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 THE MARKET PRICES OF OUR SHARES 4.1 RISKS RELATING TO OUR BUSINESS AND OPERATIONS 4.1.1 Dependence on Directors and Key Management Personnel The technology industry is a growing and fast changing sector, hence, the management and operations of the business requires the employment of high skilled knowledge workers, whether in technology or non-technology related fields. Our Board recognises and believes that our Group’s continuing success depends, to a significant extent, on the abilities and continuing efforts of our existing CEO, Executive Directors and key management personnel as disclosed in Section 8 of this Prospectus as well as the ability to attract new personnel and retain its existing skilled personnel. The labour market for skilled personnel in this field is competitive.
4.1.2 Dependence on Suppliers Our Group relies on our suppliers, with whom we work closely to support our business activities. Any severance of these relationships will have a negative impact on our Group’s ability to supply our products to our customers. We have been dealing with our major suppliers for more than five (5) years and as at the LPD, we have not encountered any major problems in sourcing for our supplies and raw materials. No assurance can be given that any future changes in the relationships with these suppliers will not have an impact on our business.
4.1.3 Dependence on Major Customer Our major customer as disclosed in Section 6.13.1 is a global semiconductor company whose product portfolio serves multiple applications within four primary end markets, namely wired infrastructure, wireless communications, enterprise storage, and industrial and others. The loss of this major customer may adversely impact our Group’s operating results.
4.1.4 Failure to Meet Demand for Our Products The growth in the global semiconductor market is dependent on the global demand for electronic products. If the market for electronics and semiconductors were to suddenly expand, our Group would require significant increases in production capabilities, including personnel as well as supplies and raw materials, in order to fully capitalise on such expansions in demand. The failure to adjust to such unanticipated increases in demand for our products could result in our Group losing existing customers or losing the opportunity to establish strong relationships with potential customers with whom we currently have little or no business. Such failures may adversely affect our Group’s future financial results and market share. [The rest of this page is intentionally left blank] 4. RISK FACTORS (cont’d) 4.1.5 Infringement of Our Intellectual Property Rights Our commercial success is dependent to a certain degree on our ability to protect our intellectual property rights. Whilst relying on certain trade secrets pertaining to our products and services, as at the LPD, we have also registered our trademarks with the Intellectual Property Corporation of Malaysia and Registrar of Trade Marks Singapore with the details as set out in Section 6.17.1 of this Prospectus. The registration of our trademarks will confer instant protections for our Group such that subsequent third party users are prevented from using trademarks that are similar to ours. As the owner of registered trademarks, we may commence legal proceedings for any infringements under the Trade Marks Act 1976 of Malaysia, the Singapore Trade Marks Act 1998 and under common law against third party users of trademarks that are similar to ours and/or which may be confusing and misleading. 4.1.6 Tax Consideration Our subsidiary company, namely FoundPac Tech had enjoyed tax incentive under the Pioneer Status for 70.00% tax exemption on statutory income for the past five (5) years for the production of test socket, hand lid, stiffener and related components pursuant to the Pioneer Status granted by MITI on 1 September 2011. The Pioneer Status had expired on 31 August 2016 as FoundPac Tech did not qualify for the renewal which was based on the income generated from the existing products of FoundPac Tech. In this regard, the taxable income generated by FoundPac Tech is subject to the prevailing statutory tax rate i.e 24.00%. 4.1.7 Credit Risk We grant our customers credit periods of between thirty (30) days and ninety (90) days and as such we are exposed to credit risks arising from our Group’s trade receivables which may arise from events and circumstances beyond our Group’s control. In the event of significant delays or defaults in payment by our customers or where our customers face significant financial difficulties, we will have to make allowance for impairment on uncollectible trade receivables or may be required to write-off uncollectible trade receivables as bad debts, which may adversely affect our financial performance. 4.1.8 Foreign Exchange Risk We are exposed to foreign exchange risk as part of our sales and purchases are transacted in foreign currencies. Moving forward, we expect to derive more revenue denominated in USD and Euro in view of our growing presence in the overseas markets. Any significant fluctuations in exchange rates, particularly the USD and Euro, may have a significant impact, whether positively or negatively, on the revenue and earnings of our Group. 4.1.9 Political Risk Our business is subject to risks associated with conducting business internationally such as US, Europe and Asia as we sell our products overseas and purchase some supplies and raw materials from foreign suppliers. We are therefore susceptible to changes in political conditions in the countries where we have business dealings. As we continue to expand our business in foreign markets, our financial condition and results of operations could be affected by a variety of factors. Political instability, including social and political crises resulting from terrorism and war, could adversely impact our financial condition. For instance, the Islamic State of Iraq and Syria (“ISIS”) have deployed several terrorist attacks in the US and Europe. A major terrorist attack could cause a disruption in the economic sectors in the country, as a result of the disruption in businesses. 4. RISK FACTORS (cont’d) 4.1.10 Regulatory Risk There are no special or industry-specific laws and regulations governing the precision engineering part industry save for the laws and regulations generally applicable to all companies carrying out business activities in Malaysia. However, the Group may be affected if there are changes in regulatory requirements in countries which the Company has dealings with (such as with the US, Europe and other parts of Asia) which may affect our financial condition and result of operations such as trade protection, import or export licensing requirements and changes in import and/or export duties. 4.1.11 Economic Risk Our revenues are mostly derived from overseas markets, particularly the US and Europe. For the past three (3) FYE 2014 to FYE 2016, revenues from the US and Europe contributed approximately 88.44%, 90.34% and 89.22%, respectively to our total revenues. Our business is thus susceptible to the economic conditions in the US and Europe. Disruption or deterioration in economic conditions may reduce customer purchases of our products, thereby reducing our revenues and earnings. In addition, such adverse changes in economic conditions, and resulting slowdowns in the market for our products, may, among other things, result in increased price competition for our products, increased risk in the collectability of our accounts receivable from our customers, potential doubtful accounts and write-offs of accounts receivable, increased risk of restructuring charges and higher operating costs as a percentage of revenues, which, in each case and together, adversely affect our operating results. 4.1.12 Non-Compliance of Condition Attached to the Land Title As set out in Section 6.8.1 of the Prospectus, the Board has confirmed that all the conditions of land use, restriction in interest and express conditions imposed on the title to the property owned by FPSB have been complied with, save for the condition requiring that 30.00% of the employees at all levels of the management of the business the purpose for which the land was alienated shall comprise Bumiputera. The Company had on 29 July 2016 submitted an application to the Pejabat Daerah dan Tanah Barat Daya, Pulau Pinang to amend the aforesaid condition to “30% of the employees engaged in the business for which the land was alienated shall comprise Bumiputera”. The application is currently pending the approval by the relevant authority. In the event of a non-compliance to the aforesaid condition, the Land Administrator may impose a fine; or the land may become liable to forfeiture by the State Authority (however, the Land Administrator shall serve a notice to the land owner, requiring the owner to remedy the breach). As at the LPD, no fine has been imposed on FPSB and no notice to remedy the breach has been served on FPSB. In the event the approval for the amendments for the abovementioned condition is not obtained or waived by the State Authority, the Group will use its best endeavours to remedy the breach and/or appeal against the decision. In the worst case scenario that the Group has exhausted all avenues to seek approval and/or appeal against the decision by the State Authority, the Board will consider relocating their operations to other premises whereby no such condition has been imposed. In such an event, the Group expects the relocation will take approximately six (6) months and the one-off cost for relocation and renovation of new premises is approximately RM2.00 million. However, the impact to the Group’s operations is expected to be minimal as the Group will undertake the re-location in phases to ensure minimal disruption to its operations. 4. RISK FACTORS (cont’d) 4.2 RISKS RELATING TO THE INDUSTRY IN WHICH OUR GROUP OPERATES 4.2.1 Failure to Adopt New Technologies Our Group operates in a dynamic market where our products are prone to evolving industry standards and frequent new product introductions and enhancements. Our Group’s future growth and success would significantly depend on continuing market acceptance of the portfolio of our products and our ability to develop new products to meet the needs of our customers. Furthermore, we may also experience design, marketing and other operational difficulties that could delay or prevent the development of our new products and services and the introduction of our products and services. There can be no assurance that we will be able to successfully anticipate technological changes and to develop new products in a timely manner and/or cost effectively. Such circumstances may in turn adversely affect our business operations and financial performance. Additionally, there can be no assurance that our D&D activities will be successful. Unsuccessful D&D activities may have a negative impact on our financial performance as the D&D expenses incurred may be substantial vis-a-vis our revenue for the relevant financial years. 4.2.2 Inability to Anticipate Changes in Customer Preferences Our Group’s continued success is dependent to a certain extent, on our ability to anticipate and to rapidly design and develop stiffeners, test sockets and hand lids for our customers. Should our Group be unable to anticipate and identify new industry trends and development, the demand for our products may be affected which will then have an impact on our Group’s operating results. Additionally, our Group may incur significant costs relating to the development and marketing of new products, or improving or improvising existing products in response to what our Group perceives to be customer preferences and demands. Such development or marketing efforts may not necessarily result in the desired level of market acceptance, volume of sales or profitability as anticipated by our Group. 4.2.3 Consolidation of Businesses Within the Semiconductor Industry The global semiconductor industry is concentrated, with a relatively small number of large semiconductor manufacturers and companies supplying to customers worldwide. This market concentration could become even more acute in the future if further industry consolidations take place, as semiconductor manufacturers and companies acquire or merge with other industry participants and as corporate restructuring such as elimination and consolidation of businesses progress. Any consolidation in the industry may impact the business processes of the affected companies, and as a result, affect our position as a supplier to these customers. As our Group’s ability to increase sales will depend mainly upon our ability to obtain or increase orders from these customers, we face additional risks of losing sales opportunities should business conditions change in the event of industry consolidations. 4. RISK FACTORS (cont’d) 4.2.4 Competition Risk Notwithstanding our competitive strengths, we continue to face competition from existing and prospective competitors which may be capable of offering similar products. Additionally, consolidation of market players within the industry may heighten competition. Whilst we strive to remain competitive, there can be no assurance that any changes in the competitive environment would not have any material and adverse impact on our business and financial performance.
4.3 RISKS RELATING TO THE INVESTMENT IN OUR SHARES 4.3.1 No Prior Market for Our Shares Prior to this Public Issue, there has been no prior market for our Shares. The listing of and quotation for our Shares on the Main Market of Bursa Securities does not guarantee that an active market for the trading of our Shares will develop. There also can be no assurance that the IPO Price which has been determined after taking into consideration the factors as set out in Section 3.7 of this Prospectus will correspond to the price at which our Shares will be traded on the Main Market of Bursa Securities upon or subsequent to our Listing.
4.3.2 Delay In or Abortion of Our Listing Our IPO is exposed to the risk of potential failure or delay should the following events, amongst others, occur:(a) our Company or the Underwriter fails to honour its obligations under the Underwriting Agreement;
(b) identified investors fail to subscribe for the portions of the IPO Shares allotted to them; and/or
(c) we are unable to meet the public spread requirements of the Listing Requirements,
i.e. at least 25.00% of our issued and paid-up share capital for which listing is sought must be held by a minimum number of 1000 public shareholders holding not less than 100 Shares each at the time of Listing. However, our Board will endeavour to ensure that our Company complies with the provisions of the Listing Requirements, including, inter-alia, the public spread requirement. In the event that we fail to fulfil any of the events above, you will not receive any IPO Shares, and our Company and the Offeror will return in full, without interest, all monies paid in respect of any application for our IPO Shares. If such monies are not returned within fourteen (14) days, then, pursuant to Section 243 (2) of the CMSA, in addition to the liability of our Company and the Offeror, the officers of our Company and the Offeror will become jointly and severally liable to return such monies with interest at the rate of 10.00% per annum or such other rate as may be prescribed by the SC upon expiration of that period until full refund is made. In the event that our Listing is aborted and/or terminated, and our IPO Shares have been allotted to the shareholders, a return of monies to investors could only be achieved by way of cancellation of share capital as provided under the Act. Such cancellation requires the approval of our shareholders by special resolution in a general meeting, consent by creditors (unless dispensation with such consent has been granted by the High Court of Malaya) and