4. RISK FACTORS 4. RISK FACTORS
You should carefully consider the following risk factors (which may not be exhaustive) in addition to the other information contained elsewhere in this Prospectus, before you apply for our Public Issue Shares. 4.1 No Prior Market for Our Shares There has been no public market for our Shares prior to our Public Issue. Our Directors and Underwriter agreed upon the Public Issue Price after taking into consideration of several factors in Section 3.7 of this Prospectus_ Nevertheless, you should not take the Public Issue Price as an indication of the market price of our Shares after the Public Issue. We cannot assure that there will be an active market for our Shares in the MESDAQ Market or that the market price of our Shares will not decline below our Public Issue Price_ The performance of Bursa Securities is very much dependent on external factors such as the performance of the regional and global economy and the performances of other bourses around the world. The performance of these bourses, to a certain extent. is driven by the sentiment in the local and global markets. On the local front, the sentiments are very much driven by the political and economic situation of the country. Hence, these sentiments will contribute towards the volatility of the trading volumes of our Shares once they are listed on Bursa Securities, and accordingly, may increase the market risk of our Shares. Nonetheless, we would like to highlight that our profitability is not at all dependent on the performance of our Shares on the MESDAQ Market of Bursa Securities.
4.2 Dependence on the Electrical and Electronics Industries We sell products and services to customers from various sub-sectors of the electrical and electronics industries, namely HOD and semiconductor. As such, our performance will, to a certain extent, depend on the outlook and cyclical nature of these industries. As such, we cannot assure that any adverse development in these industries will not affect our business, operating results and financial conditions. To mitigate this risk, we continuously explore new products in different industries, customers and geographical markets to whom or which our solutions can be sold, as set out below: HDD Industry For the fifteen (15}-month period ended 31 March 2004 and the FYE 31 March 2005 respectively, customers in the HDD industry contributed approximately 88.04% and 81.10% of our revenue respectively. This indicates that we rely to a substantial extent on our customers in the HOD industry. Since our commencement of operations, we have focused our technical expertise to develop our strength in the HOD industry. We have since established a strong network within the HDD industry. In view of this natural progression, our prospects are very much dependent on the performance of the HOD industry. However, we believe that the prospects of the HOD industry is promising, in view of the increasing use of sforage devices in consumer electronics such as gaming gadgets and personal video recorders. This would underpin the growth in the HDD industry, as well as increase the demand by HDD manufacturers for increased automation in their manufacturing processes. We believe that our developed skills in the automation of the HOD industry can be easily applied to other induslries. HDD automation requires high precision and skill in the mechanical functions of the automation line. With this expertise, our engineers have the ability to automate simpler manufacturing processes of other industries.
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Other industries Besides the HOD industry. we are also in the semiconductor and pharmaceutical industries. These industries contribute about 18.90% to our revenue for the FYE 31 March 2005. Hence. we believe there are ample opportunities for us to tap further in these industries. We also continuously seek to venture into other market segments such as bie-technology and automotive sectors as disclosed in Section 7.1.4 of this Prospectus. 4.3 Reliance on Small Number of Customers Our main customers are the Seagate Group and the WD Group, which represent 84% and 79% of our revenue in the 15-month period ended 31 March 2004 and the FYE 31 March 2005 respectively. This limited customer base is however typical in the HOD industry as it has relatively few players. The HOD industry is capital intensive and is concentrated among few players. mainly comprising USA corporations such as the Seagate Group. WD Group. Maxtor Group and Nidec Group. and the Japanese corporations such as Hitachi Data Systems (Hitachi). Toshiba Corporation and Fujitsu Ltd. (Fujitsu). The dynamics of the HOD industry is rapidly changing with the number of players in the market being reduced due to mergers and acquisitions. This has resulted in fewer players in the industry. The limited customer base may limit the market breadth for its customers. Hence, the loss of anyone or more of these customers in this industry sector may have an adverse impact On our revenue. However. we believe that our strong track recond with the Seagate Group and the WD Group makes us resilient in the face of changes. Prior to the acquisition of Read-Rite Group by the WD Group in July 2003, we had already serviced both the Read-Rite Group and the WD Group. After the acquisition, the WD Group continued to give orders to us. We seek to Iim~ the above risks by consciously and continuously providing effective engineering solutions and prompt services to our customers. Further, our foray into other industries such as the semiconductor and pharmaceutical industries. coupled with our initiatives to expand our customer base within the said industries, will aid in mitigating our risk in relying on a small number of customers.
4.4 Business Risks Similar to any other business operating in an open economy. we are subject to market forces both within Malaysia and globally. Some of the operating risks are obsolete technology. erosion of market share or downturn in the industry. In order to mitigate the risks, we have implemented various strategies such as increasing the customer base. continuous R&D and increasing our products range. However, we cannot assure that any change in the market forces will not have a material adverse effect on us. Our success will depend upon our ability to respond quickly to technological changes. enhance our technological capabilities. develop and design machines to keep in pace with the rapid technology change in the HDD and semiconductor industries in order to meet the changing customers’ needs and respond to customers’ requirements on a timely basis. Rapid technology change also means that the window period for replication jobs arising from existing prototypes may be shortened.
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Our Directors believe that with the rapid change in technology, our customers would be required to make more rapid replacements and enhancements on their automation. Hence, this would provide more opportunity for us to increase our business base. To this end, we are currently emphasising on continuous improvement of our engineers’ skills to keep abreast with the new technology, to maintain our agility in view ot constant change in technology and to remain flexible to enter into industrial automation outside the HDD industry. However, we cannot assure that our development or replication process will be successful or that the emergence of new technology or customers’ requirements will not render our technology, machines or processes obsolete or uncompetitive. 4.5 Competition Competition within the industrial automation market is less intensive as there are a small number of competitors. The industrial automation market is segmented into three (3) types comprising, design houses with replication capabilities, design houses and replicators. We fall within the category of a design house with replication capabilities, as we have the capabilities to design, develop and build machines to meet our customers’ specifications. On the other hand, a replicator merely builds the machinery based on the design provided by another party. Replicators are mainly system integrators which have the technical expertise to fabricate and, assemble machinery and equipment. This requires us to have specific expertise and skills. As such, a typical design house should specialise in a specific industry or field. This inherent nature drives players to find and focus on developing their niche markets. The barriers to entry are high as new entrants would need to fulfil standard requirements for the potential customers such as Seagate Group, WD Group, Maxtor Group, Hitachi and Fujitsu. The standards required of design houses are high. The barriers to entry are R&D capabilities, strong engineering skills, technical know-how in specific manufacturing processes and ability to meet stringent pre-requisites set by the customers. As such, it will be difficult for a new entrant to capture a share of the market as the target customers in the HOD and semiconductor industries tend to prefer only organisations with proven strong engineering base and technical know-how in the production processes. New vendors would only be selected as their suppliers if these companies have displayed good track record and are able to prove their capabilities in maintaining and supplying high quality equipment. Accordingly, there are only a few competitors in Malaysia. Our Directors believe that there are no other competitors involved in the automation of the HDD lines in Malaysia. In the semiconductor industry, some of our competitors include LKT Industrial Berhad, a company listed on the Main Board of Bursa Securities and Pentamaster Berhad, a company listed on the Second Board of Bursa Securities. Our Directors believe that other competitors tend to be at a disadvantage in terms of competitive pricing as well as lacking in local presence, as they are mainly based in the USA, Singapore and Europe. Our ability to expand our business segment is attributable mainly to our engineering and R&D capabilities and our established customer base which comprises leading manufacturers in the HOD industry such as the WD Group and the Seagate Group. We are confident that our consistent track record and good working relationship with these multinational companies since our incorporation will provide the edge over any potential new players. It is even more difficult to penetrate into high technology related industries such as the HDD industry due to its complicated specification and rapid advances in technology. However, we cannot guarantee that other companies would be able to meet the stringent requirements in the future.
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4.6 Size of Operations Although our size of operations has sufficient capacity to meet our operations, our capacity may be strained for higher volume orders. As a design house, the focus is our ability to design better yielding machines for our customers. With the design in place, we would be able to subcontract the replication of parts to replicators. To a certain extent, we have mitigated this risk by forming partnerships with a network of reliable precision tooling suppliers who are able to support us in meeting our volume requirements, as well as embarking on supply chain management to manage our subcontracting needs.
4.7 Dependence on Key Personnel We believe that our continuous success will depend, to a large extent, upon the abilities and continuous efforts of our Directors and key management, including our team of R&D engineers. Key personnel with good experience and knowledge in the automation industry are pivotal to our success. The loss of any of our Executive Directors or the key management personnel may affect our performance. KW Chin, our Managing Director, is also one of our Promoters and substantial shareholders. A minimum of 51 % of our Promoters’ direct shareholdings in us is subject to moratorium and it will be in their interest to increase our shareholders’ value. In addition, our future success will also depend on our ability to attract and retain skilled personnei, as well as to have in place a structured succession plan. It is our practice to retain our key management and skilled personnel through attractive remuneration packages. Efforts are also made to groom our existing staff members to further support our senior management andlor to shoulder further responsibilities in preparation for long term expansion. Pursuant to our Listing, all our eligible employees will be given the option to participate in our Public Issue Shares through the allocation of pink forms to them. We will continuously formulate reward systems to attract and retain our key employees. We have also set in place, proper system documentation in order to ensure continuity, proper training and to minimise workflow disruption in the event of resignations. However, we cannot assure that these individuals will retain their employment with us and that we will be able to retain additional or replacement personnel with the requisite experience and capabilities.
4.8 Absence of Long-term Contractual Agreements with Customers It is the norm for our customers not to enter into long-term contractual agreement with us or our competitors as their automation needs are on project by project basis which is largely dependent on the rapid changes in their products and technologies. Hence, the failure to secure future orders due to the absence of long-term contractual agreements with customers would inevitably have a material adverse impact on our future financial pertormance. Despite this factor, we have successfully grown in our business volume. This is achieved through our consistent track record in providing quality and innovative products coupled with a timely and efficient after-sales support services. As a result, we have received recurring orders from our customers for new R&D and replication projects.
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4.9 Project Risks Our contracts with our clients are generally on project basis. In view of the complexity of the projects undertaken, these projects are subject to the following risk factors: • Our clients may delay or cancel their projects due to unforeseen circumstances. Delays may arise from incomplete specifications from customers or unanticipated difficulties in developing the solutions. Project delays will affect profit margins as time spent to negotiate and resolve issues may delay the recognition of revenues. Additional costs may also be incurred as a result of these project delays. Further, any changes in the client’s management may cause cancellation of planned projects; and
• The award of projects may be subject to approvals of head offices located overseas in the respective home countries. The geographical distance could lengthen the time taken in issuing formal orders.
To mitigate the project risks, it is provided for in our project proposals that cost incurred by us due to delay caused by customers and cancellation of orders is to be compensated by our customers.
4.10 Revenue Flow Risks The following factors can adversely affect revenue: • Inability to complete and deliver a project to clients as scheduled. Timely completion of projects will allow project teams to commence work on other projects and thereby maximise the use of resources. Conversely, the inability to turnaround and complete a project as scheduled can materially affect revenue and profrt;
• Inability to maintain pace with developments in the automation software or processes. The demand for our products by any particular client depends on our ability to innovate and implement creative solutions; and
• We generally secure orders on a contract basis. Hence, our revenue could fluctuate significantly depending on the value and size of each contract and the number of contracts that we secure.
We seek to mitigate the above risks by equipping ourselves with qualified and trained engineers, maintaining constant R&D and broadening of customer base and markets.
4.11 Software Risks Security weakness in our systems and viral disruptions will adversely and materially affect our revenue and profit. We use computer systems and software which are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. The failure of our computer and software applications could lead to interruptions, delays, loss of data or the inability to complete client assignments. Unauthorised persons may improperly access data and damage or change systems or take confidential information. Damage caused by security breaches or computer viruses may be expensive to repair. This may undermine our client’s confidence in our systems. Since software programs are important feature to our solutions, any problems with our software may result in bad publicity for our solUfions. 4. RISK FACTORS
We have installed security measures to limit the occurrence of unauthorised access and virus attacks. In addition, we have implemented management control such as appropriate training and regular review in the organisation policies and procedures and regular risk assessment exercises.
4.12 Achievability of Our Five (5)-Year Business Development Plan The success of our 5-year business development plan will mainly be dependent upon our ability to convince our existing and targeted customers on our design and build capabilities through strategic business development plans. We would also need to maintain our R&D activities, hire and retain skilled management in the areas of engineering and business development. We cannot assure that we will be able to successfully implement our business plan or that unanticipated expenses or problems or technical difficulties will not occur which would result in material delays in our implementation or even deviation from our original plans.
4.13 Intellectual Property Our success will depend upon our ability to maintain and enhance our technological capabilities, develop and design machines which meet changing customers’ needs and respond to customers’ requirements on a timely basis. Currently, although the intellectual property relating to designs of our automation and source codes for the software applications belong to us, we do not patent our intellectual property. Hence, we cannot assure that we would be able to fully protect our intellectual proprietary rights from third party copying and exploitation. Our Management believes that this risk is relatively low due to the complexity of our products as the machinery and equipment produced involves detailed designs which are difficult and time-consuming to develop and integrate. Further, our designs are customised according to the respective customer’s specifications. Although it may have an adverse impact on our operations and financial results, the existing laws pertaining to patent, copyright and trademark offer only limited protection. To further mitigate the risk, we have an off-site storage of our designs and source codes. All our employees are also required to sign a non-disclosure agreement to protect our interest.
4.14 Impact of AFTA The AFTA agreement was signed by member countries of ASEAN in 1992 to promote economic co·operation and increase competitiveness among the member countries. With the implementation of Common Effective Preferential Tariff scheme under AFTA, the tariff on goods traded (with minimum 40% ASEAN content requirement) within ASEAN, has been reduced to between 0% and 5% in year 2003. The AFTA is not expected to have any material effect on our business as the majority of our purchases is imported, either directly or indirectly from countries which are not within ASEAN. However, we expect any purchases from ASEAN countries to benefit us as this will reduce our cost of purchases. Whilst we will try to maintain our competitiveness due to AFTA, we cannot assure that AFTA will not have any adverse impact on our business and financial conditions.
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4.15 Exchange Rate Risks For the FYE 3t March 2005, 71 % of our total revenue was from export sales. Our export sales were denominated in USD whilst our imports which were denominated in USD, Singapore Dollar, Baht, Japanese Yen and Euro accounted for approximately 16% of our cost of sales. Hence. fluctuations in foreign exchange will have a direct impact on our sales. cost of production and profit margins. However, sales and purchases transacted in USD will to a certain extent provide a natural hedge. In the management of the exchange rate risk, we have entered into foreign currency forward contracts in the normal course of our business to manage its exposure against foreign currency fluctuations on sales and purchases transactions denominated in foreign currencies other than USD.
4.16 Insurance Coverage on Assets We are aware of the adverse consequences arising from inadequate insurance coverage that could cripple our business operations. In ensuring that such risks are minimised, we review and ensure adequate coverage for our assets on a continuous basis. Our major assets are our plant and machinery and work in progress. We have taken insurance policies on all our major assets. As at 31 March 2005, the net book values of our plant and machinery were approximately RM1.55 million and the estimated value of our stocks was RM4.82 million. Although we have taken the necessary steps to insure our assets, we cannot assure that the insurance coverage would be adequate for the replacement cost of other assets, inclUding but not limited to raw materials, finished or completed equipment or any consequential cost arising therefrom.
4.17 Delay in or Abortion of Our Flotation Our Listing is exposed to the risk that it may fail or be delayed should the following events occur: (i) Our Underwriter exercising its rights pursuant to the Underwriting Agreement, discharging itself from its obligation to underwrite thereunder; and
(ii) We are unable to meet the public spread requirements, which is at least 25% but not more than 49% of our issued and paid-up share capital to be required held by a minimum number of 200 public shareholders (including employees) at the point of our Listing.
Although our Directors will endeavour to ensure our compliance of the listing requirements by the various authorities, we cannot assure that the above·mentioned factors will not cause a delay in or abortion of our Listing. 4. RISK FACTORS
4.18 Political, Economic and Regulatory Considerations In general, any adverse developments in the political, economic and regulatory conditions in Malaysia and countries such as Thailand, China, the USA, Philippines and countries within the European community, representing existing and targeted overseas market for our products, could materially and adversely affect our financial performance. Other political, economic and regulatory uncertainties include risks of war, expropriation, nationalisation, changes in interest rates and methods of taxation. While we will continue to take effective measures such as prudent financial management and efficient operating procedures, we cannot guarantee that unfavourable political and economic factors will not signfficantly affect us.
4.19 Controlling Shareholders Upon our admission to the MESDAQ Market of Bursa Securities, our substantial shareholders and Promoters, in aggregate, will beneficially own approximately 75% of our enlarged issued and paid-up share capital. They will collectively have a significant influence over matters that require the passing of ordinary and special resolutions from our shareholders resulting in resolutions being passed to the benefit of our substantial shareholders, unless they are required to abstain from voting by law and/or relevant authorities. To mitigate this risk, we have appointed three (3) independent directors to our Board. We have also set up an audit committee to oversee our overall operations and corporate governance. This is to ensure that all decision made by our Board are to the benefit of our shareholders.
4.20 Underwriting Risks The Underwriting Agreement provides our Underwriter the rights to terminate the Underwriting Agreement should our Underwriter be of the view that the success of our Public Issue may be adversely affected due to certain events, terms of which are set out in Section 3.11 of thiS Prospectus. We cannot assure that our Underwriter will not terminate the Underwriting Agreement based on the condition as set out in Section 3.11 of this Prospectus. If, as a result of the termination, our Public Issue cannot be completed, we will return all your monies in respect of your application to you without interest.
4.21 Disclosure Regarding Forward-Looking Statements This Prospectus contains several forward·looking statements, which are statements other than statements of historical facts. These statements are in relation to our expected future financial position, business strategy, plans, prospects and industry outlook. Although we believe that the expectations reflected in such statements are reasonable at the time this Prospectus is issued, we cannot assure that such predictions will prove to have been correct. Our expectations are subject to known and unknown risks, uncertainties and contingencies. As such, we cannot assure that such expectations can be achieved and actual results may be materially different from those expected. Any differences in our expectations from our actual performance might adversely affect our result in the financial and business performance and plans. Hence, you should ensure that you read and understand the assumptions and uncertainties underlying the forward-looking statements that are contained herein.