4. RISK FACTORS 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS BEFORE INVESTING IN OUR SHARES. If you are in any doubt as to the infonnation contained in this section, you should consult your stockbroker, bank manager, solicitors, accountants or other professional adviser. RISKS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH OUR GROUP OPERATES (i) We face competition from other market players comprising coconut and oil palm EFB processors! manufacturers and oil palm mills The biomass materials market for coconut and oil palm EFB fibres is still at a relatively nascent stage and given the recent emergence and acceptance of oil palm EFB fibre as a viable biomass material, the level ofcompetition remains moderate with over thirty (30) market participants comprising coconut and oil palm EFB processors/manufacturers and oil palm mills. Characterising a nascent and growing market, the market may see an increase in participations given the huge potentials on offer in addition to the favourable support from the government. However, new market participants are subjected to various barriers to entry, (Source: IMR Report by Protege Associates) Our competitive edge lies in our ability to produce large quantities of quality coconut and oil palm EFB fibres at competitive prices. As at the LPD, we have two (2) coconut fibre production lines and twenty (20) oil palm EFB fibre production lines with a total monthly production capacity of 546 mt of coconut fibre and 8,372 mt of oil palm EFB fibre respectively. Due to Our custom-built production lines and our qU<llity assurance, we are able to produce quality coconut and oil palm EFB fibres which are not only long, clean and fine, but also with great uniformity, This has provided us with a competitive advantage which facilitated the growth and development of our Group. Nevertheless, there can be no assurance that a significant change in the competitive environment would not have an adverse impact on our market positioning and/or share. (ii) We are dependent on our major customers For the FYE 31 December 2013, we have one (1) major customer (who contributed more th<ln 10% of our Group’s revenue) that is, Shenzhen Yuemao Imports & Exports Co., Ltd (“Shcnzhen YuenUlo”) who accounted for approximately 30.14% of our Group’s total revenue. For the FYE 31 December 201 J to 2013, our export of oil palm EFB fibre and Briquette to China accounted for approximately 59.13%, 62.88% and 55.22% of our Group’s total revenue T(~spectively. For the FYE 31 December 2013, all of our nine (9) China customers, including Shenzhen Yuemao, are intermediaries who do not have any contractual arrangements with our Group and transactions are canied out under normal commercial tenns. Whilst Shenzhen Yuemao has been our customer for approximately two (2) years only, we have eight (8) other China intermediaries in our customer base for sales of our oil p<llm EFB fibre and Briquette to China. Of these eight (8) China intermediaries, one (l) of the intermediaries has been our customer for approximately five (5) years, while the remaining seven (7) intermediaries have been our customers for approximately one (1) to two (2) years. As such, we <lre not dependent on Shenzhcn Yuemao for salc.s of our oil palm EFB fibre and Briquette to China. 4. RISK FACTORS (Collt’d) Although we regularly engage the end users in China, these end users generally purchase our products through intermediaries who possess the relevant licenses for the import of goods into China in accordance with the import regulations in China. Nevertheless, we intend to set up a subsidiary company in China by the first quarter of 2015 to facilitate our direct sales to the China end users and hence, mitigate the risk of dependency on intermediaries. In addition, we have been continuously increasing our efforts to expand our customer base. OUf customers for biomass materials and value-added products have increased from 110 customers in 2011 to 139 customers in 2013. Further, pursuant to the Fibre Star Reorganisation, we have gamered 875 customers in 2012 for our mattresses and related products division, which has increased to 1,242 customers in 2013. As at the LPD, our Group has not experienced any loss of major customers and/or intennediaries that had a material adverse effect on our Group’s financial performance or operations. Although we seek to limit our dependency on our major customers and/or intermediaries through the efforts mentioned above, no assurance can be given that any loss of our major customers and/or intennediaries will not have a material adverse effect on our Group’s future performance. (iii) We do not have any long term contracts with our customers We do not have any long teml contracts with aUf customers as the majority of our sales are based on order-by-order basis, which is the nonn in the industry. We also seek to establish good business relationships with our customers and have been improving our product quality and expanding our product range through our process and product development initiatives to ensure repeat orders from our customers. As at the LPD, we have not experienced any material effect from the absence of long term contracts that had a material adverse effect on our Group’s operations or financial performance. However, there can be no assurance that our customers will continue placing orders for our products. (iv) We are dependent 011 our major suppliers for the supply of raw materials The major raw materials used by our Group are oil palm EFB that is, biomass wastes, which are all sourced locally. For the FYE 31 December 2011. we purchased a substantial portion of oil palm EFB fibre from our major suppliers, AKSB and Yip Shun Trading, who accounted for approximately 19.52% and 16.80% of our Group’s total purchases respectively. However, for the FYE 31 December 2012 and 2013, we do not have any major suppliers who individually contributed more than 10% of our Group’s total purchases mainly due to the increase in supplier base from our mattresses and related products division pursuant to the Fibre Star Reorganisation in 2012. Save for the collaboration entered into between HK Palm Fibre and AKSB, we do not have any long tenn contract with our suppliers. Under the terms of the agreement, AKSB, a palm oil miller, nndertakes to supply all its oil palm EFB to HK Palm Fibre and shall not supply to any third party unless with a written consent from HK Palm Fibre. Notwithstanding that we do not have any long tenn supply contract with other suppliers, we have established good working relationships with our other suppliers. In addition, we do not foresee any major difficulty in sourcing our oil palm EFB from other suppliers as our production facilities are situated strategically within the vicinity of multiple oil palm plantations and palm oil mills. As at the LPD, our Group has not experienced any material disruption in the supply of oil palm EFB that had a material adverse effect on our Group’s operations or financial perfonnance. Although we do not foresee any difficulty in the procurement of our raw materials and have not previously experienced any material disruption in the supply of these materials, no assurance can be given that we can continue to source sufficient quantities of oil palm EFB at competitive prices. 4. RISK FACTORS (Conl’d) (v) We are dependent on the continued employment and performance of our Executive Directors and key management and key technical personnel OUf continued success depends on the continued efforts of our Executive Directors and key management and key technical personJlel who are responsible for our manufacturing operations, sales and marketing efforts and/or fOffilUlation of strategies. The loss of any of our Executive Directors or members of our key management and key technical personnel could adversely affect our performance. We strive to minimise this risk by ensuring that we have the ability to retain OUf existing employees. This is achieved by having in place human resource plans that includes suitable compensation packages, career development and training and development for our employees. Good working relationships have also been fostered amongst our employees as we provide a healthy working environment, practice good workplace culture and uphold good work ethics to create a sense of belonging amongst our employees. Further, in conjunction with our Listing, we have allocated a portion of our Public Issue Shares to our eligible employees, including our key management and key technical personnel. Should these employees subscribe for our Shares, they will become shareholders of our Company and may therefore be further motivated to contribute to our Group’s success. Nonetheless, there can be no assurance that the above measures will be successful in attracting and retaining our Executive Directors and key management and key personnel or ensuring a smooth transition should changes occur. (vi) We are subject to the risk of disruptions to our production facilities and business operations and we may not have adequate insurance coverage Our manufacturing activities are dependent on the continued operation of our production facilities. Any disruptions to our production facilities, such as breakdowns, failure, sub-standard perfonnance of our machineries, fire or power failure, will have an adverse impact on our business operations. To mitigate this risk, we carry out regular maintenance of our machineries as well as timely replacement of components which are subject to daily wear and tear. As at the LPD, we have not encountered any major disruptions to our production facilities that had a material adverse effect on our Group’s operations or financial performance. However, there can be no assurance that any breakdowns in our machineries in the future would not severely disrupt our production and operations. We are aware of the adverse consequences arising from inadequate insurance coverage for accidents and outbreaks which could disrupt our business operations. As part of our effort in limiting the above risks, we have taken up fire insurance policies for our office equipment, plant, machinery, premises and all-risks policies for our machinery. We ensure the continuity of our insurance by renewing all the insurance policies annually and reviewing the adequacy of our existing insurance coverage for all our assets. Whilst we have taken the necessary steps to ensure that our assets are adequately covered by insurance, there can be no assurance that the insurance coverage would be adequate for the replacement cost of our assets as well as its related consequential costs. Furthermore, there are also risks such as natural disasters, riots, gcneral strikes, acts of telTorism and any other risks that cannot reasonably be insured against, which may adversely affect our operations. Thus far, our operations have not been affected by any of such events. 4. RISK FACTORS (Cont’d) (vii) The loss of pioneer status may affect our profitability and financial performance As at the LPD, HK Kitaran and HK Fibre have been granted pioneer status by MIT!. Pursuant thereto. HK Kitaran’s statutory income is exempted from tax for a period often (10) years ending 30 June 2020. while 70% of HK Fibre’s statutory income is exempted from tax for a period of five (5) years ending 31 March 2017, as detailed in Section 12.1 of this Prospectus. Whilst we have taken the necessary steps to ensure that our Group is in compliance with the condition imposed by MITI for the pioneer stanIS, there can be no assurance that subsequent to the granting of the incentive, MITI/MIDA may not revoke such exemption, renew the incentive or modify the incentive in any \\’ay in the funrre. For illustration pmposes, assuming that HK Kitaran and HK Fibre were to lose their pioneer status arising from the expiry or withdrawal of the incentive with effect from 1 January 2013, it is estimated that our effective tax rate would be 33.83% as compared to the actual effective tax rate of 13.09%. (viii) We are exposed to fluctuations in the foreign exchange rates arising from our exports to China For the FYE 31 December 2013, our sales to China accounted for approximately 55.22% of our Group’s total revenue, whereby the majority of these sales are denominated in RlvlB. However, our results for the FYE 31 December 20r3 were not adversely affected by foreign exchange fluctuations as the RM generally moved in line with the RMB during the financial year as illustrated below:
2013 January Febmary March April May June July August September October November December Monthly Average * RMBIRM 0.4885 0.4969 0.5000 0.4930 0.4913 0.5132 0.5201 0.5361 0.5311 0.5208 0.5253 0.5349 (Source: Bank Negara Malaysia) Note: * Calculated based on the middLe rate at 1200 session ofthe daffy market price for ‘he respective months. During the financial years under review, we have not experienced any material adverse effect arising from foreign exchange fluctuations that had a material adverse effect on our financial performance. The net realised foreign exchange gains or losses registered by our Group for the past three (3) FYE 31 December 20r 1 to 2013 are disclosed in Section 12.2.4(iv) of this Prospectus. As part of our strategy moving forward, we plan to increase our market presence in China as detailed in Section 6.18.l(vi) of this Prospectus. As such, we may face higher exposure to foreign exchange fluctuations. To mitigate this risk, we constantly monitor the fluctuations in exchange rates and will take steps through appropriate hedging instrument(s) to minimise the effect of foreign exchange on our Group, should the need arises. Nevertheless, there is no assurance that any significant exchange rate fluctuations or changes in foreign exchange control regulations will not have a material and adverse impact on our results in the future. 30 4. RISK FACTORS (Co1lt’d) (Ix) We are exposed to risk of shipping disruptions for our exports to China We are reliant on marine transportation for the export of our products to China, who collectively contributed approximately 55.22% of our Group’s total revenue for the FYE 31 December 2013. Hence, we are exposed to shipping disruptions that may arise as a result of weather conditions, political turmoil, pirate attacks, social unrest, port strikes, oil spills, delayed or lost shipments, which may have an adverse impact to our business. As at the LPD, our Group has not experienced any shipping disruptions that had material adverse effect all our business or finance perfomlance. To mitigate this risk, we procure transportation insurance coverage for our shipping activities to indemnify us against any potential disruptions and to minimise the impact of auy potential cost or liability arising therefrom. Whilst we have taken the necessary steps to ensure that our products are adequately covered by insurance, there can be no assurance that our results would not be materially affected in the event of such incidences occurring. (x) \\’e are subject to political, economic and regulatory risks Like all other business entities, adverse developments in the political, economic and regulatory conditions in Malaysia and China could materially and adversely affect our financial results and business prospects. These risks include, among others, changes in political leadership, risk of war, changes in economic conditions, changes in interest rates, methods of taxation and unfavourable changes in government policies such as introduction of new regulations, import duties and tariffs. Whilst we strive to continue to take effective measures such as prudent finaneial management and efficient operating procedures, there is no assurance that adverse political, economic and regulatory factors will not materially affect our operations, financial performance and future prospects. (xi) Potential liability and/or disruption to our prOduction facilities for lote or non-compliance with regulatory requirements Our premises and operations are governed by the relev<lnt laws and regulations in Malaysia (including land rules and building regulations) as well as the conditions set forth in our processing licences and manufacturing licences imposed by the relevant authorities as follows: (a) Plan! I HK Kitaran has been operating in Plant 1 since 30 Junc 2010, and has obtained a processing licence on 25 August 2011 and a manl1facturing licence on 8 May 2012 in respect of its operations in Plant 1. The express condition in the land title of Plant I states that the land shall be used for the pUlpose of furniture (wood) factory only. Notwithstanding the above, the use of Plant I for the manufacturing of our oil palm EFB fibre is in accordance with the permitted category of land use, that is, Industrial (Perusahaan/Perindustrian), the OC for Plant I has been obtained and a processing licence has also been issued by MPSP to HK Kitaran. We have on 20 March 2014, through our land surveyor/consultant, written and are awaiting a formal reply from the Pentadbir Tanah Dacrah (“PTD”) to clarify whether HK Kitaran is allowed to use the land for the manufacturing of oil palm EFB Fibre. Based on the discussions between our land surveyor/consultant with PTD to date, HI<. Kitaran’s operations is not expected to be affected as the petmitted land use under the land title is ‘Industrial’. 4. RISK FACTORS (Conl’d) Under Section 127 of the National Land Code 1965, where there is a breach of express condition, the State Authority may forfeit the land, or impose a fine for the breach, or require the land owner to take action to remedy the breach. Based on the circumstances as disclosed above, it is unlikely that Plant 1 will be forfeited. Further, HK Kitaran has undertaken to apply for a variation of the express condition, if required by PTD, and pay the necessary costs, including the premium which is not expected to be material (that is, approximately RMO.22 million based on 5% of the market valuc of the said land). However, in the event the application for a variation of the express condition is not approved by the PTO, we shall relocate our operations in Plant I to a fully compliant rented property (“Relocation”). The Relocation is estimated to take approximately three (3) months and the costs to be incurred for the Relocation (comprising mainly the costs for the set up of the rented property and installation of the machineries and equipment, as well as transportation costs) is estimated to be approximately RMO.50 million. The Relocation is not expected to have any material impact on our Group’s operations as Plant 1’s operations is not the main contributor to our Group’s revenuc. Besides, during the Re’ocation period, we will bc able to temporarily undertake our Plant 1’s manufacturing operations in Plant 5. HK Kitaran has further undertaken to promptly rectify any non-compliance in relation to Plant 1 and do all such things necessary to ensure that Plant 1 will be in compliance with all such conditions attached to the land title of Plant I as well as the National Land Code 1965 and other applicable laws, rules and regulation. HK Kitaran has also undertaken not to undertake any cxpansion on Plant 1until all non-compliance in relation to Plant 1 has been rectified. (b) Plant 2
In November 2011, HK Kitaran expanded its operations to Plant 2 and commenced operations since then. HK Kitaran obtained a CCC in respect of Plant 2 on 4 April 2012 and has also obtained the processing licence and a manufacturing licence for Plant 2 on 3 August 2012 and 8 May 2012 respectively. HK Kitaran has subsequently constructed an extended shed attached to Plant 2’s factory building (“Extension”). Approval for the Extension has been obtained vide MPSP’s letter dated 23 October 20 13 as detailed in Section 6.17.1 of this Prospectus.
(c) Plant 3
Plant 3 which is cunently rented by Fibre Star from HH Furniture to house our mattress manufacturing activities does not have an OC. Our landlord, HH Furniture, has on 15 October 2012 applied to MPSP for plarming permission for Plant 3. HH Furoiture has subsequently on 4 March 2013 received a conditional approval from MPSP for the planning permission. As at the LPO, HH Furniture is in the process of fulfilling the conditions imposed. This will be followed by application for OC upon obtaining the approval from MPSP for the plalllling permission. In this regard, the OC is estimated to be issued within six (6) to nine (9) months from the date of submission of application, i.e. by December 2014. In the event that an OC is issued, we will continue to rent and operate in Plant 3, failing which, we will relocate our operations from Plant 3 to Plant 4. Further, in the event that we are required to vacate Plant 3 by MPSP pending the issuance of the OC while Plant 4 is not ready for occupation and operations, we will relocate our operations in Plant 3 to a fully compliant rented propetiy, if necessary. We have been operating in Plant 3 since IGJune 2012. In view of the estimated length of time that Fibre Star would be occupying Plant 3, we had consulted MPSP and applied for the transfer of the processing licence which was originally issued under HH Manufacturer’s name to Fibre Star’s name. The processing licence was transferred to Fibre Star on 14 August 2012. In addition, Fibre Star has obtained a manufacturing licence for Plant 3 on GSeptember 2012. 4. RISK FACTORS (Cont’d) (d) Plant 5 HK Palm Fibre has been operating in Plant 5 since 25 July 2009. HK Palm Fibre has obtained a manufacturing licence on 25 July 2012, but has yet to obtain a processing licence for Plant 5. HK Palm Fibre had been advised by the local authority, MDBB that they are required to obtain a planning permission followed by a CCC for the section of the premise of AKSB used for HK Palm Fibre’s operations, prior to applying for a processing licence. HK Palm Fibre has, on 19 November 2012 applied to MDBB for planning permission for Plant 5 and has subsequently on 5 March 2013 received the conditional approval from MDBB for the planning permission. As at the LPD, HK Palm Fibre is in the process of fulfilling the conditions imposed. This will be followed by the application for a CCC. The CCC is estimated to be issued within six (6) to nine (9) months from the date of submission of application, i.e. by December 2014. Upon obtaining the CCC, HK Palm Fibre will apply for the processing licence which is expected to be issued within three (3) months from the date of submission of application. In the event that we are required to vacate Plant 5 by MDBB pending the issuance of the CCC or a CCC is not issued for Plant 5, we will relocate our operations in Plant 5 to a fully compliant rented property, if necessary.
The licence for processing is different from a manufacturing licence. The licence for processing is issued by a local authority (in this case.. MPSP and MDBB), whereas a manufacturing licence is a licence issued by MIT! under the Industrial Co-Ordination Act, 1975 (“ICA”). With the aim to maintain an orderly development and growth in the country’s manufacturing sector, the leA requires manufacturing companies with shareholders’ funds ofRM2.5 million and above or engaging 75 or more full-time paid employees to apply for a manufacturing licence from MIT!. In relation to the processing licence, it is stated under Section .107 (5) & (6) of the Local Governnlent Act 1976 that any person who fails to exhibit his licence at all times in some prominent place on the licensed premise or to produce such licence of required to do so by any officer of the local authority authorised to demand the same shall on conviction be liable to a fine not exceeding five hundred ringgit (RM500.00) or to imprisonment for a term not exceeding six (6) months or to both. In relation to HK Palm Fibre, HK Palm Fibre has been made to understand that based on the standard By-Laws issued by the State Govemrnent of Kedah, i.e. the Undang-Undang Kecil Perlesenan Perdagangan, Perniagaan dan Perusahaan Pihak-Pihak Berkuasa Tempatan Negeri Kedah 1985, for any non-compliance with the By-Laws which include operating without applying for and obtaining a (processing) licence. MDBB has the power to issue a compound to the company of not more than three hundred ringgit (RlV1300.00). Failure to pay the compound despite repeated notices from MDBB and failure to comply with notices and warning letters from MDBB repeatedly would then subject the defaulting company to court action. MDBB can also, subject to approval by the state prosecutor, bring court action against HK Palm Fibre in which event on conviction, HK Palm Fibre may be subjected to a penalty of the sum of not more than two thousand ringgit (RM2,000.00) or imprisonment of not more than one (l) year, or to both. Section 3(1) ofthc ICA prohibits any person to cngage in any manufacturing activity unless the person is issued a licence in respect of such manufacturing activity. As stated in Section 3(2) of the ICA, a maximum penalty for the non-compliance of the Section 3(1) of thc lCA would carry a two thousand ringgit (RM2,000.00) fine or six (6) months imprisonment and to a further fine not exceeding one thousand ringgit (RMI ,000.00) for every day during which such default continues. We only applied for and obtained the manufacturing licences mentioned above after fulfilment of the requirement to apply for one under the leA. There is no specific provision under the ICA providing for a timeframe within which the company has to apply for a manufacturing licence, nor is there a provision which deals with the delay in application for manufacturing licences and there is no precedent case law in relation to the application of Section 3(2) of the lCA for the imposition of penal tics on companies which have delayed in their application for such manufacturing licences. The essence of the ICA 18 to promote an orderly development of manufacturing activities in Malaysia. 4. RISK FACTORS (Conl’d) Although we commenced our operations in Plant 1, Plant 2, Plant 3 and Plant 5 prior to the issuance and/or transfer of the processing and manufacturing licences, and prior to obtaining CCC/OC for Plant 2, Plant 3 and Plant 5, we have subsequently been granted the processing and manufacturing licences for Plant I, Plant 2 and Plant 3, manufacturing licence for Plant 5 and the CCC for Plant 2, without any fine nor penalties imposed by the relevant authorities. In addition, as mentioned above, our landlord and HK Palm Fibre have received conditional approvals from MPSP and MDBB for the planning pennission on 4 March 2013 and 5 Mareh 2013 for Plant 3 and Plant 5 respeetively. As at the LPD, there were no actions being taken by any of the relevant authorities pursuant to the above. Nevertheless, there can be no assurance that the relevant authorities will not impose any penalties for any noncompliance in the future. Save as disclosed above, we have complied with all the relevant laws and regulations in Malaysia (including land rules and building regulations) as well as the conditions set forth in our processing and manufacturing licences imposed by the relevant authorities. Whilst we continuously ensure compliance with relevant government regulations, there can be no assurance that any penalties, if imposed, will not adversely affect our Group’s performance and profitability. (xii) We are subject to the risk of losing control of HK Palm Fibre, our 50% owned subsidiary company HK Palm Fibre, our 50% owned subsidiary company, adopts Table A in the Fourth Schedule of the Act (“Table A”) as its Articles of Association. Regulation 49 of Table A provides for the Chainnan of the Board of Directors ofHK Palm Fibre to preside as Chairman at every general meeting of the company, while Regulations 53 and 80 of Table A provide for the ChaimlOn of the meeting to have a second or casting vote in the case of an equality of votes at any of the general or board meeting. In addition, Regulations 49 and 85 of Table A provide that, if at any meeting, the Chairman is not present within fifteen (15) minutes after the time appointed for holding the general meeting or ten (10) minutes after the time appointed for holding the board meeting, the members or directors present may choose one of their number to be the Chairman of the meeting. As explained in Section 5.3.7(iii) of this Prospectus, we are able to exercise control of HK Palm Fibre by virtue of the appointment of our Managing Director, H’ng Choon Seng, as the Chainnan of the Board of Directors of the company with effect from 5 October 2009. In this regard, HK Palm Fibre is deemed as our subsidiary company. Nevertheless, there is no assurance that the Chairmanship in HK Palm Fibre will remain with H’ng Choon Seng or any of our representatives, or I-I’ng Choon Seng is able to attend all the general or board meetings, or any of our representatives is appointed as the Chailman of any of the general or board meetings in the absence of H’ng Choon Seng. In the event that H’ng Choon Seng or any of our representatives is removed! not appointed as the Chainnan of HK Palm Fibre at the general or board meeting, we will lose control ofHK Palm Fibre. Should we lose control ofHK Palm Fibre through the above, we would no longer be able to consolidate the financials of HK Palm Fibre into our financial statement~ as our investment in HK Palm Fibre would be accounted for using the equity method in accordance with Malaysian Financial Reporting Standard 128 Investments in Associates and Joint Ventures. The deconsolidation of HK Palm Fibre’s financials would result in non-recognition of HK Palm Fibre’s revenue and expenses as well as total assets and total liabilities, as our investment in HK Palm Fibre would then be represented by a single item shown separately in our consolidated statement of profit or loss and other comprehensive income and consolidated statement of financial position, that is share of profits in an associate and investment in an associate respectively. However, our Board is of the opinion that such loss in control of HK Palm Fibre would not have any material impact on the PAT attributable to the owners of our Company and accordingly, shareholders’ equity of our Company and our Group as it is not expected to give rise to any significant gain or loss to our Company and our Group in view that there is no change in oUr 50% equity interest in HK Palm Fibre. In addition, such loss ill control of HK Palm Fibre should have no impact on our financial results in the future as we can continue to recognise 50% of HK Palm Fibre’s PAT through share of profits in an associate in our consolidated statement of profit or loss and other comprehensive income. 4. RISK FACTORS (Collt’d) (xiii) We arc dependent on supply of foreign workers Our operations arc dependent on the supply of foreign workers. As at the LPD, we have 549 employees, of whieh 331 or approximately 60.29% of our total employees are foreign workers, mainly from Nepal. As such, inadequate supply of foreign workers as well as any revision in policy in relation to hiring of foreign workers by the Malaysian Government lnay dismpt our operations. As part of our efforts to manage our dependency on our foreign workers, we work closely with our recruitment agencies for the recruitment and renewal of work permits for the foreign workers. To date, we have not experienced any material adverse effect on our operations as a result of shortage in the supply of foreign workers for our operations nor were there any intelruptions in our operations during the past twelve (12) months due to shortage offoreign workers. Notwithstanding the above, in the event of any shortage in the supply of foreign workers, we are able to hire local workers. However, in such an event, our profitability may be affected as the costs of utilising local workers in our operations would be higher as compared to utilising foreign workers. (xiv) We are exposed to financial risks Our working capital and capital expenditure requirements are funded by internally generated funds and/or bank borrowings. As at 31 December 2013, our Group’s total borrowings amounted to approximately RM36.80 million. All our bank borrowings are interest bearing with 62.39% of these bon-owings based on variable rates. As such, any fluctuation in interest rates could have a material effect on our finance costs. Presently, we enjoy good credit standing with our bankers and have adequate credit facilities. Notwithstanding the above, our Board is confident of our ability to meet our financial obligations when they become due and payable, after taking illto consideration our cash and cash equivalents, the banking facilities currently available to us and the net proceeds to be raised from our PubJic Issue. In addition, our Listing will enable us to tap the capital market in the future to meet our long-term funding requirements when the need arises. However, there is no assurance that future fluctuations in interest rates will not adversely impact our Group’s performance and profitability. (xv) We are exposed to the credit risks of our customers We are exposed to the risk of default by our customers. We may experience delays in payment for our products, or in more severe cases, we may not be able to collect payments from our customers. In the event of payment defaults, we would have to impair or write-off the debts, which will have an adverse impact on our profitability. In mitigating our exposure to credit risk, we will assess the financial and credit position of prospective customers prior to accepting their orders, while for existing customers, we will continually assess and review their credit positions and maintain close contact with these customers. In addition, we regularly review our trade receivables ageing and monitor subsequent collection of debts. In situations where our customer is unable to adhere to the agreed credit terms, we will examine the reasons for the delay. If there is sufficient commercial justification, we will negotiate for settJement, which could include granting our customer an extension of time for payment. Should the negotiations fail, we will initiate legal actions or proceedings to recover the amount owed to us by the customers. As at the LPD. we have not experienced any instances of significant bad debts. We strive to reduce this risk through our various credit control measures. Nevertheless, there is no assurance that our customers’ credit risk will not have an adverse impact on our Group’s future financial performance. 4. RISK FACTORS (Colll’d) 4.2 RISKS RELATING TO OUR IPO (i) There may be a delay in our Listing or our Listing may be aborted Our Listing may be potentially delayed or aborted in the event of the following: (a) our Underwriter exercising its rights pursuant to the Underwriting Agreement to discharge itself from its obligations; or
(b) we are unable to meet the public spread requirement of at least 25% of OUf enlarged issued and paid-up share capital to be held by a minimnm of 200 public shareholders holding not less than 100 Shares each, at the time of Listing.
We expect to meet the public shareholding requirement at the point of Listing by allocating the Pnblic Issue Shares to the required number of public shareholders during the balloting/private placement processes. However, should the events stipulated in (a) and/or (b) above occur, monies paid in respect of any application accepted will be returned to you without interest within fourteen (14) days after we become liable to repay it, failing which the provision of sub-section 234(2) of the CMSA will apply and we will be liable to repay the monies with interest at the rate of 10% per annum or such other rate as may be prescribed by the SC upon expiration of that period until full refund is made. In the event that our Listing is aborted but our Shares have been allotted to investors, a retUl11 of monies to such investors could only be achieved by way of cancellation of share capital as provided under the Act. Such cancellation requires the sanction of our shareholders by special resolution in a general meeting, consent of our creditors (unless dispensation with such consent has been granted by the High Court of Malaysia) and the continnation of the High Court of Malaysia. Thus, there can be no assurance that such monies can be recovered within a short period of lime or at all in such circumstances. Nonetheless, our Board will endeavour to ensure compliance with the various requirements for our successful Listing. (Il) There is no prior market for our Shares and our Share price may be volatile There is no prior market for our Shares. Accordingly, there can be no assurance that an active market for our Shares will develop upon our Listing or if developed, that such market will be sustained. In addition, our Shares could trade at prices that may be lower than the IPQ Price as a result of many factors, some of which are not within our control and may be unrelated or disproportionate to our operating results. These include, amongst others, prevailing economic and financial conditions in Malaysia and/or China, the depth and liquidity of the market for our Shares and investors’ individual perceptions of our Group. (iii) Control by onr Promoters may limit your ability to influence the ontcome of decisions requiring the approval of our shareholders Upon Listing, our Promoters will collectively hold approximately 70.29% of our enlarged issued and paid-up share capital. As a result, they will still be able to, in the foreseeable future, effectively control the business direction and management of our Group as well as influence the outcome of certain matters requiring the vote of Our shareholders, unless they are required to abstain from voting by law and/or as required by the relevant authorities. Nevertheless, as a step towards good corporate governance, we have appointed three (3) Independent Non-Executive Directors and set up an Audit Committee to ensure that, inter-alia, any future transactions involving related parties are entered into on an arm’s length basis, on normal commercial terms which are not more favourable to the related parties than those generally available to the public and are not detrimental to our minority shareholders. 4. RISK FACTORS (Cont’dj (iv) We are an investment holding company and rely on dividend payments from onr subsidiary companies for funding and payment of dividends 011 our SJulres OUf Company, being an investment holding company derives income mainly from dividends received from our subsidiary companies. Hence, our ability to pay future dividends and our ability to sustain our dividend policy in the future are largely dependent on the performance of our subsidiary companies. In detennining the size of any dividend recommendation, we will also take into consideration a number of factors, including but not limited to our financial perfonnance, cash flow requirements, debt servicing and financing commitments, future expansion plans, loan covenants and compliance with regulatory requirements. THE REST OF THIS PAGE lIAS BEENINTENTIONALLY LEFTBLANK