5. RISK FACTORS 5. RISK FACTORS You should evaluate and consider carefully, along with other matters in this Prospectus, the risks (which may not be exhaustive) below. Additional risks, whether known or unknown, may in the future have a material adverse effect on us or our Shares. 5.1 RISKS RELATING TO OUR BUSINESS AND INDUSTRY 5.1.1 We are affected by economic, market and political factors that are beyond our control We are not insulated from general business risks as well as certain risks inherent in the industry in which we operate. Some of the business risks which may affect us are a general downturn in the global, regional and national economy, specifically, the Malaysian economy, the entry of new players in the oil recycling industry, constraints in labour supply and increase in labour costs, changes in law and tax legislation affecting the industry, changes in business and credit conditions and changes in technology. Any adverse development in the political situation and economic uncertainty in Malaysia and/or other countries which we have business links, directly or indirectly could materially and adversely affect our financial performance. These include risks of war, global economic downturn, expropriation, nationalisation, unfavourable change in government policy and regulations such as foreign exchange rates and methods of taxation and currency exchange controls. We seek to mitigate these business risks through, amongst others, prudent management policies, upgrading our processes and keeping abreast with new technologies in waste management services, maintaining good business relationships with our customers and suppliers, expanding of our client and supplier base, careful contractual terms and effective human resource management. However, no assurance can be given that changes in any of the abovementioned business risks will not have a material adverse effect on our business. 5.1.2 We face competition from other Scheduled Waste contractors in Malaysia As at the LPD, there are approximately 39 Scheduled Waste contractors in Malaysia licenced by the DOE to be involved in activities related to waste oil recovery. As reported in the IMR Report, out of these 39 Scheduled Waste contractors, only 28 are active players in the waste oil recycling business. There is no assurance that the DOE will not issue new licenses in the future to other Scheduled Waste contractors to treat waste oil in the future, thereby posing more competition to us. As an integrated waste oil recycler, apart from recycling the waste oil we are permitted to collect and treat, we are also able to process and produce recycled oil products with commercial values under our own proprietary brand names. In addition, we maintain or increase our competitive edge by keeping abreast with technological advancements so as to enhance our ability to innovate, develop and introduce new and improved products on a timely basis, providing our clients with, customised and cost-effective solutions to address their waste management needs and commitment to provide quality products and services to our clients. However, no assurances can be given that competition from potential new entrants to the industry will not have a material adverse effect on our business. 5. RISK FACTORS (Cont’d)
5.1.3 We are dependent on licences issued by the DOE for our business operations The core business of HHC and Transada is dependent on the Off Site Scheduled Waste Recovery Facility licence and Off Site Storage Facility licence for the purposes of collection, transfer and transportation of Scheduled Waste issued by the DOE to handle certain Scheduled Waste containing principally organic constituents which may contain metals and inorganic materials, Le. SW3 category as classified by the DOE (Please refer to Section 6.7 of this Prospectus for further details on the Scheduled Waste categories we are licensed to handle). These licences have to be renewed annually. There is a risk that HHC and Transada may not be issued the renewal licences in the event HHC and Transada are not able to meet the requirements as set out by the DOE or if there are any changes in government policies and regulations. Furthermore, the abovementioned licences allow HHC and Transada to treat and transport a specific volume of Scheduled Waste. HHC and Transada would be required to apply for new licences for a higher volume of Scheduled Waste should there be an increase in the demand for its services beyond the maximum volume specified in the said licences. In the event that HHC and Transada are not able to procure licences to treat and transport a higher volume of Scheduled Waste, HHC and Transada will not be able to meet the increased demand for its services. HHC and Transada have been able to renew its licences annually in the past. Further, since HHC and Transada were awarded the licences, there has not been any incident or complaint against HHC or Transada or non-compliance by HHC or Transada under the EQA, save for an incident where HHC pleaded guilty and paid a penalty of RM30,000 on 9 August 2011 for an offence under Section 18(1) of the EQA for storing Scheduled Waste categorised as SW409 in the First Schedule of the Environmental Quality (Scheduled Wastes) Regulations 2005 in their head office at Kepong without licence from the DOE. Our Group took the aforementioned transgression (which was due to negligence on the part of a truck driver who temporarily unloaded a batch of used drums which are classified as Scheduled Waste SW409 at our Kepong premises without obtaining prior approval from our management before sending the truck for repairs due to a mechanical malfunction) seriously and had taken corrective actions which included analysing the root cause of the transgression and the resulting conclusion has been used to improve its EMS and its standard operating procedures so as to ensure compliance with the conditions of its licences to ensure similar events will not occur in the future. To ensure that HHC and Transada continue to have its licences renewed by the DOE, HHC and Transada will ‘actively and continuously stay abreast with regulatory requirements and best industry practices, and ensure prudent quality control.
5.1.4 Fluctuations in prices of raw materials Our total cost of raw materials accounted for 87.81%,80.03%,74.81%,70.13% and 62.63% of our total cost of sales for the past 4 financial years up to FYE 2011 and the FPE 2012 respectively. Our products depend on obtaining adequate supply of raw materials at competitive prices for our production needs. The major component of our raw materials is waste oil. Due to the positive correlation of recycled oil and virgin oil, the price of waste oil is, amongst others, subject to fluctuations in commodity prices of virgin oil, global economic conditions and demand from the end-user industries. Please refer to Section 11.2.3 of this Prospectus for further details on the fluctuations in oil prices and Section 11.2.2 of this Prospectus for more information on the effects of the fluctuations in oil prices on our financial performance. Nevertheless, our Board believes that the risk of fluctuations in prices of waste oil is mitigated by the following: (i) the impact of the price movement of waste oil is manageable as the cost of the waste oil is generally imputed in the selling price of our products; and 5. RISK FACTORS (Cont’d) (ii) our management constantly monitors the market trend of commodity prices and plan our purchases of waste oil accordingly. 5.1.5 An interruption in supply of raw materials may erode our profitability and thus affect our financial performance Our supplies primarily consist of Scheduled Waste, in particular waste oils and solvents, and in the past we have not experienced any significant shortages in waste oils and solvents supply. Should there be any such shortages in supply, our production utilisation rates and operations may be affected significantly and could potentially have a material adverse impact on our financial performance. However, the risk of shortages in waste oils and solvents supply is mitigated due to our established, extensive and diverse supplier base comprising 2,353 suppliers as at the LPD. These are industrial and commercial establishments, which include automotive assembly plants and automotive workshops, as well as those from the oil and gas, marine, paint manufacturing and printing industries. Please refer to Section 6.9 of this Prospectus for information on the availability of our principal raw materials. 5.1.6 Experienced Directors, key management personnel and skilled personnel are pivotal to our success We believe that our continued success will depend, to a significant extent, upon the continued employment and performance of our Executive Directors, key management personnel and skilled personnel. Further, due to the specialised and technical nature of the industry, we are also dependent on our key staff who possesses the relevant technical knowledge such as our chemical engineers. The loss of any of our key Directors and members of our senior management team could adversely affect our continued ability to manage our operations effectively and competitively. Our Directors recognise the importance of our ability to attract and retain our key management personnel and have put in place a human resource strategy. This human resource strategy includes suitable compensation packages and a human resource training and development programme for all supporting employees in all key functions of our operations. We have made continuous efforts to strategically develop a dynamic and strong management team and groom the younger members of the management team in assisting our key personnel to operate and manage our operations. Further, all technical formulaes and procedures are well documented and as such, the loss of any key personnel is not expected to cause any major disruption to our operations.
5.1.7 Our efforts to penetrate new markets outside of Malaysia may not succeed We intend to establish our presence in new locations outside Malaysia to market our products and services (Please refer to Section 6.27.3 of this Prospectus for further details on the targeted new locations). We will devote adequate financial resources and personnel to set up an overseas network and to create awareness of our range of products and services. However, there can be no assurance that the new market will generate sufficient revenues to be profitable. Furthermore such future expansion could expose us to foreign, economic, political, legislative and other risks. Any failure to accurately assess these issues could affect our business, financial condition and operating results. In order to minimise such risks, we will conduct market feasibility studies on the respective market before any significant investment is made and will seek strategic partners in those potential markets. We will exercise prudent spending policies and careful planning to ensure that we do not over-expand our business. 5. RISK FACTORS (Cont’d) 5.1.8 Breakout of fire, disruption in electricity supply and other unforeseen events may adversely affect us Our operations are also exposed to certain emergency risks such as fire, flood, disruption of electricity supply and other unforeseen events. Such risks may cause significant loss and interruption to our business. We have taken various steps to reduce such risks by installing fire fighting systems such as fire hydrants; hose reels, fire extinguishers and smoke alarms. We also made arrangements with the Fire Department and Sl. John’s Ambulance to conduct annual training for all employees of the Group in respect of methods of handling fire fighting equipment and proper procedures to be carried out should fire occur in our factories. Notwithstanding the above, there is no assurance that the emergency risks will not occur and will not adversely affect our assets and business operations. We also have not in the past been faced with such events which resulted in the disruption of our business operations or adversely affected our assets. Our Directors believe that we are presently adequately insured against unforeseen events such as fire and lightning, flood, malicious damage, theft and burglary. We review and ensure adequate coverage for our assets on a continuous basis. Although we have taken the necessary steps to insure our assets adequately, there can be no assurance that the insurance coverage would be adequate for the replacement cost of our assets or any consequential loss arising from the damage or loss of our assets.
5.1.9 Our business operations may adversely affect the environment Scheduled Waste disposal using the recycling method is a process that produces pol[utants of its own. These pollutants must then be disposed of as hazardous waste. The recycling of Scheduled Waste can adversely affect the environment if pollutants produced are not disposed of adequately. We regard compliance with applicable environmental regulations and the health and safety of our workforce and communities we serve as critical components of our overall operations (Please refer to Section 6.18 of this Prospectus for further information on our compliance initiatives). In addition, we have endeavoured to ensure that our recycling methods produce minimal pollutants. The recycling of materials such as drums/containers soiled with contaminants such as grease, inks and solvents, uses mainly solvents. The contaminated solvents used in the flushing of the drums/containers are recycled at our solvent recycling unil. Discharge and effluents generated from the waste oil and waste solvent recycling process are treated on-site, using a wastewater treatment system which filters and ‘polishes’ the wastewater. The treated water is then tested for fitness for reuse as recovered water for industrial usage. Residues from the various recycling processes that have little or no economic value are then treated and sent to Kualiti Alam for final disposal. Any breach or non-compliance of the environmental laws and regulations by us to which we are subject to may lead to penalties being imposed on us and/or the revocation or suspension of the licences issued to us by the relevant authorities which would materially and adversely affect some or a[[ of our business activities. There can be no assurance that we will not incur significant costs and liabilities in the future or that changes in environmental laws, regulations and enforcement policies will not result in a substantial increase in our costs and liabilities in the future. Higher regulatory, environmental and/or other relevant costs would reduce our profit margins and earnings. 5. RISK FACTORS (Cont’d) Thus far we have been complying with the environmental laws and regulations. Notwithstanding the above, like other Scheduled Waste contractors, there is nO assurance that accidents or spillages resulting in the contamination of the environment will not occur. Occurrences of such accidents or spillages may incur additional costs to our Group’s business operations. TD this end, we have in place emergency response procedures tD address such incidences and are presently insured against the cleaning-up CDStS, bodily injury and property damage resulting from such poliutiDn incidents. Although we have taken the necessary steps tD insure Dur business operatiDns, there can be nD assurance that the insurance coverage would be adequate tD CDver the clean-up CDSt Df the affected area Dr any cDnsequential loss arising frDm the damage Df assets. 5.1.10 We face competition from other methods Df Scheduled Waste disposal due to cost considerations The loss and degradation Df Dur natural resources and the threat tD human health are powerful incentives tD reduce and recycle our waste. In reality, hDwever, cDmmunities faced with cDmpeting demands Dn their budget must justify expenditures through CDSt benefit analysis. In this regard, many would cDmpare the CDSt and cDnvenience Df recycling tD treatmenUlandfiliing. In Malaysia, Scheduled Waste treatment and landfilling services are undertaken solely by Kualiti Alam. Measures will be taken tD improve the respDnse from industries, particularly the Small and Medium Industries, tD use the existing Scheduled Waste treatment facility at Bukit Nanas, Negeri Sembilan. Hence recycling services cDmpanies face the challenge Df penetrating intD servicing cDmpanies that have been using the treatmenUlandfilling DptiDn. 5.1.11 Non-renewal of working permit of our foreign workers could temporarily disrupt our operations As at the LPD, we have 49 fDreign wDrkers representing approximately 39.84% Df Dur tDtal emplDyees. Our Group recruits fDreign wDrkers with valid wDrking permits and the applicatiDns fDr the renewal Df working permits fDr the fDreign wDrkers recruited by us are dUly submitted by Dur Group to the ImmigratiDn Department Dn a yearly basis priDr tD the expiration Df the wDrking permits. Any shDrtage Df fDreign labDur may interrupt the manufacturing process of our Group. HDwever, this dependency On foreign labDur is partly mitigated by the usage Df IDcal manpower. In additiDn, we work closely with our appointed agents fDr recruitment, and renewal Df wDrk permits fDr the foreign workers. To date, we have not encDuntered any shDrtage in the supply of fDreign labDur nor were there any interruptions tD our business DperatiDns that may have a material adverse impact on our financial performance. Our Group will endeavDur tD increase autDmatiOn of our processes and hence reduce dependency Dn unskilled fDreign labDur.
5.1.12 There is nO assurance that our future plans will be commercially successful As part Df Dur future plan and strategy tD increase our Dutreach tD customers and suppliers tD tap On the waste Dil generated in the marine sectDr and nelghbDuring industries, we have cDnstructed a third treatment plant at Pulau Indah, SelangDr. Further infDrmatiDn Dn the third treatment plant at Pulau Indah, SelangDr is set Dut in SectiDn 6.12 of this Prospectus. Our expansion plans involve a number Df risks, including (but not limited tD) the CDStS of investment in fixed assets, costs of wDrking capital tied up in inventDries, as well as Dther working capital requirements. Our expansion will also depend On our ability to secure new customers and/or sufficient orders. Failure to secure new customers or sufficient orders would materially and adversely affect our business and financial performance. There is nO assurance that our expansion plans will be commercially successful. If we are unable to execute our expansion plans successfully, our business and financial performance would be materially and adversely affected. 5. RISK FACTORS (Cont’d) 5.2 RISKS RELATING TO OUR SHARES 5.2.1 Our Promoters control a significant portion of our Shares which may result in our Promoters being able to influence the outcome of certain matters requiring the vote of shareholders Our Promoters, namely, Chan Say Hwa, Soo Kit Lin and Chan Ban Hin collectively control approximately 59.49% of our enlarged issued and paid-up share capital after the IPO. Consequently, our Promoters may be able to influence the outcome of certain matters, such as the election of Directors and the approval of business ventures requiring the vote of our shareholders, unless they are required to abstain from voting by law and/or by the relevant authorities. The introduction of corporate governance rules that requires the formation of an Audit Committee, which consists 3 independent non-executive Directors, may effectively help to promote transparency in all material transactions and our Company’s accountability, thereby safeguarding the interests of the minority shareholders. Our Promoters would also be required to abstain from voting if there are any related-party transactions which may pose a conflict of interest to that of our Company. 5.2.2 There has been no prior trading market for our Shares and a market for our Shares may not develop There is currently no prior trading market for our Shares. There can be no assurance that an active and liquid market for our Shares will develop upon its Listing or, if developed, that such market will be sustained. There can be no assurance that the IPO Price will correspond to the price at which our Shares will trade on the ACE Market upon or subsequent to our Listing. The IPO Price was arrived at after taking into consideration, inter-alia, our financial and operating history and conditions, our future prospects and the prospects of the industry in which we operate in and the prevailing market conditions at the time of the Listing. The IPO Price may not be indicative of prices that may prevail in the trading market after the Listing. In recent years, the stock market in general, and the market for the securities of many companies in particular, has experienced volatile price movements which to a certain extent, were driven by local and global market sentiments. Such fluctuations may increase the market risk of our Shares. 5.2.3 Future sale of our Shares could adversely affect our Share price Any future sale or availability of our Shares can have an adverse effect on our Share price. The sale of a significant amount of our Shares in the public market after the IPO, or the perception that such sales may occur, could adversely affect the market price of our Shares. These factors also affect our ability to raise funds from the issue of additional equity securities. If our Promoters sell, or are perceived to sell, substantial amounts of Shares in the public market following the expiry of the moratorium period, it may result in a dampening effect on our Share price. 5. RISK FACTORS (Cont’d)
5.2.4 Investment in the capital market exposes the investor to capital market risk The performance of the local bourse 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 well as the growth potential of the various sectors of the economy. These factors invariably contribute to the volatility of trading volumes witnessed on Bursa Securities, thus adding risks to the market price, which may already fluctuate significantly and rapidly as a result, inter-alia, of the following factors: • differences between our Company’s actual financial and operating results and those expected by investors and analysts;
• announcements by us or our competitors of significant contracts, acquisitions, strategic alliances, joint ventures or capital commitments;
• fluctuations in stock market prices and volume;
• changes in our Company’s operating results;
• changes in securities analysts’ estimates of our Company’s financial performance and recommendations;
• change in market valuation of similar companies; • our involvement in litigation, arbitration or other forms of dispute resolution;
• additions or departures of key personnel; and
• changes in general econom ic and stock market conditions.
5.2.5 Unforeseeable events could result in the delay in Listing or the termination of the Listing exercise The occurrence of anyone or more of the following events, which may not be exhaustive, may cause a delay in our Listing or our Listing to be aborted: (i) the placees under the private placement fail to acquire the Public Issue Shares allocated to them; (Ii) the Underwriters exercIsing the rights pursuant to the Underwriting Agreement to discharge themselves from their obligations thereunder; or (iii) we are unable to meet the public spread requirement as determined by Bursa Securities, Le. at least 25% of our enlarged issued and paid-up ordinary share capital must be held by a minimum number of 200 public shareholders holding not less than 100 Shares each at the point of our Listing; However, our Board will endeavour to ensure that our Company complies with the various provisions of the Listing Requirements, inclUding, inter-alia, the public spread requirement. In the event of the failure of our Listing, all monies paid in respect of any application accepted from you will be returned in full without interest within 14 days failing which the provision of sub-section 243(2) of the CMSA shall apply accordingly. 5. RISK FACTORS (Cont’d) In the event that the listing is aborted and our Shares have been allotted to new investors, the return of monies to the holders of our Shares could only be achieved by way of cancellation of share capital as provided under the Act and its related rules. 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 confirmation of the High Court of Malaysia. There can be no assurance that such monies can be recovered within a short period of time or at all in such circumstances. 5.2.6 We are a holding company and, as a result, are dependent on dividends from our subsidiaries to meet our obligations and to provide funds for payment of dividends on our Shares We are a holding company and conduct substantially all of our operations through our subsidiaries. Accordingly, dividends and other distributions received from our subsidiaries are our principal source of income. Consequently, the amount of these dividends and distributions are an important factor in our ability to pay dividends on our Shares (to the extent declared by our Board). The ability of our subsidiaries to pay dividends or make other distributions to us is subject to the availability of distributable reserves, applicable legal restrictions contained in their loan agreements and to these companies’ having sufficient funds that are not needed to fund their operations, other obligations or business plans. In addition, changes in the Malaysian Financial Reporting Standards may affect the ability of our subsidiaries (and consequently us) to declare and pay dividends. As we are a shareholder of our subsidiaries, our claims as a shareholder will generally rank junior to all claims of our subsidiaries’ creditors and claimants. In the event of a liquidation of a subsidiary, there may not be sufficient assets for us to recoup our investments in that subsidiary.
5.2.7 New investors will incur immediate dilution and may experience further dilution Our IPO price of RMO.20 per Share is substantially higher than our proforma consolidated NA per Share of RMO.13 as at 30 June 2012 after the IPO and proposed utilisation of proceeds as referred to in Section 4.8 of this Prospectus. If we were liquidated immediately following this IPO, each investor subscribing to this IPO would receive less than the price paid for their Shares. Please refer to Section 4.8 of this Prospectus for further details.
5.2.8 Negative publicity may adversely affect our share price Negative publicity involving our Group, any of our Directors or our controlling shareholders may adversely affect the market perception or the stock performance of our Company, whether or not it is justified. Some examples are unsuccessful attempts at joint ventures, takeovers or involvement in insolvency proceedings. 5.2.9 We may issue future securities for additional funding for our future growth which will result in a dilution to our Shareholders Secondary issue(s) of securities after the IPO may be necessary to raise the required capital to fund our growth capital. If new Shares placed to new and/or existing shareholders are issued after the IPO, they may be priced at a discount to the then prevailing market price of our Shares trading on Bursa Securities, in which case, existing shareholders’ equity interest may be diluted. If we fail to utilise the new equity to generate a commensurate increase in earnings, our EPS will be diluted, and this could lead to a decline in our Share price. Any additional debt financing may, apart from increasing interest expenses and gearing, contain restrictive covenants with respect to dividends, future fund raising exercises and other financial and operational matters. 5. RISK FACTORS (Cont’d)
5.3 OTHER RISKS 5.3.1 Unfavourable financial and economic developments in Malaysia may have an adverse effect on us We are incorporated in Malaysia, and all of our assets are located or registered in Malaysia. As a result, we are subject to political, social, economic, legal and regulatory risks specific to Malaysia. Also, general economic conditions in Asia may have an effect on our business, financial condition and results of operations, as well as our future prospects. The recent global financial crisis, the recent European sovereign debt crisis, recent developments in Middle East, higher oil prices, the general weakness of the global economy and the occurrence of avian flu and swine flu in Asia and other parts of the world have increased the uncertainty of global economic prospects and may continue to adversely affect the Malaysian economy. Any future deterioration of the Malaysian and global economy could adversely affect our business, financial condition and results of operations. 5.3.2 Forward-looking statements may not be reflective of our future prospects Our Prospectus contains forward-looking statements which are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Whilst the interpretation of this information may be forward-looking, the contingencies and inherent uncertainties underlying this information should be carefully considered by the investors and should not be regarded as a representation by our Company and our advisers that the objectives and the future plans of our Company will be achieved. Any differences in the expectation of our Company from our actual performance may result in our Company’s financial and business performances and plans to be either, materially or immaterially, different from those anticipated. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK