Risk Factors

5. RISK FACTORS 5. RISK FACTORS
OUR BUSINESS IS SUBJECT TO A NUMBER OF RISKS, MANY OF WHICH 4RE OUTSIDE OUR CONTROL. PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS SHOULD CAREFULL Y CONSIDER, ALONG WITH THE OTHER MATTERS SET FORTH HEREIN, THE RISKS AND INVESTMENT CONSIDERATIONS SET FORTH BELOW. THE RISKS AND INVESTMENT CONSIDERA TlONS SET FORTH BELOW ARE NOT AN EXHAUSTIVE LIST OF THE CHALLENGES CURRENTL Y FACING US OR THAT MA Y DEVELOP IN THE FUTURE. ADDITIONAL RISKS, WHETHER KNOWN OR UNKNOWN, MA Y IN THE FUTURE HAVE A MATERIAL ADVERSE EFFECT ON US OR OUR SHARES. This Prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks faced by us described below and elsewhere in this Prospectus. 5.1 Risks Relating to Our Business and Operations 5.1.1 All of our revenue is currently derived from Western Digital and Seagate. The loss of, or a significant reduction in orders from Western Digital or Seagate would have a material adverse effect on our financial condition As of 30 September 2009, all of our revenue was derived from the sale of our components to our Key Customers or to MBA suppliers at the direction of our Key Customers. Based on direct sales, we derived 64.9% and 21.5% of our total consolidated revenue in the financial year ended 30 September 2009 from Western Digital and Nidec, respectively. Nidec is a MBA supplier to our Key Customers, and as a MBA supplier, Nidec attaches a spindle motor to the base plate before delivering its product to Western Digital and Seagate. Since Nidec as an MBA supplier now performs the assembly function for HDD manufacturers, Nidec has been directed by Western Digital and Seagate to acquire the HDD components from the JCY Group. We also sell components to five other MBA suppliers (including Nidec) at the direction of Western Digital or Seagate. As HDD vendors, Western Digital and Seagate direct their other component suppliers to buy certain of our products and direct us to deliver such products to these suppliers. As a result of our direct and indirect sales (through the MBAs) to Western Digital and Seagate, we consider them our Key Customers (further details of our customers is disclosed in Section 7.8 of this Prospectus). Historically, substantially all of our total consolidated revenue has been derived from one customer. Our Key Customers can make substantial demands on us, including demands on product pricing and on contractual terms, which may result in the allocation of risk to us as their contract manufacturer. We compete with other companies to supply components to our Key Customers and our ability to maintain a strategic relationship with our Key Customers is essential to our future performance. If we were to lose any of our Key Customers, or if any of our Key Customers should significantly reduce its orders of our products or require us to reduce our prices before we are able to reduce our cost, or if any of our Key Customers was to suffer financial hardship, our operating results would be materially and adversely affected. In addition, if any of our Key Customers’ orders require us to reduce our price, this could result in a decrease in our revenue and our gross margins, which would have a material adverse effect on our results of operations and financial condition. 5. RISK FACTORS (cont’d) In addition, any disruptions to the operations of our Key Customers, including production delays due to delayed delivery of HDD mechanical components or supplies by its other suppliers, would have a corresponding effect on our operations. Further, our customers operate in an industry that experiences frequent volatility. If either of our Key Customers were to suffer financial difficulties, whether as a result of downturns in the markets in which they oj::.erate or otherwise, this could result in a reduction of their orders for our products and have a material adverse effect on our financial condition. While we are dependent on our Key Customers for our strategic relationships, we are also exposed to credit risk of five other MBA suppliers (including Nidec) to whom we sell components at the direction of our Key Customers as our Key Customers are not liable for payment of the products that we sell to these parties. We derived 31.7% of our total consolidated revenue in the financial year ended 30 September 2009 from these third parties. 5.1.2 Our revenue, prices and margins are subject to declines due to fluctuating end­user demand of HODs Our products are used in data storage and in the establishment and operation of data communication networks. Our production is primarily based on quarterly production forecasts provided in advance by our Key Customers, and subsequently confirmed to us through purchase orders issued by our Key Customers on a periodic basis, usually every quarter. As a manufacturer and supplier of HDD mechanical components, our financial and operational results are closely linked to the growth of the HDD industry. If the actual growth in the data storage and data communication networking markets does not occur at the rate we expect or at a rate consistent with those prevalent over the past years. our business may be significantly affected. Demand for HDDs depends on the demand for systems manufactured by manufacturers (including original equipment manufacturers) and on storage upgrades to existing systems. Demand for HDD mechanical components is correspondingly affected. The demand for systems has been volatile in the past and may fluctuate depending on general economic conditions. For example. with macroeconomic conditions deteriorating rapidly in the second half of 2008, the HDD industry was hit hard in the last quarter of 2008. with a decline in unit shipments in what is traditionally the strongest quarter of the year. As a result, the HDD market may experience periods of excess capacity, which can lead to liquidation of excess inventories and intense price competition. A decline in the HDD industry would have a material adverse affect on our financial condition and operational results. In addition, if our customers were to lower the prices for their products, this could in turn force us to reduce the prices for our products. If a reduction in price is not offset by larger volume orders, this could result in lower revenue and gross margins for us, which would have a material adverse affect on our operating results. [The rest of this page has been intentionally left blank] 5. RISK FACTORS (cont’d) 5.1.3 We are dependant on the accuracy of our customers’ forecast on market demand and consumer requirements The HDD industry faces difficulties in accurately forecasting market and customer demand for its products. The variety and volume of products we manufacture is based in part on these forecasts, which are made by our Key Customers and provided to us in advance on a quarterly basis, and confirmed (with adjustments) in our customers’ purchase orders, which are usually issued on a quarterly basis (see Section 5.1.2 of this Prospectus). The quantities set forth in our customers’ purchase orders are also subject to further adjustments on a wep.kly basis. If these forecasts exceed actual market demand or, if market demand decreases significantly from these forecasts, then the HDD industry could experience periods of product oversupply and price decreases, which would have a corresponding effect on us, and which may have a material adverse effect on our financial performance. If our Key Customers’ forecasts do not meet actual market demand, or if market demand increases significantly beyond our Key Customers’ forecasts, then we may not be able to satisfy our Key Customers’ increased product needs in a timely manner, which may result in a loss of market share if our Key Customers are able to obtain their product requirements from their other ~uppliers. We also rely, in part, on our Key Customers’ quarterly forecasts in making decisions regarding investment of our resources. In addition, although we receive quarterly advance forecasts from our Key Customers, they are not obligated to purchase these forecasted amounts, but only those amounts set forth in their quarterly purchase orders (as adjusted on a weekly basis). As with most HDD vendors, our Key Customers use .11T inventory management processes, which enable them to maintain low inventory levels and require them to work closely with their suppliers to ensure timely delivery of supplies. As we rely in part on these forecasts in determining our sub-component needs and our inventory requirements, we may have inadequate or excess inventory of our products or sub-components as compared with our Key Customers’ actual requirements, which could have a material adverse effect on our operating results and financial condition. Further reductions in volumes or prices in future orders would result in a material adverse effect on our results of operations and financial condition. 5.1.4 Increased costs of raw materials may result in lower operating margins The cost and availability of certain raw materials used to manufacture our products are critical to our success. We are exposed to the fluctuations of commodity prices. If the costs of our key raw materials, such as stainless steel and alumini..lm, rise, this would increase our costs and may result in lower operating margins if we are unable to pass such increased costs on to our customers. For instance, the purchase of stainless steel coil and aluminium ingot, which are critical materials for the production of HDD base plates and top cover assembly, accounted for 19.7%, 17.2% and 11.1 % of our cost of sales for the three financial years ended 30 September 2007,2008 and 2009. Under our current arrangements with our customers, our customers would bear any price increases (and enjoy any corresponding price decreases) of certain niche HDD sub-components which we obtain from our suppliers. However, we remain liable for any price increases in commodity materials, such as stainless steel and aluminium, and our operating margins may be reduced if we are unable to pass on the increased prices of such materials to our clients, through the pricing of our products. During the end of the financial year ended 30 September 2008 and the first few months of the financial year ended 30 September 2009, we were exposed to elevated market prices in raw materials used for the prod:Jction of HDD components. Consequently, we carried inventories at a higher cost during the downturn in 2008 as the demand for HDD components decreased. 5. RISK FACTORS (cont’d) Our gross profit margin for the financial years ended 30 September 2007, 2008 and 2009 was 13.2%, 14.1 % and 13.9%, respectively. We cannot assure you that future increases in the prices of our raw materials will not have an adverse effect on our gross profit margin. 5.1.5 Our operating results depend on optimising overall quality and costs of new and established products Several key attributes are important to our business, including quality, cost, service and price. If we fail to: • maintain overall quality of products on new and established programs;
• maintain competitive cost structures on new and established products;
• produce sufficient quantities of products at the capacities our customers demand while managing the integration of new and established technologies;
• develop and qualify new products on a timely basis that have changes in overall specifications or features that our customers may require for their business needs;
• obtain commitments from our customers to qu~!ify new products, redesigns of current products or new components in our existing products;
• maintain an adequate supply of sub-eomponents and iaw materials required to manufacture our products; or
• maintain the manufacturing capability to quickly change our product mix between different capacities, form factors and spin speeds in response to changes in customers’ product demands,

our operating results could be adversely affected. 5.1.6 A production delay in one of our manufacturing facilities could affect our production process Our manufacturing facilities are in different locations and each facility is responsible for different parts of the production process. In addition to our manufacturing facilities in Malaysia, we have manufacturing facilities in Thailand and are in the process of establishing manufacturing facilities in the PRe. As such, our operations may be affected by political, economic and social developments in the Asian countries in which we operate, which may result in production delays. If there is a production delay or capacity constraint in one of our manufacturing facilities, this may affect our production process and we may not be able to deliver the products to our customers in a timely manner. This could have a material adverse effect on our business and results of operations. 5. RISK FACTORS (cont’d) 5.1.7 We may not be able to effectively manage our anticipated growth and the expansion of our operations We have recently experienced a period of growth, which has placed, and will continue to place, significant demands on our management, operational, engineering and financial resources. There is a risk that the need to manufacture increasing volumes of products in order to meet large orders may affect our ability to deliver products on time. In particular, from time to time, our ability to deliver products on time is affected by the short lead time or unscheduled sudden increase in volume of products requested by our customers. If our Key Customers increase their orders with us, we may not be able to satisfy the product needs of our new customers, which may result in a loss of market share if our new customers decide to obtain its product requirements from other suppliers. Our ability to effectively manage growth and expansion· will also require us to continue to implement and improve our operational, financial and management information systems, and design and development processes, to train and manage our employees and to continue to develop, maintain and expand our supplier and customer relationships. We are in the process of expanding and setting up new manufacturing facilities in Malaysia, Thailand and the PRC. However, our ability to fully utilise the additional capacity provided by these new facilities is cClnstrained by our ability to hire the requisite number of employees. Any failure to manage our growth and the expansion of our operations effectively could have a material adverse effect on our financial condition. We are subject to various regulations (see Sections 7.23,7.24 and 7.25 of this Prospectus). 5.1.8 We are subject to risks related to product defects, which could render us liable to compensate our customers for expenses incurred in their product recalls, and could subject us to claims in excess of the price of our products or which are greater than anticipated We test our HDD mechanical components in our manufacturing facilities through a variety of means. However, there can be no assurance that our testing will reveal latent defects in our products, which may not become apparent until after our products have been delivered to our customers, or after assembly by our customers and sold into the market. Accordingly, there is a risk that product defects will occur, which would render us liable to replace such defective products or to compensate our customers for the value of the defective products. In extreme situations, product defects could require a product recall by our customers. Product recalls can be expensive to implement and, if a product recall by our cus~omer can be directly attributed to the defects in our products, our customers could require us to compensate them for any expenses incurred in such product recall, and could in addition damage our relationship with our customers, and may cause us to lose market share with our customers. [The rest of this page has been intentionally left blank] 5. RISK FACTORS (cont’d)
5.1.9 We may not maintain adequate insurance coverage We maintain all risks industrial insurance for our manufacturing facilities, equipment and inventories, public liability insurance for losses to others arising from our business operations and actions by our employees, burglary policy and workmen’s compensation insurance. Such insurance, however, contains exclusions and limitations on coverage. In addition, we do not maintain insLiiance for business interruption. Significant damage to any of our manufacturing facilities, whether as a result of fire or other causes, would disrupt our production and may require some time before we are able to restore our production capability. Any production delay could result in a loss of market share if our customers decide to obtain their product requirements from other suppliers. Accordingly, our insurance policies do not provide coverage for all losses related to our business, and the occurrence of losses, liabilities or damage not covered by such insurance policies could have a material adverse effect on our business, financial condition, results of operation and prospects. There can be no assurance that such insurance that we do carry will continue to be available, will be available at economically acceptable premiums or will be adequate to cover any resulting liability. Further, our customers may also require us to maintain insurance policies with coverage of a certain quantum which may be higher than the coverage we maintain. 5.1.10 We depend on our suppliers for raw materials and do not typically have long­term supply contracts with them We depend on our suppliers for raw materials. To maintain competitive manufacturing operations, we must obtain from our suppliers, in a timely manner, sufficient quantities of quality materials at acceptable prices. We obtain most of our materials, including aluminium and stainless steel, from a limited number of suppliers. We purchase all of our materials on a purchase order basis. We do not have long-term contracts with any of our suppliers. In the past, suppliers have flxtended lead times or limited the supply of required materials because of their capacity constraints. Consequently, from time to time, we have experienced difficulty obtaining quantities of raw materials needed on a timely basis. In addition, from time to time, we may reject materials that do not meet our quality specifications, resulting in declines in output. There can be no assurance that we will be able to obtain sufficient quantities of raw materials and other supplies of an acceptable quality. If our ability to obtain sufficient quantities of raw materials and other supplies in a timely manner is substantially diminished or if there are significant increases in the costs of raw materials, it could have a material adverse effect on our operations and financial condition. 5.1.11 If we cease to receive favourable tax treatment in Malaysia, Thailand and the PRC, we may be subject to tax liability that could significantly affect our financial condition Our Company has been granted the MSC status with effect from 12 January 2006 by the MDC pursuant to which our Company would be granted full income tax exemption on statutory income (which is income from our core manufacturing business) under the MITA. Our subsidiary, JCY HDD Malaysia, has also been granted full income tax exemption on statutory income under the MITA by MIDA. As a result of the tax exemptions enjoyed by our Company and JCY HDD Malaysia, we are not required to pay corporate income tax in Malaysia (currently 25%) on revenue generated from our manufacture of HDD mechanical components (see Section 13.2.5 of this Prospectus). Such tax incentives are due to expire on. 11 January 2011 and 31 March 2016, respectively. We intend to re-apply for such tax incentives when they expire. 5. RISK FACTORS (cant’d) We have also received an income tax exemption for our Thai subsidiary, JCY HOD Thailand, which entitles us to tax exemption on income from our manufacturing activities in Thailand, and a reduced rate of 10% withholding taxes in respect of dividend distributions. In respect of our manufacturing activities in the PRC, we also enjoy a tax-free period of two years from the date we register a profit, after which we will be entitled to a tax deduction of 50% for the next three years. As our PRC subsidiary, YK Technology Suzhou, registered a profit in 2008, the tax benefit that we enjoy in respect of our manufacturing activity in the PRC began in 2008 and will expire in December 2012. There can be no assurance that we will be able to meet conditions imposed pursuant to our tax incentives to maintain our tax benefits or that we will be successful in renewing our tax incentives once they expire. The loss of these tax benefits will increase our tax liabilities and could have a material adverse effect on our results of operations and financial condition. 5.1.12 We may not retain our MSC status or continue to enjoy the benefits available to companies conferred with MSC status Our Company has been granted MSC status with effect from 12 January 2006 by the MDC pursuant to which we enjoy certain financial and non-financial incentives (see Section 13.2.5 of this Prospectus). Presently, all companies conferred with MSC status enjoy financial and non-financial incentives, including an exemption from local ownership requirements. Our Company’s MSC status is subject to our continuous fulfilment of certain criteria, including continuing with our design and development activities in connection with our manufacturiPlg operations. MDC, the body responsible for monitoring all MSC designated companies, has the right to withdraw any company’s MSC status at any time if any of the conditions relating to the grant of the MSC status are breached. There can be no assurance that we can retain our MSC status or continue to enjoy the incentives available to companies conferred with MSC status. There is also no assurance that the incentives currently available to companies conferred with MSC status will not be changed or modified in any material manner in the future. Any loss of our Company’s MSC status or of any incentives currently enjoyed by us as a result of our Company’s MSC status, such as income tax exemption on statutory income, may materially affect our Group’s business, operating results and financial condition. 5.1.13 Environmental costs could have a material adverse effect on our operating results Our products may be subject to various· regulations governing the environment, including those restricting the presence of certain substances in electronic products and making producers of those products financially responsibl~ for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which our customers operate, including various EU member countries. For example, the EU has ~nacted the RoHS in Electrical and Electronic Equipment Directive. The RoHS prohibits the lIse of certain substances, including lead, in certain products, including HODs, put on the market after 1 July 2006. Similar legislation may De enacted in other locations where we manufacture or sell our products. We will need to ensure that we comply with such laws and regulations as they are enacted. If we fail to comply with such legislation on a timely basis, we may suffer actions from such regulatory authorities or our customers may refuse to purchase our products, which would have a materially adverse effect on our business, financial condition and results of operations. 5. RISK FACTORS (cont’d) We are also subject to environmental laws and regulations of Malaysia, Thailand and the PRC, where we have operations. From time to time there may be incidents of violations of environmental regulations (see Section 7.18 of this Prospectus). For example, JCY HDD Malaysia was charged under section 25(1) of the Environmental Quality Act, 1974 after the Department of Environment found that the chemical oxygen demand level in the water sample they collected from one of our manufacturing facilities was higher than allowed. This would be our second offence under this section. The maximum penalty is a fine of RM100,OOO or imprisonment for a period not exceeding five years or both. In our first offence, we paid a fine of RM10,OOO. In Thailand, the relevant authorities in the industrial park imposed a limit for waste discharge. Due to JCY HDD Thailand rapid expansion, it exceeded the quota and consequently, JCY HDD Thailand paid an additional fee or penalty fee of Thai Baht 151,317.53 (or approximately RM15,OOO), We could incur substantial costs in connection with our compliance with such environmental laws and regulations, and we could also be subject to governmental fines and liability to our customers if we were found to be in violation of these laws. If we have to make significant capital expenditure to comply with environmental laws, or if we are subject to significant capital expenses in connection with a violation of these laws, this may have a material adverse effect on our financial condition or operating results.
5.1.14 Specific Risks relating to our Subsidiary in the PRC Our subsidiary, YK Technology Suzhou, is incorporated in the PRC, and has its manufacturing operations in the PRC. It is accordingly subject to various risks in the PRC, including risks resulting from economic, political and legal developments in the PRC. In addition, our manufacturing facilities in the PRC have not been qualified by our customers and there is no assurance that such qualification will be obtained. The PRC economy has been transitioning from a planned economy to a more market-oriented e~onomy. The PRC government plays a significant role in regulating industry development by imposing industrial policies, and exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. The PRC legal system embodies uncertainties which could limit the legal protections available to you and us. YK Technology Suzhou is a WFOE, which is an enterprise incorporated in the mainland of the PRC and wholly-owned by foreign investors, and is subject to laws and regulations applicable to foreign investment in the mainland of the PRC in general and laws and regulations applicable to WFOEs in particular. These laws, regulations and legal requirements are constantly changing, and their interpretation is often not available to us and other foreign investors, including you. In addition, we cannot predict the effect of future developments in the PRC legal system including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the pre-emption of local regulations by national laws. Further, although we have been granted the right to use the land we occupy in Suzhou, the lease for the land has not been registered. As registration is required to perfect the lease, in the event that a third party has a duly registered lease over the same property, the right of such third party will prevail. There can be no assurance that any new laws enacted, or any changes to the existing laws or the interpretation or enforcement of such laws will not materially or adversely affect our business or operations. 5. RISK FACTORS (cont’d)
5.1.15 Specific Risks relating to our Subsidiary in Thailand Our subsidiary, JCY HOD Thailand, is incorporated in Thailand, and has its manufacturing operations in Thailand. It is accordingly subject to various risks in Thailand, including risks resulting from economic, political and legal developments in Thailand. Our business in Thailand may be affected by the political situation in Thailand, which has been unstable from time to time. Thailand’s government has frequently intervened in the Thai economy and has occasionally made significant changes in policy. The Thai government’s actions to control inflation have resulted in, among other things, wage and price controls, capital controls and limitations on imports. Our business and operations in Thailand are also subject to the changing and uncertain legal and regulatory framework for doing business in Thailand. Thai laws and regulations governing business entities may change and are often subject to a number of possibly conflicting interpretations, both by business entities and by Thai courts. These rules and requirements are often promulgated and overseen by different government entities or departments, which may be national, regional or municipal, and these entities may differ in their interpretation and enforcement of the rules. In addition, we have employees in Thailand, and Thai labour laws are highly protective of employees. Under Thai labour laws, we are generally prohibited from discharging employees without severance payments and/or compensation in the absence of gross misconduct, neglect, acts of dishonesty or serious violation of work rule and order. As such, we have limited measures at our disposal to reduce headcount in order to increase efficiencies, reduce costs or achieve similar objectives. Any changes to employment terms and conditions that diminish employees’ rights and benefits would require the consent of the employees. We have in the past and may in the future experience work stoppages in Thailand. In December 2009, our Thai employees went on strike to demand for additional welfare and bonus, resulting in a shutdown of our Thai facilities for one full operational day. This strike was settled amicably within the day, with us agreeing to some of our Thai employees’ terms and conditions, including a one month bonus payment. This strike. and any strikes that we may experience in the future affected and may affect our business, such as delays in our operations, disruptions to our production process and monetary compensation to our workers. Any changes in economic, political, legal and regulatory conditions or policies in Thailand could adversely affect the results of our operations. 5.1.16 Unexpected production interruptions may materially and adversely affect our financial condition and results of operations Our manufacturing processes depend upon a stable supply of electricity, water and natural gas, which are subject to unexpected supply interruptions. From time to time, we have experienced water and power shortages at our manufacturing facilities in Malaysia and Thailand and we may experience similar interruptions in the future. Our manufacturing facilities could also be adversely affected by events such as the breakdown of equipment, a fire at one of our facilities, difficulties or delays in obtaining spare parts and equipment, raw material shortages, power shortages and blackouts, fire, floods, natural disasters, civil disorders, industrial accidents and the need to comply with Government directives concerning matters such as hygiene, safety and environmental protection. In particular, our manufacturing processes involve producing molten aluminium, which relies on electricity and gas supplies. Any power cuts lasting long periods could result in the stoppage of our entire manufacturing processes at a plant. No assurance can be given that any material production interruption will not occur in the future or that such interruptions would not have a material adverse effect on our financial condition and results of operations. 5. RISK FACTORS (cont’d) There were only several occasions where the company experienced interruptions in electricity supply in its Malaysia and Thailand plants where the main switch board (MSB) broke down resulting in interruption to certain Malaysia plant for 1 to 3 days. A small fire at the roof also interrupted a small portion of the plant for about half a day. However, the majority of our past interruptions were resolved within the same day and our operations were only interrupted for a maximum of half a day during each occurrence. As the electricity supply interruptions were minimal, they did not result in any material impact on our results of operations. Further, from time to time we may also receive back-bills from our electricity suppliers. For example, JCY HDD Malaysia had recently received from Tenaga Nasional Berhad a back-bill relating to the electricity supplied to our manufacturing facilities in Penang in the amount of approximately RM8.4 million which JCY HDD Malaysia is in the process of resolving. The additional electricity charges were in respect of the electricity charges supposedly undercharged by Tenaga Nasional Berhad for the period from September 2007 to November 2009 due to the incorrect meter reading from electricity meters that were either defective or tampered. 5.1.17 We depend on our key personnel and skilled employees, as well as foreign labour primarily supplied by our sub-contractors Our success depends upon the continued contributions of our key personnel and skilled employees, many of whom would be difficult to replace. Worldwide competition for skilled employees in the HDD industry is intense. If we are unable to retain our existing key personnel or skilled employees, or hire and integrate new key personnel or skilled employees, our operations may be materially and adversely affected. In addition, the HDD industry is labour intensive and we may experience difficulty in attracting employees to work in our manufacturing facilities, especially if labour costs increases. To meet our manpower requirements, we are also dependent on foreign workers, who operate in our factories in Malaysia. As at 30 September 2009, approximately 68.9% of our total employees and contract workers are foreign workers. Such foreign workers are primarily engaged on a contract basis primarily through sub-contractors who assist in all relevant regulatory and other legal aspects of engaging foreign workers. If we are unable to obtain an adequate supply of foreign workers through our sub-contractors for any reason (including, for instance, as a result of a change in Government policy on foreign labour), our operations would be adversely affected. In addition, if any of our sub-contractors are in breach of any relevant immigration, work place relations or health and safety laws or regulations, this would affect our supply of foreign workers and may place us in breach of such laws or regulations. This would have a materially adverse effect on our results of operations and financial condition.
5.1.18 Our market is highly competitive and we may not be able to compete effectively We operate in markets that are highly competitive and subject to rapid change and that are significantly affected by new product introductions and other market activities of industry participants. The price of HDDs has fallen over time due to increases in supply, cost reductions, technological advances and price reductions by major market players seeking to liquidate excess inventories or attempting to gain market share. The prices of HDD mechanical components have correspondingly fallen in tandem with the price of HDDs. In addition, rapid technological changes often reduce the volume and profitability of sales of existing products and increase the risk of inventory obsolescence. In addition, we face potential competition from new entrants, including our current technology suppliers as well as competition from other companies that produce alternative storage technologies like flash memory. If competition persists and intensifies in the future, this may have a material adverse effect on our results of operations and financial condition. 47 5. RISK FACTORS (cont’d) Some of our current and potential competitors may have longer operating histories, lower operating costs, or greater financial, technical, marketing or other resources than we do and we cannot assure you that we will have the resources to compete successfully in the future. In addition, some of our competitors have the resources to enable them to adopt aggressive pricing policies to gain market share or to shift production to lower cost regions. If we are unable to compete successfully against our current and future competitors, we could experience profit margin reductions or loss of market share which could have a material adverse effect on our financial condition. 5.1.19 Our current or future competitors may gain a technology advantage or an advantageous cost structure that we cannot match and new competitive products could have better performance or lower cost structures than HDD products It may be possible for our current or future competitors to gain an advantage in product technology, manufacturing technology or process technology, which may allow them to offer products or services that have a significant advantage over the products and services that we offer. Advantages could be in capacity, performance, reliability, serviceability or other attributes. If we are unable to match these technology advantages due to the proprietary nature of the technology, limitations on process capability or other factors, we could be at a competitive disadvantage to those competitors. In addition, if our competitors are able to achieve a lower cost structure for manufacturing HOD mechanical components by moving manufacturing facilities to advantageous locations or through other restructuring activities and we are unable to match their cost structure, we could be at a competitive disadvantage to those competitors as they may be able to sell HOD mechanical components at lower prices while remaining profitable. Advances in magnetic, optical, semiconductor or other data storage technologies also could result in competitive products that have better performance or lower cost per unit of capacity than HOD products. High-speed semiconductor memory could compete with HOD products in the future. Semiconductor memory is much faster than magnetic HODs and flash memory, a non-volatile semiconductor memory has higher “read” performance than HODs. Flash memory could become competitive in the near future for applications requiring less storage capacity than that provided by HODs. SSD, a data storage device that uses solid-state memory to store persistent data, could become more competitive in the future as it has low access time for read operations, a high speed of random reading, low power consumption and is more resistant against vibration. If these products prove to be superior in performance or cost per unit of capacity as compared with HOD products, the HOD industry may suffer as a result. This would have a material adverse effect on our operations and financial results, given our role as a HOD mechanical components manufacturer. [fhe rest of this page has been intentionally left blank] 5. RISK FACTORS (cont’d) 5.1.20 Changes in the markets for HODs require us to develop new products and new technology The HDD industry changes from time to time with the introduction of new products and new technology. For example, some new multimedia devices, such as personal video recorders and digital video recorders, incorporate one or more HDDs, and may require attributes not currently offered in our products which have resulted in a need to expend capital to develop new interfaces, form factors, technical specifications or HDD features and to increase our overall operational expenses without corresponding incremental revenue at this stage. If we are not successful in using our existing technology and expertise in manufacturing HDD mechanical components to develop new products in response to our customers’ new product offerings for the emerging CE market or if we are required to incur significant costs in developing such products, it may have a material adverse effect on our operating results and financial condition. While we continue to develop new products and look to expand into other applications, the success of our new product introductions is dependent on a number of factors, including difficulties faced in manufacturing, requirements of our customers, effective management of inventory levels in line with anticipated product demand and the risk that our new products may have quality problems or other defects in the early stages of introduction that were not anticipated in the design of those products. If we fail to successfully develop and manufacture new products, our customers may decrease the amount of our products that they purchase, and we may lose business to our competitors who offer these products. 5.1.21 Not all the conditions attached to the land which we occupy and use are fUlly complied with . We are subject to conditions attached to the land which we occupy and use. If we are found to be in breach of any of these conditions, we may not be able to continue to occupy and use the land (see Annexure A -Summary of JCY Group’s landed properties). We cannot assure you that all the conditions attached to the land are fully complied with. In particular, we are occupying and using six plots of land located at Tebrau IV Industrial Area under 60-year leases granted by the landowner, Johor Corporation, which is a Johor state government agency. We have a factory building and office on each of these plots of land. The master title to the Tebrau IV lndustrial Area expressly requires the landowner to apply to the relevant state authority for a formal re­categorisation of land use within two years from the date of registration of the master title, failing which the land cannot be used or developed for any purpose. Pursuant to the Malaysian National Land Code 1965, the affected land shall become liable to forfeiture by the state authority upon the breach of any condition to which such land is subject. Despite Johor Corporation’s obligation to obtain separate titles t:> the plots of land under the lease agreements, we were informed that Johor Corporation had not obtained separate titles. or completed the conversion of the category of land use of the master title for four out of the six plots of land. [The rest of this page has been intentionally left blank] 5. RISK FACTORS (cant’d) We use the land at Tebrau IV Industrial Area which we lease from Johor Corporation at Tebrau IV Industrial Area for our manufacturing operations. As this land use is not in compliance with the express condition of the master title, there can be no assurance that the land will not become liable to forfeiture by the state authority. Further, certain land we own or occupy in Penang, Malaysia, impose requirements relating to the employment of Bumiputera. As we are not in compliance with these requirements, there can be no assurance that the land will not become liable to forfeiture by the state authority. Further, certain of our leases in Johor, Malaysia impose Bumiputera employment requirements and a breach of these requirements may lead to the termination of such leases. If any of the land is forfeited or any lease is terminated and we are forced to move our manufacturing facilities and operations, this would result in a material adverse effect on our results of operations and financial conditions. 5.1.22 The interests of our principal shareholder, YKY Investments, may differ from those of our Company Upon completion of the Listing, YKY Investments is expected to continue to own a majority of our Company’s Shares. As a result, YKY Investments will have the power to appoint a majority of our Directors and to direct the management and policies of our Company. YKY Investments is a private company limited by shares incorporated in the Bahamas. 100% of the shares in YKY Investments are currently held by UBS Nominees Ltd and Unihouse Nominees Ltd (“UBS Nominees”) on behalf of YK Yong. Prior to Listing, it is intended that UBS Nominees (as a nominee for YK Yong), will transfer the YKY Investments shares to YKY Trustees Pte Ltd (“YKY Trustees”). As a result, YKY Trustees will hold the YKY Investments shares under a revocable discretionary trust for the benefit of YK Yong and his named beneficiaries, which are currently his wife and his children. During YK Yong’s lifetime and where he is not suffering from any incapacity, YK Yong will retain the investment or asset management functions, responsibilities, powers or duties under the trust. Under the Listing Requirements, transactions between our Company and our principal shareholder, YKY Investments, are in certain circumstances, subject to the approval of our Company’s independent shareholders (see Section 11 of this Prospectus). The interests of YKY Investments may differ from those of our Company, and resulting transactions may be adverse to our Company. 5.2 Risks Relating to Our Shares 5.2.1 There has been no prior market for our Shares On 28 January 2010, approval was obtained from Bursa Securities to list our Shares on the Main Market. It is expected that our Shares will be admitted for trading on the Main Market on or about 25 February 2010. However, our Shares comprise existing securities for which there is currently no public market. There can be no assurance as to the liquidity of any market that may develop for our Shares, the ability of holders to sell their Shares or the prices at which holders would be able to sell their Shares. The Offer Shares could trade at prices that may be lower than the Institutional Price depending on many factors, including prevailing economic and financial conditions in Malaysia, our operating results and the markets for similar securities. Our Company, our Selling Shareholder, our Joint Global Co-ordinators, our Joint Bookrunners, our Joint Managing Underwriters and Underwriters, have no obligation to make a market for our Shares or to maintain the listing of our Shares on the Main Market. 5. RISK FACTORS (cont’d)
5.2.2 We may not be able to pay dividends to our shareholders We conduct substantially all of our operations through our subsidiaries. Accordingly, an important source of our income, and consequently an important factor in our ability to pay dividends on the Shares, is dividends and other distributions received from our subsidiaries, in particular JCY HDD Malaysia. Our subsidiaries’ ability to pay dividends or make other distributions to us are subject to their having sufficient funds and distributable profits which are not !leeded to fund their operations, other obligations or business plans. Further, as our Company is a shareholder of our operating companies, our claims as such will generally rank junior to all other creditors and claimants against our operating companies. In the event of an operating company’s liquidation, there may not be sufficient assets for our Company to recoup our investment. For a description of our dividend policy (see Section 12.3 of this Prospectus). 5.2.3 The sale or the possible sale of a substantial number of our Shares in the public market following the Offering could adversely affect the price of our Shares Following the sale of 530,210,000 Offer Shares pursuant to the IPO, 530,210,000 Shares, or approximately 25.9%, will be held by investors participating in the Offer for Sale, and the remaining Shares will be held by our existing shareholders before the Offer for Sale, option holders and certain other person,;;. The Shares will be tradable on the Main Market following Listing. If existing shareholders of our Company sell or are perceived as intending to sell a substantial amount of Shares, the market price for the Shares could be adversely affected. Apart from the lock-up arrangement as disclosed under Section 4.9.2 (i) and (ii), certain Directors and key management have also entered into a lock-up arrangement in respect of the Shares allocated to them under the Preferential ShClre Allocation Scheme and/or Shares to be transferred to them by YKY Investments prior to the completion of our IPO. 5.2.4 There may be a delay or failure in trading of the Shares, or a delay between settlement and trading of the Shares The occurrence of anyone or more of the following events may cause a delay in or cancellation of the listing of the Shares on the Main Market: (i) the identified investors under the Institutional Offering fail to subscribe for the portion of the Offer Shares allocated to them;
(ii) the Placement Managers or the Underwriters exercising their rights pursuant to the Placement Agreement, or Underwriting Agreement, as the case may be, discharge themselves from their obligations thereunder; or

(iii) our Company being unable to meet the pUblic spread requirement as determined by Bursa Securities, including a minimum of 1,000 public shareholders holding not less than 100 Shares each upon completion of the Offering and at the point of the Listing; or (iv) our Company is unable to obtain the approval of Bursa Securities for the Listing for whatever reason. 5. RISK FACTORS (cont’d)

 

5.2.5 Our Share price may be volatile Our Shares are to be listed on the Main Market. The performance of our Shares on Bursa Securities is affected by external factors such as the performance of regional and international stock exchanges and the inflow and outflow of foreign funds. Sentiments may also be affected by other external factors such as Malaysian economics and political conditions and overall market conditions as well as the growth potential of various sectors of the economy. The price of our Shares may fluctuate as a result of variations in our operating results. If the trading volume of our Shares is low, the price fluctuations may be exacerbated. Si’lce our prospects are linked with the HOD industry, the price of our Shares may rise and fall in tandem with announcements of competitive developments, acquisitions or strategic alliances within the HOD industry, involving us, our subsidiaries, our competitors, our customers or our customers’ competitors. The price of our Shares is also prone to ne’vs regarding the gain or loss of significant customers or key personnel, as well as changes in securities analysts’ recommendations or estimates of our financial results. There can be no assurance that the price of our Shares will not be subject to volatility or will not fall because of developments in our industry or for other reasons, which may adversely affect your investment in our Shares. 5.3 Other Risks 5.3.1 Political. economic and social developments in Malaysia and other Asian countries may adversely affect our Group As a substantial portion of our Group’s operating revenues are derived from activities in Asia, in particular Malaysia, Thailand and the PRC, our Group’s business, prospects, financial condition and results of operations may be adversely affected by political, economic and social developments in the Asian countries in which we operate. In mid-1997, following the substantial depreciation of the Baht, many countries in Asia, including Malaysia, experienced a significant economic downturn and related economic, financial and social difficulties. As a result of the decline in value of a number of the region’s currencies, many Asian governments and companies had difficulty in servicing foreign-currency denominated debt and many corporate customers defaulted on their debt repayments. As the economic crisis spread across the region, governments raised interest rates to defend weakening currencies, which adversely impacted domestic growth rates. In addition, liquidity was substantially reduced as foreign investors withdrew or reduced investment in the region and domestic banks restricted additional lending activity. The currency fluctuations, as well as higher interest rates and other factors, materially and adversely affected the economies of many countries in Asia. The global economy has suffered a decline since 2008 and it is difficult to predict the ongoing effects of the global economic downturn. A recurrence of similar adverse economic developments globally, particularly in Asia, could have a material adverse effect on Malaysia and its economy and consequently on our Group’s financial condition and results of operations. In addition, any other adverse change in trends or a general economic slowdown as a result of changes in labour costs, inflation, interest rates, taxation or other political or economic developments in the key markets in Asia in which our Group operates could materially affect the financial condition or results of operations of our Group and the ability of our Company to pay dividends on our Shares. 5. RISK FACTORS (cont’d) Any change in government policy or any political instability arising from these changes, may have a material adverse effect on our Group, its business, operations, financial condition and prospects. Furthermore, any changes in the composition of governments could result in a change in policies, inclUding with respect to the HDD industry in the Asian markets in which we operate, which may result in increasing competition and/or increasing regulation of our Group’s activities. Any change to the regulation of our Group’s HDD activities may have a material adverse effect on our Group’s business results of operations and financial condition. Other political and economic uncertainties include but are not limited to the risks of war, terrorism, riots, expropriation, nationalism, renegotiations or nullifications of existing contracts, changes in interest rates and methods of taxation. 5.3.2 The outbreak of an infectious disease in Asia may negatively impact our Group’s business, financial condition and results of operations Demand for much of our Group’s products may be affected by, among other things, the strength or weakness of the Malaysian economy as well as the economies of other Asian countries. An infectious disease outbreak in Malaysia or other parts of Asia could have a significant impact on the Malaysian economy as well as the economies of other Asian countries. The occurrence of severe acute respiratory syndrome or Influenza A H1 N1 virus in Malaysia or in other Asian countries, could lead to a decline in the Malaysian economy or the economies of other Asian countries, as the case may be, which may have a material adverse effect on our Group’s business, financial condition and results of operations. An epidemic or outbreak could also require quarantine and other safeguard measures resulting in temporary closures or work stoppages at our Group’s main office and branches, which may also have a material adverse effect on our Group’s business, financial condition anlj results of operations. 5.3.3 The Malaysian Ringgit may be subject to exchange rate fluctuations or further foreign exchange controls BNM has in the past intervened in the foreign exchange market to stabilise the Ringgit and has, on 2 September 1998, maintained a fixed exchange rate of RM3.80 to USD1.00. On 21 July 2005, BNM announced that the exchange rate of the Ringgit will be allowed to operate in a managed float. with its value being determined by various economic factors, BNM had stated that it would monitor the exchange rate against a currency basket to ensure that the exchange rate will not deviate significantly from the current exchange rate, which may result in significantly higher domestic interest rates, liquidity shortages or other exchange controls. However, there can be no assurance that BNM or the Government will, or would be able to, so intervene or maintain the exchange rate in the future or that any such intervention or fixed exchange rate would be effective. Substantially all our revenue, expenses and foreign currency denominated obligations are denominated in, or directly or indirectly linked to benchmarks denominated in, the U.S. dollar, while our reporting currency is denominated in Ringgit. Changes in the current exchange rate may result in significantly higher domestic interest rates, liqUidity shortages, capital or further exchange controls. While fluctuations in the RinggiUU.S. dollar exchange rate may not have a material impact on Ollr U.S. dollar denominated cash flow, it may have a material impact on the reporting of our revenue, expenses and foreign currency denominated obligations, as they are reqUired to be stated in Ringgit, as well as on financial and other covenants contained in our indebtedness that are based upon such reported revenue, expenses and obligations. 5. RISK FACTORS (cont’d) Furthermore, there can be no assurance that the Government will not impose more restrictive or other foreign exchange controls. Any imposition, variation or removal of exchange controls may lead to less independence in the Government’s conduct of its domestic monetary policy and increased exposure of the Malaysian economy to the potential risks and vulnerability of external developments in the international markets. Consequently, this may adversely affect the value of the Shares and the ability of shareholders to liquidate the Shares or repatriate the proceeds from the liquidation of such Shares out of Malaysia. [rhe rest of this page has been intentionally left blank]

 

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