Risk Factors

3.0 RISK FACTORS 3.0 RISK FACTORS Before making an investment decision and applying for the [PO Shares, potential investors should carefully consider the following risk factors (which are not exhaustive) in addition to all the other relevant information contained elsewhere in this Prospectus. 3.1 No Prior Market for IQGHB Shares Prior to this Public Issue and Offer for Sale, there has been no public market for IQGHB Shares. The IPO Price has been determined after taking into consideration a number of factors. including but not limited to IQGHB’s financial history and operating conditions, its prospects and the outlook for the industry in which IQGHB operates. There can be no assurance that the IPO Price will correspond to the price at which IQGHB Shares will trade on the Main Board of Bursa Securities upon or subsequent to its listing or that an active market for IQGHB Shares will develop or, if developed, that such market will be sustained.
3.2 Control by Substantial Shareholders Upon completion of the IPO, the substantial shareholders of IQGHB comprising Chen, Wen-Chin also known as Kent Chen, Graham Arthur Clancy and Sensorlite Limited will effectively and collectively hold 48.32% equity interest in IQGHB. In addition, another substantial shareholder of IQGHB, namely Yayasan Islam Terengganu, will hold 16.94% equity interest in IQGHB after the IPO. Accordingly, they will be able to control the outcome of certain matters requiring the votes of the shareholders of the Company unless they are required to abstain from voting by law, covenants and/or by the relevant authorities or the proposal requires a special resolution to be passed which requires at least 75% majority vote. Details of the shareholdings of the said substantial shareholders of IQGHB are set out under Section 5.1.3 of this Prospectus. The structure of the Group is such that members of the Board of Directors and management have its own independent functions but overall decisions are made on a collective basis. There are certain control procedures in place to ensure business decisions are made on rational and independent basis and not through undue influence by anyone party. In addition. in compliance with the LIsting Requirements, the Company has appointed two (2) independent non-executive directors as a step towards achieving good corporate governance to ensure that any future transactions involving related parties. if any. are entered into on aml-Iength tenns. 3.3 Business Risks The Group is not isolated from general business risks as well as risks inherent in the manufacturing industry and those specific to the sensor lighting industry. For example, the Group may be affected by a general downturn in the global. regional and national economy. specifically the economies of Malaysia, Japan. China and Europe, entry of new players, constraints in skilled labour supply, changes in the law and tax legislation affecting the industry, increased production costs, changes in business and credit conditions, fluctuations in foreign exchange rates and introduction of new technologies. Although the Group seeks to limit these risks through, inter-alia, maintaining good business relationships with its customers and suppliers, diversifying customer base, conducting in-house R&D, increasing automation to reduce dependency on labour, and efficient cost control, increasing product range, no assurance can be given that a change in any of these factors will not have a material adverse effect on the Group’s business in the future.

3.4 Competition and New Market Entrants The Directors of IQGHB believe that IQGHB Group is one (I) of two (2) manufacturers of sensor lighting and motion sensors currently operating in Malaysia. As the IQGHB Group is primarily export-oriented, local competitive conditions do not have a major impact on IQGHB Group’s business. Barriers to entry as a PIR-based products manufacturer in Malaysia are high as the manufacture of PIR based products requires relatively high technical skills, continuous R&D and moderate set-up costs. In addition, Malaysia’s domestic market size is relatively small and is therefore not particularly attractive to

new market entrants. 3.0 RISK FACTORS (conI ‘d) Nevenheless, the Directors are of the view that the Group does face competition from various foreign companies, a large proponion of which are based in Taiwan and China. China’s lower cost of production could create pressure on selling prices for PIR product manufacturers. However, PIR products are becoming increasingly more technologically sophisticated and therefore are dimcult to replicate at low cost. Funhermore, the ability of the Group to create tangible product differentiation effectively minimises the threat of low price competition. The demand for PIR products mainly comes from more affluent countries like the US, European nations and Japan. In these countries, PIR products are commonly sold through hardware, DIY and electrical appliance stores. Many of these specialised relailers are large chain stores which measure the success of suppliers on the basis of profit per square fOOl of store space. Often, competition therefore is limited to obtaining one off promotional activity. The Group’s strategy is to continuously create langible product differentiation and to constantly exceed customers) needs and requirements. Although the management of IQGHB Group will continue to adopt the appropriate strategies supponive of maintaining its competitive advantage, there can be no assurance that competition will not become stiffer andlor there will be no new market entrants and thus there is no assurance that the Group will be able to sustain its existing pricing and cost structures or maintain its market share in the future. Dependence on Major Customers The Group’s major customers comprise manufacturers. distributors and retailers mainly from overseas. As at 31 March 2005, IQGHB Group has a customer base of fifty-eight (58) clients. IQGHB Group depends on some of its larger customers such as B&Q pic. based in UK, which accounted for 21.3% of the Group’s revenue for the financial year ended 3 I March 2005. The Directors of IQGHB are of the view that the Group’s relationship with B&Q pic will not have any adverse impact on the Group based on the following factors:­B&Q pic has been a customer of IQGHB Group for eight (8) years. indicating a long-term and stable relationship. This long term association provides a finn foundation for continuing business; B&Q pic has over 300 retail outlets in the UK, and is one of the largest retailers of DIY supplies. Its market leadership in the UK and extensive distribution net\vork will ensure continuing demand for IQGHB Group’s tried and tested products; and B&Q pic is a subsidiary of Kingfisher pic with a revenue of £7.70 billion for the financial year ended 29 January 2005. The financial strength of its parent company will ensure stability for B&Q pic. Additionally, all of IQGHB Group’s lOp len (10) customers have been in business with the Group for four (4) years or more. Two (2) of its top ten (10) customers have been dealing with the Group for frfteen (15) years (details of which are set out in Section 4.7 of this Prospectus). These long#standing relationships with overseas customers serve as an endorsement for the quality of IQGHB Group’s products. This also indicates IQGHB Group has a stable and sustainable customer base providing the basis for future growth. The top ten (10) customers of the IQGHB Group account for 83.64% of the Group’s to,al revenue for the financial year ended 31 March 2005. Although a significant ponion of the Group’s revenue during the said period had been generated from the top ten (10) customers, the revenue contributions from its customers are actually spread quite evenly. The Directors of IQGHB have also been actively diversifying its customer base through marketing of its products and capturing other potential customers and new potential markets from overseas. Funher, the Group also jointly undenakes R&D initiatives with some of its customers, which have in tum resulted in a strong customer-supplier relationship and thus fonns the basis of continuous relationship in the future. Despite these mitigating measures, no assurance can be given that any future changes in the relationship or loss of its major customers will not have a material impact on the Group’s business. 3.0 RISK FACTORS (cont’d)
3.6 Dependence of Major Suppliers As mentioned in Section 4.8 of this Prospectus, the top ten (10) suppliers of the Group account for approximately 45.90% of the Group’s total purchases for the financial year ended 31 March 2005. The Group is not solely dependent on anyone (I) major supplier and has established a wide network of suppliers. Within tbis network, the Group enjoys long term relationships with most of its suppliers. Although the Group seeks to limit its risk by establishing a suitably wide network of qualified suppliers to supply quality parts at competitive prices to the Group, there is no assurance that the loss of any major supplieroftheGroupwill notaffecttheopera,ionsand perfonnance oftheGroup inthefuture.
3.7 Foreign Exchange Risks For the financial year ended 31 March 2005, 99.81% of the Group’s total sales were denominated in USD. ¥ and £, whilst 86.50% of the Group’s lotal raw materials imported were denominated in USD, HKD, RMB, Singapore Dollar, Euro, NTD, ¥ and £. On 21 July 2005, Bank Negara Malaysia announced that with immediate effect the exchange rate of the Ringgit will be allowed to operate on a managed float, with its value determined by economic fundamentals. Bank Negara Malaysia will monitor the exchange rate against trade-weighted index of Malaysia’s major trading partners. Promoting stability of the exchange rate continues to be a primary objective of policy. As such, the Group will be exposed to foreign exchange rate fluctuations. To mitigate against this risk. the Group places a proportion of its export proceeds into multi-currency bank accounts 10 facilitate payments in [he corresponding foreign currency. Notwithstanding Bank Negara Malaysia’s policy of promoting the stability of the exchange rate and Ihe Group’s efforts, there can be no assurance that fluctuations in the exchange rale of the Ringgit will not have an adverse effect on the future financial perfonnance of the Group. 3.8 Cyclical or Seasonal Sales The IQGHB Group’s products are generally subject to seasonal factors as follows:­retail consumer purchase of PIR security lighting normally peaks during winter months; and retail consumer purchase ofPIR decorative outdoor lighting nonnally peaks during summer months. The purchasing pattern for security lighting products in the commercial and industrial sectors does not have the same seasonalily. This. to a certain extent. helps to balance peak produclion periods. The seasonalily is also slightly moderated by the fact thai it is less pronounced in Japan. which accounted for 13.75% oftolal Group’s revenue for the financial year ended 31 March 2005. During periods of lower production. IQGHB Group concentrates on producing non-seasonal products such as decorative and general lighting producls_ The Group also builds a certain level of PIR motion sensor stock which also helps to smoothen out the peak production periods. However, there is no assurance that any adverse changes in these seasonal factors will not have a material impact on the Group’s future performance.
3.9 Dependency on Key Personnel The Group believes that its continued success will depend on the abilities and continuous efforts of its existing Directors and key management. The loss of any key member of the Group may, to a certain extent. affect the Group’s conlinued ability to maintain and improve its perfonnance. The average length of service of thc Group’s executive directors is approximately ten (10) years. The average years of service of the Group’s key management is approximately eight (8) years. This indicates that turnover among key personnel is relatively low and that the Group has enjoyed stability over the past years in retaining key personnel. The opportunities for eligible Directors and employees of the Group to participate in the Pink Fonn Allocation and the ESOS are also expected to instil greater loyalty among the key personnel of the Group.
3.0 RISK FACTORS (conl’d) In addition, ongoing efforts are being made by the Group to groom the younger members of the management team to assume higher responsibilities, hence providing a smooth transition should changes occur. The Group continuously strives to attract and retain skilled personnel by creating promotion opportunities within the Group. However, there can be no assurance that such measures will always be successful in retaining key personnel. Any failure to recruit or retain the key personnel may materially and adversely affect the Group’s overall business and operating results.

3.10 Insurance Coverage The IQGHB Group is exposed to risks of fire and other emergencies. At present, the Directors of IQGHB believe that as part of their risk management practice, all the IQGHB Group’s raw materials, finished products and other assets are adequately insured against unforeseen events such as fire and theft, etc. Although the IOGHB Group seeks to limit these risks, there can be no assurance that the insurance coverage would be adequate for replacement cost of all the assets or any consequential loss arising from the damage or loss of the assets. 3.11 Political, Economic, Social and Regulatory Considerations Adverse developments in political, economic, social and regulatory conditions in Malaysia or other countries where IQGHB operates or markets its products, including China, Taiwan, Japan and UK, could materially and adversely affect the future prospects of the Group. Political, economic, social and regulatory uncertainties include risks of war, terrorism, sabotage, expropriation, nationalisation, re-negotiation or nullification of ex isting contracts, changes in interest rates and methods of taxation. Whilst the IQGHB Group will continue to take effective measures such as pr”dent financial management and efficient operating procedures, there is no assurance that changes in such political, economic and social regulatory factors will not materially affect the Group’s performance in the future.
3.12 Patents and Technology Know-How The nature of the business of the Group as an Original Design Manufacturer (“ODM”) depends, to a large extent, on its trade secrets and proprietary know-how. As such, it needs to protect the ideas, concepts, production and documentation relating to its proprietl1ry technologies. As at the Latest Practicable Date, IQGHB Group owns four (4) patents, covering two (2) technologics as set out in Section 4.4.4(i) of this Prospectus. The issuing author.ities for the patents held are the National Intellectual Property Right Bureau (China), the Bureau of Intellectual Property, Taiwan (Republic of China) and the United States Patent and Trademark Office (US). The Group is c”rrently awaiting approvals for another nineteen (19) patents applications covering ten (10) new technologies. Notwithstanding the Group’s continuing efforts in R&D, it may neverthcless be exposed to risk of infringement of patents owned by others. In 1994, an action was taken out in the Regional Court Munich l. Lenbachplatz 7 80316 Munich Germany by Dr Maul & Partner GmbH (“the Plaintiff’) against METRO Grosshandels GmbH (” I” Defendant”), OBI Heimwerkermarkt GmhH & Co. (“2″ Defendant”) and HEV Heimwerkermarkt Verwaltungs GmbH (“3″ Defendant”) (the 1st Defendant, the 2′” Defendan! and the 3″ Defendant are hereinafter collectively referred to “the Defendants”) for patent infringement of infrared motion detector (“Product”). The Plaintiff was successful in obtaining judgement against the Defendants on 22 January 2004 (“the Judgement”). The Defendants made an appeal to the Regional Court Munich on the Judgement. There was an oral hearing held on 1 July 2004, however, the appeal court upheld the Judgement. The Defendants were the customers of Massive Lighting Products NV, Europe (“Massive”), one of the long-term customers of the IQGHB Group. The Plaintiff had taken legal action against the Defendams which were the customers of Massive as they were selling the lighting products that contained the infrared motion detectors to which this case relates. Despite that the Plaintiff has not instituted any legal proceedings or claims directly against Massive or the IQGHB Group, Massive had agreed to indemnify the Defendants. 3.0 RISK FACTORS (colll’d) On 9 November 2004, an out of court settlement was entered into between the Plaintiff and Massive, whereby Massive had agreed to compensate the Plaintiff for a sum of Euro504,600. Whilst lQM was not contractually liable to compensate Massive for the losses it suffered pursuant to the said legal case, afier taking into consideration that Massive is one of the Group’s long term and valued customers, IQM had agreed with Massive to bear part of the commercia! settlement amounting to Euro 355,000 (or RMI,760,267, computed based on the foreign exchange rate of Euro 1.00 to RM4.96). Massive bad, in turn confirmed that the Plaintiff have no further claims against Massive and that Massive has no further claims against IQM in relation to the patent infringement case. The Directors of IQGHB affirm that the settlement by the IQGHB Group has effectively strengthened its relationship with Massive. Apart from tbe aforesaid senlement sum paid to Massive, there are no other fLnancial impact or other impact on the IQGHB Group arising from the said legal case. Messrs Ong and Manecksha via its legal opinion lelter dated 22 December 2004 is in the opinion that whilst the Plantiff could have sued the IQGHB Group for infringement of its patent, it is however, unlikely that the Plaintiff will succeed as the suit, which was filed in Germany did not include the lQGHB Group. The patent owned by the Plaintiff was not registered in Malaysia under the Patents Act, 1983. Thus, an action in Malaysia against the IQGHB Group would not be possible. Even if the said patent was so registered in Malaysia, proceedings for infringement of patents may not be instituted after five (5) years from the act of infringement which occurred since 1994. Such action would have been statutorily barred under Section 59 of the Patenls Act, 1983. FUr1her, IQGHB Group is not using the process patented 10 produce a product similar to that of the Plaintiff or making the same product as that upon which a patent has been granted. The Directors of IQGHB, after considering the legal opinion from Messrs Ong and Manecksha dated 22 December 2004, concur that it is not likely that the Plaintiff will succeed in taking any legal action directly against the IQGHB Group. !n addition. the patent which was registered in Germany had expired in 2002. The Directors of IQGHB have confirmed that as at the Latest Practicable Date, there are no legal action pending or threatened against the IQGHB Group for patent infringement. Whilst the IQGHB Group will continue to take effective measures to protect the ideas, concepts, production and documencation relating to its proprietary technologies, there is no assurance that the Group can successfully secure patents for all its designs and technologies and that the Group will not potentially infringe the patent rights of other patents owners which may materially affect the Group’s future business and performance.
3.13 Implication of the AFTA Under the AFTA initiated by the ASEAN countries, namely Malaysia, Thailand, Singapore, Indonesia, the Philippines and Brunei, a comprehensi”,e programme of regional tariff reduction has been laid out. The AFTA aims to promote economic co·operation and increase competitiveness by reducing inter-regional barriers in the ASEAN region. The Common Effective Preferential Tariff (“CEPT’) has been proposed for goods traded within the t\SEAN region. Although the implementation of AFTA may potentially increase competition for the products of the IQGHB Group. especially from lower cost producing countries, the Directors of IQGHB arc of the view that this may also offer new oppollunities for the IQGHB Group as the IQGHB Group may bc able to procure cheaper raw materials from the region thereby enabling the IQGHB Group to price its products more competitively. The IQGHB Group may also have the oppor1unity to export their products to other ASEAN countries without trade restrictions. However, no assurance can b. given that the advent of AFTA will have positive impact on the IQGHB Group in the future.
3.14 Security Risk and System/Business Disruption The Group is operating in a R&D intensive environment where its operations are susceptible to various security risks such as industrial espionage. In response to this threat, the Group has set up a number of security measures to prevent unauthorised access to its premises, R&D facilities and compuler files and therefore minimising the risk of any potential security breaches. However, there can be no assurance that in the future, there will not be any security breaches that may materially affect the operations and hence the performance of the Group. 3.0 RISK FACTORS (conl’d) Other potential risks which may affect the Group’s business include fire, power supply disruption. recurrence of the SARS virus etc. The Group has in place the following risk management policies, practices and plans as follows:­(i) Safety committee consisting representatives from various sections/departments of the IQGHB
Group to manage, train and ensure work procedures are carried out safely; (ii) The factory premises are guarded twenty-four (24) hours a day, seven (7) days a week; (iii) The Group conducts regular fire drills, exercises and training; and (iv) ln the unlikely event of an unforeseen disaster. IQM has the back-up of a full and externally audited Disaster Recovery Plan.
3.15 Rapid Technology Change To a certain extent, the Group is subject to the risks related to rapid technological change which may render the Group’s products obsolete. The Group seeks to minimise this risk by actively and continuously pursuing technological innovation. This is evident through the Group’s emphasis on R&D. which is aimed at new product development, process and product improvement and new materials development. In addition, the Company has also proposed to allocate an additional RM I5 million of the proceeds from the Public Issue to finance the on-going R&D activities of the Group. Please refer to Section 4.4.9 of this Prospectus for the R&D strategies of the IQGHB Group. Notwithstanding the above R&D efforts, there can be no assurance that any changes in new technologies will not have a material adverse impact on the future business of the Group.
3.16 Shortage of Skilled Labour Skilled labour in the areas such as assembly, manual insertion and operation of automatic insertion are critical parts of the manufacturing and assembly processes. Shortages in ~uch skilled labour would have an impact on the lQGHB Group’s operations and business. According to the Directors and management of lQGHB Group, the Group has not experienced any significant shortage of such types of skilled labour thus far. Notwithstanding the above, there can be no assurance that the Group will be able to continue to attract and retain skilled labour for its manufacturing operations. 3.17 Foreign Operations Presently, IQGHB has four (4) subsidiary companies incorporated and based overseas including China, UK, Japan and Taiwan. Like any other foreign investments, the investment of IQGHB in JQC, IQE, IQJ and fQGL will be subject to the respective policies on foreign investment of the governments of China, UK, Japan and Taiwan. In addition, the ability of the foreign subsidiary companies of IQGHB to repatriate the profits or dividends arising from IQGHB’s investments abroad will largely depend on the relevant legislations relating to the repatriation of profits prevailing at the point of repatriation. For the past five (5) financial years ended 31 March 2005, the abovementioned foreign subsidiaries of IQGHB had not declared nor paid any dividends as their profits have been reinvested into their respective businesses. The Directors oflQGHB do not expect the said companies to declare and pay any dividend for the financial year ending 31 March 2006. Nevertheless, any dividend payment by these foreign subsidiaries for the future financial years would depend on their future profits, cashflow position, availability of tax credits (if applicable) and the then prevailing policies on repatriation of profits of the respective host countries.

There can be no assurance that any changes in the government policies with respect to foreign investments and repatriation of profits in those countries will nOt materially and adversely affect the rights and/or performance of the IQGHB Group with respect to its investments abroad. The experts’ reports on the host country pertaining to policies and foreign investments and repatriation of profits are set out in Section 12.0 of this Prospectus. 3.0 RISK FACTORS (COni ‘d) 3.18 Profit Forecast This Prospectus contains the consolidated profit forecast of the IQGHB Group for the financial year ending 31 March 2006, which is based on assumptions that are subject to various uncertainties and contingencies. The Directors have considered the assumptions used in the preparation of the profit forecast to be reasonable. Due to the subjective judgements and inherent uncertainties in arriving at the said profit forecast and events and circumstances frequently do not occur as expected, there can be no assurance that the consolidated profit forecast of IQGHB Group conlained herein will be achieved and actual results may be materially different from those shown or expected. [nvestors will be deemed 10 have read and understood the nature of the assumptions and uncertainties underlying the consolidaled profit forecast contained herein.
3.19 Forward Looking Statements Certain statements in this Prospectus are made based on historical data, which may not be reflective of Ihe future results, and others are forward looking in nature which are subject to various uncertainties and contingencies. All forward looking stalements are based on estimate and assumptions made by the Directors and although believed to be reasonable are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to differ materially from the future results, performance or achievement expressed or implied in such forward looking statements. Such factors include, inter alia. genera) economic and business conditions, competition, the impact of new laws and regulations affecting lQGHB and the industry. changes in interest rates and changes in foreign exchange rates. Although the Group believes that the expectations reflected in such forward-looking statements are reasonable al this time, there can be no assurance that such expectations will prove to be correct.
3.20 Delay In or Failure of the Listing There is a risk that the listing exercise may be delayed or failed should any oflhe following events occur:­(i) The Underwriters exercise their rights provided under the Underwriting Agreement to discharge themselves from their obligations thereunder; (ii) The Bumipulera investor(s) approved by the MITI fail(s) to subscribe for the respective portion of Ihe Offer Shares allocated to them; and (ii i) The Company is unable to meet the public spread requirement. thaI is at least 25% of the tOlal number of shares for which listing is sought must be held by a minimum number of one thousand (1.000) public shareholders holding not less Ihan one hundred (100) Shares each. Although the Directors of IQGHB will continue to ensure compliance with the various listing requirements and will endeavour to avoid the above events from occurring, no assurance can be given that the above mentioned events will not occur. In the event if the abovementioned events occur, [here will be no assurance they will not cause a delay in or cause a failure of the lisling of IQGHB on the Main Board of

 

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