3. RISK FACTORS 3. RISK FACTORS
WE ARE EXPOSED TO A NUMBER OF POSSffiLE RISKS THAT MAY ARISE FROM ECONOMIC, BUSINESS, MARKET AND FINANCIAL FACTORS AND DEVELOPMENTS WHICH MAY HAVE AN ADVERSE IMPACT ON OUR FUTURE PERFORMANCE. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND INVESTMENT CONSIDERATIONS SET OUT BELOW ALONG WITH THE OTHER MATTERS IN THIS PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION. THE RISKS AND INVESTMENT CONSIDERATIONS SET OUT BELOW ARE NOT AN
EXHAUSTIVE LIST OF THE CHALLENGES THAT WE CURRENTLY FACE OR THAT MAY DEVELOP IN THE FUTURE. ADDITIONAL RISKS, WHETHER KNOWN OR UNKNOWN, MAY HAVE A MATERIAL ADVERSE EFFECT ON THE FINANCIAL POSITION OF OUR GROUP AND/OR OUR SHARE PRICE. 3.1 Risks relating to our Group and the industry in which our Group operates (i) Increase and fluctuation in price of raw materials and oil prices For the 6 months FPE 30 September 2007, approximately 26.0% and 46.7% of our raw materials purchased comprised natural rubber latex and nitrile latex respectively (FYE 2007: 40.6% and 32.1 % respectively). As both natural rubber latex and nitrile latex are commodities, the cost of sourcing these commodities as raw materials for the production of Latex Gloves are subjected to the increases in world prices. Although Malaysia is a producer ofnatural rubber, it is still subjected to world prices as a commodity. Between December 2002 and December 2007, the average monthly price of natural rubber latex concentrate registered an average annual growth rate of 19.6%. Similarly, the price of synthetic rubber, which is mostly sourced from the USA and Japan, had also registered a growth of 6.4% from USDI,607 per tonne in 2005 to USDI,710 per tonne in 2006 and a growth of 12.6% from Japanese Yen 182,000 per tonne in 2005 to Japanese Yen 205,000 per tonne in 2006. As at third quarter of 2007, synthetic rubber prices reached Japanese Yen 228,000 per tonne and USD2,256 per tonne. (Source: Independent Market Research Report prepared by Vital Factor Consulting Sdn Bhd) In addition, the price of synthetic rubber is also dependent on the price of petroleum. This is because petroleum products are used as the major feedstock to produce petrochemical based products including synthetic rubber, namely acrylonitrile-butadiene, polyvinyl chloride, polychloroprene and polyurethane. These types of synthetic rubber are the raw materials used in manufacturing synthetic rubber gloves. (Source: Independent Market Research Report prepared by Vital Factor Consulting Sdn Bhd) As such, all Latex Gloves manufacturers who use natural rubber andlor synthetic latex are also affected equally as they also use these raw materials in their production. Although we may pass on the increased costs to our customers, we will increase our selling price only if we are able to maintain our competitiveness in the market. Notwithstanding the above, there can be no assurance that increase in the prices of our raw materials will not adversely affect the future profitability ofour Group. 3. RISK FACTORS (Cont’d) (Ii) Dependency on imports of synthetic latex For the production of synthetic latex gloves, there is a dependency on imports of certain types of synthetic rubber including acrylonitrile-butadiene rubber. In the 6 months FPE 30 September 2007,46.7% of our raw materials purchased comprised synthetic rubber which was sourced entirely from overseas (FYE 2007: 32.1 %). This is mainly due to the fact that there is only one producer of synthetic latex in Malaysia and as such, the bulk of the domestic consumption of synthetic latex is mainly sourced from overseas, mainly from, Japan, the USA, Germany, Taiwan, and UK. However, we believe that there is ample supply of the synthetic latex overseas. Thus far, we have not encountered any problem in sourcing the synthetic rubber. Notwithstanding that presently there is ample overseas supply, there is no assurance that there will be no shortages in the future. (iii) Natural rubber protein allergy The natural rubber protein allergy problem refers to the effects caused by the sensitivity of users to the protein content in natural rubber Latex Gloves. This is a business risk that exists among all natural rubber Latex Gloves manufacturers. This natural rubber protein allergy continues to be a major issue in the usage of Latex Gloves which could pose as a threat to natural rubber Latex Gloves manufacturers. To overcome this problem, local manufacturers, together with the relevant authorities have put in place various strategies, including amongst others, the following: • Introduction of the SMG certification would provide users with some comfort level that approved manufacturers will, over time, reduce the maximum allowable extractable protein for compliance.
• Alternative materials, for example Nitrile Gloves, made from synthetic latex, effectively remove the problem of natural rubber protein allergy.
• Processing methods including Chlorination that produces powder-free Latex Gloves that have low extractable natural rubber protein.
• On-line polymer coating in the Latex Gloves manufacturing process helps to further reduce the amount of extractable rubber protein and create a barrier to ensure that the skin does not come in contact with the latex.
• Marketing and promotional campaigns undertaken by, among others, the Malaysian Rubber Export Promotion Council.
(Source: Independent Market Research Report prepared by Vital Factor Consulting Sdn Bhd) In 2006, MRB introduced a new ruling, whereby Malaysian made natural rubber Latex Gloves with a protein content that do not meet the requirements will be barred from exports. This new ruling is not applicable for industrial and household gloves. (Source: Independent Market Research Report prepared by Vital Factor Consulting Sdn Bhd) Our Group complies with all the requirements of protein content of MRB and continuously conducts quality control to ensure that our finished products meet the stringent requirements and adhere to the standards. 3. RISK FACTORS (Cont’d) Our Group also manufactures synthetic Latex Gloves, which avoid the natural rubber protein allergy risks. For the 6 months FPE 30 September 2007, our Group’s revenue from the sale of synthetic LatexGlovesrepresented 65.9%ofourtotalrevenue(FYE 2007:48.I%). Further, our Group continuously conducts R&D to develop a range of new products that meet the demand arising from users who wish to avoid the natural rubber protein alIergy risks. (iv) Competition Our Group faces competttlons from various competitors including local and foreign companies involved in the manufacture of Latex Gloves. The main industry players in the global market include AnselI group of companies while the main industry players in the local scene include listed companies such as Top Glove Corporation Berhad, Kossan Rubber Industries Berhad and Supermax Corporation Bhd. Competition in the manufacture of Latex Gloves also comes from other countries, mainly Thailand and Indonesia. These two countries have abundance of natural rubber and lower labour costs that may enable them to produce Latex Gloves at a lower cost. However, Malaysia continues to command a reputation for high quality Latex Gloves. With Latex Gloves playing a key role as a barrier to prevent and protect against contamination, the quality of Latex Gloves is therefore paramount. Our Group’s established track record and reputation as a manufacturer and exporter of Latex Gloves will enable us to continue to meet the demands and requirements of our customers. Our reputation for quality among our customers will also ensure that we continue to compete effectively in the global market. Further, our Group emphasises on quality control and R&D which focuses on the following: (a) continuous development ofexisting products to ensure customers’ satisfaction;
(b) the development of new products to address new areas of growth and opportunities; and
(c) continuous improvements in manufacturing processes to increase production output and efficiency;
all of which should alIow us to compete competitively with other players in the industry. Notwithstanding the above, there can be no assurance that our Group will be able to maintain or increase our competitiveness in the future. (v) Foreign exchange exposure and translation losses In the 6 months FPE 30 September 2007, approximately 98.6% of our Group’s revenue (FYE 2007: 98.2%) and approximately 74.0% of our purchases (FYE 2007: 72.0%) are exposed to foreign exchange. Fluctuations in foreign exchange rates wilI have an impact on the prices of imported raw materials as well as export earnings. This may have an impact on the profitability of operators within the Latex Gloves industry. Premised on the above and based on our present exposure to foreign currencies, in particular the USD, our profit margin is expected to improve ifthe USD strengthens against RM which will increase our profitability. However, depending on the extent of the pass through costs, the weakening ofUSD against RM will reduce our profitability due to the lower profit margin. 3. RISK FACTORS (COIlt’d) Our Group maintains foreign currency bank accounts and has USD denominated loans to handle foreign currency transactions. Some of our foreign currency receipts and loans are used to make payments in the respective foreign currencies. The foreign receipts, USD denominated loans and foreign expenses, to some extent serve as a natural hedge and reduce our cost ofcarrying currency conversion. Further, we have also entered into forward exchange contracts to hedge our foreign currency denominated revenue and expenses. As at 30 September 2007, we have entered into forward exchange contracts amounting to approximately USD9.0 million, which represents our Group’s 3 months forward contracts of approximately 60% to 70% of transactions at a time for foreign exchange hedging. Notwithstanding the above, there is no assurance that fluctuations in foreign exchange rates will not adversely affect the profitability ofour Group. (vi) Compliance with international standards and/or requirements In the 6 months FPE 30 September 2007, approximately 98.6% of our Group’s revenue was derived from Latex Gloves that are exported to various countries (FYE 2007: 98.2%). As such, our Group is required to comply with the international quality standards before the Latex Gloves are allowed to enter into the various countries of export. As at 30 September 2007, our Latex Gloves were exported to 17 countries (FYE 2007: 23 countries), which, inter-alia, includes the USA, Japan, Germany, Australia, Canada and UK and our products are required to comply with the international standards, such as the following: Countries Standards/regulations USA
