4. RISK FACTORS 4. RISK FACTORS
Applicanta for the Public Issue Shares and OFS Shares should carefuUy collSider the following In addition to all the other relevant infonnation contained elsewhere in this Prospectus, before applying for the Public Issue Shares and OFS Shares: Marketability of EFB Shares Prior to this Public lssue and OFS, tllere has been no public market for EFS Shares. There can be no assurance that an active market for EF’B Shares will develop upon its listing on the Main Board of lhe Bursa Securities or if developed, such market would sustain. The Issue/Offer Price of RM1.14 per ordinary share has been determined after taking into consideration a number of factors, including but not limited to, the Group’s financial and operating history and conditions, the prospects of the Group and the industry in which the Group operates, the forecast net PE multiple of the Group, the proforma consolidated NTA of the Group, (as set Qui in Section 3.7 or this Prospectus), as well as the valuation ofche Group’s properties,. plant and machinery, the managemenl of tbe Group, U’le market prices for shares of other companies engaged in businesses similar to that of the Group, and the prevailing market conditions at the time Ihe Underwriting Agreement was signed. There can be no assurance that the Issue/Offer Price will correspond to the price at which EFB Shares willirade on the Main Board of the Bursa Securities UjXlR or subsequent 10 its (jSllng or thai: ao active market for EFB Shares wiU develop and continue upon or subsequent to its Listing. 4.2 Business Risks The Group .is involved in the manufacturing of wood products, which is subjed to certain risks inherent in the industry. Risks applicable to the wood induslry would include fluctuations in prices of raw material, fluctuations in foreign exchange rates or currency controls, changes in the general economic and business conditions and changes in the legal and regulatory framework. A1th<lugh EFB continuously seeks to minimise and mitigate business risks, 00 assurance can be given that any change to these factors wiD not have a material adverse effed on the business of the E.FB Group. 4.2.1 Market Risks As rubberwood log is a commodity, it is subjected 10 fluctuations In prices. In some situations. i.ocreases In the price of raw malerials are DOl easily passed on 10 customers. This could impact on the margin or alternatively, if the increase in cost is passed on to customers, the manufacturer may not be price competitive. Prices of rubberwood logs may atso fluctuate due to seasonality whereby during the rainy season, the slowdown in felling activities may contribute 10 8 lempofiuy shortage in supply Ihus possibly driving the log prices up. As rubberwood log is a commodity. all manufacturers who use il will be equally affecled. However, between 1999 and 2003, prices of rubberwood logs only increased at an average rate of 3.9% per annum. Over lbe five-year period, prices of rubberwood logs have only increased from RM90 per cubic metre in 1999 to RMI05 per cubic metre in 2003. As a mitigating factor, the Group’s main raw materials are those ‘by-parts’ of the rubberwood, namely the branches of the rubberwood that cannot be used by the miUers. As such, the Group does not compete directly with the furniture manufacturers making it less sensitive to rubberwood log price fh.duations. 4. RISK FACroRS (Conl’d) 4.2.2
The Group is also confident that it is able to posilioo itself and adapt its business strategies in accordance 10 and to capitalise on tbe prevailing economic and market condilions. AvaHability of Raw Materials Rubberwood is the main raw material for the manufacturing of MOF. For the ten (10) month period ended 31 October 2004. all of the Group’s rubberwood supply was sourced locaUy from their respective country of operations; i.e. Malaysia and Thailand. However, it must be DOted that the production of MDF uses mainly branches and smaller diameter rubberwood logs which are deemed unsuitable Cor the solid wood furniture industry. AJay decline in the supply of raw materials used may impact on the manufacturers of reconslituted wood-based panel board. Between 1999 and 2003, the total acreage of rubber plantation decreased at an average annual rate of 2.7%”. The planted area in Malaysia is dominated by the smallholding sector. The income obtained by smal1holders is relatively low resulting from low volume of rubberwood harvested and low latex prices in the world market. This has reduced the investment undertaken by smallholders in rubber (oresl plantation. Even though the average annual rale of lotal acreage of rubber plantation declioed between 1999 and 2003, the areas that are replanted with rubber in Malaysia registered an average growth rate of 1.0%· per annum during the same period. In the event of a sbortage in the supply of rubberwood, tbe Group can use other alternative materials sucb as off-euts and sbaving in addition to other types of plantation wood for the production of MOF. Furtbermore the Group is considering establishing chipping operations within the Association of Soulb East Asia Nations (“ASEAN”) region i.e. in an ASEAN country that has ample supply ofrubberwood. Note: • Source: Extraction ofA~ment of the Rtxonstituted Wood·Based PaMl Baard Industry, u.pdared 27 Now:mber 2004, prepared by Vital FtJCtor Consulting Sdn 8M for inclusion in this prospectla
Cuncotly. the EFB GrotJp does not have any Iong·term contracts with suppliers of rubberwood. Nevertheless the Group enjoys long-term business relationships with its top rubberwood suppliers, ranging from two (2) to ten (10) years. In the future, the Group may seek to acquire forestry concession to extract rubberwood and! or undertake reforestation after extraction. Should this plan materialize, it would facilitate the Group in reducing its dependency On the suppliers of ruhberwood. Other types of raw materials used include Urea Formaldehyde (“UP”) glue. veneer logs and veneer sheets. These are primarily imported. The sources of imports are as follows: UP glue is impor1ed from Singapore; Veneer logs are imported from &Igium, Gennany, Solomon Islands and South Africa; and Veneer sheets are imported from Japan and Singapore.
