, Company No, 215512·A , Company No, 215512·A l 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF THE HEVEABOARD GROUP OUTLINED IN THIS PROSPECTUS, APPLICANTS SHOULD CAREFULLY CONSIDER THE FOLWWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE PERFORMANCE OF THE HEVEABOARD GROUP, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE HEREIN, BEFORE APPLYING FOR THE ISSUE SHARES. NO PRIOR MARKET FOR HEVEABOARD SHARES There has been no prior public market for HeveaBoard Shares. The Issue Price was llgreed upon by HeveaBoord and OSK as Adviser and Underwriter based up;:ln several factors and may nCM be an indication of the market price of HeveaBoard Shares after the Public Issue and Listing. See Section 3.6 of this Prospectus on the basis for the determination of the Issue Price. There can be no assurance Ihat an active public markel in HeveaBoard Shares will be developed or be sustailled, or Ihat the Issue: Price of HeveaBoord Shares will correspond to the price of which the Heve3Board Shares willrrade, upon subsequem listing on the Main Board of Bursa Securities. A number of factors may cause the price of HeveaBoard Shares to fluctuate, including but not limited to sales of substantial amounts of HeveaBoard Shares in the public market in the immediate future: announcements of developments relating to HeveaBoard business; fluctuations in HeveaBoard operating results and sales levels; lhe condilion!> of the general induslry. or the national or world-wide economy: changes in regulalion: announcements of new prooucls or producl enhancements by the HeveaBoard Group and/or its competitors. 4.2 CAPITAL MARKET RISKS As an investor of HeveaBoard, it is to be noted that HeveaBoard will be listed on Ihe Main Board of Bursa Securities. The performance of Bursa Securilies is. 10 a cerlain eXlenl. dependent on external factor.; such as the performance of lhe regional and world bourses and tlle inflow or outflow of foreign funds. Markel sentiments are also largely driven by internal factors such as the economic and political conditions of the country as well as the potential growth of Ihe various sectors of Ihe economy. These factors will invariably contribute to the volatility of trading volumes on Bursa Securities. thus adding risk to the market price of HeveaBoard Shares.
4.3 BUSINESS RISKS HeveaBoard is subject 10 certain risks inherent in the manufacturing industry and those specific to the particleboard industry. These include but are not limited to. reliance on its agents. distributors and customers for sales. increase in operating costs. changes in general economic and business condilions, constraint in labour supply. raw material shortages. changes in consumer preference!> and purchasing power, brand loyalty and foreign exchange fluctuations. While it rna}’ or may noI be possible 10 pass on any increase in COSI 10 HeveaBoord customers. no assurance can be given thaI such steps mayor may not adversely affecllhe future financial performance and business ~ospects of lhe Groop. The Group seeks to limit these risks through. infer alia, expansion of both existing and new markets. developing and maintaining a diversified network of cantlie!!>, and investment in automated machinery to improve efficiency. Additionally, HeveaBoard has amassed a wealth of knowledge and experience through its R&D efforts to pioneer innovative and groond breaking improvements. This may help HeveaBoard shifl its reliance away from cenain business risks such as labour market COndilions and raw material shonages. However. no assurance can be given that any change to the aforementioned factors will nOi have a material adverse effect on the Group’s business. 4. RISK FACTORS
4.4 ECONOMIC AND POLITICAL CONSIDERATIONS The Group’s manufacturing and business activities are focused in Malaysia and several other export counuies. Any adverse development in the economic. political and financial conditions in Malaysia and the export countries t:ouJd materially and adversely affect the financial performance and operational conditions of the HeveaBoard Group. These risks include but are not limited to the risks of an economic downturn. changes in political leadership. changes in interest rates and unfavour:lbJe changes in government policies such as changes in the method of taxation and the introduction of new regulation. ‘Whilst the HeveaBoard Group will continue to take effective measures such as prudent financial management and efficient operating procedures, there is no assurance that any adverse developmems in the political and economic scene will not materially affect the HeveaBoard Group. 4.5 AVAILABILITY OF RAW MATERIALS HeveaBoard uses rubberwood as its primary source of raw material. Consequently, the long term viability of the manufacture of particleboard would depend largely on the long run supply of rubberwood, which is sourced from the rubber estates within the vicinity of its Gemas plant. Typically, the rubberwood branches are purchased from contractors undertaking replanting contracts in the surrounding estates belonging to FELDA and other private stakeholders. Although HeveaBoard does not have any supply contract with any of these contraclors. HeveaB03rd is still confident that an adeqwlIe supply of rubberwood can be sourced from the open market at a reasonable price. Further. HeveaBoord also has the nell.ibility of utilizing rubber wood slabs and off cuts since the factory is equipped with a supplementary drum Chipper. This drum chipper is able 10 supplement up to 50% of the logs with slab’i and off cuts, while al the same time, these raw materials can also be obtained at a cheaper cost and faces less competition from other factories. However, of concern is the future depletion of rubberwood supplies, as a result of an increased demand for rubberwood furniture, and the increased utilisation of rubberwood for wood-based panel products. Although such is the case, there is strong governmental support to ensure that an adequate area of rubber trees is replanred annually to promote the rubber-based furniture industry. A Rubber Forest Plantation Fund which was allocated RM200 million in the form of soflloons was established in March 2003, to manage Ihe planting of 25,000 hectares of rubber trees per year for the next 15 years. In order to mitigate the loog term supply risk of rubberwood, HeveaBoard has intensified its R&D programme to utilize alternative species of plant and waste materials and at the same time increase the yield from each unit of raw material. Please refer to Section 7,5 for more details pertaining to the availability of raw materials.
4.6 COMPETITION The management of HeveaBoard faces suong competition from various particleboard and wood-related product manufacturers such as Mieco Chipboord 8erhad, Pahanco Bhd and Subur Tiasa Particleboards Sdn 8hd. The HeveaBoard Group also f!tCes competition from potential new entrants into the market as well as the development and emergence of other wood substitutes. ITHE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK l 4. RISK FACTORS Management contends that its pclsition in the particleboard industry in Malaysia is very competitive and [hat Hl’:veaBoard is currently one of the top three major players in (he Malaysian particleboard industry. The Group has also established a strong presence in the export market since 1998, particularly in USA, UK, China. France. Australia. Japan and other countries in South East Asia. In order to maintain and strengthen its posilion. Heve<lB03rd intends to conlinually improve the qualify of its products through R&D, increase its focus on pricing its products competitively and leverage on their long standing relationships with existing customers. Meanwhile. the high barriers to entry such as the start-up cost of setting up facilities and the necessary technical know-how in the production process will act as a deterrent to potential new players. The HeveaBo3rd management also contends that the risk posed by wood substitutes would be mitigated by its commitment to the diversification of its product r;lnge. In fact. with the emergence of a niche market in Japan for low formaldehyde emission particleboard, HeveaBoard as a pioneer manufacturer of EO and super EO particleboard in South Easl Asia (which conforms to this new emission sfalldard) is poised to gain new market share and cushion the impaci of such competition. Despite the Company’s commitment tow:lrds the above mentioned strategies. there can be no assurance that HeveaBoard will be able to maintain or increase its market share in the future. Please refer to Section 7.9 for further details pertaining 10 the Group’s competitive advantages. 4.7 IMPACf OF AFTA The AFfA agreement was signed between Malaysia. Thailand, Singapore. Indonesia. fhe Philippines. Brunei, Vielnam. Laos. Myanmar and Cambodia to promOfe economic cooperation and increased competitiveness by reducing inler-regional tariffs between member countries. AFTA has resulted in a gradual reduction of tmde barriers in ASEAN. Under AFfA. member countries have begun to lower import tariffs. export subsidies and tax relief since the year 2000. With the initiation of the Common Effective Preferential Tariff scheme under AFfA, tariff on goods traded within the region. which meets 3 40% ASEAN content requiremenl. will be reduced to 0% -5%. This would result in a liberalised market and intensify competition among panel product prodllcers in the region. Although competition among particleboard producers is expected to intensify under AFTA, Ihe market liberalisation of the industry is expected to present opportunities to efficiently·run parljcleboard producers to increase their market shares both domestically and regionally if tl\ey are able 10 emerge as low cost producers under the AFfA regime. To enhance its competitiveness under the AFfA regime, the HeveaBoard Group plans to continually improve the quality of its products and increase ils focus on pricing its products competitively. In addition. the HeveaBoard Group periodically performs upgrading works on its machinery and undertakes training programmes for its workforce to keep them abfeasl with current production technologies alld technical know·how. Working groups 10 focus on cost reduction. waste management and process improvements have also been sel up to reduce production co~t and enhance the quality and productivity of the Company. The adoplion of such practices is intended to put the HeveaBoard group in good position to adapt, maintain artdlor increase its market share in the region posl-AFfA. Please refer to Section 7.9 for more detllils pertaining to competitive advantages enjoyed by HeveaBoard which may help the Group mitigate the risk posed by the implementation of AFTA. l 4. RISK FACTORS
4.8 DEPENDENCE ON KEY PERSONNEL As in other businesses, the Group believes that its continued success depends significantly on the abiliLi~ ::md continued eITons of its e;r;isting Directors, senior management and long serving technical support staff. The loss of any of the key members of the Group, Directors and senior management could adversely affeci the performance and ability of the Group 10 compete effectively. However. over the years. the HeveaBoard Group has been able to expand and strengthen its personnel base with the rigorous on-the-job training extended to the middle management and operalions staff. while at the same time providing a competitive remuneration and incentive scheme to illCrea$e performance and productivity of employees. The Group is confident that the continuous human resource development provided will enhance the capabilities of existing employees, help attract new, skilled personnel and mitigate its reliance on key management. The Group recognises that their future success will depend upon the management”s ability to retain employees and ensure the smooth transition of the management team in the future.
4.9 FUTURE CAPITAL INJECTIONS The Directors of HeveaBoard believe that the net proceeds from the Public Issue, together with cash flow generated from HeveaBoard operations and other existing sources of funds. will be sufficient to meet the projected working capital of the Group, and also. the capit.al expenditure required for the second manufacturing line as mentioned in Section 8.7 of this Prospectus. However. there is no assurance that future events may not cause the HevenBoard Group to seek additional capital sooner. If additional capital is required. there can be no assurance that it will be available. or if available. that it will be on terms satisfactory or favourable to the HeveaBoard Group. Further, the issue of additional equity or other convertible securities by HeveaBoard may result in the dilution of the percentage equity holding of the Company’s existing shareholders at the point in time. 4.]0 INVESTMENT RJSKS As mentioned in Seelion 8.7 of this Prospectus. the Group has embarked on an expansion plan which will significantly increase the particleboard production C3PllCity of the Group. once it becomes fully operational. The estimated investment cost for this second manufacturing line is approximately RM225.0 million (e)(c\uding working capital and contingencies) which is to be funded by a mixture of internally generated funds. ex.ternal borrowings, proceeds from the Public Issue as well as proceeds from the subsequent ex.ercise of the Warrants. In considering to undertake an investment of such magnitude. the Board has carried out e;r;tensive feasibility studies, and in so doing, have exercised due care in considering the risks and benefits associated with such a project. Appropriate measures have been taken in identifying and securing the necessary financing as well as in planning the successful integrlllion of this venlure with its current business operations. Further, the Group is suongly commiued towards the close monitoring of the project in order tt) mmimize any implementation issues or delays in the installation and commissioning of the second manufacturing line. However. no assurance can be given that the investment will be succesful or that the project will be completed as scheduled. In the event of a longer gestation period. HeveaBO<1.rd may not be able, or may be slow, to recover its investments and/or achieve satisfactory returns. For further details on the risk. factor associated with ttle establishment of the second manufacturing line. please refer to Section 4.24 below. , Company No, 215512·A l 4. RiSK FACTORS 4.11 CONTlNUED CONTROL BY EXISTING SHAREHOLDERS Upon completion of the Publil: I~sue, the Directors and subst:lotial shareholders of HeveaBoard will, in the aggregate, beneficially own approximately 64.7% (assuming the Issue Shares made (lvllilable to the eligible directors and persons who have contributed to the success of the Company subcribes in full to the HeveaBoard shares offered to them) of the issued and paid-up share capital of HeveaBoard. Depending on how they choose to vote aod because of lheir shareholdings. these sbareholders. if acting together. will significllncly influence the outcome of certain mailers requiring the vote of Company’s shareholders, including but nQ( limited to decisions on future business op)X)rtunities and other significant corporate transactions. Nonetheless. HeveaBoard has appointed two (2) independent directors as a step lowards good corporate governance to ensure lhat any future transactions involving related parties. if any. are entered inlo on arms-length lerms. 4.12 RELATED PARTY TRANSACTIONS Certain Directors and substantial shareholders of the HeveaBoard Group have inlerest in companies carrying out similar business activities as the HeveaBoard Group. Please refer 10 Section 9 of this Prospectus for details of disclosure on any potential cantliet of interests and factors that would avert any potenti:ll conflict of interests. The HeveaBollrd Group may continue to enter into business or otOer transactions with rdated parties in lhe future. However. the: Audit Commiltee of HeveaBo:ud will monitor the: related party lransactions to ~nsure that these transactions are carried out al anns length basis and on commercial lerms which will nol be detrimental to the minority shareholder.~ of the HevellBoard Group. The appropriate disclosures regarding related pany transactions will also be made in the annual reports of the Company.
4.13 LITIGATION RISKS As Itt 15 November 2004. the HeveaBoard Group is not engaged in any material litigation either as plaintiff or defendant which will materiaJJy and adversely affect the financial performance of the HeveaBoard Group and the Directors of HeveaBoard are not aware of any proceedings pending or threatened against the Company or ils subsidiaries. or any facts likely (0 give rise 10 any legal proceedings. HeveaBoard has not. 10 dale. experienced any material liability claims against Ihe Company. However. no assurance is given Ihat the financial performance of the HeveaBoard Group will nOl be adversely affected by future liability claims. as ;1 result of existing or future laws, or unfavourable judicial decisions.
4.14 PRODUCTION RISKS HeveaBoard. like other companies in the manufacturing industry. is susceptible 10 operational risks inherent to the industry. particularly to those relating to fire outbreaks. and breakdowns or disruption in Ihe production line. Currently. He\’eaBoard operates a single production line of various independent processes in its plant. To dale, there has not been any breltkdown in critical mOichinery that has severely disrupted ilS operations. ITHE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 4. RISK FACTORS
Nonetheless, Heve.1Board has in place several risk management practices 10 minimize/prevent the disruption of lhe production line. The equipment and machinery are serviced strictly according to a planned maintenance programme on a periodic basis. At [he same time. the senior management and operational staff of the Group are enTrusted with the duty of evalualing and performing securily che.:ks on the plant. and ensuring security policies and control systems are strictly adhered to. Additionally, various tire fighting systems have been installed in the factories and corporate offices. which are guarded 24 hours to prevent tampering or interference from outsiders. A trained emergenC)’ response team (“ERr’) and an in-house fire fighting squad have also been set up to respond to any unexpected incidents. However. HeveaBoard provides 00 assurance that any breakdown in its machinery will not occur which could severely disrupt its operations in the future. Other major considerations in the production of particleboard products are Ihe consistent supply of water and electricity for the Factories. In order to mitigate any risks associated with water and power inlerruptions, the Groop has their own generators and water tanks COnstructed on the premises of their properly, 4.15 UNDERWRITING RISKS Up to 7.740,000 of the Issue Shares are to be underwritten by the Underwriter. The underwriTing commission is payable by the Company at a rate of 1.75% of the Issue Price of RM2.00 per Share for the Issue Shares made available for the Malaysian Public and the unsubscribed portion of the Issue Shares reserved for lhe Directors. eligible employees and persons who have contributed to the success of the HeveaBoard GrOtlp. However. the agreement of the Underwriter (0 underwrite tip 10 7.740.000 Issue Shares should not be taken as an indication of the merits or assurance of Ihe value of the Issue Shares.
4.16 RELIANCE ON AND RELA T10NSHIPS WITH MAJOR CUSTOMERS The Group’s major customers comprise wood panel products trading companies. foreign companies. and manufacturers of furniture and speaker boxes. The proportion of local to export sales was approximately 26% 10 74% based on the latest audited results for Ihe six (6) months financial period ended 30 June 2004. Sales to its top ten (10) major customers. (refered to in Section 7.3 of this Prospectus) 3ccoontro for apprmdmately 70% of total Group sales. HeveaBoard major customers are mostly established companies with long standing track records in their respeclive countries. None of HeveaBoard major cuslomers contributed more than 7% to total Group turnover. with the exception of General World Sdn Bhd (K-Mart). USA and Nitori. which contributed 20.8% and 13.4% to Group turnover respectively for the six (6) months financial period ended 30 June 2004. However, the top ten (10) major customers have on average a relatively short term relationship with HeveaBoard. with a length of relationshi p averaging approximately three (3) years. In mitigating the Group’s dependence on any single customer as well as the risk arising from the relatively short term relationship with its customers. lhe Group const.1nlly endea\’ours 10 source for new customers while ar the same time believes strongly in building customer relationships. The Group regularly receives repeat orders and customer referrals which is testimony (0 the product quality and ability of the Group to build and maintain strong relationships with its customers. Whilst the HeveaBoard Group aims to continue Wilh production of quality products at competitive prices. there can be no assurance that it would enjoy the continuing support of its customers. and/or thaI its reliance and relationship with its major customers will not severely affect its business in the future. , Company No, 215512·A l 4. R]5K FACTORS 4.17 ABSENCE OF LONG-TERM SALES CONTRACTS The Group has not entered into any long term sales contracts with any of its major customers. However. the absence of such contracts is considered the norm in the wood-based products industry. The Group seeks to limit this risk. by inler-alia venluring into new markels and broadening irs clientele base 10 reduce the dependence on any single customer. The Group has thus far eslablished a proven track record in terms of providing quality products which have earned the Group the confidence and recognition of various local and overseas customers. This is evidenced by Ihe recurrent sales orders HeveaBoard receives from its long standing customers, while at the same time some of its newer cuSlomers have been expressing inlerest in iocreasing their (ulure orders. Despite the above, the Group gives no assurance that the risk arising from the absence of long term contracts, lIlay or may not materially affect the financial performance of the Group in the future.
4.18 FORWARD LOOKING STATEMENTS Certain statements in this Prospectus are based on historical data, which may not be reflective of the future results. while others are forward-looking in nature and are subject to uncertainties and contingencies. All forward· looking slatemenis are based 00 eslimales and assumplions made by the Direclors of HeveaBoard, and although believed 10 be reasonable. are subjecl to known and unknown risks, uncertainties and OIha factors which may CllUse the actual results, performance or achievements to differ materilllly from the future results. Although HeveaBoard believes that. the expectations reflected in such forward·looking statementS are reasonable al Ihis time, there can be no assurance that such e>:peclations will prove 10 have been correct. The inclusion of Ihe forward-looking Sllliemenls in this Prospectus should not be regarded as a representation or warranty by the Company that the plans and objectives of the HeveaBoard Group will be achieved. Further, the Group is not under any obligation to update or revise such forward-looking statements to reflect any change in expectations or circumstances. 4.19 FINANCING RISK Significant fluctuations in interesl rates may pose an impact on the financial performance of the HeveaBoard Group as some of the working capital requirements are met partially by short term and long term borrowings (in addition 10 internally generated funds). These borrowings are also subject 10 lerms and conditions which may limit the Group’s operating and financial flexibililY. Any aCI or omission by the Group that breaches such terms and conditions may give rise to rights by the banks or financiers to terminate the relevanl borrowing facilities anellor enforce any charge andlor security that may have been granted. in relation to lhose facilities. As 011 30 June 2004. lhe HeveaBoard Group’s tolal borrowings amoumed 10 approximately RMI7.9 million or a gearing ratio of approximately 0,23 times based on the audited consolidated balance sheet of the Group as at 30 June 2004. In order to mitigate the above financial risk and increase cost savings, the HeveaBoard Group has consistently adopled prudent financial decisions and will be ulilising part of the proceeds from the Public Issue to reduce b:mk. borrowings. However, Ihere can be no assurances that the Group will be able to conlinu~ to meet its debt obligations nor will the Group be adversely affected by financing risk in the future. 4. RISK FACTORS
4.20 CURRENCY RISK As at 15 November 2004 the HeveaBoard Group derives approximalely 74% of its sales from Ihe ell,port markel. These transactions are mainly denominated in foreign currencies mainly in USD. The risk of foreign ell,change fluctuations has been reduced since Ihe imposition of a fixed ell,change rate for the RM again’it the USD in September 1998. However. in the event that the fixed exchange rate is lifted or re-pegged to a new rate, the Group mayor may not have a greater exposure to foreign currency fluctuations. Additionally. any benelits. if any, currently enjoyed by HeveaBoard export sales performance, in terms of cheaper exports as a result of the weakening US Dollar, may be mitigated in the future, due to the volatility of foreign exchange fluctuations. The Group will, as a mitigating faclor. attempt 10 use various hedging techniques to mitigate this risk. However. there can be no assurance thar any future significant fluctuations in exchange rates and financial crisis will not materially or adversdy affect the HeveaBoard Group’s operations.
4.21 CHANGES IN GOVERNMENT REGULATIONS AND TECHNICAL BUILDING STANDARDS Changes or additions in the regulatory conditions and technical standards for building material in Malaysia and other major export countries could materially and adversely affeel the financial prospects of the HeveaBoard Group. With the enforcemenl of a new standard on formaldehyde emission (which causes harmful health effecls if exposed to in large doses) in Japan, it is expected that manufacturers and exporters of wood producl…. intended for the Japanese market will be udversely affected. as most of the products currently manufactured have emission of formaldehyde above the new limits. In order to comply with the new standards on formaldehyde emission. Ihe application of new technology is required, and there may be an increase in the COSt of production. HeveaBoard has reacted by pioneering the commercial production (Asian Timber) of a new type of particleboard that conforms to the new Japanese formaldehyde emission standard and has since successfully exported it to Japan, Vietnam, the Philippines and Indonesia. Currently, there are only niche markets for formaldehyde free p3rticleboard panels but as more importance is being placed on environmental and health concerns, such higher standards will likely be adopted on a larger scale. No assurance can be given Ihal there will be other new or additional changes made to regularions and/or technical standards on building materials in the future, which may adversdy affect the Group’s future operations and profitability. However, the Group has alw3Ys prided itself in adapting and updating itself with the lalest product inoovation and market developments.
4.22 ENVIRONMENTAL CONCERNS The timber and wood-based industries are facing constant market pressures. calling for the need to balance economic benefits with that of environmental costs and eXlernalities relating to the long tenn depletion of natural resources. However. as particleboard is essentially a reconstituted wood panel made of particles derived from branches and wood residues, unlike typical timber-processing businesses where logging often occurs. particleboard and panel products use sUSlainable and environmentally friendly raw materials. 4. RISK FACTORS
Additionally, in order to maintain its competitiveness and increase gross yields. HeveaBoard has an incentive to re-use and recycle product inputs and increase material savings via nl(J(e efficient manufacturing processes. To this end. HeveaBoard strongly advocates environmental friendly management practices which would further boost its image 3S 3 responsible processor of wood related products. The Group is committed to the constant monitoring and checking of its manufacturing facilities to ensure compliance with the relevant environmentlll laws. However, there is no assuram:e that any change in the policies of the Government would lIot materially andlor adversely affect the operations nnd pwfitability of the HeveaBoard Group.
4.23 ADEQUACY OF INSURANCE COVERAGE The management of the Group is aware of the adverse consequences arising from inadequate insurance coverage on lhe Group’s major assets compt”ising land and buildings, plant and machinery and slocks. While the Group reviews and seeks to ensure adequate insurance coverage on a continuous ba.”is, there can be no assurance that there will not arise any incident or even! which may render the insurance coverage inadequate to compensate for the replacement cost of the assets or any other loss arising thereon. 4.24 ESTABLISHMENT OF A SECOND MANUFACTURING LINE As mentioned in ~tion 8.7 of this Prospectus, the Group has embarked on an expansion plan involving the establishment of a second ffi3nufacturing line located adjacent to ilS currem existing parlicleboord plant in Gemas. The second manufacturing line entails a IOta I investment cost of approximately RM225.0 million (excluding working capital and contingencies) and is expected 10 be completed in the year 2006. The contract for the design, supply, installation and commissioning of the particleboard plant (“Supply Contract”) was entered into on 6 October 2004, between HeveaBoard and Dieffenbacher GmbH + Co. KG. The Supply Contract is valued at Euro 37.8 mi11ion (or equivalent to approximately RM180.7 million based on the exchange rate of RM4.78; Euro 1). Following the completion of the second manufacturing line, the annual production capacity of the Group is expected to increase significantly, thus contributing positively towards the Group’s future profltabililty. However. the successful implementation of the abovemenlioned expansion plan is very much dependent on the receiPf of various regulalOry approvals and adequate financing as well as subject to other external risks. such as those related to lhe limely de(jvery of Ihe necessary tools. machinery and equipment. the successful completion, installation and commissioning of the planl. the securing of adequate construction material, potential cost over-runs anel/or the safisfactory performance of the contractors. In order 10 mitigate the risks mentioned above, the Group has embarked on a detailed and extensive feasability study on this second manufacturing line. A major part of this feasibility study involved the contribution and advice of Dieffenbacher GmbH of Germany (“Dieffenbachcr”), the contract vendor for HeveaBoard second manufacturing line, and one of the leading particleboard equipment manufacturers in Europe. The Group’s technical arrangement and close working relationship it enjoys with Dieffenbacher will provide the Group with the necessary guidance and expertise to minimize any deJays in terms of the development of the project. Following the complelion of this second manufacluring line. Ihe Group is confident that the application of the advanced technology in its plant will ensure HeveaBoard of quality competency and a competitive advantage in terms of production efficiency and the meeting of its customers’ future needs on a timely basis. The Board believes thaI the Group’s expansion plans will enable the Group to continue maintaining And increasing its market share both locally and abroad. l <t. RISK FACTORS Nevertheless. there can be no assur:’lOce that the investment in the second manufacturing line will be successful or that any delay in the commencemenl of the commercial operations of Ihe new plant will not have a materially adverse effect on lhe financial and operational business tlcti”ities of lhe Group. 1 THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK