued ability to manage our operations effectively and competitively. Our future success also depends on our ability to attract, hire, train and motivate sufficient skilled personnel. 4. RISK FACTORS (Cont’d) Our Directors recognise the importance of our ability to attract and retain our key management personnel as well as skilled personnel and have put in place a human resource strategy. This human resource strategy includes suitable compensation packages and a human resource training and development programme for all supporting employees in all key functions of our operations. We have made continuous efforts to strategically develop a dynamic and strong management team and groom the younger members of the management team in assisting our key personnel to operate and manage our operations Furthermore, in recognition of their contributions to our Group, pursuant to the Listing, we have reserved 8,250,000 IPO Shares for allocation to the Eligible Persons in order for the eligible Directors and employees to participate directly in the equity of our Company. We also believe that by increasing our profile through our Listing, we will be able to attract more qualified personnel to continuously play an active role in the growth of our Group. Notwithstanding our efforts to create a conducive working environment and providing motivation to our employees, there is no assurance that the above measures would be successful in retaining our Group’s key management and skilled workforce. 4.1.7 Loss of profits due to unanticipated cost overruns and project delays Our revenue is mainly derived from project-based contracts. Although we closely manage and monitor our projects costs, costs overruns may arise during the installation and commissioning stages as a result of unanticipated modification works due to customer requests or unscheduled delays due to delay in readiness of site. In the event the unanticipated modification works are done upon customer requests, we would normally issue variation orders to recoup the costs incurred. In selected events, we may also elect to bear the costs incurred for unanticipated modification works requested by our customers in view of maintaining good relationships but would be dependent upon the cost of such modifications. Notwithstanding the above, failure to meet the completion date of the projects may also lead to damages being claimed by customers, thus affecting our profitability. In addition, customers may delay or cancel their projects due to any unforeseen circumstances at any point of time during the duration of the project. This said delay or cancellation of projects by our customers may have an adverse impact on our financial performance as presently, all contracts entered into for our projects do not include any clauses allowing us to recoup any costs incurred, save for the respective progress billing stages in accordance with the terms and conditions agreed of the said contracts. However, in the event of a delay not caused by us, our Group endeavours to enter into negotiations with our customers for the recovery of any additional costs incurred via the issuance of variation orders. To mitigate the above risk, our Group will conduct studies on the specifications of each project in order to ensure smooth implementation and avoid cost overrun. In addition, we believe that our management has the experience and expertise and by working Closely with our customers, to ensure that all work specifications are met, errors or defects within our projects or products shall be reduced to a minimum level. For the Period under Review, although we have experienced a delay in one project, we have not experienced any project cancellations or material project cost overruns. Although we strive to maintain a commendable track record of timely project completion with quality and best practices with regard to our services, there can be no assurance that failures would not occur and affect our Group’s financial performance and reputation. 4. RISK FACTORS (Cont’d)
4.1.8 Warranty claims by our customers and defects liability incurred The systems developed and installed by us along with our corresponding equipment must conform to and perform according to our customers’ specifications as agreed upon for each project. In the event our products installed do not conform to the pre-agreed specifications or suffer from defective materials and workmanship, we will have to rectify the defects at our own cost resulting in reduced profitability. We provide warranties of 18 months upon delivery or 12 months upon commissioning of the system, whichever comes first, for our products. Our warranty provided is limited to rectifying or replacing the defective material or defective part, and does not cover any consequential losses due to the daily wear and tear of our equipment installed. We usually factor in a certain amount for such potential defects in esti mating/budgeting the total cost of a project undertaken by us. In addition, the breakdown of certain parts of the equipment installed is also covered by the warranties provided by our suppliers. Our Group has also maintained a reasonable sum of product liability insurance to cover any incidental liability claims for our products installed by us. In addition, our Group has good relationships with our customers based on our track record in meeting our customers’ requirements and needs, and as such, any occurrence of unusual or excessive defects may affect our business reputation. Nevertheless, our Directors believe that with our experience and expertise and by working closely with our clients to ensure that all work specifications are met, defects in our projects can be minimised. Although we have not suffered any material losses as a result of non-performance of project specifications, product warranty claims or claims made for defects liabilities, no assurance can be given that we will not be adversely affected in the event of the abovementioned risk.
4.1.9 Our ability to continuously and consistently secure new contracts Our business is mainly project-based. We therefore have to continuously and consistently secure new sales contracts to sustain our financial performance. There Can be no assurance that we will be able to secure new contracts in the future. As such, our profitability and financial performance will depend on our ability to secure new projects on a regular basis. If we are unable to do so for any reason, our profitability and financial performance may be adversely affected. Presently, our Group does not have any intentions to diversify into any other industry. To mitigate this risk, our management endeavours to establish and maintain good working relationships with our existing and former customers. Our Group constantly engages in various marketing activities with a view to secure new contracts and to expand our customer base. In addition, our Group has allocated RM11.0 million from the proceeds to be raised from the Public Issue for the expansion of facilities and RM4.0 million for the set-up of a R&D facility which is expected to enhance our production and R&D capabilities. With the extensive industry experience and knowledge of our Group’s founders, our already well-represented and established products in the largest palm oil producing countries coupled with our “efficient-centric” solutions, we believe the risk of our ability to secure new contracts is well mitigated.
4.1.10 Fluctuation of revenue and profitability Our Group derive a substantial portion of our revenues and profits from the provision of solutions and sale of milling systems, which are mainly project based in nature. The contract sum for a milling system project is usually small in amount and the contract period is relatively short ranging from 3 months to 12 months. On the other hand, a provision of solution project is typically larger in amount and usually stretch over a longer period ranging from 12 months to 24 months 4. RISK FACTORS (Cont’d) Our revenue stream is largely derived from our provision of solutions, which contributed approximately 52.50%, 66.24%, 54.66% and 85.34% to our total revenue for the FYE 2011, FYE 2012, FYE 2013 and FYE 2014 respectively. The revenue generated from the provision of solutions for each financial year will depend sUbstantially on the recognition of revenue from the type of projects secured and undertaken during a particular financial year, based on the percentage-of-completion method As a result, our Group’s revenue and profitability are subject to the type and nature of such projects undertaken and may therefore fluctuate/vary from period to period due to the timing on the recognition of such revenue which coincides with the relevant billing milestones of each specific project (especially for turnkey solutions projects which are awarded in larger sum contracts). In relation to profitability, our profits for each financial year depends substantially on the contribution generated through the type of contracts secured and the work undertaken for our provision of solutions and sale of milling systems in any financial year. The provision of solutions and the sale of milling systems together contributed 88.79%, 89.87%, 93.69% and 95.18% of the total gross profit of our Group for the FYE 2011, FYE 2012, FYE 2013 and FYE 2014 respectively. Our gross profit margin for each financial year differs as each project differs in terms of scope, length and costs which will have an effect on our gross profit margins. Generally, the provision of solutions, in particular turnkey solutions, will encompass a wider scope, longer duration of contract and higher costs as compared to the rest of the products and services offered by our Group as it involves the prior construction or renovation of a POM. Thus, our Group’s profitability is also subject to the nature of such projects and may therefore fluctuate/vary from period to period. As such, our revenues and profits for any period are not necessarily indicative of revenues and profits that may be expected for any future period. Please refer to Section 10.2 of this Prospectus for further details on our revenues and profitability for the Period under Review.
4.1.11 Competition faced by our Group from existing market players and new market entrants Our Group faces competition from existing competitors in the industry as well as new market entrants. However, our Board believes that the impact of competition from new entrants is mitigated by certain barriers of entry such as, knowledge to design, manufacture, integrate and fabricate systems and hardware, competent technical skills, track record or reliability to produce and deliver dependable and competent systems, which meet the specifications of customers. Although we continually seek to maintain and adopt appropriate strategies to remain competitive, there can be no assurance that competition from existing competitors and/or new market entrants will not have a material adverse effect on our performance/market share in the future
4.1.12 Risk of failure during our Group’s expansion into foreign markets We have penetrated into foreign markets since 2004. We intend to further expand our business presence in other foreign markets where we believe there is a demand for our services and products. We have set up a permanent presence in Indonesia via our sales and marketing office in Jakarta. In view of our present exposure and future expansion plans in Indonesia, we may be exposed to the risks imposed by the economic, social and political conditions in Indonesia. The profitability of our operations and the success of our expansion plans in Indonesia may be adversely affected due to any political or economic reforms undertaken in Indonesia. In addition, in the event of any government-imposed wage and price controls, mandated industry restructuring and trade barriers, such as high tariffs and customs duties, may negatively affect us. Our continuing expansion in foreign markets may strain our resources including financial resources and may also stretch our management personnel. Any failure to accurately assess the abovementioned issues, amongst others, could affect our Group’s business, financial condition and operating results. 4. RISK FACTORS (Cont’d) In mitigating the above, we comprehensively familiarise ourselves with the relevant business requirements and conditions of the respective foreign markets, namely amongst others, the present condition of the local economy and palm oil milling machineries sector, the current requirements for market entry, the required compliance of all laws and regulations for our business operations in a foreign country, the respective restrictions imposed on a foreign business and knowledge of local industry practices, as well as carefUlly assess the investment viability of an expansion into new foreign markets. Thereafter, we will carefully implement our expansion plans and our management will continue to monitor closely our Group’s operating and financial performance. Through this, our Group will then be able to minimise our risk exposure. 4.1,13 Risk of foreign exchange rate instability as a portiori’ of our Group’s revenue is denominated in foreign currencies A portion of our revenues are denominated in foreign currencies. As such, an appreciation of the RM against the respective foreign currencies may adversely affect our financial performance because it may reduce our revenue reported in RM terms. During the Period under Review, approximately 79.30%, 83.05%, 36.83% and 23.35% of our Group’s revenue has been derived from the overseas market, which is denominated in a combination of foreign currency and RM. Notwithstanding the above, our Group’s foreign exchange exposure in terms of our total revenue for the FYE 2011 is 39.86%, for the FYE 2012 is 13.93%, for the FYE 2013 is 38.52% and for the FYE 2014 is 28.89%. Nonetheless, our Group has not been materially affected by the fluctuations of the foreign exchange rates during the Period under Review. Our Group mitigates its exposure to foreign currency fluctuations by the purchase of certain materials and parts as well as engaging subcontractors and labour in the same foreign currency which we conduct our sales. This forms a natural hedge, ensuring that our Group is not adversely affected by unfavourable foreign currency movements. We also have in place foreign currency accounts to maintain any surplus or unutilised foreign currencies for future payments to foreign suppliers/vendors to further minimise our Group’s exposure to foreign currency fluctuations. Notwithstanding the above, there can be no assurances that foreign currency fluctuations will not materially adversely affect the financial performance of our Group. 4.1.14 Risks faced by our Group pursuant to the joint venture agreement entered into by Dolphin Applications with its joint venture partners to establish PT Emas Hijau Dolphin Applications had entered into a joint venture and shareholders agreement with its joint venture partners on 16 January 2015 to establish a new associate company, namely PT Emas Hijau wherein Dolphin Applications has a 30% equity interest. PT Emas Hijau is currently dormant and its intended principal activity is that of the building, operating and managing of POMs to be located in Indonesia. Our Group has embarked on this opportunity to show case the full range of our products to our potential customers. As at the LPD, the costs incurred by our Group as part of this initiative is approximately RMO.22 million. Although the joint venture between Dolphin Applications and its joint venture partners is regulated by the abovementioned joint venture and shareholders agreement, we are nonetheless exposed to certain risks and uncertainties as a result of the joint venture. As the success of PT Emas Hijau is dependent on the fulfilment of the responsibilities and continuous commitment of each joint venture partner, any inability of the respective parties to fulfil their responsibilities or invest in the joint venture in the manner that is anticipated may result in the failure of the joint venture. In the event of any such failure, there are no assurances that we would be able to recoup in full or in part any of the costs incurred. 4. RISK FACTORS (Cont’d) To mitigate the above risks, we would take all reasonable steps that are within our control to ensure that our responsibilities and obiigations to the joint venture are fulfilled and carried out accordingly. However, any failure by our joint venture partners, which we have no control over, could result in us having to make additional investments or undertake additional obligations in addition to those as stated in the joint venture and shareholders agreement, which could have a material adverse effect on our financial condition. Please refer to Sections 6.5.7 and 6.27.4 of this Prospectus for further information on PT Emas Hijau.
4.2 RISKS RELATING TO OUR SHARES 4.2.1 Our Promoters control a significant portion of our Shares which may result in our Promoters being able to influence the outcome of certain matters requiring the vote of shareholders Our Promoters, namely, Low Teck Yin and Hoh Yeong Cherng collectively control approximately 57.04% of our enlarged issued and paid-up share capital after the IPO. Consequently, our Promoters may be able to influence the outcome of certain matters, such as the election of Directors and the approval of business ventures requiring the vote of our shareholders, unless they are required to abstain from voting by law and/or by the relevant authorities. The introduction of corporate governance rules that requires the formation of an Audit Committee, which consists three independent non-executive Directors, may effectively help to promote transparency in all material transactions and our Company’s accountability, thereby safeguarding the interests of the minority shareholders. Our Promoters would also be required to abstain from voting if there are any related party transactions which may pose a conflict of interest to that of our Company. 4.2.2 There has been no prior trading market for our Shares and a market for our Shares may not develop There is currently no prior trading market for our Shares. There can be no assurance that an active and liquid market for our Shares will develop upon its Listing or, if developed, that such market will be sustained. There can be no assurance that the IPO Price will correspond to the price at which our Shares will trade on the Main Market upon or subsequent to our Listing. The IPO Price was arrived at after taking into consideration, inter-alia, our financial and operating history and conditions, our future prospects and the prospects of the industry in which we operate and the prevailing market conditions at the time of the Listing. The IPO Price may not be indicative of prices that may prevail in the trading market after the Listing. In recent years, the stock market in general, and the market for the securities of many companies in particular, has experienced volatile price movements which to a certain extent, were driven by local and global market sentiments. Such fluctuations may increase the market risk of our Shares. 4.2.3 Future sale of our Shares in large quantities could adversely affect our Share price Any future sale of our Shares or our Shares made available in large quantities can have an adverse effect on our Share price. The sale of a significant amount of our Shares in the pUblic market after the IPO, or the perception that such sales may occur, could adversely affect the market price of our Shares. These factors also affect our ability to raise funds from the issue of additional equity securities. If our Promoters sell, or are perceived to sell, substantial amounts of Shares in the public market following the expiry of the moratorium period, it may result in a dampening effect on our Share price. 4. RISK FACTORS (Cont’d)
4.2.4 Investment in the capital market exposes the investor to capital market risk The performance of the local bourse 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 the 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, which may already fluctuate significantly and rapidly as a result, inter-alia, of the following factors: • differences between our Company’s actual financial and operating results and those expected by investors and analysts;
• announcements by us or our competitors of significant contracts, acquisitions, strategic alliances, joint ventures or capital commitments;
• fluctuations in stock market prices and volume;
• changes in our Company’s operating results;
• changes in securities analysts’ estimates of our Company’s financial performance and recommendations;
• change in market valuation of similar companies; • our involvement in litigation, arbitration or other forms of dispute resolution;
• additions or departures of key personnel; and
• changes in general economic and stock market conditions.
4.2.5 Unforeseeable events could result in the delay in Listing or the termination of the Listing exercise The occurrence of anyone or more of the following events, which may not be exhaustive, may cause a delay in our Listing or our Listing to be aborted: (i) the placees under the private placement fail to acquire the Public Issue Shares allocated to them;
(ii) the Underwriter exercising the rights pursuant to the Underwriting Agreement to discharge themselves from their obligations thereunder; or
(iii) we are unable to meet the public spread requirement as determined by Bursa Securities, i.e. at least 25% of our enlarged issued and paid-up ordinary share capital must be held by a minimum number of 1,000 public shareholders holding not less than 100 Shares each at the point of our Listing; However, our Board will endeavour to ensure that our Company complies with the various provisions of the Listing Requirements, including, inter-alia, the public spread requirement. In the event of the failure of our Listing, all monies paid in respect of any application accepted from you will be returned in full without interest within 14 days failing which the provision of sub-section 243(2) of the CMSA shall aoolv accordinalv 4. RISK FACTORS (Cont’d) In the event that the Listing is aborted and our Shares have been allotted to new investors, the return of monies to the holders of our Shares 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. 4.2.6 We are a holding company and, as a result, are dependent on dividends from our subsidiaries to meet our obligations and to provide funds for payment of dividends on our Shares We are a holding company and conduct substantially all of our operations through our subsidiaries. Accordingly, dividends and other distributions received from our subsidiaries are our principal source of income. Consequently, the amount of these dividends and distributions are an important factor in our ability to pay dividends on our Shares (to the extent declared by our Board). The ability of our subsidiaries to pay dividends or make other distributions to us is sUbject to the availability of distributable reserves, applicable legal restrictions contained in their loan agreements and to these companies’ having sufficient funds that are not needed to fund their operations, other obligations or business plans. In addition, changes in the Malaysian Financial Reporting Standards (“MFRSs”), if any, may affect the ability of our subsidiaries (and consequently us) to declare and pay dividends. At this juncture, there are no applicable MFRSs that will affect the ability of the subsidiaries to declare and pay dividend. However, should there be amendments on the MFRSs or new MFRSs to be issued in the future which will have an impact on the profit of our subsidiaries, these may affect the ability of the subsidiaries to declare and pay dividend due to lower profits and dividend payable under single-tier system. As we are a shareholder of our subsidiaries, our claims as a shareholder will generally rank junior to all claims of our subsidiaries’ creditors and claimants. In the event of a liquidation of a SUbsidiary, there may not be sufficient assets for us to recoup our investments in that subsidiary. 4.2.7 New investors will incur immediate dilution and may experience further dilution due to our IPO Price being higher than our proforma consolidated NA per Share Our IPO Price of RMO.68 per Share is substantially higher than our proforma consolidated NA per Share of RMO.36 as at 31 December 2014 after the IPO and proposed utilisation of proceeds as referred to in Section 3.7 of this Prospectus. If we were liquidated immediately following this IPO, each investor subscribing to this IPO would receive less than the price paid for their Shares. Please refer to Section 3.8 of this Prospectus for further details on dilution.
4.2.8 Negative publicity may adversely affect our Share price Negative publicity involving our Group, any of our Directors or our controlling shareholders may adversely affect the market perception or the stock performance of our Company, whether or not it is justified. Some examples are unsuccessful attempts at joint ventures, takeovers or involvement in insolvency proceedings. 4. RISK FACTORS (Cont’d) 4.2.9 We may issue future securities for additional funding for our future growth which will result in a dilution to our Shareholders Secondary issue(s) of securities after the IPO may be necessary to raise the required capital to fund our growth capital. If new Shares placed to new and/or eXisting shareholders are issued after the IPO, they may be priced at a discount to the then prevailing market price of our Shares trading on Bursa Securities, in which case, existing shareholders’ equity interest may be diluted. If we fail to utilise the new equity to generate a commensurate increase in earnings, our EPS will be diluted, and this could lead to a decline in our Share price. Any additional debt financing may, apart from increasing interest expenses and gearing, contain restrictive covenants with respect to dividends, future fund raising exercises and other financial and operational matters.
4.3 OTHER RISKS 4.3.1 Unfavourable financial and economic developments in Malaysia may have an adverse effect on us We are incorporated in Malaysia, and a majority of our assets are located or registered in Malaysia. As a result, we are subject to political, social, economic, legal and regulatory risks specific to Malaysia. Also, general economic conditions in Asia may have an effect on our business, financial condition and results of operations, as well as our future prospects. The recent global financial crisis, the recent European sovereign debt crisis, recent developments in Middle East, volatile oil prices, the general weakness of the global economy and the risks faced by our customers in the palm oil industry as disclosed in Section 4.1.2 above have increased the uncertainty of global economic prospects and the prospects of the palm oil milling machineries sector which may continue to adversely affect the Malaysian economy and palm oil milling machineries sector. Any future deterioration of the Malaysian and global economy could adversely affect our business, financial condition and results of operations. 4.3.2 Forward-looking statements may not be reflective of our future prospects Our Prospectus contains forward-looking statements, which are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Whilst the interpretation of this information may be forward-looking, the contingencies and inherent uncertainties underlying this information should be carefully considered by the investors and should not be regarded as a representation by our Company and our advisers that the objectives and the future plans of our Company will be achieved. Any .differences ‘in the expectation of our Company from our actual performance may result in our Company’s financial and business performances and plans to be either, materially or immaterially, different from those anticipated. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK