3, RISK FACfORS 3, RISK FACfORS Before investing in Ollr Shares, you should pay particular attention to thc facl Ihat we, and \0 a large extent our activities, are subject to thc legal, regulatory and business environment in Malaysia. OUf business is subject 10 a number of faclors, many of which afC outside OUf control. Prior 10 making an investment decision, you should carefully consider, along with other matters in this Prospectus. thc risks and investment considerations set out below. The risks and investment considerations set out below afC not an exhaustive list of the challenges thai we currently face or that may develop in the fUlUrc. Additionltl risks, whether known or unknown, may in the future have a material adverse effect on us or OUf Shares. 3.1 DEI)ENDENCE ON MAJOR CUsrOMER An inherent characteristic of the semiconductor industry is that Ihe semiconductor manufacturers arc always developing new ICs continuously. Prior to thc commercialisation of 3 new semiconductor device, the semiconduClor manufacturers need to ensure that the new semiconductor package can be tested on a test handler. Without a suitable lest solution, no matter how good the device is. it cannot be commercialiscd as each device needs to be lested for functionality at the end of the process before reaching their customers. This is when the semiconductor manufacturers work closely with the test handler manufacturers to develop suitable test solution for specific packages. The test handler manufacturers, such as SRM, in turn. form a symbiotic relationship with specialist test probes and t~t sockets design and development companies, like our Group: to produce a tcst handler, with the customised test probes and solution to address thc requirements of the newly developed 10i. This relationship between the tesl handler manufacturers and the test probes and solution providelS allow both components of the industry to realise Ihe full benefits of specialisation., as the test handler manufacturers will be concerned with chip handling techniques which is to bring the newly developed ICs 10 be inspected and to the test sile to be tested, whereas the concentration of the tcst probe and te.<;t socket manufacturers will be: in areas such as mechanical, electrical and dimensional precision test solution reliability in line with Ihe exact configuration of the newly developed 10i. SRM is principally involved in the manufacturing of semiconductor testing equipments. SRM supplies high speed semiconductor test handler equipment to the semiconductor and electronics manufacturing industry and is now a world leader for tcst and inspection handlers with a global reach of sales and support offices in the US, Europe. China, Korea, Taiwan, the Philippines and Thailand (Sources: SRM’s filing reports with tile Companies Commission ofMafaysia and www.srm.com.my) SRM has historically contribuled more than 60% of our Group’s revenue, as sci out below, and is expected to contribute significantly to our Group’s revenue in the future: Four (4)-montb Finallcial Finandal Financial Financial finaocial year eoded yellr ended yur l:l1ded year ended period tftded 30 June 2004 30JUDC2005 30 June 2006 30 June 2001 31 October 2007 ” % ” ” ” Conlribution to Group’s revenue 67.28 77.18 86.15 73.51 76.%
There is no long-term contract between OUT Group and SRM. Therefore. the lack of long-term contract between our Group and SRM may exJXlsc our Group to the rh;k of failure in securing any future orders or secure substantially reduced orders from SRM, both of which may have a material adverse financial impact on our Group. Nonetheless, we recognise the said risk and are of the view that the said risk is mitigated by the following mitigating factors: <il as sc’ 0″ i, Scotio’ 15.6 of ‘hi, P””peeI”, IF Mio'” “‘” ,”,«cd ;”0 • P”,d’Li Supply Agreement dated 3 January 2007 with SRM in order for JF Micro to supply products like the 19 3. RISK FACfORS (Cont’d) test probes and tcst sockets 10 SRM for a period of three (3) years which is automatically renewable for another three (3) years upon expiry of the said period, if the Product Supply Agreement is not otherwise terminated; (ii) our Group’s strategy 10 collaborate with SRM will allow both companies to be at the forefront in Ie technology as well as provide SRM with a viable source for the consumable component in its test handlers. With the established business relationship between OUf Group and SRM over the past years resulting from good quality of our products and the ability of our Group to produce customised lest solutions for them, the possibility of the aoovementioned risks is mitigated; (iii) the existing users of SRM’s machines will still need to source the tcst probes directly from test probe manufacturers. i.e. our Group in the unlik.ely event that SRM does not supply the leSI probes. This is due to the fact thai the chip manufacturers who are cum:ntly utilising these Iypes of machines will still require a constant supply of customised lest probes in order to maintain its day-Io.-day operations. In addition, these test probes arc consumable and most of them arc customised and designed specifically for SRM’s machines. These form a natural mitigating factor on the sustainability of the business of our Group; (iv) we have embarked on R&D to diversify our product range and hence capture a wider customer base. Our Group launched a new range of product, namely Lasak™ pins, in December 2006. The product has been tested by some of the potential customers and lhe responses arc encouraging. 1be commercialisation of the aforesaid producl wiU enable our Group 10 caplUre wider customer base as this product is marketed to a different group of cuslomers. Besides, our Group plans to introduce new ranges of products over tbe next three
(3) years as sci OUI in SeClion 4.3.3 of this Prospectus; and
(v) we inlend to adopt more extensive markeling efforts, the details of which arc set out in Seclion
10.2.2 of this Prospectus. Whilst om Group will usc our best efforts in diversifying our Group’s customers base and hence revenue base. there can be no assurance Ihat the aforesaid efforts will be able to mitigate the risk arising from dependence on major customer.
3.2 RELIANCE ON SEMICONDUCTOR INDUSTRY Our business activities predominantly rely on the semiconductor industry, especially on the process of testing. The semiconductor industry has become increasingly cyclical, driven over the years by economic conditions and transitory technological advancement. Market growth and life eycles of end products have shortened, while technological advancements, characterised by greater integration complexities, the transition to submieron manufacturing and wider usc of complex SoC have had an evolulionary impact on tcsting requirements. Our Group seeks 10 minimise the risk of reliance on any particular industry for its earnings by continuing to emphasise on R&D activities. The Group believ(,’S IhM the: competitiveness of its products lies in its ability 10 keep abrea~ wilh the forefront of advanced electronics technology. The successful development of new products from its innovations has created demand of our Group’s products. and hence enabled our Group to achieve projected sales targe!.
3.3 TECHNOLOGICAL CHANGES Our Group operatcs in an environment where our operations arc exposed to risk of technological changes. The risks involved include the obsolescence of technology used and the ability of our Group to enhance our technological capabilities and respond 10 lechnological changes in manufacturing process in a cost effective and timely basis. 3. RISK FACTORS (Con/’d) Our R&D department plays a vital role to ensure the technologies developed by us arc in-line with thc tcchnological ctmnges. We always strive to improve existing and develop new products through intensive R&D programme. We arc confident that with our CQmmitmenl to R&D activities, our Group will able to kecp abreast with development in technology. 3.4 COMI’ETITION Even Ihough, as at the Latest Practicable Datc, we are a manufacturing company specialising solely in the manufacturing of cantilever type tesl probes in Malaysia. unlik.e lhe other manufacTuring companies which are also involved in other business activities, our Group faces competition from foreign imports which arc distributed locally. The impending trade liberalisation would not impact the business of our Group in view that the test probes impor1cd arc currently tax-exempt anyway. Despitc the apparem competition in Ihe industry, our Directors arc of the view that the high quality of products and services, price/cost advantage. strong R&D capabilities and long-term relationships with our suppliers and custOnlen> provide us with an edge over our competitors. In addition, we continuously strive to increase our marketing channels and product lines, as well as to emphasize on product differentiation and quality. While we are constantly improving our operations to remain competitive, no assurancc can be given that we will be able to maintain, or improve upon, our existing market position in the fulurc.
3.5 DEPENDENCE ON KEY PERSONNEL AND SKILLED PROFESSIONALS As with other bu.’iinesses, we believe that our continued success depends to a cer1ain extent upon the abilities and continued efforts of our existing Directors, key management and technical personnel. The loss of our Managing Director, Executive Directors and members of the key management and lechnical pcl’$Onnel could negatively affect our Group’s continued ability to manage the operations effcctively and competitively. Our Directors recognise the importance of our Group’s ability to attract and retain its key personnel. We have in place a human resource strategy, wh.ich includes proper hiring and promotion policics. We have also made continuous efforts to strategically develop a dynamic and strong managementtcarn and groom our personnel in assisting senior key personnel to operate and manage our activities. However, there can be no assurance that the above measures will be successful in retaining key personnel or cnsuring a smoolh tranSilion should changes o<:cur.
3.6 RISK OF EXPANSION INTO NEW MARKETS Our Group’s future results will substantially be dependent on market acceptance and ability of our new products developed and to be developed by us 10 meet the changing needs of the market. As set out in Section 10 of this Prospectus, we intend to venture into the manufacturing of fine pitch test probes for lead-free devices, pogo pins, lesl sockets and pogo pins for RF applications. However, under the present fast changing tcchnology and markct conditions, there is no assurance that our competitors will nol develop new products or technologies in the ncar future that may shorten the product life cycle of our Group’s new products or render them obsolete or no longer competitive in the markct placc. To mitigate the above and remain competitive, our Group will usc our best endeavours in carrying out R&D activities to develop and introduce new products in a timely manner in response 10 the fast changing market demand and custom!;r requirements. However, there clIn be no assurance that our Group will not be affected by the ncw products introduced by other players within the samc industry in which om Group operates. 3. RISK FACI’ORS (Conrd)
3.7 PROTECfION OF INTELLECTUAL PROPERTY RIGHTS The success of our Group is to an extent dependent on the protection of trademarks and patents on Inc core technologies that we have developed over the years, We have applied for the patent registration of the lechnoklgy employed by us and also applied for the trademark registration of brand names used by uS as sci out in Section 4.3.5 in this ProspCClUS. In addition, we intend to apply for registration of them in various jurisdiction. This will allow our Group to initiate legal proceedings against parties deemed to have infringed upon OUT Group’s proprietary rights. In addition, our Group has adopted necessary step 10 ensure that the technology used by our Group is restricted to and retained by the key personnel of our Group to avoid leakage of confidential information. which will affect the competitiveness of our Group. To furthe.r mitigate the risk, persons who have access to Ihese information are required to sign confidentiality and non-disclosure agreements whereby the)’ undertake not to disclose confidential information to third parties.. Notwithstanding the above. there can be no assurance Ihat others will nOI independently obtain access to our Group’s know-how or independently develop products or technologies similar to those of our Group, or thai we will necessarily be successful in the application for registration of ow property rights. However, existing patent, copyright. trademark, trade secret laws and other intellectual and industrial property laws do nOI afford unlimited prolection. In addition, apart from existing laws in Malaysia <:tnd those countries in which our Group carries on or intends to carryon business, remedies under such laws are subject to the vagaries of litigation. There can be no assurance that our Group will be able to protect our proprietary rights against unauthorised duplication of methods and application, any of which could nave a material adverse impact on our Group’s business.
3.8 AVAJlABILITY OF SKILLED HUMAN RESOURCES Tile manufacturing process of test probes involves a combination of automalion using advanced computerised machines and manual prOCe1;SCS in the final stcp, as it involves miniaturised component parts. These processes involve skilled workers. The performance of our Group may be jcopardiscd by the shortage of skilled workers and may suffer from production downtime, inferior product quality, failure in mccting delivery schedules and eventually loss of customers. As in any other iooustry, there is competition for high!y skilled workers. We recognise the imponance of a comprehensive human resource plan 10 stay ahead in tcchnological advancement. We subscribe 10 the belief of retaining knowledge and experience. In order to achieve an optimal retention rate among our staff and personnel, there is a series of both formal and informal onthe-job training to upgrade our staff wilhin the organisation for their internal growth opportunities. Notwithstanding the above, there can be no assurance that our Group will be able to continue to recruit and retain skilled human resources.
3.9 UNCERTAINTY IN THE BUSINESS DEVELOPMENT PLAN Our Group’s three (3)-year business development plan will be dependent amongst others, upon our Group’s ability to cnler into strategic marketing arrangemenlS on a timely basis and on favourable tenns, to successfully develop and commercialisc further applications of the tochnology via our R&D efforts, to hire and retain skilled manageme.nt, to obtain ade<juate financing as and when needed and to successfully monilor our business groWlh_ Although our management is experienced in this industry and always committed to the development of our Group, there can be 00 assurancc that our Group will be able to successfully implement our business development plan or that unanticipated expenses or problems or technical difficulties will not occur which would result in material delays in its implementation or even deviation from our original 3. RISK FACTORS (Cont’d) plans. In addition, the actual results may deviate from thc said plan due to rapid technological and market changes, as well as competitive pressures.
3.10 BORROWiNG RISKS AND RESTRlCfIVE COVENANTS Our total borrowings based as at the latest Practicable Date amounted to approximately RM5.0J million, all of which are domescic borrowings and interest-bearing. Plcase refer 10 Section 8.4 of this Prospectus for further information on our borrowings. As such, any additional borrowings and/or increase in interest rates may result in an increase in interest expense and affcct Ihe profitability of our Group. There can be no assurance thallhc interest rates will be maintained in the future and/or that any increase in our borrowings will not have a material effcct on the performance of our Group. Our credit facilities may also be subject 10 periodic revicw by Ihe blinks or financiers and contain certain covenants which may limit our operating and financial flexibility. Any act or omission by us Chat breaches such covenants may give rise to rights by the banks or financiers to terminate the relevant credit facilities and/or enforce any security granted in relation to those credit facilities. This may in tum cause a cross default of other credit facility agreements. These covenants are commonly contained in credit facility agreements in Malaysia. There can be no assurance that our performance will not be adversely affected should we breach such covenants of any of our facility agreement.
3.11 INVESTMENT RiSKS We may from time to time invest in new equipment or new ventures which wc believe to be beneficial to our business or is synergistic with our current operations. Although we excrcise prudence in our decision-making, lnere is always lhe potential risk thai the returns from these investments may have a longer payback period than expected or the investments may fail. Although we will mitigate our investment risks by excrcising due care in the evaluation of our investments., there can be no assurance that all our future investments will yield positive returns and would not have any adverse material effect on our future financial performance.
3.12 CONTROL BY PROMOTERS Upon completion of the Public Issue, our substantial shareholders, namely Foong Wei Kuong and Wang Mci Ling. who are the Promoters and our Managing Director and Executive Director respectively, will be collectively holding approximately 60.5% of our equity interest. They will emcrge as the largest shareholders of our Company. As StIch they will be able to control the outcome of certain mallcrs requiting the voles of our Company’s shareholders unless they are required to abstain from voting and deliberating by law and/or the relevant authorities. In compliance with the MMLR, our Company has appointed two (2) Independent Non-Executive Directors as a step towards good corporate governance to ensure that any futurc transactions involving related parties. if any. are entered inl0 on an arms-length basis. 3.[3 GENERAL ECONOMIC, POLITICAL. LEGISLATIVE Al’lD SOCIAL CONDITIONS As with any business, our business is nol impervious to advcrse developmenls in the economic, socioeconomic. political, legislative and social conditions both on the domestic and international front, and/or other countries which we have and/or may have (in future) business links. Any advcrse developments of such nature could malerially and advelSCly affect our business, operations and financial performance. The political. economic and social uncertainties include. but are not limited to. lhe changes in politicallcadcrsb.ip. war, global economic downlum, expropriation. nationalisation, and unfavourable change in Government policy and regulations. including changes in foreign exchange rates and methods, taxation and exchange control restrictions. Our business is also vulnerable to certain J. RISK FACTORS (Cont’d) risks inherent in the industry in which we operate. We may be affected by entry of new players, constraints in skilled labour supply and increase in labour costs, changes in law, tax legislation. business and credit conditions. We seck to mitigate these risks through prudent management policies, active R&D. securing and maintaining good business relationships with our customers and suppliers, expansion of our client base in the local market and effective human resource management. However, we cannot provide any assurance that our business and operations will not be adversely affected by any change in any of these environments.
3.14 INADEQUATE INSURAl’iCE COVERAGE We are aware of the unfavorable consequences arising from inadequate insurance coverage that could impair our business operations. In ensuring thaI such risks are minimised. we review and ensure adequate coverage for our assets on a continuOUS basis. A1 present, our Direclors arc of the opinion that wc are adequately insured against unforeseen events such as fire,theft and burglary. Although we have taken the necessary steps to mitigate the risk of firc hazards, theft and burglary, there can be no assurance that the insurance coverage would be adequate for the replacement cost of our assets or any resulting loss arising from the damage or loss of our assets.
3.15 PROFIT FORECAST This Prospectus contains a profit forecast of our Group thai is hased on assumptions. which our Directors believe to be reasonable, bul wtllch nevertheless is :iubjeclto uncertainties and is contingent in nature. Due to the inherent uncertainties of the profil forecast. and because events and circumstances frequently do not occur as expected, there can be no assurance that the profit forecast will be realised and actual results may be materially different from tOOs.c shown. You will be deemed to nlwe read and understood the assumptions for the profit forecast that are contained in this Prospectus. 3.16 NO PRIOR MARKET FOR OUR SHARES Prior to this IPO, there has been no public market for our Shares. The Issue Price of RM0.40 per Public Issue Share was determined after laking into consideration several factors. including but not limiled to, our financial and operating history and conditions, our future plans and prospects and the future prospects of the industry in which we operate, the proforma consolidated NTA per Share and the prevailing market conditions. The price at which our Shares would trade on the MESDAQ Market of Bursa Securities after the IPO may be influenced by a number of factors, including the liquidity of the market for our Shares, changes in securities analysts’ estimates of our financial results or recommendations and the perception of investors of us. Therefore, there can be no assurance that thc Issue Price will oorrespond 10 the price at which our Shares will trade on the MESDAQ Market of Bursa Securities upon or subsequent to our Listing, or thaI an active market for our Shares will develop and continue upon or subsequent to our Listing. The price at which our Shares will be haded may be higher or lower than Ihe Issue Price.
3.17 FORWARD-LOOKING STATEMENTS Certain statements in lhis Prospectus are based 00 historical data which may not be reflecti….e of the future results, and others are forward-looking in nature which are subject to uncertainties and contingencies. All forward-looking statements arc based on estimates and assumptions made by our Board, and although believed to be reasonable, arc 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 achievements expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements arc 3. RISK FACI’ORS (Cont’d) reasonable at this poiot in time, there can be no assuraoce that such expectations will prove to be co…… 3.18 DELAY OR FAILURE TO UST The occurrence of anyone (1) or more of the following events may cause a delay in or abortion of our listing: (i) the Underwriter exercising its rights under the Underwriting Agreemeot and discharging itself from its obligations tbereunder; (il) the identified investors fail to subscribe for the portion of the Public Issue Shares to be placed to them under the private placement; and (ill) we are unable 10 meet the public spread requirement, that is, at least 25% of the issued and paid-up share capitaJ of the Company be held by a minimum Dumber of 1,000 public shareholders (including employees). [n the event our Qunpany may nol be allowed 10 proceed with our Listing on the MESDAQ Market of Bursa Securities. monies paid in lUp<lCl of application for the Public Issue Shares will be returned in full withoul inleresl if the said permission for Usting is not granted six (6) weeks from Ihe date of issue of this Prospectus or such longer period as may be specified by lhe Sc. provided that our Company is notified by or on behalf of Bursa Securities wilrun the aforesaid timeframe. If any such monies are nol returned in full within fourteen (14) days after we become Liable to do so. then lhe provision of subsection 243(2) of the CMSA shall apply accordingly. Although our Directors will endeavour to ensure compliance by our Company of the various listing requirements, including, iDler-alia, the public spread requirement imposed by Bursa Securities for our successful Listing. 00 assurance can be gjven Ihat tbe abovementioned events wiU not occur and cause a delay in or abortion of our liMing. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK