Risk Factors

DISCLAIMER: THE FOLLOWING INFORMATION IS TAKEN FROM FRONTKEN IPO PROSPECTUS DATED ON 22 JUNE 2006. SOME INFORMATION MAY BE OUTDATED OR NO LONGER RELEVANT.

RISK FACTORS

BUSINESS RISKS
The FCB Group is not insulated from general business risk as well as certain risks inherent in the industry in which it operates. For example, the Group may be affected by a general downturn in the global, regional and national economy, entry of new players, 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 fluctuations in foreign exchange rates. Any adverse development in the political situations and economic uncertainties in Malaysia, Singapore and/or other countries which the FCB Group has business links, directly or indirectly, could materially and adversely affect the financial performance of the Group. These adverse developments include risks of war, global economic downturn, expropriation, nationalisation, unfavourable change in government policy and regulations such as foreign exchange rates and methods of taxation and currency exchange controls. These adverse developments may affect the level of investments in the oil and gas, petrochemical, semiconductor and electronics sectors, which would in turn affect the demand for the FCB Group’s services. Although the Group seeks to limit these business risks through, inter alia, prudent management policies, constant upgrading on latest technology advancements, continuous R&D, maintaining good business relationship with its customers, principals and suppliers, training and retention of skilled labour, increasing its range of products and services and expansion of its clientele base in both the local and overseas markets, no assurance can be given that any change in any of these factors will not have a material adverse effect on the Group’s business.
COMPETITION 
The Group faces competition in both regional and global markets from competitors who may expand their business to emulate the same range of products and services, and from new players entering the same industries as the Group. Increased competition may result in reduced operating margins and loss of market share. There can be no assurance that the emergence of other new technologies or the introduction of newer services will not render the technology and services of the FCB Group uncompetitive. The Group also faces the possibility of increased competition from existing smaller players should they decide to form strategic partnerships with established foreign players that have greater technical and financial resources. The Group has enjoyed close working relationship with its customers, to which it has consistently provided quality services and solutions in meeting their requirements. Certain of its major customers have had business relationship with the FCB Group for between two (2) and eight (8) years. The Directors of FCB believe that the Group possesses the requisite technical expertise and engineering know-how with its proven work processes in surface engineering and mechanical engineering work. The Group also has technology alliance with Tocalo (the world’s largest independent thermal spray coating service provider) in thermal spray coating as well as Ares Green (Taiwan’s biggest precision cleaning service provider) in precision cleaning services to provide effective services to the customers. Over the years, the Group has gained competitiveness through establishing an integrated one stop end­to-end services which is supported by R&D in advanced materials and complex surface metamorphosis engineering solutions, collaborative surface metamorphosis engineering and prototyping, as well as transient manufacturing supply chain solutions. The Group believes that today, it is one of the major players in advanced materials and thermal spray or machining services industry, with market presence in both Malaysia, Singapore, the Philippines and Thailand.
To remain competitive, the Group has in place several strategic measures, including carrying out R&D activities to provide new innovative solutions and enhancing existing products whilst at the same time lowering production costs.  It is also constantly exploring ways to improve its production processes in order to increase production efficiency and ensure the continuous offering of consistent quality, promptness in delivery and competitive pricing of its services.  However, there can be no assurance that the Group will not be affected by the competitive strategies adopted by other players within the same industry in which the Group operates and that the Group will be able to maintain or expand its existing market share in its local and overseas operations.
RELIANCE ON SEMICONDUCTOR INDUSTRY 
The FCB Group’s business activities are predominantly focused on the semiconductor, power generation, petrochemical, and oil and gas sectors, with semiconductor contributing approximately 32% to the Group’s revenue for the financial year ended 31 December 2005. In the semiconductor sector, the Group provides services to the front-end semiconductor manufacturing (wafer fabrication), storage media manufacturing, flat panel display manufacturing and organic light-emitting diode (“OLED”) industries. The semiconductor industry (in particular, the front-end semiconductor manufacturing sector) is cyclical and has historically experienced periodic downturns. This cycle is influenced by the nature of the business, the way semiconductor companies plan and execute their investment plans and the cycle time required to add new manufacturing facilities to their operations. Any downturn in the semiconductor industry would adversely affect the utilisation rates of production equipment, which in turn, would reduce the demand for thermal spray coating and precision cleaning services. The Group seeks to minimise the risk of dependence on any particular industry for its earnings by continuing to place emphasis on R&D activities, as it has in the past. The Group believes that R&D plays a pivotal role in driving the growth of its business and has continuously invested in and carried out R&D activities on tough engineering problems for various industries. The successful development and commercialisation of new surface metamorphosis solutions for various industries through continuous R&D and improved technical expertise and innovation has created market needs for the Group’s services, resulting in expansion of products and services offerings to multiple industries and a diversified customer base from a broad spectrum of industries. The Group has been making conscious efforts in expanding its customer base over the years through a combination of continuous market penetration as well as market and product development strategies. The Group’s current diversified customer base across various industries indicates that its earnings would not be highly susceptible to a downturn in any one industry. However, there can be no assurance that any downturn in any of the industries that the Group operates in will not adversely affect the Group.
TECHNOLOGICAL CHANGES 
The risks involved with technological changes are the obsolescence of current technology and the ability of the Group to enhance its technological capabilities and anticipate or respond to technological changes in manufacturing processes in a cost-effective and timely basis. As in any technology based industry, surface metamorphosis technology using thermal spray processes and a series of complementary processes faces the risk of technological stagnation and / or obsolescence.  Other new coating technologies may emerge in the future that could potentially provide an alternative to thermal spray coating in today’s applications. Although new processes and materials are continuously being developed through R&D, there can be no assurance that the emergence of new technology will not render the Group’s technology uncompetitive.
The FCB Group is constantly exploring technical collaboration possibilities with global specialists to enhance its technological capabilities in areas where the applications are commercially viable. Currently, the Group keeps abreast of the latest technology via technology alliance with Tocalo, the world’s largest independent thermal spray coating service provider.  Additionally, the Group has technology R&D collaboration with Ares Green and OTS. The Group also has technology collaboration with Lam Research, a leading supplier of wafer fabrication equipment and services to the global semiconductor industry. To advance its technological know-how and enhance its competitive edge, the Group expects to continue to place emphasis on R&D activities as it has in the past. The Group’s commitment to R&D activities, including the setting up of R&D centre in Malaysia, will enable the Group to keep abreast with development in technology.
PROTECTION OF INTELLECTUAL PROPERTY 
The Group is to an extent dependent on the protection of its trademarks and patents on the core technologies that it has developed.  Existing intellectual property and confidentiality laws do not afford unlimited protection. In addition, apart from existing laws in Malaysia and those countries in which the Group carries on and intends to carry on business, remedies under such laws are subject to the vagaries of litigation.  There can be no assurance that the Group will be able to protect its proprietary rights against unauthorised duplication of methods and processes. Failure to protect or enforce its intellectual property rights may result in an adverse impact on the Group’s business. In order to protect the technology know-how, the Group has selectively applied for registration of its patents in Singapore as set out in Section 5.3.5 of this Prospectus, and intends to apply for registration of its patents in Malaysia. This will allow the Group to initiate legal proceedings against parties deemed to have infringed upon the Group’s proprietary rights. Further, the technology used by the Group is restricted to and retained by the key personnel of the Group to avoid leakage of confidential information which will affect the competitiveness of the Group. Persons who have access to these information are required to sign confidentiality and non-disclosure agreements whereby they are forbidden from disclosing confidential information to third parties. Notwithstanding the above, there can be no assurance that others will not independently obtain access to the Group’s know-how or develop product or technologies similar to those of the Group.
FOREIGN EXCHANGE RISK 
Currently, the Group has operations in Singapore, Malaysia, Thailand and the Philippines. A majority of the Group’s revenue is denominated in SGD and as such the performance of the Group would be subject to the performance of the SGD relative to the Ringgit.  However, the exposure to the fluctuation in SGD is mitigated through matching SGD-denominated sales and purchases by the Group’s Singapore-based subsidiary. Although the Group does not have a formal hedging policy with respect to its foreign exchange exposure, it will continue to monitor its exposure to foreign exchange fluctuation and will consider hedging any material foreign exchange exposure if deemed necessary. FCB is also subject to translation risks as its consolidated financial statements are denominated in RM while the financial statements of its foreign subsidiaries are prepared in their respective functional currencies. As such, any material fluctuations in foreign exchange rates will result in translation gains or losses on consolidation. Any such translation gains or losses will be recorded as corresponding changes in translation reserves.

AVAILABILITY AND PRICES OF RAW MATERIALS 

The main raw materials used by the FCB Group include substances such as thermal coating powders, wires and rods.  To maintain competitive operations, it is crucial that the Group must be able to obtain sufficient quantity of quality materials at acceptable prices in a timely manner. The Group sources most of its materials from both local and overseas suppliers. While the Group is not dependent on any single supplier, any serious and prolonged shortage of such materials may lead to loss of business opportunities which may adversely affect the Group’s financial performance and possibly inhibit the expansion of the Group’s business. In addition, the cost of materials used are dependent on their prevailing demand and supply conditions. The Group seeks to minimise its exposure to shortages of materials and price fluctuation through the purchase of materials from a pool of suppliers, both locally and overseas, who have an established track record and are able to provide constant supply promptly at competitive prices.  With long-term relationships and mutual trust with its suppliers, the Group has not in the past experienced any difficulty or disruptions in production due to difficulty in procuring materials. In the event that the Group is unable to source its raw materials from its main suppliers, it will have other readily available alternate suppliers to meet its raw materials requirements. Further, in the event of cost fluctuations, the Directors believe that the Group is able to address such cost increases by adjusting its selling price. Notwithstanding the above, there can be no assurance that the Group will be able to continue to minimise its shortages and cost fluctuations and/or transfer any cost revision in the provision of its services to its customers and that any unfavourable price fluctuations or shortages may not materially and adversely affect the Group’s operations and performance.
AVAILABILITY OF SKILLED HUMAN RESOURCES 
Provision of thermal spray coating and precision cleaning services are complex processes, which involve significant technological and specialised equipment. As at 30 April 2006, approximately 86% of the Group’s production employees are skilled workers.  The performance of the Group may be affected by the shortage of suitably qualified skilled workers and may suffer from inferior product quality, production down time, failure in meeting delivery schedules and loss of customers’ confidence. As in any other industry, there is competition for highly skilled employees. The management of the Group recognises the importance of human resource training to stay ahead in technological advancement. The Group also believes in investing in its workforce. On-the-job training is viewed as one of the more effective training tools for its employees.  The employees of the Group are subject to work orientation programs, on-the-job training and cross training in the various processes. Although the Group seeks to limit the risk of shortage of skilled human resource, no assurance can be given that any change to this factor will not have a material adverse effect on the Group.
FOREIGN LEGISLATION 
The Group has, through its subsidiaries and associated company, established business operations in Malaysia, Singapore, the Philippines and Thailand. For the financial year ended 31 December 2005, approximately 78% of the Group’s revenue was derived from its operations in Singapore, through FS. Despite the Group’s plans to expand its business operations in Malaysia, it is envisaged that a significant portion of the Group’s activities will remain in Singapore under FS. Accordingly, like any foreign investments, the investment of FCB in FS will be subject to the policies of the Singapore Government on foreign investment.
The ability of FCB to repatriate the profits arising from its investment in FS will largely depend on the relevant legislation relating to repatriation of profits prevailing at the point of repatriation. Currently, subject to the settlement of the applicable taxes, Singapore places no restriction or time frame on the reinvestment or repatriation of earnings and capital, and maintains no significant restrictions on remittances, foreign exchange transactions and capital movements. However, there can be no assurance that any change to the policies of either Singapore and/or the Malaysian Government with respect to foreign investment and repatriation of profits will not materially and adversely affect the rights and/or performance of the FCB Group with respect to its investment in FS.
INSURANCE COVERAGE AND RISK OF BUSINESS DISRUPTIONS 
The Group is aware of the adverse consequences arising from inadequate insurance coverage on its assets.  In ensuring that such risks are minimised, the Group reviews and ensures coverage for its assets on a continuous basis. At present, the Group has insurance coverage for its properties, plant and machinery, office equipment and stocks, as well as policies to cover any loss of profit arising from business interruption.  In addition, the Group has taken various steps to reduce the risk associated with fire by having proper fire-fighting systems in its building premises and exercises stringent security measures to minimise risk of fire breakout. Although there has not been any major disruption to the Group’s business operations as a result of outbreak of fire, energy crisis or disruption in water supply, and the Group has taken the necessary steps to insure its assets, there can be no assurance that the insurance coverage would be adequate to compensate for the replacement cost of the assets or any consequential loss arising from the damage or loss of the assets of the Group.
DEPENDENCE ON KEY PERSONNEL
As in any other business, the FCB Group believes that its continued success will depend, to a significant extent, upon the abilities and continued efforts of its existing Executive Directors and senior management team. The loss of any of the FCB Group’s Executive Directors and key members of the senior management team could affect the FCB Group’s continued ability to manage the operations effectively and competitively.  Currently, some of the key management personnel are shareholders of FH, which is a promoter of the Company. The Directors of FCB recognise the importance of the Group’s ability to attract and retain its key personnel and have in place a human resource strategy, which includes a suitable compensation package and regular training sessions for all supporting employees in all key functions of the Group’s operation. The Group has made continuous efforts to strategically develop a dynamic and strong management team and groom the younger members of the senior management team in assisting senior key personnel to operate and manage the Group’s activities. However, there is no assurance that these key personnel will retain their employment with the Group and that FCB Group will be able to retain additional or replacement personnel with the requisite experience and capabilities.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS 
The Group’s operations in Singapore and Malaysia are subject to certain environmental legislation and regulations imposed by Singapore’s Ministry of Environment and Water Resources and Malaysia’s Department of Environment respectively which regulate, inter alia, the discharge of industrial effluents and wastewater. The Group’s production facilities in Singapore are also subject to regular inspection by the National Environment Agency in Singapore. Non-compliance with the relevant environmental legislation may result in penalties and fines or revocation of the Group’s business licenses.
The Directors of FCB are of the opinion that the existing operations of the Group are in strict compliance with the present environmental laws and regulations. However, there is no guarantee that such laws and regulations will not be amended by the government in the future, in light of the increasing importance of environmental awareness in Singapore, Malaysia and around the world. This may lead to the Group incurring additional costs to comply with changes to the regulations.
CONTRACTS WITH CUSTOMERS AND SUPPLIERS 
Save for Siemens AG Power Generation Operating Plant Services, Ulvac Singapore Pte Ltd, Lam Research and Fuji Electric (Malaysia) Sdn Bhd, and in line with industry practice, the FCB Group does not enter into long term contract with its major customers or suppliers. Over the years, the Group has built and maintained good relationships with its existing customers and at the same time adopted various strategies, such as continuous market penetration and market / product development strategies, to broaden its customer base. The Group has an established and proven track record in terms of quality services, technical expertise and engineering know-how, which has earned the Group confidence and recognition from its customers. The Group enjoys cordial relationship and good support from its major suppliers and is not reliant on any supplier for its supply of raw materials. It is not dependent on any single supplier and has not experienced any disruption to its supply of raw materials thus far. The Directors of FCB believe that the Group’s focused efforts in maintaining and expanding its customer and supplier base shall enable the Group to minimise its dependence on any particular customer or supplier.
CHANGES IN OUTSOURCING TREND  
FCB is a beneficiary of today’s global outsourcing trend.  Wafer fabs are outsourcing cleaning services of their equipment to third party contractors. Global power equipment manufacturers such as Siemens are increasingly outsourcing part of the repair and refurbishment work to specialist service providers like the FCB Group. Therefore, any reversal in the outsourcing trend may have an adverse impact on the Group’s future prospects, although Lynck, the Independent Market Research Consultant, believes there is no indication yet that this is forthcoming.
Further, the Directors believe that as global competition becomes more apparent, OEMs are creating competitive advantages by focusing on their core business and outsourcing many of the component fabrication and cleaning functions to external specialists, such as the FCB Group, who are able to provide more flexibility, efficiency and cost-effective solutions. Besides providing a range of value-added services, such specialists are able to achieve economies of scale with large volumes handled. The Directors thus believe that rising global trade provides increasing opportunities, and bodes well, for specialist service providers such as the FCB Group.
BORROWINGS 
The FCB Group’s total borrowings from financial institutions as at 31 December 2005 amounted to approximately RM25.4 million, comprising short and long term domestic and foreign borrowings. The aforesaid borrowings are all interest-bearing. Fluctuation in interest rates may have a material effect on the Group’s profitability. However, the Group plans to utilise RM3 million of the proceeds raised from the Public Issue towards the repayment of bank borrowings, after which the Group’s future financial performance will be less encumbered by the cost of borrowings which are subject to volatility in interest rates. The credit facilities of the Group may also be subject to periodic review by the banks or other financial institutions and contain certain covenants which may limit the Group’s operating and financial flexibility. Any act or omission by the Group that breaches such covenants may give rise to rights by the banks or financiers to terminate the relevant credit facilities and/or enforce any security granted, in relation to those credit facilities and this may in turn cause a cross default of other credit facility agreements. There can be no assurance that the aforesaid breaches will not have any adverse effect on the Group’s operational and financial results.  The FCB Group has not in the past and is not presently in breach of any such covenants of any credit facility granted to the Group and will at all times take all reasonable efforts to observe such covenants.
UNCERTAINTY IN THE BUSINESS DEVELOPMENT PLAN (“BDP”) 
In order to achieve the Group’s BDP, the Group relies on the availability of management, financial, customer support, operational and other resources.  The success of the Group’s BDP will be dependent, amongst others, upon the Group’s ability to successfully develop and commercialise further applications of its technology, its ability to enter into strategic marketing arrangements on a timely basis, to successfully monitor its business growth and on favourable terms, to hire and retain skilled management, as well as to obtain adequate financing when needed.
As a mitigating factor, the Group has been operating in this business since 1996 and its management is experienced in the thermal spray coating and precision cleaning industries. Nevertheless, there can be no assurance that the Group will be able to successfully implement its BDP or that unanticipated expenses or problems or technical difficulties will not occur which would result in material delays in its implementation or even deviation from its original plans.  In addition, the actual results may deviate from the BDP due to rapid technological and market changes, as well as competitive pressures.

PROFIT FORECAST AND FORWARD-LOOKING STATEMENTS 

This Prospectus contains the consolidated profit forecast of FCB (details of which are set out in Section 10.10 of this Prospectus) which have been prepared based on various bases and assumptions that the Directors of the Company consider to be reasonable based on the prevailing market and operating conditions. These bases and assumptions are subject to uncertainties and contingencies that are often outside the control of the FCB Group. There can be no assurance that actual results will not differ materially from the consolidated profit forecast in the event that the market and operating conditions vary from those assumed. Investors are deemed to have read and understood the assumptions and uncertainties underlying the consolidated profit forecast that are contained herein. In addition, certain statements in this Prospectus are based on historical data which may not be reflective of future results.  Other forward-looking statements regarding the Group’s financial position, business strategies, plans and prospects are subject to uncertainties, unknown risks or other factors which may cause the actual performance or achievements to differ materially from those expressed in such forward-looking statements. Although the FCB Group believes that the expectations reflected in such forward-looking statements are reasonable at this time, there can be no assurance that such expectations will prove to be correct.

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