-Acceptable Quality Level Standards under the FDA -ASTM Japan
-EN 455; -EN 556-1; and -EN 1041, which is equivalent to ASTM
Canada -CGSB -Canadian General Standards Board Certification Listing Programme Australia -TGA UK
In the 6 months FPE 30 September 2007, approximately 69.7% of our Group’s revenue was contributed from export to the USA (FYE 2007: 69.4%). As such, it is imperative and critical that our Group is able to meet the standards/regulations set by the FDA. According to the FDA, all domestic and foreign medical glove manufacturers, or contract manufacturers of finished gloves are required to register their establishments with the FDA. As HSB exports to the USA, it is registered with the FDA. Since the commencement of our Group’s operations in the FYE 1989, our Group’s exports of Latex Gloves did not comply with FDA standards only on two occasions, once in 6 May 1993 and 5 May 1998, both ofwhich were subsequently resolved. Apart from these two incidences, our Group has been complying with the standards and requirements of the FDA. 3. RISK FACTORS (Cont’d) In the event these standards or regulations by the importing countries are not met, our Group’s revenue and business operations may be adversely impacted. In order to mitigate this risk, our Group ensures that our quality assurance system is in place. Since 2000, we have conformed to all the standards above. This demonstrates our Group’s ability to continually manufacture Latex Gloves that can meet international standards and requirements. Our Group will constantly strive to comply with the international standards and/or requirements of the countries of export of our products. However, there can be no assurance that our Group will be able to comply with the international standards and/or requirements in the future. (vii) General Exclusion Order and Claims for Damages Tillotson Corporation (“Tillotson”) is currently seeking a General Exclusion Order to block the importation of Nitrile Gloves that infringe on its patent into the USA. Tillotson alleged that 31 manufacturers and re-sellers of Nitrile Gloves that were imported into the USA, including HHB, HSB and PUI, infringed Tillotson’s U.S. Patent No. RE 35,616. Tillotson has also filed a claim ofunspecified damages for infringement on its patent on Nitrile Gloves. Currently HHB, HSB and PUI are included in the General Exclusion Order and also in the claim for unspecified damages for infringement of Tillotson’s patent on Nitrile Gloves. There is a risk that our Group may not be able to export the Tillotson’s patent infringing Nitrile Gloves to the USA if the International Trade Commission of the USA (“ITC”) grants the General Exclusion Order. There is also a risk that our Group may be required to pay damages ifTillotson wins its case in claiming damages against our Group. For the 6 months FPE 30 September 2007, approximately 82.0% of HSB’s Nitrile Gloves exported to the USA are manufactured based on an exclusive patent licence agreement with Microflex Corporation in relation to the high stress retention Nitrile Gloves (FYE 2007: 70.0%). In this respect, HSB has filed a motion to the ITC for summary determination that the patented high stress retention Nitrile Gloves do not infringe on Tillotson’s patent. Our solicitors are of the opinion that HSB’s motion is meritorious and, if the motion is successful, the General Exclusion Order will not affect HSB’s high stress retention Nitrile Gloves. Currently, Tillotson has not served HHB, HSB and Pur with a specific claim for damages. If the specific claim is served, HHB, HSB and Pur will contest the claim. In the event that Tillotson wins its case, damages will then be determined by the court. If however the matter is settled out of court, our Directors estimate the compensation to be approximately USD582,000 (or equivalent to RM1.85 million based on an exchange rate of USDl.OO: RM3.18). This amount is calculated based on past settlements made by other parties involved in the same case. (viii) Absence of long-term contracts We have not entered into any formal long-term contracts with our customers. Notwithstanding this, we wish to highlight that it is a common practice in the industry to work from confirmed purchase orders that may be based on order book of approximately 45 days to 60 days. Our Group also works from an annual production forecast provided from one of our major customers, Microflex Corporation. We have not encountered any major problems in our dealings with Microflex Corporation for the past 19 years. 3. RISK FACTORS (Cont’d) Although there are no long-term contracts, our Group has developed a long-term business relationship with our customers. This is substantiated by the fact that for the 6 months FPE 30 September 2007,9 of our top 20 customers have been dealing with our Group for 5 years or more (FYE 2007: 10 of the top 20 customers) and 6 of the top 20 customers have been dealing with our Group for 8 or more years (FYE 2007: 6 ofthe top 20 customers). Our long-standing customer relationships will ensure business continuity and growth. Our Group’s business is also relatively dependent on our suppliers. Thus far, our Group has enjoyed good business relationships with our major suppliers since the commencement of dealing with these suppliers. Further, we do not expect the absence of long-term suppliers’ contracts to have any significant impact on our operations. We also believe that we have the experiences and capabilities to source from alternative suppliers should the need arise. (Ix) Dependency on major customers For the 6 months FPE 30 September 2007, Microflex Corporation and Medline Industries, Inc from the USA contributed approximately 28.4% and 20.8%, respectively of our Group’s total revenue (FYE 2007: 41.8% and 17.3%). The following factors help to mitigate our Group’s dependency on the major customers: Microflex Corporation (a) Microflex Corporation has been our customer for 19 years, indicating a long-term and stable business relationship which provides the basis for continuing business and growth;
(b) Microflex Corporation is one of the established companies in the marketing and distribution of Latex Gloves in the USA. Its distribution network covers both the USA and overseas. Microflex Corporation’s international division has approximately 105 distributors spread across 40 countries. The extensive distribution network of Microflex Corporation would enable our Group to access a wider customer base without the need to invest and establish a distribution network, warehousing and logistics;
(c) Between FYE 2005 and 2007, we have been reducing our dependency on Microflex Corporation as a customer from 62.2% to 41.8% in terms of revenue contribution while our Group’s revenue has continued to grow from RMI09.6 million to RM240.9 million. In the 6 months FPE 30 September 2007, our dependency on Microflex Corporation as a customer further reduced from 41.8% for the FYE 2007 to 28.4%;
(d) Despite the growth in revenue from Microflex Corporation as a customer, the revenue contribution from Microflex Corporation in proportion to our Group’s revenue has been reducing over the last 3 financial years and the 6 months FPE 30 September 2007, as follows:
FYE 2005 FYE2006 FYE2007 6 months FPE30 September 2007 Revenue (RM’OOO) % of total sales to Microflex Corporation 109,579 62.2 160,275 53.6 240,915 41.8 137,563 28.4
3. RISK FACTORS (Cont’d) This is an indication of our Group’s ability to increase our revenue from other customers but at the same time reduce our dependency on Microflex Corporation; (e) According to our Management, our Group supplies approximately 40% of the total requirements of Microflex Corporation. The ability of our Group to meet a substantial amount of Microflex Corporation’s total requirements also creates a dependency by Microflex Corporation on our Group. As such, this business relationship creates a certain level of dependency on our Group;
(f) Nevertheless, throughout the years of business relationship, our Group has formed a close and stable relationship with Microflex Corporation including joint R&D on new products as demonstrated in the elastic high stress retention Nitrile Examination Gloves; and
(g) The joint development in elastic high stress retention Nitrile Examination Gloves has resulted in the filing of a patent under Microflex Corporation, whereby Microflex Corporation has been awarded and received the US Patent 7,176,260. Our Group, as the exclusive licenced manufacturer of the product, had on 20 June 2007 entered into an exclusive patent licence agreement with Microflex Corporation for the rights to manufacture this type of Nitrile Gloves for the duration of the patent, and the exclusive licence to sell this type of Nitrile Gloves to distributors, whose business is primarily in the acute healthcare market.
Medline Industries, Inc (a) Medline Industries, Inc has been our customer for 2 years. Further, as set out in the table below, the revenue contribution from Medline Industries, Inc has continued to grow from 5.5% in the FYE 2006 to 20.8% in the 6 months FPE 30 September 2007. This is an indication of a continuing business relationship between our Group and Medline Industries, Inc: FYE 2005 FYE 2006 FYE2007 6 months FPE30 September 2007 Revenue (RM’OOO) % of total sales to Medline Industries, Inc 109,579 – 160,275 5.5 240,915 17.3 137,563 20.8
; and (b) Medline Industries, Inc manufactures and distributes more than 100,000 medical products with 7 manufacturing facilities in North America and more than 25 joint venture manufacturing plants worldwide. The company has 29 distribution centers to service their health care customers such as hospitals, extended care facilities, surgery centers, commercial laundries, physician offices and other alternate care sites. This extensive distribution network of Medline Industries, Inc would enable our Group to access a wider customer base without the need to invest and establish a distribution network, warehousing and logistics. 3. RISK FACTORS (Cont’d) Further, the following factors also help our Group in mitigating our dependency on our major customers: (a) Part of our Group’s philosophy has always been focusing on nurturing and building strong long-term business relationships with our customers. In the 6 months FPE 30 September 2007, 9 of our top 20 customers have been dealing with our Group for more than 5 years or more (FYE 2007: 10 of our top 20 customers) and 6 of our top 20 customers have been dealing with our Group for 8 or more years (FYE 2007: 6 of our top 20 customers); and
(b) For the 6 months FPE 30 September 2007, our Group has developed a base of 885 customers (FYE 2007: 981) spread across 18 countries, including Malaysia (FYE 2007: 24 countries). Of these, 53 are brand owners and intermediaries (FYE 2007: 56), 818 are end-user customers (FYE 2007: 911) namely, dental clinics and physicians’ offices, and 14 are distributors for products under our own brand names (FYE 2007: 14). The diversity and established number of customers would provide our Group with the platform for future business growth.
