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 (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO ALL OTHER RELEVANT INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, BEFORE MAKING AN APPLICATION FOR OUR IPO SHARES. 4.1 RISKS RELATING TO OUR BUSINESS AND OUR OPERATIONS 4.1.1 Dependency on the Teaming and Support Services Agreement, HSSI and HSSME Since the establishment of HSSE’s business in 2001, HSSE has been co-operating and working in a strategic business collaboration with HSSI and subsequently with HSSME under the Teaming and Support Services Agreement. Pursuant to the Teaming and Support Services Agreement, both HSSI and HSSME are bound under an exclusive arrangement to collaborate, co-operate and work together with HSSE to bid for, procure, obtain, or otherwise provide engineering and project management services. HSSE currently derives all of its revenues from HSSI and HSSME via the Teaming and Support Services Agreement. Under the Teaming and Support Services Agreement, HSSE shall identify, source and select potential projects and proVide the Support Services to HSSI and HSSME; whereas HSSI and HSSME, each an engineering consultancy practice registered under the REA, shall provide professional engineering services for the projects. Given our reliance on HSSI and HSSME under the Teaming and Support Services Agreement, we will be subject to those risk factors affecting the operations of HSSI and HSSME, details as follows:(a) REA Registration Under the REA, a body corporate providing professional engineering services may only practise as an engineering consultancy practice if it is registered with the Board of Engineers Malaysia and has been issued with a certificate of registration. HSSI is registered under the REA to proVide civil engineering consultancy services while HSSME is registered under the REA to provide mechanical and electrical consultancy services. If the Board of Engineers Malaysia finds that:(i) the engineering consultancy practice or any of its director or shareholder has breached, or failed to comply with or carry out, any of the terms, conditions or restrictions imposed by the Board of Engineers Malaysia upon registration of that engineering consultancy practice;
(ii) the composition of the board of directors or shareholders of the engineering consultancy practice does not comply with provisions of the REA;
(iii) the engineering consultancy practice has failed to furnish information relating to any change in the composition of its board of directors or shareholders to the Board of Engineers Malaysia within thirty (30) days of such change; or (iv) the director, shareholder or employee of an engineering consultancy practice, being a person registered under the REA, has committed, or is gUilty of, or has contributed to, any of the acts or things set out in the REA, which includes interalia,:4. RISK FACTORS (Cont’d) (aa) if he is convicted of any offence involving fraud or dishonesty or moral turpitude in Malaysia or elsewhere; or (ab) if he offers or accepts any commission which in the opinion of the disciplinary committee of the Board of Engineers Malaysia is an illicit commission; or (ac) if his registration under the REA has been obtained by fraud or misrepresentation; or (ad) if he is found to be incapable or no longer able to perform his professional duties effectively; or (ae) if he becomes a bankrupt; or (af) if he fails to discharge his professional duties with due skill, care and diligence, the Board of Engineers Malaysia may by written notice to the engineering consultancy practice, order, the issuance of a written warning or reprimand to; the imposition of a fine not exceeding RM50,OOO on; the suspension of the registration for a period not exceeding two (2) years of; the cancellation of the registration of; or any combination of the above sanctions on, the engineering consultancy practice. HSSI and HSSME must comply with the restrictions and conditions imposed by the Board of Engineers Malaysia under the REA in order to keep its certificate of registration. If HSSI and HSSME fail to comply with the applicable conditions and restrictions imposed by the Board of Engineers Malaysia, then its certificate of registration may be suspended or cancelled. Separately, HSSI and HSSME may also encounter delays in the annual renewal of their respective certificate of registration. Given our reliance on the Teaming and Support Services Agreement, any failure by HSSI and HSSME to keep or renew their certificate of registration under the REA could result in suspension of our business operations, restriction or prohibition of certain business activities, or commencement of new business, thereby materially and adversely affecting our business, financial position, results of operations and prospects. Notwithstanding the above, HSSI and HSSME have not experienced any instances of failure and/or delays in renewing their certificate of registration under the REA from the date they were first registered with the Board of Engineers Malaysia. The DDWG is of the view that HSSE’s role under the Teaming and Support Services Agreement is not under the purview of REA and hence HSSE is not required to be registered as an engineering consultancy practice under the REA.
4. RISK FACTORS (Cont’d) (b) Continuity of HSSI and HSSME As at LPD, pursuant to the Registration of Engineers (Amendment) Regulations 2015:(i) at least seventy percent (70%) of shares of a body corporate registered as an engineering consultancy practice under the REA must be held by Professional Engineers (as defined by the REA) with Practising Certificate (as defined by the REA); and
(ii) at least two third (2/3) of the board of directors of a body corporate registered as an engineering consultancy practice under the REA are Professional Engineers (as defined by the REA) with Practising Certificate (as defined by the REA).
The continuity of HSSI and HSSME is dependent on its succession planning to ensure that the shareholdings and directorships requirements under the REA are met at all times. Failure by HSSI and HSSME to comply with these requirements may result in its certificate of registration being suspended or cancelled, which could then result in suspension of our business operations, restriction or prohibition of certain business activities, or commencement of new business, thereby materially and adversely affecting our business, financial position, results of operations and prospects. To ensure continuity of the Collaboration:(i) HSSI and HSSME will continuously groom and develop younger members of the management team of HSSE (as nominated by HSSE) to gradually assume greater responsibilities as part of its succession planning. In this regard, HSSE has identified first and second line of successors for HSSI and HSSME. HSSI and HSSME have tailored a structured plan for the continuous grooming of their identified successors which includes enhancing their relevant management and technical skills through proper training and development programmes. As an integral part of their succession planning programme, HSSI and HSSME also undertake regular and constant monitoring of the progress of their identified successors; and
(ii) HSSE has entered into the Shareholding Agreements with HSSI, HSSME, and all the shareholders of HSSI and HSSME. The Shareholding Agreements seek to deal with three (3) circumstances:
(aa) Upon the death or incapacity of any shareholder of HSSI and HSSME or where any shareholder of HSSI and HSSME shall be deregistered as a registered professional engineer under the REA or any applicable law, HSSE shall have the option to purchase all of the shares in HSSI or HSSME held by that shareholder or to nominate a registered engineer of its choice to purchase the shares in HSSI or HSSME (subject always to compliance with the requirements of the REA or any other applicable laws). (ab) In the event the REA / Board of Engineers Malaysia allow equity holding by a non-registered entity, HSSE has the option to purchase shares in HSSI / HSSME. The option may be exercised by HSSE at any time or from time to time and there is no limit in time for HSSE to exercise this option. The existing shareholders of HSSI / HSSME shall sell their shares in equal proportions to HSSE pursuant to the exercise of the option.
4. RISK FACTORS (Cont’d) (ac) No new allotment or issuance of shares in HSSI or HSSME shall be carried out without the written consent of HSSE. No shares held by the shareholders in HSSI and HSSME may be sold, transferred, assigned, disposed, or dealt with without the written consent of HSSE. In addition, the shareholders of HSSI and HSSME have also undertaken not to pledge, charge, or howsoever encumber their shares in HSSI and HSSME. The Shareholding Agreements shall be binding on the estates, heirs, administrators, executors, lawful successors, receivers or managers, lawful representatives, and legal assigns of HSSI, HSSME and all the shareholders of HSSI and HSSME. Further details of the Shareholding Agreements including the price of the options are set out in Section 6.2.2 of this Prospectus. In 2015, the REA was amended pursuant to the Registration of Engineers (Amendment) Regulations 2015 to allow non-professional engineers to hold thirty percent (30%) shares in an engineering consultancy practice. As such, on 30 May 2016, HSSE acquired thirty percent (30%) of the ordinary shares in HSSI and HSSME, after which HSSI and HSSME became our associated companies. Please refer to Section 5.3.6 of this Prospectus for further details on the above mentioned acquisitions. 4.1.2 Reliance on Infrastructure Projects Awarded by Governmental Bodies We are principally involved in the provision of engineering and project management services to governmental bodies and private sectors particularly. For the FYE 2015, as much as 71% of our revenue was contributed by Government in line with our major revenue contribution from infrastructure projects. As such, failure to continue securing projects awarded from governmental bodies could adversely affect our financial performance. Factors that could affect our prospects of securing future contracts from governmental bodies include but are not limited to changes in government framework and curtailments in government expenditures towards the construction industry, as well as competition from new and existing market players. Notwithstanding the above, we have established cordial relationships with the clients in the government bodies, agencies and government-linked companies. We are confident that we are able to compete with new and existing market players in securing new projects from governmental bodies by leveraging on our proven track record, experience and our competitive advantages in the engineering and project management services industry. Nevertheless, there can be no assurance that we will continue securing projects from governmental bodies moving forward.
4.1.3 Risk Relating to our Growth and Expansion Our growth and expansion plans are subject to the opportunity risks as they have yet to materialise. Further, as and when these plans materialise, we would be exposed to the relevant risks associated with each respective area of expansion. At present, most of our projects revolve around infrastructure developments including highways, rail transit systems and railways, ports, retail and commercial development. Moving forward, as part of our medium-term business plan and strategy, we intend to expand our engineering and project management services to the water and power generation sectors and expand our core services offering with the addition of a fourth (4th) core service i.e. provision of facility management. In addition, we also aim to enhance our business presence in India, the Middle East and ASEAN regions. Please refer to Sections 6.4.1 to 6.4.3 of this Prospectus for further details of these plans. 4. RISK FACTORS (Cont’d) Although we have allocated proceeds towards these expansion plans as set out in Section 3.10.1, there is no assurance that these plans will successfully materialise within the stipulated time expected. Our Board will proceed with the plans in each respective area of expansion as and when a feasible opportunity arises. Details of the risks in our growth and expansion plans are further set out below. Enhancing our Business Presence in India. the Middle East and ASEAN Regions Our future geographical expansion plans to India, Middle East and ASEAN regions expose us to the uncertainties of the foreign region and their respective business environment, which depend on the respective country’s economic, social and political conditions. The financial performance of our operations and the success of our expansion plans may be adversely affected by any political or economic reforms that may arise. This may have adverse effect on our financial, management and operational resources. Any failure to accurately assess the abovementioned issues, amongst others, could affect our Group’s business, financial condition and operating results. We strive to familiarise ourselves with the relevant business requirements and conditions of the respective foreign markets, namely amongst others, the present condition of the local economy and construction industry, the reqUired compliance of all laws and regulations for our business operations in a foreign market, the respective restrictions imposed on a foreign business and knOWledge of local industry practices, as well as carefully assess the investment viability of an expansion into new foreign markets. The assessment of our proposed expansion to each foreign market is outlined in Section 6.4.1 of this Prospectus. Furthermore, we also had hands-on experience in these foreign markets in collaboration with various strategic partners in the past as detailed in Section 6.4.1 of this Prospectus. We believe that through cooperation with and/or acqUisition of local strategic partners who have experience in the local business environment, our Group will then be able to minimise the risks associated with expanding in India, the Middle East and ASEAN regions as described above. Continuous Expansion on our Three (3) Existing Core Services and Proposed Venture into a Fourth (4th) Core Service i.e. Facility Management We are well-positioned to venture into the provision of facility management services, as we believe that our eXisting mUlti-disciplinary engineering expertise can be translated directly towards the provision of facility management as a fourth core service. However, there can also be no assurance that we can compete successfully with other market players despite our existing expertise, especially against market players that possess extensive experience in the provision of facility management service. We believe that our track record in the engineering and project management services market could serve as a basis for existing clients under the Collaboration to incline towards engaging us for future projects for our existing three (3) core services. Notwithstanding the repeat business that we have experienced with existing clients to date, there can be no assurance that these existing client relationships will continue and that our track record will directly result in more business opportunities within our three (3) existing core services. 4. RISK FACTORS (Cont’d) Venturing into the provision of Support Services to the Water and Power Generation Sectors in Malaysia Our venture to provide Support Services to both the water and power generation sectors will expose us to the business risks associated with these sectors. Factors that affect these sectors include, but are not limited to the demand for water services and energy consumption, government spending in these sectors and industrial activity. To accelerate our venture in the water sector, we intend to undertake a joint venture or acquisition exercise as detailed in Section 3.10.1 of this Prospectus. As at the LPD, we are in the midst of identifying suitable targets that possess the requisite track record and experience in the water sector for the potential joint venture or acquisition. To provide Support Services to the power generation sector, we intend to set up a power division within our Group by recruiting experienced engineers in the said sector as detailed in Section 3.10.1 of the Prospectus. The power division, upon formation, will be spearheaded by our Executive Director, Dato’ Ir. Khairudin Bin Sidek who has experience in power generation sector as detailed in his profile in Section 8.2.2 of this Prospectus. Notwithstanding the aforementioned plans, there can be no assurance that the successful acquisition of or joint venture with a target in the water sector nor the setting up of a power division will directly result in successful project tenders within these sectors in future. 4.1.4 Continuity of our Existing Order Book The services proVided by our key subsidiary, HSSE are on project basis, ranging between twenty four (24) to sixty (60) months depending on the nature, size and complexity of each project. Given the nature of such appointment, it is necessary for us to secure new projects through the Collaboration on a continuous basis. Should we fail to do so, our financial performance may be adversely affected. Notwithstanding the above risks, we have not experienced any such failure that has an adverse effect on our operating activities, results of operations and financial condition in the past due to good continuous relationship with the clients, our experience and specialisation. Such relationship, experience and specialisation have encouraged recurring business with the clients and also business with new clients through recommendations and referrals from existing clients via the Collaboration. 4.1.5 Potential Liability Claims HSSE may be subject to potential liability claims indirectly pursuant to the Teaming and Support Services Agreement. In this respect, both HSSI and HSSME are the contracting parties with the clients and sub-consultants and hence, will be the first party to face potential claims / litigation, credit risks and other liabilities. Notwithstanding the potential claims against HSSE, pursuant to the Teaming and Support Services Agreement, HSSI and HSSME shall indemnify and hold HSSE harmless against all claims in the course of providing services in accordance with the instructions and directions of HSSI and HSSME. On the contrary, indemnities provided by HSSI and HSSME shall not apply where the infringement arises if the services proVided by HSSE are not in accordance to the instructions and directions of HSSI and HSSME. In each project, we will endeavour to limit our liability to the lower of our fees or the limit of our professional indemnity insurance. 4. RISK FACTORS (Cont’d) There can be no assurance that our existing insurance coverage is sufficient to compensate for the claims, and in such circumstances, could have a material adverse effect on our results of operations or financial condition. Notwithstanding the above, we have not experienced any claim for damages arising from our Group’s operations which are not sufficiently covered by insurance nor any claim that has had a material adverse impact on our financial performance in the past.
4.1.6 Dependency on Key Management and Technical Team We believe that our continued and future success largely depends on our continued ability to hire, develop, motivate and retain engineers and other qualified personnel needed to develop new services, support our existing range of services and provide quality services to the clients. Having a strong key management and technical team are vital to maintain the quality of our Group’s services whilst retaining the business confidence of the clients. The loss of a few key personnel simultaneously or within a short time may create an unfavourable or material impact on our Group’s operations, if there is lack of succession planning or timely replacement or an inability to attract and retain personnel. We believe that by increasing our profile through the Listing together with continuous development of corporate culture, remuneration, promotion, succession planning and benefits policies, we will be able to retain, attract and hire more talent to drive the growth of the Group. Notwithstanding the above, we have not experienced any departure of any key management or technical team member which has had a material effect on our business operations in the past.
4.2 RISKS RELATING TO OUR INDUSTRY 4.2.1 Dependency on the Construction Industry Our Group is predominantly involved in the provision of engineering and project management services to the construction industry. As such, our Group is exposed to the vagaries of the construction industry caused by certain risks inherent in the said industry which include, inter-alia, construction delays and cost over-runs which could in turn, adversely affect our business, operations and financial performance. According to the IMR Report, the Malaysian economy is expected to grow by 4.0 to 4.5% in 2016. The Malaysian construction industry is expected to expand by 7.9% in 2016. The construction industry in Malaysia is also expected to benefit from the implementation of various projects and initiatives by the Malaysian Government to boost domestic investment. Malaysia is undergoing continuous expansion as the economy is expected to maintain moderate growth moving forward whilst the construction industry is expected to benefit tremendously from government-led spending. However, there can be no assurance for changes in the industry which are beyond our control and our Group will continue to adopt prudent management and efficient operating procedures to adapt to any negative changes in the construction industry. 4. RISK FACTORS (Cont’d) 4.2.2 Political, Regulatory and Economic Risks The performance of our Group is correlated to the overall economic and political conditions both domestically and internationally, as it is largely dependent on the performance of the construction industry. Like all other business entities, adverse developments in the political, economic and regulatory conditions in Malaysia and the countries in which we operate in could unfavourably affect our financial position and business prospects. These risks include, among others, risks of war, changes in economic conditions, changes in interest rates and unfavourable changes in government policies such as introduction of new regulations, import duties and tariffs. However, there can be no assurance that adverse political, economic and regulatory changes, which are beyond our control, will not materially affect our Group’s businesses despite having prudent financial management and diversification of businesses. Further, as we also aim to enhance our business presence internationally to India, the Middle East and ASEAN regions, our international expansion will also be subject to the policies of the relevant governments on foreign investment. There can be no assurance that any change in the policies on foreign investment will not have any material effect on our proposed expansion plans. 4.2.3 Competition Risk Our Group faces competition from existing competitors within the industry we operate in. Some of these existing competitors may have fundamentally similar capabilities and compete on key attributes which include resource ability, competency, reliability, range of services provided, experiences as well as a good track record for timely completion of projects. We compete with diverse competitors ranging from major international players to local players. Although competition exists in the engineering services industry, it is imperfect due to licencing and registration requirements which partly inhibit absolute free competition. In addition, there are numerous barriers to entry in the industry, including requirements of pre qualifications by clients based on technical compliance, capacity, proven track record, registration with various regulatory bodies, safety record and experiences in the required areas of expertise. Notwithstanding the competitive environment of the industry, our Group is confident that our competitive advantages, reputable track record and strength give our Group the edge needed to maintain or secure more contracts and market share within the scope of engineering and project management services. We are constantly reviewing our service offering and marketing strategies in response to the ever-changing market conditions and the adoption of new information technology to improve and value-add our service offering. [ The rest of this page is intentionally left blank] 4. RISK FACTORS (Cont’d)
4.3 RISKS RELATING TO THE INVESTMENT IN OUR SHARES 4.3.1 No Prior Market for our Shares Prior to our Listing, there was no public trading 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. Our IPO Price was determined after taking into consideration a number of factors including but not limited to our historical earnings, prospects and future plans and our financial and operating history. There can be no assurance that our IPO Price will correspond to the price at which our Shares will be traded on the ACE Market of Bursa Securities upon or subsequent to our Listing or that an active market for our Shares will develop and continue upon or subsequent to our Listing. The price at which our Shares will trade on the ACE Market of Bursa Securities may be influenced by a number of factors including, amongst others, the depth and liquidity of the market for our Shares, investors’ individual perceptions of our Group, market and economic conditions.
4.3.2 Failure/Delay in or Abortion of our Listing Our Listing is exposed to the risk that it may be aborted or delayed on the occurrence of any one or more of the following events:(a) The identified investors fail to subscribe for the portion of our IPO Shares;
(b) Our Underwriter in exercising its rights pursuant to the Underwriting Agreement discharges itself from their obligations therein; and
(c) We are unable to meet the public shareholding spread requirement as determined by Bursa Securities, whereby at least 25.0% of our total number of Shares for which listing is sought must be held by a minimum number of 200 public shareholders each holding not less than 100 Shares upon the completion of our IPO and at the point of our Listing.
In this respect, we will exercise our best endeavour to comply with the various regulatory requirements, including, inter-a/ia/ the public shareholding spreads requirement in paragraph (c) above for our successful Listing. However, there can be no assurance that the abovementioned factors / events will not cause a delay in or non-implementation of our Listing. Upon the occurrence of any of these events, investors will not receive any Shares and we will return in full without interest, all monies paid in respect of any application for our Shares within fourteen (14) days, failing which the provisions of sub-sections 243(2) and 243(6) of the CMSA will apply accordingly and we will be liable to repay the monies with interest at the rate of 10.0% 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 our Listing is aborted and/or terminated, and our Shares have been allotted to the shareholders, a return of monies to all 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 Malaya) and the confirmation of the High Court of Malaya. There can be no assurance that such monies can be recovered within a short period of time or at all in such circumstances. 4. RISK FACTORS (Cont’d)
4.3.3 Dividend Payment Our Company, an investment holding company, derives its income mainly from dividends received from our subsidiaries. Hence, our ability to pay future dividend is largely dependent on the performance of our subsidiaries. In determining the size of any dividend recommendation, we will also take into consideration a number of factors, including but not limited to our financial performance, cash flow requirements, debt servicing and financing commitments, availability of distributable reserves and tax-exempt profits / tax credits, future expansion plans, loan covenants and compliance with regulatory requirements.
4.3.4 Trading Price and Volume of our Shares The trading prices and volume of our Shares could be subject to fluctuations in response to various factors, some of which are not within our control and may be unrelated or disproportionate to our operating results. These factors may include variations in the results of our operations, changes in analysts’ recommendations or projections, changes in general market conditions and broad market fluctuations. In addition, the performance of Bursa Securities 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 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 of our listed shares. Nevertheless, the profitability of our Group is not dependent on the performance of Bursa Securities as the business activities of our Group have no direct correlation with the performance of securities listed on Bursa Securities.
4.4 OTHER RISKS 4.4.1 Continued Control by our Promoters Our Promoters will collectively hold 62.6% of our enlarged issued and paid-up share capital upon Listing. Because of the size of their shareholdings, our Promoters will have significant influence on 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 which are members of our Audit Committee. The Audit Committee’s role is to ensure that, inter-alia, all future transactions involVing related parties are entered into at 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 to the detriment of our minority shareholders.
4.4.2 Future Fund Raising May Dilute Shareholders’ Equity Our capital requirements are dependent on, amongst others, our business, the availability of our resources for attracting, maintaining and enlarging client base and the need to maintain and expand our service offering. Thus, we may need additional capital expenditure for mergers and acqUisitions or investments. An issue of new HEB Shares or other securities to raise funds will dilute shareholders’ equity interest and may, in case of a rights issue, require additional investment by shareholders. 4. RISK FACTORS (Cont’d) 4.4.3 Forward-Looking/Prospective Statements Certain statements in this Prospectus are based on historical data which may not be reflective of future results and others are forward-looking in nature that are based on assumptions and subject to uncertainties and contingencies which mayor may not be achievable. Whether such statements would ultimately prove to be accurate depends upon a variety of factors that may affect our businesses and operations, and such forward-looking statements also involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, plans, performances and achievements, expressed or implied, by such prospective statements. Although we believe that the expectations reflected in such future statements are reasonable at this time, there can be no assurance that such prospective statements or expectations will prove to be correct in the future. Any deviation from the expectations may have a material adverse effect on our business and financial performance. The above is not an exhaustive list of challenges we are currently facing or that may develop in the future. Additional risks whether known or unknown, may in the future have a material adverse effect on us and/or our Shares. [ The rest of this page is intentionally left blank]