Risk Factors

4. RISK FACTORS —_.__.._—–­4. RISK FACTORS —_.__.._—–­NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, BEFORE INVESTING IN OUR SHARES. If you are in any doubt as to the information contained in this section, you should consult your stockbroker, bank manager, solicitors, accountants or other professional adviser. RISKS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE (i) Dependence on our major customers We derive a significant portion of oW’ revenue from our major customers who collectivEly contributed approximately 41.25%,44.19%,37.64% and 71.18% of our total revenue for the FYE 31 Decemher 2010 to 2012 and FPE 30 June 2013 respectively, with B&Q China, one of our major customers contributing 41.25%, 24.84%, 13.40% and 11.82% of the respective revenue. The majority of OUf sales are on an order-by-order basis which is a nonn in the industry. Save for one (1) year to three (3) years agreements with an automatic extension to formalise the terms of our supply arrangement with three (3) home improvement retailers, including B&Q China, without commitment on the quantity to be supplied, we do not have fonnal long-tenn agreement with our customers. However, we have established good business relationships with our customers~ such as B&Q China whom we have remained as its sole authorised bamboo flooring supplier since our inception in 2004, through amongst others our consistent delivery of quality products and services. In addition, we are also widening our distribution network through the appointment of third party dealers, whereby these dealers will actively promote our products whilst we have to station our own sales personnd at the stores of the home improvemt:nt retailers such as B&Q China to activeiy promote our products. As at the LPD, we have 31 appointed dealers which are mainly located in the Guangdong province of China. The current concentration of our appointed dealers in the Guangdong province is due to our strategy to strengthen our foothold in this province’s market, the centre of our sales network, before expanding to other provinces in China. As at the LPD, we have not experienced any loss of major customers that have a material adverse effect on our financial performance. Nevertheless, there can be no assurance that our business relationships with our major customers will be maintained in the future or the order for our products from these customers will continue at the same levels. (ii) Disruption in supply and/or price fluctuation of bamboo materials Moso bamboo is the main material used in the manufacturing of our products, which accounted for more than 90% of our total cost of sales for the past three (3) rYE 31 Decemher 2010 to 2012 and FPE 30 June 2013. Our Moso bamboo materials are sourced within the Jiangxi province of China where our Ganzhou and Yanshan manufacturing facilities are located. However, bamboo cutters are not encouraged to harvest bamboo during the spring season, that is from January to March, to avoid potential damage to the growth of new bamboo or shoots during tlus season, As such, should we face a shortage of bamboo materials and our suppliers are unable to fulfil our requirements, our operations and financial performance could be adversely affected, However, as at the LPD, we have not faced any shortage of bamboo materials as we have capacity to stockpile sufficient quantities of bamboo materials for our requirements and/or pay deposits to our suppliers to secure our bamboo materials supply, if required, We have also established good business relationships with our major suppliers, the majority of whom we have been dealing with for more than four (4) years, and have not experienced any material disruption in the supply of bamboo materials from our suppliers nor any material increase in the price of bamboo materials. 4. RlSK FACTORS (Cont’d) In addition, we do not foresee any major difficulty in sourcing the required quantities of bamboo materials as Maso bamboo grow in abundance in the Jiangxi province and there are a number of bamboo cutters and/or distributors whom we can source from should the need arises. Nonetheless, there can be no assurance that we can continually source sufficient quantities of bamboo materials at competitive prices. (iii) Competition within our industry We operate in the bamboo flooring industry which is fragmented with approximately 200 bamboo manufacturers spread across China (Source: IMR Report). Thus, there can be no assurance that we will continue to be able to compete successfully with the other competitors and/or new entrants in the future Our success will depend on our ability to compete effectively against these competitors in tenus of amongst others, product quality, product range and customer service. In mitigating this risk, we intend to continue our focus on improving the quality of our existing products and accelerate the development of new products through R&D. We will also continue to widen our domestic distribution network through the appointment of third party dealers to increase awareness of our products and our brands and thereby, expand our business. Further, we have managed to diversify our customers to include the overseas market. For the FYE 31 December 20 I0 to 2012 and FPE 30 June 2013, our overseas sales accounted for approximately 50%, 44%, 49% and 20% respectively of our total revenue. Notwithstanding our strategies and future plans to increase our revenue as well as our portfolio of customers, there can be no assurance that changes in the competitive environment will not have a material adverse effect on our financial performance. (iv) Competition from substitute flooring products Bamboo flooring can be substituted with a variety of other flooring materials. Their closest subsiituies are other wood flooring types, including solid wood, engineered solid wood, laminate wood and cork flooring. Substitution and preference across various flooring materials are based on aesthetic and functional factors as well as price/cost requirements. However, it is anticipated that increasing awareness of the benefits of bamboo as a renewable source and substitute for other wood species will result in greater demand for bamboo flooring. (Source: IMR Report) As part of our efforts to increase demand for our products, we have launched twelve (12) serles of bamboo flooring, comprising both strand woven bamboo flooring and horizontal and vertieal bamboo flooring, with different features and/or aesthetics to cater for different consumer preferenees and requirements as well as different pricing to cater for different segments of the market. In addition, we are also exploring the production ofnew products to widen our product range, such as outdoor bamboo flooring, bamboo wall panelling and bamboo doors. Further, to complement bamboo as an environmentally friendly material, we are committed to ‘green’ operating practices, whereby our environment management system has been accredited as being ISO 1400 I :2004 compliant. However, there can be no assurance that consumer preferences will continue to trend towards environmentally friendly flooring materials or other more viable environmentally friendly flooring materials will not be developed. 4. RISK FACTORS (Collt’d) (v) R&D investments may not lead to snccessfnl sales of new or improved pl’Odocts OUf investments in R&D may not result in successful and saleable new or improved products. New or improved products that may appear to be promising in the early stages of R&D may fail to be commercialised for a variety of reasons, including changes in consumer trends. We intend to utilise approximately RM2.0 million of our IPa proceeds for our R&D collaboration with FRIM, as detailed in Section 6.6 of this Prospectus, to enable us to produce longer and/or higher bamboo products such as fumiture, doors, structural beams and other building materials. However, there can be no assurance that these bamboo products will be successfully launched. Unsuccessful R&D may have an adverse impact on our financial perfonnance as the expenses incurred on the R&D may have to be written off or sales of these bamboo products may be insufficient to cover the R&D expenses. (vi) Operational risks Our production are subject to operational risks including accidents, fire, theft, power shortage, unexpected failure or sub-standard perfonnance of our manufacturing equipment and natural disaster, which may adversely affect our operations. To mitigate the risks relating to accidents and fire, we ensure that our manufacturing facilities and warehouses meet all safety requirements imposed by the relevant authorities. In addition, we also provide trainings on safety requirements and proper use of our machineries to our production personnel. In mitigating the risk of unexpected machinery breakdowns, we conduct regular servicing of our machineries. In addition, our production team possesses a comprehensive understanding of our machineries, which enable them to monitor and regularly maintain our machineries, as well as the expertise to repair machinery breakdowns. However, there can be no assurance that such unexpected events would not occur or if occur, would not have a material adverse effect on our operations and financial perfonnance. We have also taken up insurance covering our property, plant and machineries as well as inventories, and regularly review the adequacy of existing insurance coverage for our assets. However, there can be no assurance that this coverage is sufficient to offset the potential liabilities and fmanciallosses relating to our operations. In the event that the amounts of such liabilities and losses exceed the insurance coverage of our policies, we may have to bear such liabilities and losses ourselves. There are also other risks such as natural disasters, riots, general strikes, acts of terrorism and other risks that cannot reasonably be insured against, which may adversely affect our operations and financial perfonuance. As at the LPD, we have not encountered any major accidents, fire, unexpected machinery breakdovro. and/or other unexpected events that have a material adverse effect on our operations. (vii) Brand protection We sell our finished products under our brands, ‘Kanger’ and ‘KAR Masterpiece’ as well as on OEM basis. Future sales of our products will depend in part on increasing brand recognition for our products and our ability to protect our brands from abuse by third parties which may affect our reputation and the goodwill associated with our brands. We are also reliant on our distributors to maintain the goodwill of our brands. Our Sales and Marketing Department are continuously undertaking marketing strategies to increase awareness of our products and our brands. However, there can be no assurance that our marketing strategies will remain effective or our brands will not be tarnished in any manner, including any negative publicity or perception, whether in the PRe or internationally, whether true or untrue, by us or any third party. As at the LPD, there has not been any negative publicity on our brands. 4. RISK FACTORS (Collt’d) ——_._——–­We have registered trademarks for OUf brands, ‘Kanger’ and ‘KAR Masterpiece’. As at the LPD, OUf trademarks are only registered in the PRe and hence, do not enjoy protection in other jurisdictions. As and when the need arises, we will consider to register our trademarks intemationally. If third parties infringe or challenge our intellectual property rights, our brands, reputation and financial performance may be adversely affected. As at the LPD, we do not have any knowledge of third parties infringing or challenging our intellectual property rights. However, there can be no assurance that OUf intellectual property rights will not be infringed upon, and that measures taken by us to protect OUf intellectual property rights through the trademark registration of our brands will be adequate to prevent brand infringement by others. (viii) Dependence 011 our Managing Director, key management and key technical personnel Our continued success will depend, to a large extent, on the abilities, experience and continued effort~ of our Managing Director, who has been instmmental in the development of our Group, as well as our key management and key technical persOlmel. The loss of any of our key personnel without suitable and timely replacements may adversely affect our continued ability to compete and grow in the industry. We strive to minimise this risk by ensuring that we have the ability to retain our existing employees. This is achieved by having in place human resource strategies and practices that includes suitable compensation packages and career development for our employees. Good working relationships have also been fostered amongst our employees as we provide a healthy working environment, practice good workplace culture and uphold good work ethics to create a sense of belonging amongst our employees. Nonetheless, there can be no assurance that the above measures will be successful in retaining our key management and key technical personnel or in ensuring a smooth transition should changes occur. (ix) Poiiticai, economic and reguiatory risks \)lie sell our products in both the PRC and overseas markets. Hence, any adverse development in the political, economic and regulatory environment in the countries involved may adversely affect our operations and financial perfonnance. These risks include but are not limited to changes in general economic and business conditions, government legislations and policies affecting our industry, inflation, fluctuations in foreign exchange rates and interest rates, political and social development, risks of war, expropriation, nationalisation, renegotiation or nullification of existing contracts, methods oftaxation and tax policy, and currency exchange controls. We will continue to adopt prudent management and precautionary measures but there can be no assurance that these measures are sufficient to address any future changes in the political, economic and regulatory environment in the countries involved. 4.2 RISKS RELATING TO THE PRC (i) Changes to the PRC environmelltallaws and regnlations Our PRC subsidiary companies are currently in compliance with the environmental laws and regulations in the PRC. However, environmental laws and regulations in the PRe have historically been subject to frequent changes. We are unable to predict the future costs or other future effects of environmental laws and regulations on our operations. Any changes to the relevant PRC environmental laws and regulations may impose more stringent compliance requirements which require us to incur additional costs in order to comply with such laws and regulations and hence, may adversely affect our operations and financial perfonnance. Any failure to comply with such new laws and regulations could also subject us to penalties, suspension or cessation of our operations) and therefore there is no assurance that our operations and financial perronnance would not be adversely affected. 4. RISK FACTORS (Com’d) (ii) Uncertainties in the PRC legal system The legal system in the PRC is based on the Constitution of China and is made up of, written laws, regulations, circulars and directives. The Chinese government is still in the process of developing the country’s legal system to meet the needs of investors and to encourage foreign investment. As the Chinese economy is undergoing development generally at a faster pace than their legal system, some degree of uncertainty exists in connection with whether and how existing laws and regulations will apply to certain events or circumstances. Precedents on the interpretation, implementation and enforcement of PRC laws and regulations are cun-enlly limited and the decisions of the PRC courts do not bind the same in subsequent cases. As a result, it may be difficult for us to predict the outcome of any disputes that we may be involved in the PRe. Even in cases where judgments are granted in our favour, we may be unable to enforce them if the party does not have the means to satisfy the judgment. In the event that we fail to obtain judgment or are unable to enforce judgments, we may not be able to recover the judgment debt, which we would have otherwise been entitled to. Accordingly, our operations and financial perfonnance may be affected. (iii) Changes in tbe economic, political and social conditions of tbe PRC Since 1978, the Chinese government has undergone various refonus of their economic systems. Such refonns have resulted in economic growth in the PRC in the last three (3) decades. However, many of the refonns are unprecedented or experimental and are expected to be refined and modified from time to time. Other political, economic and social factors may also lead to further adjustments to the refonn measures. This refinement and adjustment process may consequently have a material impact on our operations and/or financial perfonnance. Although the Chinese economy has enjoyed relatively good growth in the past and is expected to continue to grow in the future, there is no assurance that such growth will continue and our operations and financial perfonnance would not be affected. (iv) Increase in income tax or changes in income tax incentives of the PRC Pursuant to the Jiangxi Provincial Local Taxation Bureau’s support in certain areas such as the southern part of Ganzhou through revitalisation and development tax incentives and service measures Crr[§ ~~:l.ii!. 11 fjj,:%-fijJ 3′: tJ 5i: M’ 1fj,i¥J ~ JW ‘!’ :9c iJ). IZ jJi\ W .!Y: 1ft fjj, ~ll: 1ft l!! JJ& i’i’i fD ~li :%-mINi), our subsidiary company, Ganzhou Kanger was granted a preferential tax rate of 15% commencing from the FYE 31 December 2012, as compared to the prevailing statutory tax rate of 25%. Please refer to Section 12.l.l(ii) of this Prospectus for further details of Ganzhou Kanger’s preferential tax rate. However, there is no assurance that this tax incentive will not be revoked or changed in the future. If there is an increase in tax rates or changes in the tax incentive that we currently enjoy, we may incur higher income tax charges which will adversely affect our financial perfonnance. (v) Restrictions on dividends/payments from our PRC subsidiary companies SAFE regulates foreign exchange matters in the PRC, including the conversion of RM:B into foreign currencies, and vice versa. RMB conversions are regulated by the Regulations for Foreign Exchange Controls of the PRC (,!,i~ A f\’;~fD 1ll!J~1[‘1if.l’IU1kf70 and other relevant foreign exchange regulations (collectively “Forex Regulations”). 4. RISK FACTORS (Con/’d) According to the Forex Regulations, China-established foreign invested enterprises (“FIE”s) are reqnired to obtain Foreign Exchange Certificates for FIE OHlitJt’i:1t{E:Iil5Tr;l[‘l\’i2 ilE) (the “FIE Certificates”) from SAFE or its local counterpart so that they can open and operate foreign (non-RMB) currency bank accounts for the payment of: (a) Recurring items from the current account, including the distribution of dividends and profits to foreign investors of FIEs, subject to the presentation of board resolutions authorising the distribution; and
(b) Capital items from the capital account such as repatriation of capital, repayment of loan and for security investment.

Conversions in the current account can be effected freely whilst conversions in the capital account require approval from SAFE or its local countelpart. As a FIE, Ganzhon Kanger has obtained and will continue to maintain its FIE Certificate. As such. Ganzhou Kanger is able to convert its RlvIB profits into foreign currency and repatriate dividends to our Hong Kong snbsidiary company, HK Kanger and ultimately to our Company and shareholders.
Further, the funds raised could be repatriated and used in the PRC in the mallller set out in Section 3.6 of this Prospectus. The use of such funds in the PRC has to be in accordance with the relevant PRC
laws and regulations. The Chinese government may impose further restrictions or requirements on the conversion of R1vIB by Ganzhou Kanger for repatriation of dividends to our Company outside the PRC, or our Company re­investing in the PRe. As Ganzhon Kanger and its PRC snbsidiary companies currently generate all our profits and these profits are denominated in RlvIB, any future restrictions on currency exchanges may affect our ability to repatriate such profits for the distribution of dividends to our shareholders or for funding our other business activities outside the .PRe. Further, any future restrictions could aflect our ability to utilise funds raised ontside the PRC for use by Ganzhou Kanger and its PRC subsidiary companies.
According to the Foreign Exchange Regulation of Domestic Individuals and its implementation rules (1’A5Trj[‘El’J’I!;\;lftfj~I!lJilU), PRC resident individuals are required to obtain approval from SAFE or its local countelpart for purchase andlor remittance of foreign currency for their overseas investments as well as register their overseas investments under the capital account with the local branch of SAFE. Accordingly, prior to the completion of the Acquisition of HK Kanger, the PRC shareholders of HK Kanger, that is Leng Xingmin, Zhan Xinxia and Qiao Ning (collectively, PRC Shareholders) have filed an application for the registration of their investment in HK Kanger with the SAFE Ganzhon Branch. However, the SAFE Ganzhon Branch replied that the said application could not be accepted for the time being as there are no operational rules (J*{‘F~1!l JilIJ), that is guidelines detailing the procedures andlor penalty for non-compliance, issued by SAFE for the registration ofPRC individuals’ overseas investments. In the event that SAFE issues operational rules for the registration of individuals’ overseas investments and the PRC shareholders of our Company are required but fail to register their interests in 0UI’ Company, SAFE may limit the repatriation of dividends by andlor limit capital injections into Ganzhou Kanger. However, the exact fonn and quantum of penalty for non-compliance call1lot be ascertained at this juncture as the relevant operational rules have not been issued. Notwithstanding the above, we have obtained undertakings from the PRC Shareholders to register their investments in our Company with SAFE upon issuance of the relevant operational rules, if required. Guandong Grebright Law Finn, the Legal Adviser to our Company on PRC law, is of the opinion that in the event the said registration is reqnired, the risk of rejection of the application is ‘low’ as the PRC Shareholders had earlier sought
SAFE’s approval for their investment in HK Kanger. In addition, the application and interpretation of PRC laws in relation to the acquisitions of our PRC subsidiary companies by HK Kanger are disclosed in Section 5,4 of this Prospectus. 30 4. RISK FACTORS (Conl’d) (vi) Changes in PRe laws and regulations in respect of currency conversion The value of the RMB against foreign currencies is subject to changes in the Chinese government’s policies and international economic and political developments. The People’s Bank of China (“PROC”) annonnced on 19 June 2010 that it would gradually relax the peg between the RMB and a basket of currencies (primarily the USD). This is tbe resumption of a policy the PBOC had initiated in mid 2005 and suspended in mid 2008. An appreciation of the RMB will result in our products being more expensive to overseas customers and may reduce the demand for our products. However, our Board is of the opinion that a gradual appreciation of the RMB will have minimal impact on our revenue and profit margins derived from sales to overseas customers as we are 110t operating on a price war strategy but by differentiation of our products in terms of quality and features and/or aesthetics. Devaluation or depreciation of the RMB will affect the amount of dividends or other distributions received by our shareholders as well as any foreign CUITency obligations we may have. A revaluation or appreciation of the RMB on the other hand may affect the amount of funds that we receive in RMB from fund raising activities outside the PRC. There can be no assurance that there will not be any material and/or volatile fluctuations in the RMB, the occurrence of which may affect our ability to compete, our financial position, the amount of dividends/distributions our shareholders may receive, and the amount we may receive from fund raising activities outside the PRe. There is also no assurance that the RMB will not be subject to administrative or legislative intervention by the Chinese government or adverse market movements. (vii) Difficnlty in enforcing Malaysian judgement against us, OUI’ Managing Director and key management Our subsidiary companies, Ganzhou Kanger, Shenzhen Kanger and Yaushan Kanger are im;urpuralt’:u. in the PRC, and our main operations and assets are located in the PRe. In addition, our Managing Director and key management are PRC residents, and most of the assets of these persons are located outside Malaysia. As a result, it could be difficult for investors to effect service ofprocess if they wish to make a claim against our Company, Managing Director or key management, or to enforce a judgement obtained in Malaysia against our Company, :Managing Director or key management. (viii) Non-renewal or revocation of permits and business licences As a pre-requisite for carrying on our business in the PRe, we are required to obtain certain pennits and business licenses from various government authorities. Details of our permits, approvals and business licenses are set out in Section 6.11 of this Prospectus. As at the LPD, we have obtained all material pennits, approvals and business licenses for our operations. However, most of these permits, approvals and business licenses are subject to periodic inspection as well as fulfilment of conditions imposed by the relevant government authorities, where the standards of compliance required in relation thereto may from time to time be subject to changes. Revocation of our pennits, licences and certificates may result in our inability to CaITy on our business. In such an event, our operations and financial perfonnance may be adversely affected. In addition, it may be costly for us to comply with any subsequcnt modifications, additions or new restrictions to these compliance standards. Although our PRC subsidiary companies have not experienced any difficulty in obtaining and maintaining the requisite pennits and licences and we do not foresee any potential issues in renewing our existing permits and licences, there is no assurance that existing permits and licences will be renewed, or renewed within the anticipated timeframe, or that new pennits and licences required will be obtained in a timely manner. 4. RISK FACTORS (Cont’d) (ix) Potential liability for additional social contributions for our PRC employees Under the relevant PRe laws and regulations, our PRe subsidiary companies are required to make certain contributions for the benefit of all our PRC employees. Prior to September 2013, our PRC subsidiary companies, Ganzholl Kanger and Yanshan Kanger, have not made full contributions for some of our employees who did not want to make the required social contributions and have requested for their employees’ portion not to be deducted from their wages. As the employer’s portion can only be contributed together with the employee’s portion, we are not able to make the required social contributions for these employees. As such, we did not fully comply with the requirements under the relevant regulations. Pursuant to the Social Insurance Law of the PRC, where a company fails to apply for social insurance registration for its employees, the administrative department of social insurance may require the company to make the social insurance registration within a prescribed period. If the company fails to do so, it shall be imposed a tine ofbetween 100% and 300% of the payable social insurance premiums, and its principal and other personnel directly responsible shall be imposed a fme of not more than RMB3,000. Where a company fails to purchase social insurance for its employees, a penalty of 0.05% of payable social insurance per day will be imposed on the company, and an additional penalty of betweell 100% and 300% of payable social insurance will be imposed on the company if the company fails to purchase the payable social insurance within a prescribed period by the authority. Pursuant to the Regulation on the Administration ofHousing Accumulation Funds of the PRC, where a company does not open housing funds account for its employees, the authority may require the company to open the housing funds account within a prescribed period. If the company fails to do so, the authority may impose a penalty of RMBIO,OOO -RMB50,000 on the company. If the company fails to pay the housing funds, the authority may require the company to make full payment within a prescribed period. The outstandi.ng social insurallce ana nousing funds contributions amounted to approximately RMBI3,920, RMB208,656, RMB233,940 and RMB260,940 for the FYE 31 December 2010 to 2012 and FPE 30 June 2013 respectively. As at the LPD, the relevant authorities have not required our PRC subsidiary companies to make payments for the previous outstanding social contributions. However, there is no assurance that the relevant authorities will not require us to make payments for all previous outstanding social contributions and/or penalise us in the future. To mitigate this risk, we have obtained an undertaking from our Promoter, Leng Xingmin to indemnify us in full for all outstanding social contributions and/or penalty which may be imposed on us. (x) Negative publicity on PRC products Negative publicity on the quality and/or safety of products made in the PRC, whether with or without merit, relating to our industry or otherwise, may affect consumers’ confidence in general, which in tum may affect the demaud for our products as consumers may decide to purchase products made in other countries as opposed to PRC products as a general precaution. To mitigate this risk, we ensure that the materials used in our production are environmentally friendly and meet the relevant regulatory standards. In addition, we have also obtained CE marking for our products in recognition of their compliance with the European Union legislation as well as the ISO 14001 :2004 for our environment management system. However, there can be no assurance that any negative publicity on PRC products would not affect the demand for our products and thereby, our business and financial perfonnance. 4. RISK FACTORS (Cont’d) (xi) Changes in PRC labour laws On 29 .Tuue 2007, the Chinese govemment introdnced a labour law namely, the Labour Contract Law of the PRC (tpif’.A~~OfO[;g;;ii!Jr5[O]ji\;) (“New Labour Law”) which came into effect on I .Tanuary 2008. The New Labour Law imposes greater liability on employers and significantly impacts the costs of an employer’s decision to reduce its workforce. If we decide to significantly change or decrease our workforce in the PRe, the New Labour Law could adversely affect our ability to enact such changes in a maImer that is advantages to our circumstances or in a timely and CDst effective manner. Further) any future introduction of new laws and regulations may result in increases to our labour costs and hence, adversely affect our financial perfonnance. (xii) Unauthorized actions by our legal representatives According to the General Principles of the Civil Law of the PRC, a legal representative of a company is empowered to act on behalf of the company in accordance with the PRC law and its articles of association. Notwithstanding this, our PRe subsidiary companies may still be held accountable even for unauthorized actions of our legal representative. To set forth the limits of the authority of our legal representative which in tunl mitigates the risk of unauthorized actions by our legal representative, we have filed our PRC subsidiary companies’ articles of association and related corporate documents with the SAlC which set forth the particular powers of the executive director, our legal representative of the PRC companies. (xiii) Audit of PRC compauies For purposes of statutory filings in China, the financial statements of our PRC subsidiary companies can only be audited by PRC auditors who have the knowledge and/or experience to ensure that the financial statements are in compliance with the requirements of the PRC accounting standards. Differences in accounting treatments with our Company’s financial statements may arise due to the different requirements of the MalaYSlaIl accounting standards. To mitigate this risk, we will appoint the PRC affiliates of our Malaysian auditors to facilitate our Malaysian auditors in ensuring the financial statements of our PRC subsidiary companies are in compliance with Malaysian Financial Reporting Standards (“MFRS”) for purposes of preparation of our Company’s andited consolidated financial statements. 4.3 RISKS RELATING TO OUR fNTERMEDlATE HOLDfNG COMPANY BEfNG fNCORPORATED fN HONG KONG (i) Political and economic nncertainties in Houg Kong Notwithstanding that our business is predominantly based in China, we are still subject to the political and economic uncertainties in Hong Kong in which our subsidiary company, HK Kanger is incorporated. Such political and economic uncertainties include but are not limited to government fiscal and monetary policies, risks of war, expropriation, nationalism, methods of taxation and tax policy, and currency exchange controls. Further, changes in tax laws or other regulatory actions taken by the Hong Kong government may affect or restrict the repatriation of profits or capital out of Hong Kong to our Company. (ii) Potential liability for late fIling of statutory forms and/or failure to attach the auditors’ report during the Annual General Meeting (“AGM”) Our Hong Kong subsidiary company, HK Kanger increased its authorised share capital on 24 October 2012 and 29 October 2012 respectively. Under Section 55 of the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) (“Ordinance”), any increase in authorised share capital of a company reqnires the filing of a notice with the Companies Registry of Hong Kong (“Companies Registry”) within 15 days after the increase took effect. However, the notices were filed late by HK Kanger on 22 November 2012 and 29 November 2012 respectively. Notwithstanding that the late filing of a notice 4. RISK FACTORS (Cont’d) ————–_….–_…._—–­does not affect the validity of the above increases in authorised share capital of HK Kanger, under the Ordinance, HK Kanger and every officer of HK Kanger who is in default for such late filing may be prosecuted and, if convicted, shall be liable to a fine of maximum ofHKD10,000 and, for continued default, to a daily fine of HKD300. The aggregate amount of the potential fine for both late filings is estimated to be approximately HKD29,000.
Under Section 45 of the Ordinance, whenever a company makes any allotment of its shares, the company shall file a return of the allotment with the Companies Registry, and in the case of shares allotted as fully paid up on a capitalisation, the company is required to deliver a copy of the resolution authorising the allotment to the Companies Registry, both within one (I) month after the allotment. However, the retum of allotments in respect of the allotment of shares for cash on 29 October 2012 and the resolutions for the allotment of shares pursuant to a capitalisation on 24 October 2012 and 29 October 2012 respectively were only filed by HK Kanger on 28 December 2012. Therefore, under the Ordinance, HK Kanger and every officer of HK Kanger who is in default for the aforesaid late filings may be prosecuted and, if convicted, liable to a fine of maximum HKD50,OOO and, for continued default, to a daily fine of HKD700. The aggregate amount of the potcntial fme for the aforesaid late filings is estimated to be approximately HKD214,400. Additionally, under Section 129C(I) of the Ordinance, the profit and loss account laid before a company in general meeting shall be annexed to the balancc sheet, and the auditors’ report shall be attached thereto. However, the auditors’ report dated 15 January 2013 (“Auditors’ Report”) was not attached to the profit and loss account (“Acconnts”) presented at the 2012 AGM of HK Kanger. HK Kanger and every officer of HK Kanger who is in default for failing to attach the Auditors’ Report to the Accounts may be prosecuted, and if convicted, shall be liable to a fme ofHKDI50,000. The above unintended and inadvertent breaches of the Ordinance were mainly due to HK Kanger not having a designated person to deal with its secretarial matters and not being aware of the specific requirements of the Ordinance during the material period.
As at the LPD, there has not been any prosecution initiated against HK Kanger, nor has it been subject to any fme relating to the above late filings and/or failure to attach the Auditors’ Report to the Accounts at the 2012 AGM. However, there is no assurance that the Companies Registry will not take
action against HK Kanger in the future in respect of any of the above. To mitigate this risk, HK Kanger have obtained an undertaking from our Promoter, Leng Xingmin to indemnify the company, excluding the officers of the company, in full for any fine which may be
imposed on us and/or loss arising in relation to the above late filings and/or failure to attach the Auditors’ Report to the Accounts at the 2012 AGM. Further, we have set up a compliance team, comprising our Group Chief Financial Officer, Zhan Xiuxia and our Group Administration and Human Resource Manager, Kuang Wangchun, who will strictly monitor the timeline for all required filings and/or attaclunent of reports to ensure compliance with the Ordinance and report directly to our Board on the required compliance in future.

(iii) Fluctuations in exchange rates The dividends from our PRC subsidiary companies, through Ganzhou Kanger, will be repatriated via our intelmediate holding company, HK Kanger. Although the Hong Kong government does not impose any foreign exchange controls, the dividends may be affected by fluctuations of the HKD against the RMB and/or RM. There can be no assurance that there will not be any material and/or volatile fluctuations in the HKD, the occurrence of which may affect the amount of dividends/distributions our shareholders may receive. There is also no assurance that the HKD will not be subject to administrative or legislative intervention by the Hong Kong government or adverse market movements in future.

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