3. RISK FACTORS 3. RISK FACTORS Applicants for the IPO Shares should carefully consider the following risk factors (~vhjch is not exhaustive) in addition to the other information contained elsewhere in this Prospectus before applying tor the ,PO Shares:3.1 Sensitivity to Economic Factors The performance of the iron and steet industry is dependent not only on the performance of other industries which place their own lndividual demands on iron and steel products but also the general economic condition as a whole. Empirical evidence suggest that a healthy economy with a strong GDP growth coupled with a boom in the construction sector coincides with a robust iron and steel industry, and vice versa. Notwithstanding the above, the Group remained healthy and continued to show strong and profitable periormance in the face of the economic downturn between 1998 and 2002.
3.2 Business Risks The Group is subject to ~nherent risks in the manufacturing industry such as vola1i1ity in the supply and price of raw materials, labour supply shortage, increases in labour and overhead costs and foreign exchange rate fluctuations. Although the Group does not presently experience any adverse effects from such factors, no assurance can be given that they will not have a material effect on the Group’s business in the future. ‘n order to mitigate such risks, the management of the Group has implemented various strategies such as purchasing from reputable international suppliers and trading houses, optimising diversification of suppliers and distributors and increasing automation to reduce rel~ance on manual labour.
3.3 Dependency on Key Management The contlnued pertormance of HTVB will largely depend on the abilities and continued efforts of its existing Directors and senior management as wen as the ability to attract and/or reta~n quatified personnel. However~ based on the long and dedicated service of many of its Directors and staff~ the Group is confident that they will continue serving the Group for the years to come.
3.4 Delay in or Abortion of the Listing of HTVB The occurrence of anyone or more of the following events may cause a delay or an abortion of the listing HTVB:(1) the identified investors fail to subscribe for the portion of the Restricted Issue Shares and P’acement Shares;
(ii) the Underwrlter(s) exercising its(their) rights pursuant to the underwrlttng agreement to discharge itself(themse\ves) from its(their) obligations thereunder;
(iH) the Company is unable to meet the pubhc spread requirementl that is~ at ~east 25% of the issued and paid-up share capital of the Company must be held by a minimum number of 1,000 pUblic shareholders holding not less than 100 Shares each upon completion of the IPO at the point of listing of the Company’s Shares on the KLSE. 31
3. RISK FACTORS….. confd Ownerrrlt’eJLocation Description I Existing Use Approximate land I built-up area Net Book Va’ue @ 31.07.2001 (RM’OOO) Disposal date Disposal prIce (RM’OOO) !ill! 8·01·05 K1 Park Damansara, Muklm Batu, Daarah Gombakl Selangor Apartment (under constructi0 n) 948 square feet 138 04.3.2002 100 85-G-4 Evergreen Park, Bandar Sungai Long, Muk~m of Cheras t Daerah Ulu Langat1 Selangor Condominium Vacant N/A 11123 square feet 148 @31.07.2000 20.6.2000 142 A·1008 Storey No 1O, Block A MPAJ Square Shop Lot Vacant NfA 1,085 square feet 321 21.5.2002 200 THH 308·12·1 Jade View Apartmentl Jalan Bukit Gambir, Taman Jade View 11700 Penang Apartment Vacant N/A 700 square feet 126 11.12.2001 95 No 13~ 2l1d Floor, Desa Permata Air Itam, Penang Shop Lot Vacant NJA 1,900 square feet 223 28~11.2001 175 Subtotal 712 TOTAL 81723
3.7 Foreign Exchange Risk The Group sources some of its trading goods such as building materials from overseas and these goods are payable in foreign currencies thereby subjecting the Group 10 foreign exchange risk. This risk is m’t~gated in the medium term due 10 the current Ringgit being pegged against the USD. However there can be no assurance that the peg of the Ringgit against the USD will remain and that future foreign exchange fluctuations aris~ng from the lifting of the adjustment of the Ringgit peg or currency controls will not adversely impact the HTVB Group~ tn view of this, the management of HTVB Group is constantly monitoring the Group’s USD exposure and taking the necessary measures to hedge against foreign exchange risks, whenever deemed appropriate. Notwithstanding the above, the Group sources a substantlal portion of its raw materials for its manufacturing d\vision locally from Megastee~ Sdn Bhd which will aiso help mitigate the Group’s exposure to this risk. 3.8 Pricing of Raw Materials The price of iron and steel is dependent upon the world demand and supply and is a commodity traded based on the rates quoted on the London Metal Exchange. A shortage of supply may [ncrease the pricing of raw materials~ The Group has, howeverJ maintajned a long term re’ationship with the foreign suppliers as well as the local dealers and is able to source the raw materials at competitive prices. 33 3t RISK FACTORS.. r.r cont’d
3.9 Import Tariffs on Steel Products Imposed by the United States In March 2002l the United States imposed tariffs on certain types of imported stee~ products by approximately 30%. Arising from the tariffs, steel products from countries outside the United States would become more costly and less attractive and discourage US importers of steel products. This may lead to a situation of an excess supp~y in the global steel market depressing the price of steel products4 There is no assurance that the imposition of the tariffs will not affect the ‘evel of exports of stee’ products of the Company to the United States and hence affect Its revenue. However, the Directors are of the view that this wil~ bring minimal effect, if at all, on the Company as the level of exports to the United States by the Company is negligible if any, while other markets namely those in the South East ASIan and Asian regions are more attractive for the Company to export to. Direct exports to the United States account for on~y an average of 3.62% of the total Group revenue from export for the six(6)-month period ended 31 January 2003.
3.10 No Prior Market for HTVB Shares Prior to this IPOl there has been no public market for HTVB Shares and there can be no assurance regarding the future development of the market for HTVB Shares. There ;s no assurance that the IPO price will correspond to the price at which HTVBls Shares will trade on the Main Board of the KLSE upon or subsequent to its listing, that an active market for HTVB’S Shares will develop and continue upon or subsequent to its list;ng4 The ,PO price of RMO.55 per Share has been determined after taking into consideration a number of factors, ,ncludlng but not limitjng to the Group·s financial and operating history and standjng~ the future plans and prospects of the Group and the industry in which the Group is involved, the NTA of the Group, the market prices for shares of companies engaged in business similar to that of the Group and the market condition prevaHing at the time of the ;ssue of this Prospectus.
3.11 Competition In view that the iron and steel industry is an established one, the Group faces competition from other iron and steel producers who are both local and foreign-based~ No assurance is given that the Group will be able to maintain its market share for al~ its products in the future. However, it is the firm commitment of the Group 10 expand both the domestic and overseas markets in order to strengthen its competitive position.
3.12 Political, Economic and Regulatory Considerations Adverse developments tn poHt,cal, economic and regulatory conditions in Malaysia and other countries where the Group is currently marketing its products or may undertake projects or market its products in the future could materially and adversely affect the financial prospects of the Group~ Other polltica~. economic and regulatory uncertainties include risks of war, expropriation, nationaljsation, renegotiation or nullification of existing contracts) changes in Interest rates and methods of taxation and currency exchange controls. 34
3. RISK FACTORS.~~.. contJd 3.17 Impact of AFTA At the fourth ASEAN Summit in Singapore in January 1992, ASEAN initiated the AFTA agreement which was signed between Malaysia, Thailand) Singapore, Indonesia, Phillippines and Brunei to promote regional economic lntegration and increase competit1veness by reducing 1nter-regional tarlffs between member countries. AFTA will result in a gradual reduction of trade barriers In the ASEAN countries by the year 2003. Traditional protection ~n the form of import tariffs will be virtually abolished and under AFTAI member countries will have to commence lowering tariffs, export subsidies and tax relief from the year 2000 and are to be abolished by 2003. With the lnltiat[on of the Common Effective Preferential Tariff scheme under AFTAI tariff on goods traded within the region, which meet a 400k Asean content requirement, will be reduced to 0-5% by the year 2003. This would result in a liberalised market and lntensify competition among steel producers ~n the region. With AFTA, steel and steel-related product manufacturers will have access to a much wider integrated domestic market. It will also open up the local market to a greater degree of foreign direct investment. As with the recent trade agreement between ASEAN and China, local producers will have access to an even bigger market. Notwithstanding 1he above, the industry will also have to face intense competition from its regional counterparts and this will force manufacturers to improve their efficiency and productivity levels. Although every effort has been taken by the Group 10 maintain its competitiveness, there is no assurance that AFTA wlll not have any adverse effect on the Group’s business and financial conditions~
3.18 Valuation Prospecflve investors should note that valuation is subjectlve in nature and subject to inherent uncertainties, including but not limited to the economic environment, the property sector and the share market conditions. Some of these sectors are experiencing volatllity amidst economic slowdown and this situation1 if continues to prevail, will adversely affect the short term values of the assets. There is no assurance that the fair value of the properties of the HTVB Group (including investment properties) will not be duly reflected. The market prices of the assets will depend, inter-aHa, on the economic condition, both locally and externally and the prevailing property market conditions. The Board has considered the valuation of the properties of the HTVB Group and views that the valuation of 1hese properties as detailed in Section 6.3 of this Prospectus reflects·their realisable value to the Group. [ The rest of this page is intentionally left blank. ] 36