4. RISK FACroRS (Conl’d) 4.2.3
4.2.4 4.2.5 Availability or Skilled Work£rs Knowledge of and expertise in industriaJ technology is crucial to the operation of the business and the level of technical skills and knowledge required in the manufacturing of reconstituled wood-based panel board is moderate to high. Although the operations of the business are fully automated, the Group would stiU require the skill and expertise of machioe operators to operate tbe machineries. As such, tbe need for skilled workers coupled with Ute light labour markel pose a challenge to many companies in soorcing quality perronnel in the reconstituted wood-based panel board industry. The Group has had a relatively stable workforce over tbe years with low staff turnover. This is owing 10 the Group’s commitment to provide it’! personnel with the opportunity for training and career advancement, as it believes that people are the most valuable assets of the Group. In addition, the Group continuously tries to enhance productivity via technology and back-office improvements to further mitigate the risk of labour shortage. £CODOmic, Political Aad Regulatory Risks The Group’s business, prospects, financial conditions and level of profitability may be affected by the development of the economic, polilicaJ and regulatory environment in the countries wbere the Group operates as well as CJlports to. Any adverse development in political Situation, economic uncertainties or changes in the regulatory environment could materially and adversely affect the financial performance of the Group. These risks include, among others, risks of war, terrorism, global economic downturn, epidemic outbreaks, social unrests, changes in interest rates and unfavourable changes in government policies such as introduction of new regulations, import duties and tariffs. Whilst the Group practices prudent financial management and efficient operating procedures. tbere is 00 assurance that adverse political and economic developments, which are beyond the Company’s control. will oot materially afftet the Group. SociI) U.rese in Thailand Qurently, SFC a subsidiary, operates in Hatyai, in southern Thailand. The recent social unrest in southern Thailand may pose some risk to the Group’s operations there. The Thai authorities with the co-operation of the Malaysian authorities are trying to curb these spurts of social unrest. Should the authorities resort to imposing new restrictive regulations/measures to manage the situation such as imposition of martiaJ law, the Group’s performance in Thailand may be affected. As stated in Section 4.1.7 nerem, a significant amount of tile Group’s profit is forecasted 10 be derived from its operations in Thailand. Oureolly, it is important to note that the social unrest as mentioned above occtlned in the eastern peninsular of southern Thailand and is away from the Group’s operations. However, should the social unrest worsen and escalate and/or spread to areas closer to Hatyai, the Group’s profitability could be affected. 4. RISK FACroRS (Conl’d) 4.2.’
Disease Outbreaks As stated in Section 5.4.7 herein, a substantial amount of the Group’s products was exported to Otina for the financial year ended 31 December 2003. As such, the Group’s performance is, to a certain degree, dependent on China’s economic. political and social conditions. In the year of 2003, the outbreak of Severe Acute Respiratory Syndrome (commonly known as “SARS”) had affected the economy of countries within the East and South· East Asia region, including China (one of the Group’s major countries ofexport). In light of the above, should there be another outbreak of SARS or any similar epidemic outbreak, the perfonnance of EFB may be affected. However, the governments of the respective countries which are potentially at risk of such outbreaks have laken precautions to prevent another outbreak of SARS, although there can be no assurance that such outbreaks will not occur in the future. Risks Associated witb Substitute Products There are various different types of substitutes for reconstituted wood-bascd panel boards. Wood-based substitutes such as solid timber, bamboo, rattan and plywood, as well as non-wood substitutes such as vinyl, concrete. granite, marble and metals, compete with reconstituted wood-based panel board in terms of similar applications and end·user sectors. However, recoDSlituted wood-based panel boards including MDF are considered to be the new substitutes for solid wood, plywood and other wood based materials. Reconstituted wood-based panel boards such as MDF has many of the mechanical and physical characteristics of solid wood but without the natural faults. As such, although there are many substitute products for MDF, the major advantages of reconstituted wood-based panel boards over many of lOOse substitute products arc as follows: (8) iow cost, as the production of reconslitoted wood-based panel board utilises wood wastes, smaU-diameter logs and mature trees from wood processing mills;
(b) more environmentally friendly as mainly plantation wood is utilised as raw materials compared wilh tropical hardwood-based alternatives; and
(c) highly versatile in applications.
In fact. the following reconstituted wood·based panel board would represent a closer substitute and higher threat to other wood-based substitutes:
(a) Chipboard and particleboard provide some cost advantages over plywood for similar applicatloBS; and
(b) MDF is fast becon»og the material of choice for kitchen cabinets and cupboards due to its many superior qualities over plywood. such as moldability.
4. RISK FACroRS (Conl’d)
4.2.8 Risks Associated witlilaternptioo EFB Group did 001 experience any disruption in busioess arising from security and system disruption on its operating plants, which have a significant effect on its operations in the past twelve (12) months prior to the date of this Prospectus. The Directors do Dot foresee that there would be any disruption to the security and system of the Group’s operations which would materially affect the Group’s output. In addition, the Group has a regular maintenance scbedule for its’ machinery and equipment Notwilhstanding this. there is no assurance that security and system disruption will oot materially affect the Group’s business in the future.
4.2.9 Ta:x Ioceotbes UDder MIDA Pioneer Statti EFB has been granted the Pioneer Status [or Reinvestment in Resource-Based Industry under the Promotion of Investments Act, 1986 which exempts up to 70% of their statutory iocome for a five (5) year period for production of wooden furniture, MDF flush doors and MDF with or without overlay for reinvestment on existing production sites subject to the following conditions: (i) Value-added production on wooden furniture and MDF flush doors to achieve a minimum of 50%;
(ii) Value-added production on MDF with or without overlay to achieve a minimum of 40%;
(iii) A minimum of 51% of EFB’s shares is to be purchased and held by Malaysians (at tbe point of EFB’s listing); and (iv) EFB must maintain separate accounts for products approved for the pioneer status taJl: incentives and for products not approved for the same incentives subject to agreement by the Inland Revenue Board of Malaysia. Should there be a delay in fulfilling the abovementioned conditions, tbe Group’s taxation wuld be affected, wttich would in tum affed the profit after Iall: of Ute Group. 4.3 FtnallClal Risks It is inherenl in any business that there arc possible limitations to its growth as well as its operating and financial flexibilities as a result of the business’s borrowings and nonrecovcrability of outstanding debts. Significant fluctuation in the domestic interest ratcs would affect the financial performance of the Group, as working capital requirements and capital expenditures are financed in pari by borrowings and industrilil hire purchase respectively. Total banking facilities of the Group was appro:timately RM233 million as at 31 October 2004, out of which approximately RM87.776 millioD is still outstanding, whilst hire purchase stood at approximately RMO.8 millioD M at 31 October 2004. Will.. the proceeds to be raised from the Public Issue, approximately RM32.0 million will be utilised for repayment of the banking facilities. The Directors of EFB are of the opinion that after laking into account the casbflow position, available banking facilities and gross proceeds from the Public Issue, the Group will have adequate funds to meet its current and immediate working capital and capital expenditure requirements. Presently, the Group is not exposed to tbe risk of material bad debts, as their customers have been prompt in meeting their financial commitments. 4. RISK FACTORS (Conl’d)
4.4 Foreign Excbaoge Risb Approximately 44% of tbe Group’s lotal purchases of raw material were imported and 85% of the Group’s turnover was exported for the fmancial year ended 31 December 2003. For tbe ten (10) month period ended 31 October 2004, approximately .55% of the Group’s total purchases of raw material were imported and 82% of tbe Group’s turnover was exported. Due to the Group’s purchases IlDd sales in foreign currencies. mainly in USD aDd EURO, it is therefore subject to foreign exchange fluctuations. In addition, the fact that the Thai Baht is not pegged to any major currencies does pose some foreign exctlange risks. Tbe fixed exchange rale of lhe USD at RM3.8OIUSD1.00 imposed by the Malaysian government on 1 September 1998 mitigates the foreign exchange risk for the Malaysian Ringgit. To miligate the foreign exchange risk in relation to the Thai Baht, SFC. a subsidiary of EFB, has borrowings with a financial institution in Thailand, which are therefore considered domestic borrowing for SFC. Save for when required on an ad hoc basis to mitigate its exposure wilh the EURO, the Group does not have any other hedging arrangement with its principal bankers. With regards to the Group’s maio imported raw material supplies, namely glue, in the event that tbe foreign exchange rates are not in the EfB Group’s favour, the Group has the option to source the supply from local suppliers. However, the price of some of the locally purchased raw materials arc still susceptible to foreign exchange fluctuations. 4.5 Ucenees aDd Registrations The Group’s qualification to operate is based on the licenses and registrations set out in Section 7 of this ProspectuS. All of these liceDCes and registrations are valid for only a speciflC period of time with renewal based 00 the Group’s compliance witb tbose requirements imposed by lbe relevant parties. There is no assurance that these licences and registrations will be renewed when they expire. The Group, however, will continue to ensure that it is in compliance with the requiremeots at all times, and is confident about the on-going renewals, as there have been no instances of failure to obtain the renewals in the past.
4.6 Competition The induslry in which the Group is involved in requires prodigious amount of start-up cost. 10 paltkular, the MDF sector has moderately high barriers to eotry in terms of initial capital outlay, technical know-how, skilled workforce and the requirements for licences and registrations, amongst others. Whilst new entrants to the industry may find the domestic market difficult to penetrate, the Group is not insulated from competition from the existing foreign/local manufacturers. The Group, however, bas several competitive advantages over its rival companies in thai the Group produces consistently high quality products and has an extensive and diversified market penetrntion with a large custoffiCr base. The Group also has tbe advantage of having a wellestablished martel reputatioo and strong customer relationship. In penetrating the overseas markets where the Group has plans to set-up operations, the Group would also be facing relatively high barriers to entry, namely the high start-up cost and the lack of local presence. To minimize the high start·up cost aod lhe Group’s inexperience in such markets, lhe Group expects to eoter iolo joint-ventures with local manufacturers. This mode of pel1etratioo is evident in ils Thailand operalions, where SFC was sel-Up as a jointventure. Given the Group’s track record, the Group has fared well in competing with the foreign! local manufacturers in providing similar products worldwide. 4. RISK FACTORS (Conl’d)
4.7 Dependency on Key MaDagemeat and Key Penonnel 1be Group believes that its continued success depends to a significant extent On the abilities and continued efforts of its existing Directors and competent senior management learn. and its ability to anract and retain skilled personnel. The Group is committed to providing continuous training to its employees in order to retain key management and personnel. The Group practices management empowerment wt.ere funcliooldepartmenl heads are relatively autonomous and have significaOl decision-making authority within their span of control and within clearly defined boundaries. As such, there is no over-reliance on the Managing Director to be involved in the details and all aspects of the operational and functional areas. This management philosophy enables tbe Managing Director 10 focus on strategic matters and devdopment of tbe business for growth and success. In addition, within eacb function, constant on-the.job training is undertaken to enable key staff to depulise tbe function/department bead where necessary. Nevertheless, the Group has put in place a management succession plan to ensure business continuity. Tbe Group’s management succession plan is based on a two-pronged approach: (i) Grooming senior management for succession to Managing Director; and (il) Grooming existing staff and tUring new staff tor succession 10 fuocIional maDagement and executive directors. Notwithstanding the management succession plan, there is no assurance that any changes to the existing management team ot EFB would have no material effect on the business, operations and fmancial conditions of the EFB Group. 4.8 Owuersbip aDd Co.erol ot tbe Group Upon completion of the Public lssue, EFB’s single largest group of sharebolders comprise Kuo Wen Chi, Kuo Jen Chang, Kuo Jen Chiu, Kuo Huei Chen and Hsu Mei Lan. CoUectively, they hold 48.5% of EFB (please refer to Section 2.2 of this Prospectus). A5 sucn, these controlling shareholders of EFB will be able to lnfluence tile outcome of certain matters requiring tbe votes of the Company’s shareholders unless lhey are required to abstain from voting and deliberating by law and/or tbe relevant authorities. The Group has made the relevant application to Mm and MIDA for additional tax incentives sucb as setting off the future Group’s profits against the cost of investment in SFC. Should the application result favourably to the EFB Group, the abovementioned non-Malaysian prorooters may be required to reduce their sbarcholding;; in BFB further 10 comply with lhe maximum equity conditions of not mort: tban 40% foreign sbareholding in EFB as may be imposed by MITl andl or MIDA 4. RISK FACTORS (Conl’d)
4.9 Risks Associated willi Breakout of FireIEDergy CrisisINataral Disasters/Other Emergency Risks Breakout of fire. disruptions of electricity of supply. as well as Ooods, amongst otber natural disasters, emergency risks aoo energy crisis would adversely impact the Group’s operations. lnterruption in power supply would pose a significant risk: to the Group. To prevent the risk of lire from the pressing process during any interruption in power supply, the Group bas a back.up generator for this purpose. However. the back-up generator is not sufficient to suppor1 the entire manufacturing plant sbould there be a major energy crisis. As such, there can be no assurance that even with the existing risk management practices, the Group will not be affected in the event of a fire. flood, energy crisis, natural disasters or other exceptional events. Insumnc~ Co.,~l’tIglI ON Ihll Group’s lUSW AI present, the Group’s inventory of raw material and finished goods, properties, equipment and machineries are insured against loss and lor damages from fire. As tbe Group’s main raw material, namely rubberwood logs, is less susceptible to fire due to its lower surface area over volume ratio, the Group maintains minimal amount o( insurance on the rubberwood logs. Allhough all reasonable steps have been taken by the Group to ensure that all its assets are adequately covered by insurance, 00 assurance can be given that lhe insurance coverage would be adequate for the replacement cost of the assets of the Group in the future. 4.10 Global Oil Prices Since lhe begiDDing of 2004, gIobaJ oil prices have risen sharply, reaching as high as USD55 per barrel in October 2004, representing a 60% hike from the star1 of the year. The EFB Group consumed approximately RM4.8 million worth of fuel constituting 2.52% of its lotal cost of manufacturing for the financial year ended 31 December 2003 wbereas for the ten (10) montll period ended 31 October 2004, the Group consumed approximately RM7.4 million worth of fuel constituting 3.4% of its to1al cost of manufacturing. In view of lhe rising energy prices, the performance of lhe EFB Group may be adversely affected due to higber manufacturing cost to be incurred and possibility of increase in selling prices o( the Group’s products. 4.11 Stability of Revenue The demand (or the Group’s products is neither seasonal nor cycltcaJ. The elasticity of demaoo will be depeodent on the end-user industry sectors, and the price of robberwood logs in tbe international market. Some of the major usage and application<; o( MOF and particleboard include the following: (a) baildiag ioteriof’S including architectural features such as columns and arcl1ways. partitions, wall and ceiling panelling, doors, base material for laminated and veneered wood products for Oooring and wall panelling, and olbers;
(b) promlng, joinery and millwork applications including furniture lDOuldings, joinery, skirting, architectural mouldings, decorative doors, pillars, architraves. window and door components sucb as frames. sills. stiles. rails, louver blades and panelling. Oooring pieces, finger joints and veneer-wrapped mouldings, door slopS, door jarOOs casings and others;
(c) household products including picture frames., IOys, game boards, cots, hi·fidelity speaker boxes, shoe beeIs, snooker tables aDd others; aod
4. RISK FACroRS (Conl’d)
(d) furoiture and fixtures including kitcbeo bench tops, kitchen cabinets, office and household furniture, shelves, computer stands, television casings, built-in furniture, dining sets, bedroom sets, backers of cupboards and drawers, display cabinets and others.
Tbe Group’s products are sold 10 38 countries iBCluding Malaysia. based on the ten (10) monlb period eoded 31 October 2004. The coverage of different markets helps the Gtoop to minimise the depeodeocy on anyone particular country or groups of countries. In 2003, the market size based on production of MDF in Malaysia was estimated at 1.5 million cubic meters. As such. in 2003, EFB Group’s market share of MDF in Malaysia was approximately 16% based on the production of 246,391 cubic meters. In 2003, based on production, EFB Group ranked second among manufacturers within tile MDF Industry in Malaysia. (Source: Extraction of Assessment of the Reconstituted Wood-Based Panel Board Industry, updated 27 November 2004, prepared by Vitol Factor Consulting Sdn 8M for inclusion. in rhe prospectus). 4.12 Ihstricm-e Cove…fs UDder BorrowiJIg Facility Aglftmnts The Group, pursuant to facility/loan agreements entered into by tbe Group with banks or financiers. are bound by certain positive and negative covenants, which may limit the Group’s operating and financial tlexibility. The aforesaid covenants are of a nature whicb are commonly contained in credit facility agreements in Malaysia and in Thailand. Any act by the Group falling within tbe ambit or scope of such covenants wiU require consent of tbe relevant bank/financier. Breach of such covenants may give rise to a right by the bank/finaBCier to tenninate tbe relevant credit facility and/or enforce any security granted in relatton to that facility. SFC’s assets have been mortgaged to the foreign financial institution as collateral for credit facilities granted fur the assets purchased. The Board of Directors of EFB is aware of such covenanls and shall take precaulions necessary 10 prevent auy such breach.
4.13 Tecldology Used or To Be Used by EFB Group .ad thf: R8pid Development of Tf’Chaologlcal CIlaBge The reconstituted wood-based panel industry promotes and embraces the development of advance technologies to improve and enhance its products. The Directors believe that the new machinery will enable EFB Group to attain higher productivity and enhance tbe quality of its products. However, the equipment and machinery used in this industry have gone through little change over the last few years as the machine and technology used have Ioog Ii.fe spans. All the new technological developments originate from the equipment manufacturers. The Group’s personnel are trained by the manufacturers upon purcbase of such equipment. WhiJe the Group is ~anlly improving the technology used to remain competitive, no assurance can be given that such improvements would allow the Group to be able to maintain its existing market position in the future. 4. RISK FACTORS (Conl’d)
4.14 Forward-Looking Statements Certain statements in this Prospectus are based on historical data which may DOt be reflective of the future results. and olbers are forward-looking in nature which are subject to uncertainties and contingencies. All forward-looking statements are based on estimates and assumprions made by the Board of Directors of the Company. and altbougb believed to be reasonable, are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, perlormaoce or achievements to differ materially from the future results. performance or achievements expressed or implied in such forward-looking statements. Such factors include, inter-alia, general economic and business conditions, competition, tbe impact of new laws aod regulations affecting the EFB Group and the industry. cflanges in interest rates and cbanges in foreign exchange rates. In light of these uncertainties, the inclusion of forward-looking statements in this Prospectus should not be regarded as the plans and objectives ofthe Group will be achieved. 4.15 Dependency on Major Supplien and C.stomen The Group’s customers are primarily retailers and distributors who sell directly to consumerbased product manufacturers and consumers. Any adverse socio-economic factors. such as decline in OODSumer confidence, expenditure and employment rates will impact on the Group’s business. Notwithstanding the aforementioned. the Oroup has a wider range of wood products marketed for the export market to provide col1Surner diversity aDd wider IJ1iU’kd coverage to minimise tbc impact of negative socio-eoooomic factors in the lotal market. EFB Group is not highly dependent on anyone single customer. This is reflected by the facl lbat its top customer represented approximately only 9.72% of its total revenue for the ten (10) month period ended 31 October 2004. Furthermore, the top 3 customers combined accounted for 16.31% of the total turnover of the Group for the ten (10) month period ended 31 OcCober 2004. In addition, the Group has developed long-term relationships with its top 3 customers and Ihis. 10 a certain extent serves as a form of mitigation, taking inlo account the foUowing: Del Mar International has been dealing with the Group fur 12 years; Ben Thanh Material Company has been dealing with the Group for 5 years; and Tonab Trading Co Sdn 8hd bas been dealing with the Group for 11 years. Overall approximately 9 out of its top 10 customers have been dealing with the Group for 5 or more years. Of this. 6 have been dealing with the Oroup for 9 or more years. The Group is dependent on suppliers for rubberwood for its manufacturing requirements. Any interruption in the supply of rubberwood would adversely impact the Group’s business. To mitigate this dependency, tbe Group has a diverse pool of suppliers. In addition, no single supplier contributes more than 20% of total purchases of raw materials in 2003 and in 2004. Please refer to Section 5.8 of this Prospectus for lbe Group’s major suppliers. The venture into Thailand was to accommodate the Group’s integrated expansion plans to meet its existing and future demands for its products. In addition, the abundance of rubberwood supply for its raw material in Thailand had also induced the Group into setting up SFC. With SFC. the Group has a wider thickness range of MOE As such.. dependcocles on major customers are likely to be miligaled. 45 4. RISK FACTORS (Cont’d) Tile Group, as higWighted in Section 5.9 herein, the Group intends to invest in wood-chipping machinery as well as establishing a glue resin plant. With these plans, over-dependencies On glue and wood suppliers may, in the future, be somewhat mitigated. The Group is in the midst of negotiating a forestry-concessionaire agreement, wbereby the Group wculd be able to harvest the trees for its MOF, further minimizing the Group’s dependency on wood suppliers. Since no one customer of the Group’s products aocounts for more than 20% of the Group’s sales, the Group does not have any major dependency on any single customer. Although the Group seeks to limit these risks, no assurance can be given tbat any change to these factors will not have a material effect on the business of the EFB Group. 4.16 Dependency on Major Product MDF is the main product produced by the Group wbere it contributed significantly to the total revenue of the Group for the past five years. MDF has diverse applications due to tbe advantages offered such as lower cost compared to traditional plYWOOd, and its characteristics, for example versatility in application and moldability·. Some of the major usage and application of MOF and particleboard include building interiors, profiling, joinery and millwork applications, household products and furniture as highlighted in Section 4.11 above. In addition, tbe production of MDF is more environmentally-friendly, where plantation wood is used for laW materials compared with tropical hardwood-based alternatives. Based on the reasons above, EFB is expected to fare well notwitbstanding the dependency on its main product. In addition, the Company is constantly undertaking research and development to improve its products to better meet customer needs, tbe process of which facilitates tbe Company to identify new areas of opportunities and growth. • (Source: Assessmenr of the Reconstituted Wood-Based Panel Board Industry, updated 27 November 2004, prepared by Vital Factor Consulting Sdn Bltd for inclusion ill this Prospectus)
4.17 Profit Estimate and Forecast This Prospectus contains the consolidated profit estimate and forecast for the EFB Gronp that bas been prepared based on certain assumptions, whicb the Directors of the EFB Group belief to be reasonable, but which nevertheless, are subject to uncertainties and contingencies. Due to the basis of assumptions and inherent uncertainties of the profit estimate and forecast and because events and circumstances frequently do not occur as expected, there can be no assurance that the profit estimate and forecast contained herein will be realised and actual results may be materially different from those sbown. Investors will be deemed to bave read and understood the descriptions of the assumptions and uncertainties underlying the profit estimate and forecast tbat are contained herein. The future profitability of the Group is dependent to a certain extent on the operations in Thailand, where a substantial amount of tbe future earnings of the Group is estimated and forecasted to be derived from Thailand. Operations in Thailand will supplement and provide additional capacity to the Group’s existing MDF production line, facilitating the Group’s expansion plans. The management believes that the profit estimate and forecast is attainable as there is demand for the Group’s products in Tbailand. In the event that the Group is unable to expand on its customer base in Thailand, tbe Gronp expects to still be able to sell ils products from Thailand’s operations to its existing customers. In addition, no adverse implication on the operations of the EFB Group in Malaysia is expected from the Tbailand operations due to the fact that the Thailand opelations arc currently producing MDF of different specifications. 46 4. RISK FACTORS (Cont’d) Notwitbstanding the above, the profit after tax forecast of the Group in respect of the financial year ending 31 December 2005 is subject to EFB obtaining the pioneer certificate as anticipated, whereupon 70% of the statutory income shall be tax-exempt. In the event the pioneer certificate is not obtained as anticipated or is obtained at a materially later date, notwithstanding thot the profit before tax may not be affected, the Group’s profit after tax would be reduced by the shortfall in the provision for taxation. The quantum of the shortfall and its effect on the profit after tax thereafter would depend on the timing of the pioneer certificate.
4.18 New InvestmentsIVenture Currently, the EFB Group, through its newly incorporated subsidiary, SFC, has ventured into Thailand in manufacturing of MDF. Whilst opportunities in this market are encouraging, there is the potential risk that these investments will not be successful. In this event, the EFB Group may not recoup the cost of investments amounting to approximately RM27 million and other relevant expenses incurred in respect of the new subsidiary. However, the management is of tbe opinion that based on their experience and tbeir local associates, the venture will be beneficial to tbe Group. In tbe event thot the Group is unable to sell its prodncts to new customers, management is of the opinion that the demand from existing customers is sufficient to absorb the Group’s current output.
4.19 Risk Mall8gement Plans and Practices As disclosed in 4.9 above, the EFB Group has adequate insurance policies with licensed insurance companies in Malaysia, which provide comprehensive coverage against material damage to its assets like property, machinery and equipment and group accident as a result of explosions, fire and natural disasters. The Group has put in place the following risk management or practices to mitigate its risks associated with fire and other faclors: (i) The EFB Group has a strict policy of practicing and maintaining safety standards including its own 24-hour security with closed circuit television monitoring each area of the manufacluring plant to maintain the highest level of security including the risk of a fire; (ii) As part of the Group’s safety procedures, the Group has a fire protection water sprinkler system covering the entire manufacturing plant, which will be activated automatically in the event of a fire; and (iii) The Group has adequate insurance coverage on the manufacturing plant, production equipment and machinery, and office equipment against any risk of fire. To prevent the risk of fire from the pressing process during any interruption in power supply, the Group has a back·up generator for this purpose. However, the back-up generator is not sufficient to support the entire manufacturing plant should there be a major energy crisis. Although interruption of electricity supply may pose a significant risk, the Group bas not taken any coverage against the disruption in electricity supply. This is because management is of the view that such occasions of breakout in electricity supply is rare. The EFB Group has established an in-bouse committee comprising of members from different management levels. The committee meets every three months to discuss and resolve safety matters and environmental issues faced by the employees. 47 4. RISK FACI’ORS (Conl’d) For the vartous risks 10 which EFB is exposed in its day-to-day operations and to complement its insurance programme, EFB tw an Emergency Response Plan (“ERP”) to deal with emergencies al its office and operalional facilities. lbe emergency actions cover fire. power outage. crimes, Datural disaslers, and serious injury or dealb. The ERP is in accordance with lhe current local stalutes and regulations and is desigoed to minimize risks and to develop and maintain BF8’s ability to respond to any interruption in its operations and promptly rrsore its maiD business functions.
Some of tbe main environmental issues faced by the companies involved in the manufacture of reconstituted wood panel ioclttde: disposal orbulk wasle comprising timber materials; conllol ofsmoke emisston from the boiler. wood dust in working areas and its conlrol aDd disposal; ud wastewater from boiler oonraining wood based sludge. Wood dust created in the air in worting areas and its control as weU as its disposal. if left uocbccked, is flammable and can be an expiosive hazard. in addition, constant inhalation of wood dust which acts as carriers of paint lacquers, wood preservatives and residual formaldehyde from adhesives may cause respiratory problems and other bea.llh problems. To mitigale these risks, the Group has tauo several measures as listed below: (a) To ensure a clean worting environment, the Group has installed a centralised suction and air filtration system 10 minimise combustion. The system serves to minimise air pollution, particularly from wood dust created during the manufacturing process. In additioo, workers are provided with dust masks and protective glasses, which minimise breathing in the wood dust and protect the eyes respectively;
(b) The Group bas instaUed a sprinkler system as weU as heat and spark detectors which are attached to the macb.inery for fire protectioo; aDd
(c) The Group has also an in-house water treatment facility 10 recycle the wastewater containing wood-based sludge from boilers 10 be re-used in the manufacturing process. The sludge crealed lhrougb tbe water lIeatment process is transported and disposed by Kualili Alam Sdn Bhd.
4.21 Dday iD the Listing The success of the listing exercise is also exposed to tbe risk that it may be delayed should tbe foUowing occur. (i) the BumiputU8 investors approved by the Mm tail 10 lake up the portion of the Public Issue Shares and OFS Stwu;
(ii) tbe underwriters fail to honour their obligattol\S under lhe underwriting agreement;
and (tii) the Company is unable 10 meet tbe public spread requirement i.e. alleast 25% of the listed share capilal of the Company must be held by a minimum number of 1,000 public shareholders balding oat less than 100 ordinary shares of RMO.25 each in EFB at the point of listing. 48 4. RISK FACroRS (Conl’d)
4.22 Timber CertificatioD Certification of timber products is becoming increasingly important in Europe and North America. Wood-based producing markets that do not provide a credible certification system are likely to face bans on timber trade in the Europe and NortA American markets. 10 situattons wbere markets constihl1e strong consumer prefereoces for certified produc1S, certification is viewed as a powerful means of raising forest managemenl performance. As relevant bodies such as the Forest Stewardship Council (‘FSC”) and World Wildlife Fund C’WWF’) achieve the status of sole certification system, it will create a monopoly position in timber certificatioo in Europe. Hence, the certified members will ultimately be committed to purchase and sell only certified timber products as well as setting their own targets and timetable for trading certified timber products. [n response to the requirement for certified or ‘green’ timber by major export markets, particularly European countries. Malaysia itself has come up with its own certification system to provide a credible alternative to the FSC certification system and 10 counter the effect of lbe system in Europe and North America. The Malaysian Timber Certification Couocil (“M’fCCj is the organisation that plans and operates a voluntary national timber certification scheme to provide assurance to buyers of Malaysian tiri>er products that have been sourced from sustainably managed forests. The standards of the national timber certification being used by MTCC are in accordance with the Malaysian Criteria Indicators, Activities and Standards of Performance for Forest Management Certification. This is based on the standards used under the MalaysiaNetherlands cooperation programme in timber certification. MTCC also issues Chain-of-Custody (“CoC”) to local manufuct:urers and exporters who have interest in registering their wood-produc1s. Between 14 December 2001 and 12 April 2002, 26 wood-based manufacturers and exporters have been awarded with CoC certification on various scopes of wood-products manufacturing. EFB has been accredited with CoC by FSC since 2003. This provides customers with the assurance that eenain proportion of the Group’s products are derived from a well-managed forest under a programme that is accredited by tbe FSC.
4.23 Implemeatatioa of ASEAN Free Trade Area (“AFfAtf) With the implementation of AFTA through Common Effective Preferential Tariff rCEPT’), the reduction of import duties ranging from 0% to 5% on a wide range of produclS may make imports competitive against locally manuf’aclured products. CEPT is lhe mecbanism by which tariffs on goods traded within the ASEAN region, which meet a 40% ASEAN content requirement, atC subjected to a reduction of the above-mentioned range of tariff from 2003 onwards (2006 for Vietnam. 2008 for Laos and Myanmar). Fibreboard is subjccted to import duties ranging from 5% to 15% which is higher than the general AFIA CEPT rate. This offers some form of prolec1ion against imports of fibreboard. (Source: Extraction of Assessment of the Reconstituted Wood-Based Panel Board Industry, updated 27 November 2004, prepared by Vital Factor Consulting Sdn Bhd for inclusion in this Prospectus) 4. RISK FACTORS (Conl’d) For the financial year ended 31 December 2003, the local market contributed 15.2% of the Group’s revenue, whereas fur the ten (10) month period ended 31 October 2004, tbe local market contributed 17.8% of the Group’s revenuc. From lhat perspective, AFTA would DOl have a significant impact on EFB Group’s busi.oess. However no assurance can be given that any further reduction (0 the import duties will not have a material impact on the business of EFBGroup. 4.24 Dep8deocy 011 II P.rtic…..r Market The Group is relatively dependent on tbe China market. This is reflected by tbe fact that for the financial year ended 31 December 2003 and ten (10) month period ended 31 October 2004, China contributed 22.5% and 19.9% of total revenue respectively. & such, any do\Vllturn in the China marl;et would have a material impact on the business of tbe Group. However, the Group services a wide spread of customers wilhin China. For the financial year ended 31 December 2003 and len (10) montb period ended 31 October 2004, the Group’s Cltina martel comprised 82 and 70 cuslomers respectively. Ful1bermore, tile Group exports its products to many provinces within China namely: Guangdong; Fujiang; Jiang Su; Zhe Jiang; Shanghai; Beijing; Fujian; Shangdong; and Hong Kong. In addition to China, EFB Group has an extensive coverage of the market that extends to 38 countries including Malaysia for the leD (10) month period ended 31 October 2004. The coverage of different markets helps the Group to minimise tbe dependency on anyone particular country or groups of countries. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK