Risk Factors

4. RISK FACTORS 4. RISK FACTORS
NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MA Y NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE PERFORMANCE OF OUR GROUP. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND INVESTMENT CONSIDERATlONS SET OUT BELOW ALONG WITH OTHER INFORMATION CONTAINED HEREIN IN THIS PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION. IF YOU ARE IN ANY DOUBT AS TO THE INFORMATION CONTAINED IN THIS SECTION, YOU SHOULD CONSULT YOUR STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR OTHER PROFES~ONALADWSER THE RISKS AND INVESTMENT CONSIDERATIONS SET OUT BELOW ARE NOT AN EXHAUSTIVE LIST OF THE CHALLENGES THAT WE CURRENTLY FACE OR THAT MA Y DEVELOP IN THE FUTURE. ADDITIONAL RISKS, WHETHER KNOWN OR UNKNOWN, MA Y HAVE A MATERIAL ADVERSE EFFECT ON THE FINANCIAL PERFORMANCE OF OUR GROUP. 4.1 RISKS RELATING TO THE BUSINESS AND OPERATIONS OF OUR GROUP 4.1.1 No long term contract with major customers Our Company does not have long term contracts with our major customers. Our customers provide us with their estimated orders and specifications which enable us to plan and allocate resources to meet the potential orders but they do not constitute confirmed orders until our customers provide us with their purchase orders. Hence, our Company’s revenue is mainly generated on an order-by-order basis (“Order Basis”). This may give rise to the lack of sustainable and reliable cash flows as customers are not bound by long term contracts. It is a common industry practice for the Order Basis that allows for more flexibility in pricing our products. In mitigation, despite the lack of formal long term contracts, we have developed long term business relationships with our customers and we have been receiving repeated orders from them. These long term relationships have enabled us to develop a good understanding of our customers’ requirements and expectations, ensuring continuity of business with our existing customers.
4.1.2 Log supply As our Company is involved in the wood-based industry, availability of logs, being the main raw material for the manufacturing of our plywood, is important. Our Company may be subject to risk of shortage in supply of log. Our Company does not own any timber concessions and we presently source our logs mainly from Sabah, in particular Keningau. However, we believe that the above risk can be mitigated in the following manner:­(i) We would normally have various suppliers for the supply of logs so as not to be highly reliant on anyone single supplier. We have dealt with more 40 Jog suppliers in Keningau and vicinity areas. For the FYE 31 December 2010, we have purchased our log supply from more than 20 log suppliers;
(ii) To reduce our susceptibility towards any adverse repercussions arising from the shortage of log supplies, we have entered into a contract with a log supplier or contractor to secure reasonable supply of logs for our production and will seek to enter into contracts with other log suppliers or contractors in future.

4. RISK FACTORS (Cont’d) In respect of the timber supply agreement entered into between Focus Lumber and GSSB dated 1 October 2009, GSSB does not own any timber concession; instead, GSSB has entered into a log extraction and timber sale agreement with Rakyat Berjaya Sdn Bhd (“RBSB”). RBSB has appointed GSSB as the exclusive contractor for extracting logs in the timber concession area and Sabah Berjaya Sdn Bhd (“SBSB”) as the authorised agent of RBSB for the sale and delivery of extracted logs to GSSB. Both RBSB and SBSB are 100% owned by Innoprise Corporation Sdn Bhd which is in turn owned by the Board of Trustees of Yayasan Sabah. If the said agreement is terminated or GSSB is not able to obtain the log supply for whatever reason, GSSB may in turn not be able to fulfil its obligations to deliver the logs to us. In this case, there is no assurance that the operations and profitability of our Group will not be affected accordingly; (iii) We would continuously negotiate with new log suppliers for the supply of logs and may enter into log supply agreement with these potential log suppliers; and (iv) We may obtain log supplies from other areas in Malaysia or other countries should the need arise. This may result in higher transportation cost and will in turn increase our cost of sales and reduce our profit margin accordingly. Over the years, we have not faced any severe shortage in log supply and we believe that the current volume of log supplies is sufficient to meet our future consumption. 4.1.3 Risk of labour shortage As at the LPD, we have 1,007 employees out of which 955 are factory workers and 871 of our factory workers are foreign workers. Any shortage of labour due to the lack of supply or government restrictions on the employment of forejgn workers may disrupt our operations and cause reduction or delays in our production. Our key management, through their vast experience in the plywood industry, continuously strives to increase productivity and efficiency as well as apply technology such as automation of our manufacturing process to reduce the dependency on labour. For example, our Company has purchased one (1) set of shredder machine from Europe in February 2010. This new machinery helps to reduce manpower required to perform shredding tasks on log ends, centre cores, pallets and wood waste. In addition, we continue to source for manpower via the following:­(i) Encouraging both foreign and local workers to introduce potential employees through their network of friends and relatives;
(ii) Accepting referrals from human resource development agencies and government departments; and

(iii) Working with foreign recruitment agencies both domestically and overseas for access to foreign labour. 4.1.4 Fluctuation in log prices Logs are our main raw materials. The price of logs is subject to fluctuation due to changes in supply and demand conditions. Any shortage in supply or upsurge in demand for logs may lead to an increase in the price of logs. Weather conditions and climate changes are also one of the factors that may influence the supply of logs as there will be less logging activities during the monsoon months due to wet weather conditions, hence resulting in lower supply of logs. 34 4. RISK FACTORS (Cont’d) Our Group’s average log purchase prices per m3 for the FYE 31 December 2008 to 2010 were RM328.49, RM310.68 and RM364.77 respectively. The decrease in average log purchase prices in the past two (2) FYE 31 December 2008 and 2009 was generally due to the drop in demand for log as a result of the slowdown in the economy. In addition, the use of new upgraded machinery by our Company during the FYE 31 December 2009 enabled us to use higher quantity of smaller logs which are lower in cost. For the FYE 31 December 2010, the average log purchase price had increased as compared to the previous financial years generally in tandem with the increase in log price in the industry. We believe that our Group is able to mitigate the risk of fluctuation in log prices given that if the price of logs increase over time, the selling price for plywood should likewise increase, and vice versa. In any event, all manufacturers will be similarly affected by the price increase of logs and should likely pass on the price increases to their respective customers in the longer term to ensure continuing business sustainability. It generally takes about one (1) to two (2) months to pass on any price increases to the customers. The adjustment to the selling price would normally be reflected in the next price quotation to the customers. Nevertheless, the extent of any adjustment to the selling prices would take into consideration the prevailing market demand for plywood and market acceptance to the price adjustment and to the extent that it would not materially affect the demand for our plywood products. However, there is no assurance that the profitability of our Group will not be affected in the event that the increase in our selling price is not sufficient to offset the impact of the cost increase. Nevertheless, we believe that our Group would be able to pass on the cost increase to our customers in the longer term, in the event of any increase in the log prices.

4.1.5 Foreign exchange risk Our Company exported 87.5% of our products overseas for the FYE 31 December 2010. Our Company’s products are exported to various countries such as the US, Taiwan, Korea, Singapore, Australia, India, Mexico and the PRC. These transactions are mostly denominated in USD. Hence, we are exposed to foreign exchange risk as a substantial portion of our business transactions are carried out in foreign currencies. In this regard, any strengthening of the RM against the USD would have an impact on the results of our Group. Likewise, any weakening of the RM against the USD would contribute favourably to the results of our Group. Notwithstanding the fluctuation in foreign exchange, our Group may adjust our pricing of sales quotations within a certain period of time with certain degree of flexibility which may in turn reduce the impact of foreign currency movement accordingly. For example, in the event that the USD weakens against the RM, our Group may adjust our selling price to the extent that it would not affect the demand for our products materially to mitigate the impact of any unfavourable foreign exchange movement.
4.1.6 Reliance on the US market and a single customer 55.1 % of our Group’s revenue for the FYE 31 December 2010 was derived from exports to the US market, and 35.4% of our Group’s revenue was from Ihlo Sales & Import Co. It is our Company’s strategic decision to focus on the US market as we are able to command a better pricing for our plywood due to the higher quality requirements of the RV market, such as plywood with good finishing and low formaldehyde emission. Nevertheless, our Company would be able to divert our sales to other markets and countries in the event of unfavourable market condition in the US as reflected in our sales analysis in Section 11.4 of this Prospectus. 4. RISK FACTORS (Cont’d) The US market and the sales to Ihlo Sales & Import Co. are expected to continue to contribute substantially to the revenue of our Group. As such, our Company’s future growth and profitability are expected to be linked to the political and economic risks in the US. There is no assurance that in the event of another slow down in the US economy in the future or the loss of Ihlo Sales & Import Co. as our customer, our Group’s financial performance will not be affected accordingly. Currently, to the best of our knowledge, our plywood sale to the US market is mainly consumed by the RV market. In 2009, our Group has attained a market share of approximately 23.9% in the US market for the imports of plywood, veneered panels and similar laminated wood from Malaysia. Going forward, we will continue to expand our customer base in the US market as we believe that we are in a position to procure more customers from the followings:­(i) The lucrative RV market in which our plywood can command higher pricing as the RV market demands higher quality plywood (e.g. good finishing and low formaldehyde); and
(ii) Many other markets such as furniture, home decorating and house constructions.

Based on the information as stated in the Independent Market Research Report by Dun & Bradstreet (O&B) Malaysia Sdn Bhd, the US import of plywood, veneered panels and similar laminated wood from the world amounted to approximately RM4.53 billion in 2009, whereby approximately RM188.7 million were imported from Malaysia. It is also stated that the RV market in the US is recovering from one of the worst years ever in 2009, with projections of a robust increase in unit shipments in 2010 due to pent-up demand, improved credit availability, job security and consumer confidence, hence, the US market is a large market for us to tap. We foresee that the RV market in the US is a lucrative market for our Company to continue to expand our customer base. In addition, we have customers from other markets such as Taiwan, India, Mexico, Korea, Singapore, Australia and the PRC. Our key management is also actively involved in diversifying our market portfolio within the existing countries by procuring new customers as well as penetrating into new countries and market segments to expand our customer base. Further, Ihlo Sales & Imports Co. has been a customer of our Company for the last nine (9) years and is an established trader of plywood. We have developed a good relationship with Ihlo Sales & Import Co. through the long term relationship, timely delivery and reliability and quality of our products which will facilitate continuous business dealings in the future. Ihlo Sales & Imports Co. presently sources majority of its supply of plywood for its supply to the RV market from Focus Lumber. 4.1.7 Competition Our Company faces competition from existing and new entrants, both locally and overseas. Competition from existing players would mainly be in the form of product differentiation and quality. The threats from new entrants are relatively low due to high barriers to entry in the segment of the plywood industry that we operate (thin panel plywood) in light of the followings:­(i) Access to supply of logs;
(ii) Strong track record and good relationship with key customers;

(iii) Technical ability in manufacturing plywood; (iv) The ability to reap the benefits of efficiencies and cost reductions brought about by the high economies of scale; and
(v) Sufficient working capital.

Please refer to Section 5.1.2 of this Prospectus for further details on the competitive edge of our Group. 4. RISK FACTORS (Cont’d) Nevertheless, although we are confident of maintaining our competitive advantages, there can be no assurance that competitive pressures in the future will not materially affect our market share and consequently our financial results. 4.1.8 Environmental issues Being in the timber-related industry, we are subject to stringent environmental laws and regulations which may affect our business operations. The environmental issues that we may encounter include bulk waste comprising timber materials, smoke from burning wood for the boiler and sawdust in the air in the working areas. In order to minimise the impact of our operations on the environment, we reuse our bulk waste to generate biomass fuel for use in our production plant and office in Keningau, Sabah. Our power plant operated by Untung Ria falls under the biomass project promoted by the government. We also reuse waste in the manufacturing of our new timber product, LVL. In addition, our main manufacturing plant is equipped with a dust collecting machine to ensure that waste generated from the veneer process is collected and disposed of properly. This is further mitigated in view that our Company is a CARB Certified Manufacturer. The formaldehyde emission of our plywood is below 0.05 parts per million. Besides that, our products are also certified by the Japanese government under the JAS which standard imposes stringent requirements on, amongst others, the production process including receiving and storing of raw materials, formulations of finished products and processing methods and machinery and/or tools used in production. These certifications are endorsements that our products are environmental friendly. 4.1.9 Dependency on key management To a large extent, our continued success will depend on the abilities and continued efforts of our existing Directors and key management team. We are managed by qualified personnel with vast experience in the plywood and timber industry. The loss of any of our Directors or key management may adversely affect our operations and competitiveness in the market. We strive to minimise this risk by ensuring that we have the ability to retain our existing key management and have a succession plan through grooming the junior and middle level executives to support key management and/or to shoulder further responsibilities. In addition, in recent years, our Group has groomed key management personnel who are the children of our founders and they are also the shareholders of our Company. They include Yang Sen, who is the Head of Sales and Marketing, Yang Hsi Hsien who is the Deputy Head of Logs Department and Lin Hao Wen who is the Executive Director and the Assistant to the Managing Director. These will ensure continuity and competency of the management team. Although we seek to limit our dependence on our Directors or key management, there can be no assurance that the above measures will always be successful in retaining our Directors or key management or in ensuring a smooth transition or management succession plan should such key persons be no longer able to serve our Group. 4.1.10 Workplace safety and health matters Our Group’s operations are SUbject to various laws and regulations, including those relating to workplace safety and worker health. We believe that our existing operations are in compliance with the relevant laws and regulations and are not aware of any workplace safety and health matters currently, individually or in aggregate, that may have a material adverse effect on our financial condition. As at the LPD, there has not been any occurrence of major accidents during the course of operations. 4. RISK FACTORS (Cont’d) Furthermore, our Group has mitigated some of these potential workplace safety and health liabilities by purchasing, amongst others, employees’ liability and workmen compensation insurance policies. However, the risks of workplace safety and health costs and liabilities exist in our Group’s operations, and there can be no assurance that claims for damages resulting from our Group’s operations will not have any material adverse effect on our Group’s financial condition or results of operations. 4.1.11 Operational risks and insurance coverage We are susceptible to various operational risks such as accidents, outbreaks of fire or flood, energy or other natural calamities which may disrupt our business operations or cause significant losses or damage to our goods, production facilities, warehouse and office. We seek to limit the above risks through the following risk measures:­(i) We have taken up property insurance covering our factory premises, fixed assets and inventories. As at 11 March 2011, our Group’s insurance coverage for our assets is RM55.4 million which represents 80.8% of the total NCA of our factory premises, fixed assets and inventories as at 31 December 2010;
(ii) Our premises are equipped with basic regulatory fire-fighting equipment such as fire hose reel system and fire extinguishers stored at strategic locations which can be easily accessible in the event of fire. In addition, we also have a mobile fire extinguisher which was custom-designed by us for use in our manufacturing plant in the event fire breaks out at unreachable areas (areas within the manufacturing plant whereby the fire brigade is unable to reach) within our premise. Employees are trained on the use of these equipment, proper fire­fighting techniques and procedures and evacuation drills; and

(iii) We ensure that our facilities, manufacturing plant and warehouses comply with all safety requirements stipulated in various licences issued by the relevant authorities. In-house training and briefing on safety requirements and proper use of machineries are also conducted to ensure that our employees are adequately trained to minimise the risks of industrial accidents. Notwithstanding the above measures, there is no assurance that our insurance coverage is sufficient to cover any potential losses in the event of fire, theft or accidents and in such event, we may be liable to cover the insufficiencies, which may adversely affect our business and financial performance. However, our business operations have not been affected by any such events thus far including other risks such as natural disasters, general strikes, riots and any other risks which cannot reasonably be insured against. 4.2 RISKS RELATING TO INVESTING IN OUR SHARES 4.2.1 No prior market for our Shares Prior to the IPO, there has been no public market for our Shares. Hence, there is no assurance that upon listing, an active market in our Shares will develop, or, if developed, that such a market can be sustained. The IPO Price was determined after taking into consideration various factors and we believe that a variety of factors could cause our Share price to fluctuate and such fluctuations may adversely affect the market price of our Shares. There can be no assurance that the IPO Price will correspond to the price at which our Shares will trade on the Main Market of Bursa Securities upon our Listing and the market price of our Shares will not decline below the IPO Price. 4. RISK FACTORS (Cont’d) 4.2.2 Share price volatility and volume of our Shares The performance of Bursa Securities is very much dependent on external factors such as the performance of the regional and world bourses and the inflow or outflow of foreign funds. Sentiment is also largely driven by internal factors such as economic and political conditions of the country as well as the growth potential of the various sectors of the economy. These factors invariably contribute to the volatility of trading volumes witnessed on Bursa Securities, thus adding risks to the market price of our listed Shares. Nevertheless, the profitability of our Group is not dependent on the performance of Bursa Securities as the business activities of our Group have no direct correlation with the performance of securities listed on Bursa Securities. In addition, the market price of our Shares may be highly volatile and could fluctuate significantly and rapidly in response to, amongst others, the following factors, some of which are beyond our control:­(i) Variations in our results and operations;
(ii) Success or failure in our management team in implementing business and growth strategies;

(iii) Changes in securities analysts’ recommendations, perceptions or estimates of our financial performance; (Iv) Changes in conditions affecting the industry, the general economic conditions or stock market sentiments or other events or factors; (v) Additions or departures of key personnel;
(vi) Fluctuations in stock market prices and volumes; or

(vii) Involvement in litigation. 4.2.3 Ownership and control by our existing shareholders As disclosed in Section 7.1.1 of this Prospectus, our Promoters will collectively hold in aggregate approximately 61.18% of our enlarged issued and paid-up share capital upon listing. As a result, they will still be able to, in the foreseeable future, effectively control the business direction and management of our Group as well as having voting control over our Group and as such, will likely influence the outcome of certain matters requiring the vote of our shareholders, unless it is required that they abstain from voting either by law and/or by the relevant guidelines or regulations. Nevertheless, our Group has appointed three (3) independent directors and set up an Audit Committee to ensure that any future transactions involving related parties are entered into on armS-length basis or normal commercial terms that are not more favourable to the related parties than those generally available to third parties and are not detrimental to our minority shareholders, and to facilitate good corporate governance whilst promoting greater corporate transparency. 4.2.4 Failure or delay in our Listing The occurrence of anyone or more of the following events, which is not exhaustive, may cause a delay in or cancellation of our Listing:­(i) The MITI approved investors fail to acquire the Shares allocated to them under the Public Issue;
(ii) Our Underwriters exercising their rights pursuant to the Underwriting Agreement to discharge themselves from its obligations thereunder; and/or

39 4. RISK FACTORS (Cont’d) (iii) We are unable to meet the public spread requirement of the Listing Requirement, i.e. at least 25% of our issued and paid-up share capital for which listing is sought 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. In such event, investors will not receive any of our IPO Shares and we together with the Offerors will return in full, without interest, all monies paid in respect of any application for our IPO Shares in compliance with sub-section 243(2) of the CMSA. 4.2.5 We may not be able to pay dividends to shareholders Our ability to pay dividends or make other distributions to our shareholders may be subject to:­(i) our Group’s dividend policy; or
(ii) us having profits and excess funds which are not needed to fund our operations, obligations or business plans.

Our shareholders’ claims will generally rank junior to all other creditors and claimants against our Group. In the event of liquidation, there may not be sufficient assets for us to payout dividends. Please refer to Section 11.5 of this Prospectus for details on our dividend policy. 4.2.6 Forward looking statements This Prospectus contains certain forward-looking statements that are based on historical data, which may not be reflective of the future performance of our Group and others are forward-looking in nature which is subject to uncertainties and contingencies. Forward­looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially from future results. Such forward-looking statements are based on numerous assumptions regarding our present and future business strategies, the environment in which our present and future business strategies have been developed and the environment in which we will operate in the future. Although our Group believes that the expectations reflected in such forward-looking statements are reasonable at this point in time, we can give no assurance that such expectations will be justifiable. Whether or not such statements prove to be accurate would be dependent upon a variety of factors that may have an effect on the business and operations of our Group. In light of these uncertainties, the inclusion of such forward-looking statements in this Prospectus should not be regarded as a representation or warranty by us, the Offerors or our Principal AdViser, that our plans and objectives will be achieved.

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