Nevertheless there can be no assurance that the dependency on our major customers will not have any adverse impact on our business. (x) Dependency on major markets For the 6 months FPE 30 September 2007, USA represented the largest export market for our Group having contributed 69.7% of our Group’s total revenue (FYE 2007: 69.4%). Therefore any decline in the demand of Latex Gloves from the USA will have an impact on our Group’s revenue. USA is also Malaysia’s largest export market for Latex Gloves whereby USA accounted for 38.8% of Malaysia’s total exports of Rubber Gloves in 2006. Between January and September 2007, USA remains the largest export market representing 35.9% of Malaysia’s total exports in Rubber Gloves. This indicates that USA is a major consumer of Latex Gloves, thus any decline in demand from this country will equally affect all manufacturers of Latex Gloves in Malaysia. (Source: Independent Market Research Report prepared by Vital Factor Consulting Sdn Bhd) As our Group also exports to 17 other countries worldwide (6 months FPE 30 September 2007), this will, to a certain extent help to diversify our risks and provide our Group with the basis to expand to other markets. Nevertheless there can be no assurance that the dependency on the USA will not have any adverse impact on our business. (xi) Dependency on major suppliers For the 6 months FPE 30 September 2007, our Group is dependent on its top 3 suppliers, namely Zeon Asia Pte Ltd from Singapore, Nantex Industry Co Ltd from Taiwan, and a local company, Revertex (M) Sdn Bhd, which represented 23.5%, 19.5% and 13.7% of our Group’s total purchases for the 6 months FPE 30 September 2007 respectively. For the FYE 2007, our Group is dependent on its top 3 suppliers, namely ED & F MAN Malaysia Sdn Bhd (formerly known as Sajic-Alcan (Malaysia) Sdn Bhd), Nantex Industry Co. Ltd. from Taiwan and Zeon Asia Pte Ltd from Singapore, which represented 21.4%, 14.8% and 12.8% of our Group’s total purchases for the FYE 2007 respectively. 3. RISK FACTORS (Cont’d) The following factors help to mitigate our Group’s dependency on the major suppliers: Top suppliers of natural rubber latex (a) Our Group has been dealing with ED & F MAN Malaysia Sdn Bhd (formerly known as Safic-Alcan (Malaysia) Sdn Bhd), and Revertex (M) Sdn Bhd for the last 13 years and 19 years respectively. This continuing business relationship will provide some form of basis for the supply of natural rubber latex;
(b) As natural rubber latex is a commodity item, these materials can be sourced from other suppliers, locally and overseas. Furthermore, buying a significant proportion from the same supplier can enable our Group to obtain benefits ofvolume discount;
(c) In addition, our Group also deals with 3 other natural rubber latex suppliers within the top 20 suppliers for the 6 months FPE 30 September 2007 (FYE 2007: 3), indicating that there are alternative suppliers that are currently able to meet our Group’s requirements; and
(d) As for the availability of natural rubber latex, there is ample source of supply from local production and imports.
Top suppliers of nitrile latex (a) The top suppliers of nitrile latex, Zeon Asia Pte Ltd from Singapore and Nantex Industry Co. Ltd. from Taiwan, have been dealing with our Group for the last 10 years and 4 years respectively. This reinforces the suppliers’ continuing business relationships with our Group;
(b) For the 6 months FPE 30 September 2007, our Group has 2 other nitrile latex suppliers within the top 20 suppliers (FYE 2007: 2), indicating that there are alternative suppliers that are currently able to meet our Group’s requirements; and
(c) As for availability in supply of nitrile latex, there are ample sources overseas. In Malaysia, there is one synthetic latex plant that started operations in 2003. However, most of the synthetic latex used is primarily imported from a number of overseas suppliers.
(xii) Shortage of natural rubber supply Manufacturers of natural rubber Latex Gloves are dependent on the availability of raw materials, primarily natural rubber Latex. Thus, any shortage in the supply of natural rubber will have an impact on manufacturers ofnatural rubber gloves. The potential supply of natural rubber in Malaysia is dependent on the total area under rubber cultivation, and on the replanting rate ofrubber trees. Between 2002 and 2006, total acreage of rubber plantation decreased at an average annual rate of 2.4% to reach a total acreage of
1.23 million hectares. Furthermore, rubber cultivation in Malaysia is dominated by smallholders, who operate 95% of the total area under rubber cultivation in 2006. If latex prices were low, smallholders may reduce their investments in rubber forest plantation. In 2006, areas that were replanted with natural rubber declined by 1.8% to reach 20,212 hectares. However between 2002 and 2006, the areas replanted with natural rubber increased at an average annual rate of 1.5%. 3. RISK FACTORS (Cont’d) In addition, the conversion of rubber plantations to oil palm plantations, housing, and other commercial uses, plus the low level of returns from rubber plantations by smallholders will have an impact on the future availability of natural rubber latex. As part of the Ninth Malaysia Plan, the Malaysian Government will continue to promote agriculture sectors including the rubber sector. Part of the Ninth Malaysia Plan includes development of the rubber sector to focus on accelerating efforts to consolidate and rehabilitate smallholding rubber plantations to increase productivity. An optimum area of 800,000 hectares will be maintained as rubber zone by 2020 to meet the requirements of local rubber processing industries. Between 2002 and 2006, production of natural rubber registered an average annual growth rate of 9.6%. In 2006, production of natural rubber increased by 14.0% to reach approximately 1.3 million tonnes. Between January and June 2007, the production of natural rubber amounted to 590,100 tonnes. Between 2005 and 2010, production of natural rubber is expected to grow by an average annual rate of2.8% to reach approximately 1.3 million tonnes in 2010. The Government’s support and measures for the rubber sector will at least provide some form of assurance on the availability of natural rubber to cater to the growing natural rubber Latex Gloves in the medium-term. In addition, manufacturers that are producing both natural rubber and synthetic Latex Gloves are better positioned to insulate themselves against any shortage in supply of natural rubber. Malaysia also imports natural rubber to supplement its own production. In 2006, Malaysia imported 521,669 tonnes of natural rubber mainly from the Association of Southeast Asian Nations (“ASEAN”) countries. (Source: Independent Market Research Report prepared by Vital Factor Consulting Sdn Bhd) Notwithstanding the above, there can be no assurance that any change of the abovementioned factors will not have any material adverse impact on our Group’s operations and financial performance. (xiii) Recoverability of debts Our Group is principally involved in the manufacturing of Latex Gloves. Our Group grants credit period ranging from 30 to 60 days to some of our customers, which our Directors opined is within the industry norm. Our Group also extends open credit to some of our major customers, which have long-term and stable business relationships with our Group and have been good paymasters. Further, our Group has also secured stand-by letter of credit from some of our customers to mitigate the risk of non-collectibility. Our Group has not in the past few years written off any significant sum for bad debts and our trade debts are usually collectible. In addition, our Directors and our Management realise the importance of credit control and are continuously monitoring the outstanding trade debts of our Group and will undertake relevant measures to ensure that the trade debts are maintained at a manageable level at all times. Notwithstanding the above, the non-collectibiJity of trade debts still forms part of the business risks of our Group. Accordingly, should the trade debts tum bad, the fmancial position of our Group may deteriorate and we may be adversely affected. 3. RISK FACTORS (Conl’d) (xiv) Cost of energy Energy is one of the major components in the production of Latex Gloves. Hence, the local Latex Gloves industry can remain competitive if the cost of heating fuels is competitive both with the local competitors as well as those in the region. Our Group uses biomass wastes and natural gas to replace our dependency on diesel and MFO for the heating system. Biomass wastes used include oil palm empty fruit bunches and palm kernel shells. To ensure continuous supply of materials for our biomass heaters, we have entered into 2 biomass supply agreements for the procurement of oil palm waste for our biomass heaters for a period of 36 months each commencing from I July 2006 and I July 2007 respectively at a certain agreed price. This enables our Group to contain our costs should the price ofthe oil palm waste increase. (xv) Continuing and new demand for our products Our Group’s future results will depend on our ability to generate continuing demand from our existing customers as well as demand by new customers for our products. The demand from our existing and new customers will depend on, inter-alia, our ability to price our products competitively against the other players in the market and our ability to satisfy our customers. Notwithstanding that we are able to retain our existing customers, there is no certainty that the actual demand for our products in the future would meet the expectations of a projected increase in demand for our products by new customers due to the competitive environments in the Latex Gloves industry. However, we believe that we are able to retain and attract new customers as our products are competitively priced and are of good quality. Our Group is an established and competent glove manufacturer, known for our consistent quality and reliability. (xvi) Labour intensity The glove industry relies on labour, in areas such as stripping of gloves, quality control and packing. As such, glove manufacturing companies including our Group, are subject to risk of labour shortages and increase in labour costs. Shortage of labour would compromise our Group’s ability to meet production schedules. Further, labour cost in Malaysia is not as competitive as other lower-cost countries like Thailand, Indonesia and China. Competition from these countries will pose as a threat to us if labour costs of our Group becomes a significant component of our total manufacturing cost. In this respect, we are constantly reviewing our processes to reduce our dependency on manual labour. Through our R&D, we have successfully implemented various process improvements, which are then integrated into our production lines. Some of the improvements in our processes include robotic glove stripping that minimises the need for product handling and defects from manual stripping, and auto stacking system to arrange and transport frnished products to minimise human handling. These steps are taken by our Group to reduce dependency on labour and to avoid an increase in labour cost which would increase our total manufacturing cost. 3. RISK FACTORS (Cont’d) (xvii) Reliance on key management and key technical personnel We believe that the continued growth and success of our Group will depend, to a large extent, on the continued services of our Executive Directors, management team (including key technical personnel), as well as our ability to identify, recruit, train and retain qualified employees. Our management team, led by our Managing Director, Kuan Kam Hon @ Kwan Kam ann, has been instrumental to the development of our Group. Hence, the loss of our existing key management (including technical personnel), either due to resignation, health or other reasons, to the extent where we are unable to find suitable replacements, or our inability to attract and retain qualified personnel, may have adverse effect on our Group’s business, operating results, fmancial conditions and further development. However, every effort is made to groom younger members of the management team to take over from the senior management to ensure a smooth transition. As part of our management succession plan, we have implemented the following steps to retain our key management and key technical personnel: • Allocation of the EES Shares to Selected Senior Management who have contributed significantly to the success of our Group;
• Offering competitive remuneration packages; and
• Providing training and career development opportunities.
(xviii) Ownership and control Following the Offer for Sale and EES, our Company will be controlled by our Promoters and BTSB, who will collectively control approximately 62.4% of our Shares. Further, following the Proposed Share Transfer, our Promoters and BTSB will transfer an aggregate of 122,234,000 HHB Shares held by them to HISB, an investment holding company, which would result in HISB holding approximately 50.4% of our Shares. In this respect, they will be able to exercise their voting rights attached to their HHB Shares in respect of the matters requiring shareholders’ approval including the election ofDirectors. Depending on how they choose to vote and due to the size of their shareholdings, these substantial shareholders will have a significant influence over matters that require the passing of ordinary resolutions by our shareholders, unless they are required to abstain from voting by law or by the relevant authorities. (xix) Disruption to the manufacturing operations Our Group may face major disruption to our manufacturing operations due to uncontrollable external factors such as flIe, explosion, energy crisis, flooding, sabotage, civil commotion, war, computer viruses, hacking, acts of God and other calamity. In the event our Group is affected by such uncontrollable external factors, the financial performance and operations of our Group may be adversely affected. During the current FYE 2008, there was a fire breakout at one of our manufacturing plants, of which several production lines were temporarily affected. A loss adjustor has been appointed by the insurance company to estimate the value of the loss arising from the fire breakout. Our Directors opine that this event will not have a significant effect on our Group’s business operations and the existing insurance coverage shall be sufficient to cover the damages arising from the flIe breakout. 3. RISK FACTORS (Conl’d) In ensuring the risks of disruption to our manufacturing operations are maintained at the minimum, our Group has ensured that we are adequately covered by insurance. This is done via our Group’s insurance brokers who will advise and manage our insurance coverage on our Group’s assets on a yearly basis. (xx) Insurance coverage Our Group’s operations are very much dependent on our assets, including our production factories, plant and equipment and large sums of investment have been put into these assets. Our Group is aware that the adverse consequences arising from inadequate insurance coverage that could affect our business operations. In ensuring such risks are maintained at the minimum, our Group has ensured that we are adequately covered by insurance. This is done via our Group’s insurance brokers who will advise and manage our insurance coverage on our Group’s assets on a yearly basis. Our Group has insurance coverage for consequential loss of profit, fire, burglary, general risks, goods in transit, public liability, product liability and our manufacturing plants. (xxi) Sensitivity to economic downturn Any downturn in the local and global economies will normally impact overall consumptions in the market. Our Group may also be impacted by the economic downturn as we manufacture gloves that cater for the medical industry, electronic industry and food and beverage industries, which may be invariably impacted by the economic downturn. Our Directors are of the view that any downturn would not materially affect our business as the main end-users of our Group’s products are mainly used in the medical industry that is relatively more resilient to such downturns. Further, despite the economic slowdown during the period 2001-2002, our Group was able to weather such slowdown and had continued to be profitable during that period. However, there is no assurance that any adverse change in the local and global economic conditions will not affect our business materially. (xxii) Political, economic and regulatory factors Any adverse changes in the political, economic and regulatory environment and uncertainties could have an unfavourable effect on our financial and business prospects. These changes may include, but are not limited to the risk of war, terrorist attacks, riots, changes in political leadership, global economic downturn and unfavourable changes in the governmental policies such as changes in the employment of foreign workers, taxation, interest rates, licensing or introduction of new regulations. Much of the above factors are beyond our control. Whilst we would continue to take effective measures such as prudent financial management and efficient operating procedures, there is no assurance that any changes to these factors will not materially and adversely affect our financial position or business in the future. 3. RISK FACTORS (Cont’d)
3.2 Other risks (i) Potential delay or failure of our Listing Our Listing may be potentially delayed or aborted in the event the Underwriters, exercising their rights under the underwriting agreement, discharge themselves from their stated obligations. (ii) No prior market for our Shares Prior to the Offer for Sale, there is no public market for our Shares. There can be no assurance that an active market for our Shares will develop upon listing on the Main Board of Bursa Securities, or ifdeveloped, whether such market will be sustained. The offer price ofRM1.80 per Offer Share has been detennined after taking into consideration several factors including, but not limited to, our Group’s operating history and financial performance, the prospects and outlook of the industry which our Group operates in and the future plans of our Group. There can be no assurance that the offer price will correspond to the price at which our Shares will trade on the Main Board of the Bursa Securities upon or subsequent to our Listing. (iii) Compliance with the public shareholding spread As set out in Section 2.3.1 of this Prospectus, the Offerors will transfer the unsubscribed Offer Shares under Section 2.3.1 (iii) of this Prospectus into an escrow account. Arising therefrom, our Company may not be able to meet the public shareholding spread requirement at the point of our Listing. In this respect, Bursa Securities had, vide its letter dated 19 March 2008, granted our Company an extension of time of six (6) months from the date of our Company’s listing on the Main Board of Bursa Securities for us to comply with the public shareholding spread requirement under paragraph 3.05(1) of the Listing Requirements where at least 25% of the total number of Shares for which listing is sought must be in the hands of a minimum number of 1,000 public shareholders holding not less than 100 Shares each. Pursuant to paragraph 8.15 of the Listing Requirements, in the event a listed issuer does not comply with the public shareholding spread requirement, the listed issuer may request for an extension of time to rectify the situation. Bursa Securities may also accept a percentage lower than 25% of the total number of listed shares for public shareholding spread. However, Bursa Securities may suspend trading in the securities of the listed issuer and/or de-list the listed issuer if the public shareholding spread is not met. We and the joint placement agents will use our best endeavours to place out the unsubscribed Offer Shares (as deposited into the escrow account) to public shareholders within six (6) months from the date of our Listing. Further, depending on the subsequent trading of our Shares, we may seek the approval of Bursa Securities to accept for a percentage lower than 25% of the number of Shares for public shareholding spread if Bursa Securities is satisfied that such lower percentage is sufficient for (iliquid market in our Shares. (iv) Volatility in our Share price and trading volume The market price of our Shares may fluctuate as a result of variations in the liquidity of the market for our Shares, difference between our actual financial operating results and those expected by investors and analysts, changes in analysts’ recommendations or projections, changes in general market conditions, and broad market fluctuations. The market price of our Shares is also susceptible to certain new developments or technology advancements within the Latex Gloves industry, acquisition or strategic alliance by our competitors or gain or loss of our major customers. 3. RISK FACTORS (Cont’d) On the other hand, the performance of Bursa Securities, which affects the volatility of our Share price, 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. Sentiments are also largely driven by internal factors such as the economic and political conditions of the country as welI as the growth potential of the various economic sectors. These factors invariably contribute to the volatility of trading volumes witnessed on Bursa Securities, thus addi.iJ.g risk to the market price of our listed Shares, which could result in substantial losses for investors in acquiring our Shares. (v) Ability to pay dividends
We are principally an investment holding company and the core operations of our Group are carned out through our subsidiary, HSB. Accordingly, our major sources of revenues are dividends and other distributions received from HSB. However, our ability to declare dividends or make other distributions in the future is subject to us having profit and excess funds which are not required to be retained to fund our Group’s operations, other obligations or business plans and may in the future be subject to restrictions contained in future loan agreements which limit the payment of dividends without the prior written consents of lenders.
(vi) Disclosure regarding forward-looking statements
Certain statements in this Prospectus are based on historical data, which may not be reflective of the future results. Other statements, which are forward-looking in nature, are subject to uncertainties and contingencies. Although our Directors believe that the expectations reflected in such forward-looking statements are reasonable at this time, there can be no assurance that such expectations will subsequently materialise. Their inclusion in this Prospectus should not be regarded as a representation or warranty by us, RHB Investment Bank or any other advisers that the plans and objectives of our Group wilI be achieved. Any difference in the expectations of our Group and our actual performance may result in our Group’s financial and business performances and plans being materially different from those anticipated. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK