Risk Factors

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 Our operations require us to obtain and hold CIDB certificate of registration and the loss of this certificate could significantly hinder our business We are required to obtain and hold valid certificate of registration issued by CIDB in order to operate our businesses. We must comply with the restrictions and conditions imposed by the government authorities in order to keep such registration. If we fail to comply with the applicable requirements or any required conditions to keep the registration, then our registration may be downgraded, suspended or cancelled. Delay or refusal may also occur when renewing such registration upon their expiry. Under the LPIP Act, no person shall undertake any construction works in Malaysia unless he is registered and holds a valid certificate of registration issued by CIDB. There are 7 specified registration grades for each category and a contractor is not permitted to tender for any construction project which exceeds the value of the construction works specified in the registration grade. Our subsidiary, IBSB is currently a Grade 7 contractor registered with CIDB for the categories of B04 (Building General Works) and CE21 (General Civil Engineering Works). As Grade 7 contractor, IBSB is able to tender for construction projects in Malaysia without any limit to the value of the construction works. Failure to keep or renew the registration could result in suspension of our business operations, restriction or prohibition of our business activities, thereby materially and adversely affecting our business, financial position, results of operations and prospects. As at LPD, we have not faced any failure in keeping or renewing our GDB certificates of registration. 4.1.2 The continuity of our order book is not assured and any significant decline in our order book will adversely affect our long term sustainability and growth Our principal business is in the construction of residential and non-residential buildings. We are normally awarded contracts on a project-to-project basis. There is no assurance of continuity from one project to the next project. In our industry, it is common for jobs to be awarded based on competitive bidding, and as such, we have to bid competitively for every contract that we wish to secure. There is a risk that we may not be able to secure every contract that we tender for. Any significant decline in our order book from the current level will adversely affect our long term sustainability and business growth. As at 31 March 2017, our order book comprised unbilled contracts amounting to a total of RM486.16 million. However, there can be no assurance that we will be able to maintain at least such level of order in the future. In addition, our order book is subject to unexpected project cancellations or scope adjustments which may occur from time to time, and which could reduce the value of our order book. 4. RISK FACTORS (Cont’d) Our unbilled order book as at 31 IVlarch 2017 which amounts to RM486.16 million includes RM40.25 million from a project awarded by Fabulous Range Sdn Bhd (a subsidiary of Lum Chang Holdings Limited group). If this project which is held in abeyance is not resumed, our order book will reduce to RM445.91 million. This project represents 8.28% of our unbilled contract value as at 31 March 2017. 4.1.3 Any unanticipated increases in costs associated with our construction projects may impair our financial performance There are 2 types of construction contracts, lump-sum with quantity and lump-sum without quantity. Lump-sum with quantity contracts allows us to claim for additional costs arising from variations in the estimated quantity whilst lump-sum without quantity contracts prevents us from claiming additional costs arising from variations in the estimated quantity. Nonetheless, both types of lump-sum contracts do not provide for fluctuations in prices. As such, our failure to accurately estimate the resources and time required for a project or our failure to complete our contractual obligations within the timeframe and costs committed could have a material adverse effect on our financial performance. Although a substantial portion of our revenue were derived from lump-sum with quantity construction contracts (99.36% in FYE 2014, 97.50% in FYE 2015 and 77.08% in FYE 2016), we are still exposed to the risks of fluctuations in the prices and we assume the risk that the actual costs associated with our performance may be greater than anticipated. Furthermore, any variation works are usually carried out before the finalisation of the variation orders and therefore, we are exposed to the risks that we may not be able to claim the full amount of variation orders from our client. However, there have been situations where clients have paid partial payment for the variation order pending finalisation. Our cash flows and profitability will be reduced if the actual costs to complete a contract exceed original estimates. Our cash flows and profitability are therefore dependent upon our ability to accurately estimate the costs associated with our construction projects. These costs may be affected by a variety of factors, such as lower than anticipated productivity, conditions at the work sites differing materially from what was anticipated at the time we bid for the contract, higher costs of materials and labour, delay in the availability of financing and political or social disruptions, amongst others. These variations in costs may cause actual gross profit for a project to differ from those originally estimated and, as a result, certain contracts or projects could have lower margins than anticipated, or losses if actual costs for our contracts exceed its estimates, which could reduce our profitability, cash flows and liquidity and impact our financial condition. 4.1.4 Our failure to complete our projects within the stipulated contract period could result in liquidated damages The timely completion of projects undertaken by our Group is dependent on many external factors inherent in the construction industry including, inter alia, the timely receipt of requisite licences, permits or regulatory approvals, availability of construction materials, equipment and labour, availability of financing and satisfactory performance of any subcontractors appointed. Any adverse developments in respect of these factors can lead to interruptions or delays in completing a project, which may result in our clients imposing liquidated damages on us that could affect our profitability and cash flows. 4. RISK FACTORS (Cont’d) We had in the past only encountered two experiences where our clients imposed liquidated damages amounting to RMO.21 million and RMO.18 million respectively on us as a result of delay in the completion of the projects. The contract sum for the said projects was RM45.50 million and RM56.89 million respectively and as such the liquidated damages of RMO.39 million did not have any material adverse financial impact on our Group. We are still maintaining good relationship with these clients. 4.1.5 Our operations depend on the availability of an adequate supply of construction materials at competitive prices We utilise various construction materials such as steel bars, ready-mixed concrete, tiles, timber and plywood, bricks, reinforced mesh, cement, sand and sanitary items in our construction activities, and are thus dependent on the continuous supply of such materials which we source from a number of suppliers in Malaysia. Our construction materials are price sensitive, and we face the risk of obtaining sufficient quantities of construction materials at competitive prices. Some of our construction materials such as steel bars are commodities and their prices are subjected to the fluctuation in global market prices. As we have been in the construction industry for more than a decade, we have experienced construction materials price fluctuation over the years. However, none of such price 1’Iuctuations had a material adverse impact on our financial performance. Further, any fluctuation in construction materials prices will affect the entire construction industry as a whole. Nonetheless, any price fluctuations in construction materials caused by shortages and price volatility of construction materials, which are beyond our control, could result in increased costs and material adverse effect on our future financial performance.
4.1.6 We are dependent on the services of our subcontractors to complete our contracts We usually engage subcontractors to carry out different parts of our construction activities particularly those requiring specialised licences such as plumbing, sewerage, fire protection and prevention system as well as specialised trade work such as painting, mild steel works and water proofing. In addition, we also engage labour only subcontractors such as bricklayer, plasterer and tiler with the objective to reduce the need for our Group to employ a large workforce to lower our operating costs. Subcontractors are appointed following the shortlisting of candidates based on the project requirements, assessment of tenders submitted by the candidates, as well as our past working experiences and relationship with the candidates. Upon negotiation of pricing and scope of works or bills of quantities, we will enter into formal contracts with the subcontractors. As our subcontractors have no direct contractual relationship with our clients, we are subject to risks associated with non-performance, late performance or poor performance by our subcontractors. While we may attempt to seek compensation from the relevant subcontractors, we may from time to time, be required to compensate our clients prior to receiving the said compensation. If no corresponding claim can be asserted against a subcontractor, or the amounts of the claim cannot be recovered in full or at all from the subcontractor, we may be required to bear some or all the costs of the claims, in which case our financial performance could be materially and adversely affected. Subcontractor failures are generally a result of lack of financial resources, quality workforce, quality management team, or they generally produce poor quality work or use substandard materials that does not meet the contract’s specifications. 4. RISK FACTORS (Cont’d) 4.1.7 Our operations are dependent on our ability to obtain adequate financing at competitive rates We rely on overdraft and trade financing such as bankers’ acceptances and revolving credit facilities to partially finance our working capital. Such credit facilities are callable on demand or have short term repayment tenure. We also rely on bank guarantees for tender bonds and performance bonds. A tender bond is submitted as part of the tender documents to proVide assurance to our client that we will proceed with the contract (as per the tender) upon the acceptance of the tender. Upon the acceptance of the Letter of Acceptance, we will then replace the tender bond with a performance bond. A performance bond, on the other hand, will proVide assurance to the client on the satisfactory completion of a project by us. The tender bond amount is usually specified in the tender document as determined by the client, while the performance bond is generally 5.0% of the total contract sum awarded. The validity of the tender bond is dependent on the tender validity period of 3 to 4 months, whereas the performance bond will only expire after the issuance of the practical certificate of completion. Both the tender bonds and performance bonds are issued to the client in the form of bank guarantees. Such bank guarantees are used for all aspects of the project construction contract life cycle from the start of the tender process to the expiration of our liability towards the client in accordance with the terms of each respective contract. Tenure requirements for these bank guarantees are structured to match the underlying construction contracts with the respective counterparties. If we are unable to secure adequate credit facilities at competitive rates for the abovementioned requirements, our cash flows, operations, growth and expansion plans will be adversely affected. There is also a risk of (a) simultaneous demand for immediate repayment on our outstanding credit facilities; and (b) calling on the tender bonds and performance bonds by our clients should we fail to meet our contractual obligations. If any significant calls take place simultaneously, this would have a material adverse effect on our working capital and in turn, have a material effect on our business, financial position, results of operations and/or prospects. Nevertheless, we have not experienced any calls in the past. Our total bank borrowings as at 31 December 2016 amounted to approximately RM32.89 million. As at 31 December 2016, bank guarantees issued for contract works being carried out by us amounted to RM18.27 million. Any increase in interest rates on our borrowings and fees on our bank guarantees will adversely affect our profitability and cash flows. 4.1.8 We are subject to potential liability and warranty claims We warrant the work that we perform including the work of our subcontractors. Our warranty comprises specific performance warranty such as external paint work and water proofing work which may run for up to 5 and 10 years respectively and defects liability which generally covers a period of between 24 to 36 months. Our warranty period commences from the date of certified practical completion of the project. The costs associated with any warranty claims shall be borne by us and charged as our costs of sales for the respective projects. Any material warranty claims on our work could have a material adverse effect on our results of operations and cash flows. During the FYEs 2014 to 2016, we have not experienced any warranty claims which has materially affected our financial performance. 4. RISK FACTORS (Cont’d) 4.1.9 We are subject to workplace hazards and potential workmen’s compensation claims and loss and damage to our machinery and equipment Our employees and subcontractors are exposed to potential hazards such as bodily injuries and loss of life due to workplace accidents. We have in the past 3 financial years and up to the LPD encountered 2 cases of accidents resulting in loss of life at the construction sites, all of which were related to our foreign workers and covered by our foreign workers’ compensation insurance. There was no material adverse impact on our operations resulting from these accidents. We have also taken up workmen compensation insurance which provides insurance coverage to our local workers involved in the projects at the construction sites. In addition, we are also exposed to risk of loss and damage to our machinery and equipment arising from amongst others theft, improper usage, fire and explosion. We have not experienced any loss or damage to our machinery and equipment which had a material adverse effect on our operations or financial performance. Furthermore, we have taken up contractors’ all risk insurance to manage any losses which may arise. Nonetheless, the occurrence of workplace accidents and damage to our machinery and equipment could result in significant increase in project costs, or affect our ability to perform our contractual obligations, which could materially and adversely affect our financial performance. There can be no assurance that our existing insurance coverage is sufficient to compensate for the claims. Further, there can be no assurance that such insurance policies will continue to be available on terms acceptable to us. 4.1.10 Our continued success requires us to hire and retain qualified personnel We believe that our continued and future success largely depends on our continued ability to hire, develop, motivate and retain qualified personnel needed to support our existing range of services and provision of quality services to our clients. Having an experienced key management team is vital to maintain the quality of our Group’s services whilst retaining the business confidence of our clients. The loss of significant key management (simultaneously or within a short span of time) without timely replacement may create an unfavourable or material impact on our Group’s operations. 4.1.11 We may be exposed to the risks in property investment as a result of contra payment in the form of properties It is common practice in the construction industry for our clients to impose ‘contra’ payment with the properties under their development up to a specified percentage of the awarded contract value. Please refer to Section 5.7.1 for further details on the ‘contra’ payment with properties. Separately, our clients may also seek our support for their property development projects, in which, we may on a case to case basis, as a measure of bUilding good client relationship, undertake an outright purchase of those properties. As at LPD, we have total 12 properties which were received by us via ‘contra’ and purchased outright from our client’s property development projects, which details are set out below: 4. RISK FACTORS (Cont’d) Properties received via ‘contra’ payment  Properties purchased from our clients  Audited NBV  Audited NBV  as at 31  as at 31  December  December  No.  2016  No.  2016  units  RM’OOO  units  RM’OOO  Properties that are currently vacant Properties that are used by our Group Properties that are rented out Total  7 1 2 10  13,712 917 272 14,901  2 1 1  3,242 2,589 653
As a result of the above, we may be subject to certain risks inherent in property investment. These include amongst others, fluctuation in property prices and rental rates, changes in the general economy and conditions in the property market. 4.1.12 We are dependent on certain major clients Certain of our major clients had contributed substantially to our revenue for the FYEs 2014 to 2016, details as follows:  FYE 2014  FYE 2015  FYE 2016  Major c1ient(l)  0/0 revenue contrib ution  Horizon Hills Development Sdn Bhd (a joint venture  23.87  16.48  4.55  between UEM Sunrise Berhad and Gamuda  Berhad)  Engtex Group Berhad  18.97  7.52  9.91  UEM Sunrise Berhad  8.62  15.77  12.78  Lum Chang Holdings Limited  20.27  15.23  3.89  Mitraland Group Sdn Bhd  15.96  12.04  Gamuda Group  5.71  13.59  7.49  Tropicana Corporation Berhad  8.74  16.07  Eco World Development Group Berhad  20.39  Plenitude Berhad  5.82  12.80  93.40  95.19  87.88  Note:
(1) Being major clients which have contributed 10.0% or more of our revenue for anyone of the financial years under review. Further details of such major clients, the projects undertaken and their respective revenue contribution are set out in Section 6.8 of this Prospectus. Moving forward and based on our order book as at LPD, we will continue to be dependent on certain of our major clients as 66.13% of our total unbilled contract value as at 31 March 2017 is expected to be derived from 2 major clients, details as follows: Unbilled contract value as at 31 March (2)0/0 revenue Major c1ient(l) 2017 contribution Mitraland Group Sdn Bhd  RM’OOO 188,088  38.69  Eco World Development Group Berhad  (3)133,426 321,514  27.44 66.13
4. RISK FACTORS (Cont’d) Notes: (1) Being major clients which are expected to contribute 10.0% or more of our unbilled contract value as at 31 l”larch 2017. Further details of such major clients, the projects undertaken and their respective unbilled contract value are set out in Section 6.5.2(b) of this Prospectus. (2) Calculated based on the unbilled contract value to be derived by each major client divided by our total unbilled order book of RM486.16 million as at 31 March 2017. Please refer to Section 11.11 of this Prospectus for details of our order book. (3) Comprises various projects under Eco World Development Group Berhad. Based on the table above, Mitraland Group Sdn Bhd and Eco World Development Group Berhad are expected to be significant contributors to our future revenue, accounting for 66.13% of our unbilled contract value as at 31 March 2017. Notwithstanding this, the proportion of our contract revenue from the major clients may differ for each financial year depending on the duration and progress of the project undertaken with each of the major client. As a result of our continuing dependency on certain of our major clients, we are exposed to the risks that such clients may cease to contract with us in the future or non-performance by such major clients. Our financial performance may be materially and adversely affected if we were to lose one or more of our major clients (or reduce the level of services prOVided to them) without capturing new clients to replace the loss of business, or if we were to encounter difficulties in collecting payments from these major clients, or if the development projects undertaken by our major clients are delayed or terminated. Although our client portfolio includes a diversified pool of property developers and we have not encountered any major disputes with our clients, there is no assurance that the current working relationship with our major clients will not deteriorate or that such major clients will continue to contract with us in the future or that we will be able to maintain a diversified pool of property developers clients. 4.2 RISKS RELATING TO OUR INDUSTRY 4.2.1 We are dependent on the property development industry in Malaysia The majority of our clients are local property developers and any adverse changes in the property development industry in Malaysia will affect us. The Malaysian property development industry is susceptible to the political and economic stability of Malaysia, inflation, financing costs and in recent years, various cooling and tightening measures imposed by the Federal Government to soften speculative activities in the property sector such as maximum loan-to­value ratio of 70% for the third mortgage and above taken out by a borrower and the use of net income calculation method instead of gross income when computing the debt service ratio for potential borrowers. Such measures imposed by the Federal Government may dampen the growth prospects of the Malaysian property sector. In 2015, the Malaysian property market registered a total transaction volume of 362,105, reflecting a decline in total transaction volume as compared to 384,060 in 2014. Similarly, the value of transactions also declined, registering a 8.0% drop from RM163.0 billion in 2014 to RI”l149.9 billion in 2015. 4. RISK FACTORS (Cont’d) In 2016, the total transaction volume registered in the first three quarters (“First Q3”) amounted to 240,001 transactions with a value of RM95.67 billion. Residential properties dominated market activity in the First Q3 of 2016 which consists of 63.2% and 50.8% of transaction volume and value respectively during that period. Slowdowns in the property development industry and decreased demand by end-customers for real estate could also affect our clients and their property development plans. Such cancellations or deferrals of our clients’ property development projects could result in decreased demand for our services or reduced the profitability of those services and could materially adversely affect our financial performance and prospects. Todate, we have not experienced any cancellations of projects but we have experienced deferrals of projects where our clients lengthen the contract period. Such deferrals however have not materially adversely affected our financial performance. 4.2.2 We face competition in the construction industry, which could adversely affect our business The construction industry is highly fragmented, and we compete with other companies ranging from small independent firms to larger firms. Our competitors may have greater resources than us or have specialised expertise in certain segments. Due to the nature of our business, we are actively involved in tendering for building construction projects. We compete on pricing, availability of financial and manpower resources, technical expertise, operating track record and quality of workmanship. Our bidding success rate for FYE 2014, FYE 2015 and FYE 2016 were 31.58%, 22.22% and 8.89% respectively. Although the bidding success rate for FYE 2016 was 8.89%, the value of new projects secured was apprOXimately RM296.52 million as compared to RM236.17 million secured in FYE 2015. As a result of the various cooling and tightening measures imposed by the Federal Government in recent years as mentioned in Section 4.2.1 above, the growth of the property market was somewhat dampened. As such, competition amongst building contractors for construction projects increased which resulted in our decreasing bidding success rate. However, our order book as at the 31 March 2017 stood at RM486.16 million which will be recognised progressively over the next 2 financial years. We have also been actively participating in tenders and have tendered for projects in Klang Valley and Johor with total tendered sum of RM434.05 million since January 2017 up to the LPD. Nonetheless, if we are unsuccessful in bidding for these projects, or if there is intense price competition, then our financial performance and prospects could be adversely affected. 4.2.3 We are dependent on foreign workers to undertake our construction activities Construction activities are labour intensive and given the shortage of local workers, the construction industry in IVlalaysia relies heavily on foreign labour. Our operations are highly dependent on foreign workers which are either under our employment or our subcontractors’ employment. As at the LPD, we employed a total of 359 foreign workers which represents 69.71% of our total employees. All of our foreign workers are solely utilised for our own projects. In addition, we also depend on foreign workers from our subcontractors, the number of which will depend on each project requirement which may change from time to time. 4. RISK FACTORS (Cont’d) Hiring of foreign workers in the construction industry is allowed by the Government, subject to certain conditions, which may change from time to time. As a result of restriction imposed on the hiring of foreign workers such as the freezing of hiring foreign workers of a certain nationality, the construction industry is facing a shortage in the supply of foreign workers. Nevertheless, we have not experienced any material adverse impact on our business operations arising from such shortages of foreign workers in the past. At this juncture, we obtain work permits for our foreign workers, which may be renewed on a yearly basis up to 10 years. Any adverse changes to the policies relating to the employment of foreign workers in the construction industry between Malaysia and the countries from which our foreign workers are sourced or any significant increase in labour wages, may adversely affect our operations, financial performance and prospects. As at LPO, there are no past occurrences whereby our Group had breached the regulatory requirements/conditions relating to foreign worker employment and working permits which had material adverse operational and financial impact on our Group. 4.2.4 We are subject to the political, regulatory and economic risks in Malaysia We operate in Malaysia and our clients’ projects are also based in Malaysia. As such, the financial performance and business prospects of our Group will depend on the political, economic and regulatory conditions in Malaysia. Any adverse developments in the political, economic and regulatory conditions in Malaysia could unfavourably affect our financial performance and business prospects. Amongst the political, economic and regulatory uncertainties that may affect our operations includes changes in the political leadership leading to unstable political situation, terrorism actiVities, changes in interest rates, fluctuation in currency exchange rates and unfavourable changes in government policies such as introduction of new regulations, import duties and tariffs. Notwithstanding that we have not experienced any adverse political, economic and regulatory changes which have materially adversely affected our operations and financial performance, there can be no assurance that any adverse political, economic and regulatory changes, which are beyond our control, will not unfavourably affect our future financial performance. 4.3 RISKS RELATING TO THE INVESTMENT IN OUR SHARES 4.3.1 There has been 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.

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