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 Group We are exposed to certain risks in the include, without limitation, the following: electronics/semiconductor industry. These risks 4.1.1 Dependency on the Electronics/Semiconductor Industry
Our Group is primarily dependent on the semiconductor segment of the electronics industry. All our revenue was generated from the aforementioned industry. As an EMS provider offering semiconductor packaging used in wireless communication devices such as mobile phones and networking products, our financial health is closely linked to the electronics industry. Over the last few years, we have been upgrading our technical and production capabilities to extend our product and service range to cater for different application markets. We started from offering basic assembly services to our current comprehensive semiconductor packaging services to other OEM manufacturers ·which are not in competition with Avago, our key customer. We are currently working on securing projects with new customers who are in line with our Group’s objectives of diversifying our revenue streams, thereby reducing our dependency on a single industry as well as increasing profit margins through continuous R&D activities to enhance production efficiency and cost reduction. Notwithstanding the aforesaid, there is no assurance that any change to the above factors will not have a material adverse effect on our Group’s business and financial conditions. 4.1.2 Dependency on Avago Most of our revenue comes from our key customer, Avago (through its wholly-owned subsidiary, Avago Technologies) who accounted for 99.9% of our total revenue in FYE 2010 and 99.6% for FPE 2011. Thus, we are overly dependent on Avago. We are competing with other EMS companies in Malaysia to provide semiconductor packaging services to Avago and our ability to supply our products and services to Avago is vital to our Group’s performance and financial condition. If we lose our key customer or if our key customer chooses to reduce or terminate orders, our Group’s operating result will be materially and adversely affected. Nevertheless, our position and reliance on the continued ordering of products from Avago is mitigated based on the following:(i) Avago competes in four (4) key target markets, namely wireless communications, wireless infrastructure, industrial and automotive electronics. In the wireless communications market segment, Avago prOVides RF amplifiers, filters, modules and LEDs for mobile phones. A majority of Avago’s manufacturing operations are outsourced; choosing to maintain an efficient global supply chain while adopting a low-cost operating model. Currently, we offer a comprehensive semiconductor packaging services, including back-end wafer processing, package assembly and RF final testing as well as failure analysis to Avago. 29 4. RISK FACTORS
(ii) Companies in the semiconductor industry for packaging services are typically dependent on a few key MNCs to generate a large portion of their sales. This is mainly due to the fact that these companies are able to provide value added services to the tJlNCs, which minimise the points of contact for the tJlNCs during the procurement process. Instead of dealing with many vendors, the points of contact are concentrated into a few major vendors which have track records of meeting their stringent requirements. (iii) The technologies in wireless microwave telecommunication semiconductor products are constantly evolving. Therefore, the need for our expertise in developing more sophisticated and miniaturised ICs has become essential. Our Group has been, and still is one of Avago’s main EMS companies since it started outsourcing its semiconductor packaging services to external contract manufacturers. (iv) Our business relationship with Avago goes back to the early days of our incorporation, and since then, our manufacturing contract with Avago has never been disrupted. In fact, over the years, we have fostered a solid relationship with Avago. As a testimony to our strong business relationship, we are able to obtain long term and repeat orders from Avago. Furthermore, our manufacturing contract with Avago has recently been extended on 1 May 2010 for another three (3) years ending 2013.
(v) Both Avago and Inari Technology rely on each other. Avago relies to an extent on our supply of IC chips and we are likewise dependent on Avago’s sales. In FYE 2010, as an indication of the significance of Inari Technology to Avago’s key wireless communications division, Inari Technology was awarded the Excellent IVJanufacturing and Outsourcing Support on Wireless Semiconductor Division (WSD) Products Award for Year 2009 by Avago.
The relationship between our Group and Avago was further strengthened in March 2010 with Avago’s subscription of 1.215 million RCPS-A in Inari Technology. The RCPS-A were converted into ordinary shares of RM 1.00 each in Inari Technology on 5 August 2010. Based on the above, we expect our appointment as an EMS company for Avago to continue in the future without disruption. Nevertheless, we wish to highlight that there are prohibitions by Avago ·for the Group to supply to other parties under the following situations: (i) the devices/products manufactured are competing with Avago’s products;
(ii) the customers/parties are competing with Avago;
(iii) the technologies used are developed by Avago; (iv) the intellectual property to be used are owned by Avago; and
(v) the equipments/machineries to be used are consigned by Avago.
The conditions to be met before tendering for Avago’s manufacturing contract are as follows: (i) Inari must have the personnel with technical expertise and experience in the relevant field for the manufacture of Avago’s products;
(ii) Inari must have a production facility located near to Avago with sufficient floor space; and
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(iii) Inari must have sufficient financial backing from its investors/shareholders. The associated risks implied while setting the price for sale to Avago are as follows: (i) Accuracy of forecasted production volume. The forecasted volume impacts Inari’s fixed cost allocation. However, Inari will negotiate a revision in the price for sale if there is a significant variance between initial quote (forecast) and actual production volume.
(ii) High capital commitment. Once the capacity of the existing consigned equipment (from Avago) is fully utilised, Inari will need to acqUire additional equipment to increase its output. This will result in higher equipment cost to Inari. However, Inari has the right to impute an agreed cost of the new equipment into the pricing of the products.
(iii) Risk of fluctuation in exchange rate. This is in view that some of the local expenditure and indirect materials purchased are paid in Rrvl but imputed in USD when setting the price for sale to Avago. To further mitigate the risk of over dependence on a single customer, we have expanded our market coverage by increasing our customer base as well as other products and services, in order to cater for other application markets in the semiconductor industry in 2010. Currently, other customers under our portfolio are VigSys Sdn Bhd, l’JewICT (M) Sdn Bhd, Wi2Wi Inc., Ceedtec Sdn Bhd, Duolabs SpA andSILQ Sdn Bhd. Although we seek to limit the dependency on our key customer, no assurance can be given that the new and existing customers will continue to use our Group’s products and services or continue to maintain their relationships with us. 4.1.3 Dependency on Experienced Management and Key Personnel Our Board recognises and believes that our Group’s continued success depends, to a significant extent, on the abilities and continuing efforts of our Executive Directors as well as our key management and key technical personnel. The loss of any Executive Director, key management, and/or key technical personnel could adversely affect our Group’s continued ability to compete in the industry. Thus, we recognise the importance of our Group’s ability to attract and retain our key management and technical personnel, and have in place remuneration packages which are on par with the industry standards for employees, especially for key management and technical personnel as well as proViding a good working environment which promotes productiVity and loyalty. Efforts are made to continuously attract new skilled personnel to strengthen our eXisting team. In addition, most of our Executive Directors and key management and technical personnel have been with us since our establishment. Although we seek to limit the dependence on key management and technical personnel through the efforts mentioned above, there is no assurance that any change in the key management and technical personnel structure will not have a material adverse effect on our Group’s future performance.
4.1.4 Competition We are operating in a highly competitive industry and the components which we are manufacturing for use in the wireless communications market are subjected to rapid technological changes. If our manufacturing capabilities fail to keep abreast with the rapid
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changes in the product specifications and stringent quality requirements, our customers may terminate orders to us which will materially and adversely affect our Group’s performance and financial condition. Over the years with persistent hard work and a positive focus, our Group and ·its personnel have successfully carved our reputable track record in servicing MNCs in the semiconductor industry. These are results from our good service, continuous R&D efforts and continuous upgrading of new manufacturing technologies, machines and equipment as well as the practice of stringent QMS. Although no assurance is given that our Group is able to maintain our market position in the electronics/semiconductor industry, our Directors are confident that our Group can sustain our position in view of our reputation among our OEM customers as well as our technical know-how and industry knowledge, particularly in back-end wafer processing, package assembly and final testing. We believe that the competition from existing companies and new entrants can be mitigated, to a certain extent, as our Group can leverage on our competitive strengths to defend our market position. We also believe that the impact of new entrants is limited by the numerous barriers to entry such as long period of required audits, established track record, design and technical skills, steep learning curves and economies of scale. Although we seek to-continue to adopt appropriate strategies to remain competitive; there can be no assurance that competition from existing competitors and/or new entrants will not have a material adverse effect on our performance. 4.1.5 Shortage of Skilled Labour and Dependence on Supply of Foreign Labour The nature of our business is such that it is highly dependent on the availability of skilled labour. In Malaysia, there is a shortage of skilled labour for the electronics/semiconductor industry. In addition, the semiconductor packaging industry is also labour intensive and we may experience difficulty in attracting employees to work in our manufacturing facilities. We are also dependent on the supply of foreign labour. As at LPD, our Group has 1,323 employees, of which 739 are foreign workers. These foreign workers, which account for approximately 55.9% of the total workers of our Group, are mainly involved in shop-floor manufacturing. More than half of the foreign workers are employed on a contractual basis. The foreign workers are mainly sourced from Indonesia, Nepal, Myanmar and Vietnam. In view of the above, any review of policies in relation to foreign labour by the Government may adversely affect our Group’s operations. To mitigate the risk of possible disruptions to the operations due to a shortage of foreign labour, we have adopted measures to ensure the retention of foreign workers by prOViding training, competitive remuneration, housing and amenities and a harmonious working environment. Nevertheless, no assurance can be given that any changes in immigration and labour policies by the Government in respect of foreign labour will not affect our Group’s operations.
4.1.6 Production/Operational Risks Our Group’s revenue is dependent on our production process running smoothly and efficiently. Our Group’s daily operations are susceptible to events of emergency such as explosion, fire, flood, energy crisis, health crisis, sabotage, civil commotion and natural
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disasters. Our Management is aware of the adverse consequences arising from such events which could cripple our business operations. We have taken precautions to minimise risks of fire outbreaks by installing fire hydrants, fire extinguishers, and sprinklers throughout our factories, and training our employees in basic fire-fighting techniques. Our Group also has a dedicated maintenance team to conduct regular maintenance on our machinery and equipment, and our staffs are trained to solve the majority of the production interruptions in which we may face. A further precautionary step is to ensure that we have adequate insurance coverage for our operations. We have taken up fire insurance policies for our office equipment, plants, machinery, premises and all-risks policies for our machines. The insurance policies and coverage are reviewed by our Group on a yearly basis. However, despite all the precautions we have taken to limit these risks, there is no assurance that these production/operational risks will not materially affect our Group’s business and/or the insurance coverage our Group has taken would be comprehensive enough to reflect the replacement cost of the assets or any consequential loss our Group may suffer. 4.1.7 Foreign Currency Exchange Fluctuation A large portion of our Group’s revenue is derived from exports and is denominated in USD. As such, we are exposed to foreign currency exchange losses or gains arising from timing differences. Any appreciation or depreciation of foreign currencies against the RIVl will result in our Group incurring foreign currency exchange gains or losses due to fluctuations in the exchange of foreign currencies to RM. Foreign currency exchange fluctuations may also result in translation gains or losses on our Group’s financial result which is denominated in foreign currency whilst RM is our Group’s reporting currency. Any such translation of gains or losses will be recorded as translation reserves or deficits as part of our Group’s shareholders’ funds. The risk of foreign currency exchange fluctuations is, to a certain extent, mitigated by the managed float mechanism adopted by Bank Negara Malaysia on the RM vs. USD conversion rate since the de-pegging of the RM. This may prevent extreme fluctuation of the RM vis-avis USD. If the need arises, we will also use hedging techniques such as forward foreign exchange contracts to mitigate the risk of foreign currency exchange fluctuations. Nevertheless, there can be no assurance that any foreign currency exchange fluctuation will not impact the revenue and earnings of our Group significantly.
4.1.8 Rapid Technological Change Our Group, as both a technology user and provider, cannot avoid the risk associated with the obsolescence and rapid advancements in technology. Our future depends on our ability to adopt increasingly sophisticated technology. We have to deal with the ever-advancing needs and requirements by customers, adoption of new manufacturing processes and use of the latest machinery and equipment in our operations to run more efficiently than our competitors. As an ISO-certified company and to ensure the maintenance of our status, our Group will need to comply with the latest quality requirements revised from time to time. As part of our Group’s efforts to mitigate this risk, our Group undertakes efforts which include on-going R&D, provision of staff training in line with new technologies and the pursuit of technological innovation. Although our Group seeks to limit the risk associated with rapid technological change, there is no assurance that it will not impact on our business.
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4.1.9 Fluctuation in Raw Material Prices The raw materials used by our Group are wafer, PCB/substrate, passive/active components and gold wire. We acquire most of raw materials from local and overseas suppliers. We are exposed to fluctuations in raw materials prices which may have adverse impact on our financial results. The cost and availability of raw materials used to manufacture our products are important to our business. Any increase in the raw materials price may affect our profit margin if we are unable to pass on the cost to our customers. Nevertheless, our Board believes that the volatility of our raw material cost is manageable, as our supply orders are based on production orders and not long-term supply contracts. Generally, most of our products are sold based on the production forecast and the amount of raw materials are purchased using the same forecast. We do not take open positions in raw material purchases. As such, the impact of the price movement of our raw materials, if any, would be minimal, since the fluctuation in cost of raw materials would be passed on to our customers within the same or next cycle of orders. Notwithstanding the above, no assurance can be given that any fluctuation in raw material prices will not affect the future profitability of our Group.
4.1.10 Decline in End User Demand The SiP packages manufactured by us are mainly used in wireless application devices such as mobile phones, PDA, GPS devices, WiFi devices and Bluetooth products. The demand for such products will have an effect on the demand for SiP packages. During the past few years, we have seen growing demand for these devices, especially mobile phones and smartphones. According to the IMR report, the global unit shipments of cellular phones reached 1.2 billion units in 2009 and it is expected to attain 1.6 billion units in 2014. We do not foresee any decline for the demand of wireless communication and consumer electronics products during the next few years. Although there is a positive trend in demand for wireless microwave telecommunication products, there is no assurance that the demand will continue to be positive and that any decline in demand will impact on our business.
4.1.11 Production Delay We are currently operating at 85% capacity on average. Any production interruptions caused by events such as power outages and machine downtime will cause production delays and affect our delivery schedules. We have implemented proper production planning procedures to ensure smooth operations. Our production planning division will forecast our production for the next six (6) months on rolling basis, of which first three (3) months are secured. Through this method, we are able to allocate the necessary resources to meet our customers’ production schedules. To mitigate machine downtime, we carry out scheduled maintenance on the machinery and equipment to ensure they are operating efficiently and effectively. We also have a team of technical staff with the relevant skills to provide immediate repair in case there is any machine downtime. During the last 12 months, we have not experienced any significant machine break down which has resulted in a major production delay. 4. RISK FACTORS
Although we take precautions in the maintenance of our machinery and equipment, nevertheless, there can be no assurance that the machinery and equipment will not break down and impact the revenue and earnings of our Group. 4.1.12 Product Defects The SiP packages manufactured by us are mainly used in wireless application devices such as mobile phones and network products. A SiP package is miniature in size and requires careful handling during the manufacturing process. As an ISO certified and approved EMS company, we have a stringent quality policies and procedures to ensure all the products manufactured by us are of highest quality and with near zero defect. As such, we conduct 100% inspection and failure analysis on the final products and ensure they have zero defects before we deliver them to our customers. In addition, we have a strict ESD programme and control procedures to prevent SiP package failure through handling. After the products are tested, they are packed, sealed in proper packaging and stored in a secure facility. With strict implementation of our quality policies, controls, procedures and programmes, we have not experienced any product defect which has materially and adversely affected our Group’s reputation in the semiconductor packaging industry since our inception. In spite of our·stringent quality policies, controls, procedures and programmes, there can be no assurance that we can guarantee the products manufactured by us have no defects and impact the revenue and earnings of our Group.
4.1.13 Factory Building Not in Compliance With Certificate of Fitness Code Our first factory, Plant 1, was originally approved for a two (2) storey building by Majlis Perbandaran Pulau Pinang. However, it was discovered that Plant l’s previous owner had extended the building into a 3-storey building without prior consent from the necessary authorities. As such, our Plant 1 is not in compliance with the certificate of fitness issued. To mitigate this risk, we had on 16 August 2010 submitted an application to Majlis Perbandaran Pulau Pinang for the ratification of the said extension. There has been no material non-compliance with current statutory requirements, land rules or bUilding regulations in respect of the landed properties owned/leased by our Group. In addition, none of the above land has breached any land-use condition or permissible land-use. Nevertheless, there can be no assurance that the authorities will not impose penalties to our Group as prescribed by the relevant laws should our application be rejected. 4.2 Risks Relating to the Investment in Our Shares 4.2.1 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 of RMO.38 per Share was determined after taking into consideration a number of factors including but not limited to our historical earnings, prospects and future plans, our financial and operating history and the market value of our assets. 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 the Listing or that an active market for our Shares will develop and continue upon or subsequent to the Listing.
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The price at which our Shares will trade on the ACE Market of Bursa Securities after our IPQ 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. 4.2.2 Failure I Delay in or Abortion of the Listing The 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 the Private Placement Shares allocated to them pursuant to the Private Placement;
(b) The Underwriter exercising its rights pursuant to the Underwriting Agreement discharging itself from the obligations therein; and
(c) We are unable to meet the public shareholding spread requirement, which is at least 25% of our total number of Shares for which listing is sought must be held by a minimum number of 200 public shareholders holding not less than 100 Shares each upon the completion of our IPQ and at the point of Listing.
In this respect, we will exercise our best endeavour to comply with the various regulatory requirements, including, inter-alia, the public shareholding spreads requirement in paragraph (c) above. However, there can be no assurance that the abovementioned factors/events will not cause a delay in or non-implementation of the Listing. In the event of the failure of the Listing, we will return in full without interest, monies paid by the investors in respect of all applications.
4.2.3 Dividend Payment Qur Company, an investment holding company, derives its income mainly from dividends received from our subsidiary companies. Hence, our ability to pay future dividend and our ability to sustain our dividend policy in the future are largely dependent on the performance of our subsidiary companies. 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.
4.2.4 Continued Control by Promoters Upon Listing, the Promoters will collectively hold a total of approximately 65.15% of our enlarged issued and paid-up share capital. Depending on how they choose to vote and because of their shareholdings, these shareholders will generally be expected to 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 four (4) Independent Non-Executive Directors and set up an Audit Committee 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.
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4.2.5 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 the Group have no direct correlation with the performance of securities listed on Bursa Securities.
4.2.6 Underwriting risk up to 20,386,000 IPO Shares are to be underwritten by the Underwriter. The underwriting commission is payable “by our Group for our IPO Shares for the unsubscribed portion of our IPO Shares reserved for Malaysian Public and eligible Directors, employees and persons who have contributed to the success of our Group. However, the agreement of the Underwriter to underwrite up to 20,386,000 IPO Shares should not be taken as an indication of the merits or assurance of the value of our IPO Shares. 4.3 Other risks 4.3.1 Political 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 electronics industry. Like all other business entities, adverse developments in political, economic and regulatory conditions in Malaysia 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. Our Group has taken efforts to diversify our range of services and markets, improve on our marketing and distribution strategies as well as pre-empting certain regulations to mitigate any possible adverse impact on our Group from any adverse development in political, economic and regulatory authorities. Whilst we strive to continue to take effective measures such as prudent financial 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.
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4.3.2 Forward-Looking I 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 may’ or 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 forwarp-Iooking 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. [ Therestofthispageisintentionally leftblank}