5. RISK FACTORS We are exposed to a number of possible risks that may arise from economic, business, market and financial factors and developments, which may have an adverse impact on the financial performance of our Group and/or our share price performance. You should carefully consider the risks and investment considerations set out below along with the other matters in this Prospectus before you make your investment decision. The risks and investment considerations set out below are not an exhaustive list of the challenges that we currently face or that may develop in the future. These and other risks, whether known or unknown, may have a material adverse effect on the financial performance of our Group and/or our share price. Risks relating to our business operations (i) We are subject to the fluctuations in prices of raw materials The common raw materials we use include Pre-vulcanised latex, silicone oil, foil, boxes and carton boxes. For the FYE 2013, our main raw material was Prevulcanised latex. For more details on the major types of raw materials that we purchased for our manufacturing operations, please refer to Section 7.12 of this Prospectus. Pre-vulcanised latex, key for manufacturing of our condoms, is produced from latex concentrate which in turn is an internationally traded commodity, where its price is subject to demand and supply forces. Sen/kg 1,200.00 ,———–.——.—.—.—-.—-.——1,000.00 +—————+\”‘-\800.00 +——-.——–§l——-“r–;;;;;;;:—–.–600.00 400.00 i——-\…….”-“”‘~”——200.00 0.00
The prices of latex concentrate experienced high volatility in the market between January 2008 and JUly 2013. Owing to the efficiency of the global market place, any volatility in the prices of latex concentrate are quickly translated along the supply chain, affecting the cost of condom manufacturing. This contributes to the uncertainty in the costs of condom manufacturing. In turn, this impacts the manufacturing and marketing planning processes of condom manufacturers. In the first seven (7) months of 2013, the average prices of latex concentrate declined by 18.5% over the corresponding period of 2012, due to the health of the global automotive industry, as natural rubber is the primary input for tyres. The tyre industry accounts for approximately 70% of global natural rubber consumption. Global economic weakness, due to the eurozone sovereign debt crisis, has prompted anticipation of slower automotive sales growth. This has, in turn, lead to expectations of poorer tyre sales and a corresponding decline in natural rubber demand. 32 5. RISK FACTORS (Cont’d) The outlook for the latex concentrate market remains uncertain as external factors continue to playa major role in determining prices. The market is expected to be impacted by concerns over the eurozone sovereign debt crisis, the Chinese and global economies, as well as the vagaries of the weather that lead to floods in the natural rubber producing countries. (Source: Infobusiness Research) Our average raw material cost comprise approximately 69.6% of our cost of sales for the past four (4) FYEs, any fluctuation of raw material costs will have an impact on our profit margin. Any increase in raw material prices will result in lower gross profit and vice versa on the assumption of constant product selling price. To mitigate the fluctuations in raw material pricing, we work closely with our customers in planning their respective manufacturing forecasts to map out our manufacturing schedules so that we may determine a more accurate supply forecast and plan our purchases accordingly. Notwithstanding above, there can be no assurance that any increase in the price of raw materials will not adversely affect our business performance. Please refer to Sections 13.2.2(i) and 13.2.3 of this Prospectus for details of the impact of raw materials prices on our Group. (ii) We are exposed to foreign currency risks For the FYE 2013, 91.2% of our total revenue was denominated and transacted in foreign currencies (mainly in USD). Most of our purchases were denominated in the local currencies of our operations, Le. RM and THB. Our net gains and losses in foreign exchange translation for the FYE 2010, FYE 2011, FYE 2012 and FYE 2013 are shown below: FYE 2010 FYE 2011 FYE 2012 FYE 2013 (RM’OOO) (RM’OOO) (RM’OOO) (RM’OOO) Realised (2,654) (37) 1,229 (1,508) Unrealised (1,527) 328 1,568 1,398 Total (4,181) 291 2,797 . (110)
To mitigate foreign currency risk, our Group entered into various foreign exchange forward contracts with banking institutions to sell foreign currencies at agreed prices for fixed periods of time during the FYE 2010 to FYE 2013. Our foreign exchange forward contracts were for converting sales receipts denominated in foreign currencies to RM and THB. We also maintain accounts in USD, GBP and Euro for business transacted in foreign currencies. These foreign currency accounts are later used to make payments in the respective foreign currencies incurred in our business, thus forming a natural hedge to minimise our foreign currency exchange risk exposure. Furthermore, we enter into foreign exchange forward contracts in relation to USD for hedging purposes. In addition, we constantly monitor our foreign currency exchange risk exposure and will hedge as and when we consider necessary. Going forward, our Group will continue to enter into foreign exchange forward contracts to hedge a majority of our net exposure. 33 5. RISK FACTORS (Cont’d) Notwithstanding the above measures in place to minimise our foreign currency exchange risk exposure, any significant currency fluctuation such as the continued strengthening of the RM and/or THB against the USD, GBP and Euro, may materially and adversely impact our financial performance. Please refer to Sections 13.2.4 and 13.2.5 of this Prospectus for details of foreign exchange gains and losses incurred by our Group for the past four (4) FYEs. (iii) We are dependent on major suppliers Our business relies on our major suppliers, such as Revertex and Getahindus from Malaysia, which represented 25.3% and 17.5% respectively of our Group’s total purchases for the FYE 2013. We have maintained business relationships with Revertex and Getahindus for the last 24 years and five (5) years respectively. Nevertheless, our dependency on a single supplier for Pre-vulcanised latex is mitigated by the availability of alternative sources. MPIB has been our reliable supplier for packaging foil for the last 17 years. Our reliance on MPIB is mitigated as we can source packaging foil from other local suppliers. To date, our current suppliers have been reliable and were able to supply to us with sufficient raw materials in a timely manner. There are no interruptions of raw materials supply to our Group for the FYE 2010 to FYE 2013. There can be no assurance that we will be able to continue to obtain sufficient supply of raw materials in a timely manner from our existing suppliers. A reduction in the supply of any main raw material may lead to an increase in costs or result in disruptions to our manufacturing operations schedule. For more information on our major suppliers, please refer to Section 7.13 of this Prospectus. (iv) The financial and operational conditions and the overall profitability of our Group will depend on the continued employment and performance of our Directors and key employees (both management and personnel) Our future performance depends to a significant extent on the expertise, experience and continued efforts of our Directors and key employees. This is one of our Group’s key success factors and the loss of the services of our Directors and key employees could materially affect our Group’s operations. We believe that our success largely dependent on good management succession planning and our ability to continue to attract, motivate and retain qualified and skilled personnel. To ensure smooth succession planning at the middle level, we train and groom younger members of our management team to gradually take on greater responsibilities. As part of our Group’s human resource planning, our staff are required to undergo training programmes consisting mandatory training (on-the-job and ISO certification training) as well as selective intermediate and advanced training. Trainings are mostly conducted in-house with the exception of selective intermediate and advanced trainings which are conducted by third (3rd) parties. These include conferences and seminars that highlight new developments and progress in the field of standards and regulatory requirements. By exposing our employees to these conferences and seminars, we equip our personnel with the knowledge and knowhow to grow our Group’s business as well as to enhance their career progression capabilities. 34 5. RISK FACTORS (Cont’d) We recognise the importance of attracting and retaining our Directors and key employees and have put in place competitive remuneration packages. In addition, our Group has also set aside a portion of the Issue Shares to eligible Directors and employees of our Group in order to provide an opportunity for them to participate in the continuing growth of our Group by way of equity participation as well as to instill loyalty amongst them. Over the years, our Group has been able to retain our Directors and most of the key employees as a result of the aforementioned. This coupled with the cordial relationship between us have ensure the Directors’ and key employees’ continued employment and performance in our Group. NotWithstanding the above, there can be no assurance that the above measures will be successful in retaining our Directors and key employees (both management and personnel). (v) We are dependent on foreign labour Our operations in Malaysia are dependent on the supply of foreign labour. As at the LPD, approximately 60.5% of our employees are foreign workers mainly from Myanmar, Nepal and Vietnam. Therefore, inadequate supply of labour as well as any policy revision in respect of foreign workers may disrupt our manufacturing process. As part of our effort to reduce our dependency on manual labour, we have increased the usage of automated ET machines in our manufacturing flow. In addition, we work closely with our recruitment agencies for the recruitment and renewal of work permits for the foreign workers. To date, we have not experienced any acute shortage in the supply of labour for our operations nor were there any interruptions in our operations during the past 12 months due to an acute shortage of foreign labour. For the FYE 2012, there was a delay of new foreign workers’ arrival to replace the expiring foreign workers during the 6P programme (process of legalising illegal foreign workers) initiated by the Government of Malaysia. The Malaysian government has introduced a minimum wage policy of RI’v1900 per month for the Peninsular Malaysia that came into effect on 1 January 2013. However, this revision to the wages is not material and is minimal to our manufacturing cost. (Vi) We are exposed to operational risk Any failure in our internal processes, people or systems may result in losses in manufacturing, revenue and our reputation. Our processes are designed so that each and every condom manufactured will go through a series of in-process testing to ensure the final product meets international standards. We continue to monitor and improve our processes to minimise the occurrence of operational failures. In addition, our testing machines are recalibrated at set intervals and samples are taken at random to be analysed and tested further. The entire batch of condoms will be rejected and scrapped if any discrepancies are found. We have not faced any material losses due to operational risks in the past as we have been conducting regular maintenance and inspections to our machineries as well as trainings for the responsible personnel. We are also in the process of increasing the usage of automated ET machines to reduce human error while, at the same time, increase our rate of manufacturing. Regardless, total elimination of operational risk is not possible and we may be susceptible to failures in operations. 35 5. RISK FACTORS (Cont’d) (vii) We are exposed to unexpected and uncontrollable events Our Group is susceptible to risks due to uncontrollable external factors such as outbreak of fire and floods, explosion, energy crisis, sabotage, civil commotion and other calamity which may cause significant losses or damage to our products, manufacturing facilities, warehouse and office, thus disrupting and affecting our business operations. We are also aware of the adverse consequences arising from inadequate insurance coverage for accidents and outbreaks of fire which could disrupt our business operations. To mitigate this risk, we have taken up necessary insurance covering our Group’s premises, fixed assets as well as personal injury insurance covering our employees. For the past four (4) FYEs, our business operations are not affected by unexpected and uncontrollable events. However, there is no assurance that this coverage will be sufficient to cover all potential losses and to indemnify our Group against all possible liabilities arising from operations disruption. 5.2 Risks relating to our industry (i) The global condom industry is highly competitive We have and will continue to face competition from existing competitors and potential new market entrants. Well established international condom manufacturers in particular may have greater financial resources, similar fundamentals and capabilities to compete with us on cost, reliability, quality, time-to-market and capacity. However, we believe that we set ourselves apart from many of our competitors by offering the following: (a) Our Group’s market reputation and position as the world’s largest condom manufacturer in terms of annual manufacturing capacity;
(b) Extensive product mix. We offer condoms in various flavours, colours and textures to suit the needs and specifications of our customers. This allows us to expand our coverage across a much wider market segment;
(c) Manufacturing flexibility. Our manufacturing capacity allows us to accommodate both small or large manufacturing batches and urgent orders; and
(d) Against international competitors, we may leverage on Malaysia’s reputation as the world’s leading manufacturer of latex products.
Due to the key reasons above and because of our reputation, the flexibility, diversity of our market coverage and our international distribution network, we have a potentially wider customer base. We will also continue to take other pro-active measures to mitigate competition risks, including continuous reviews of our development and market strategies in response to market demand. Despite the highly competitive global condom industry, our Group’s revenue has been on an increasing trend annually as a result of the increased sales of condoms for the past four (4) FYEs. 5. RISK FACTORS (Cont’d) Notwithstanding the above, there is no assurance that the financial and operational conditions and the overall profitability of our Group will not be affected by competition from other players in the industry. (ii) The lack of long term contracts In general, our Group does not enter into long-term contracts with our customers. Our business is normally transacted via purchase orders, which is commonplace practice in the industry. Despite this, we have built an established track record and credible name in the industry throughout our 25 years of experience with our customers. As a result, we have a continuous flow of orders for our products from some of our major customers. Despite not having long term contracts with them, 60% of our top 10 customers in the FYE 2013 have had more than six (6) years of business relationship with us. Furthermore, our Group’s geographical reach in exports is a testimony to our Group’s product acceptance in the global condom industry. The lack of long term contracts does not have significant impact on our Group’s financial and operational conditions as well as our long term overall profitability as evidenced by the increase in our Group’s revenue. Notwithstanding the above, there can be no assurance that the absence of any longterm contracts with our customers will not have an adverse effect on the financial and operational conditions and the overall profitability of our Group in the long term. For further details on our major customers, please refer to Section 7.11 of this Prospectus. (iii) We are exposed to product liability risk Our products, namely condoms, may from time to time be subjected to customers’ complaints. As a result, we may face an inherent risk of exposure to product liability claims. Also, any product liability claims or allegations made against us, regardless of the authenticity and validity, would have a negative impact on our Group’s credibility and reputation. We are a manufacturer of condoms and do not have direct contact with consumers. As such, insurance coverage in relation to product liability (including claims of damages by consumers) is covered by our customers (distributors). Nevertheless, we may still be subject to the cost of recalling and replacing the defective batches of our products should they be found to be out of specification during our customers’ preshipment inspections or throughout the shelf life of our products. To minimise product liability risk, our Group has implemented stringent QA procedures (as disclosed in Section 7.8 of this Prospectus). In addition, all our tender market orders are subject to independent third (3rd ) party laboratory tests. These tests will be used to authenticate any complaints received. We are also in constant discussion with our customers to ensure that their requirements are fUlly understood and addressed. We are not subject to any product liability claims during the FYE 2010 up to the LPD. 5. RISK FACTORS (Cont’d)
(iv) We are exposed to the risk of revocation of certifications, approvals, permits and licenses We have to comply with the laws, regulations and specific conditions set by the relevant authorities. As at the LPD. our Group has obtained all necessary certifications, approvals, permits and licenses in order for us to manufacture and market our condoms in the countries to which we export our products. However, as disclosed in Annexure A, we are in the midst of applying to the Fire and Rescue Department for one (1) of our manufacturing facilities in Port Klang to obtain the fire certificate from the Fire and Rescue Department (“Property Application”). Notwithstanding the lack of fire certificate, all of our manufacturing facilities are fUlly insured. We have taken up necessary insurance covering our premises and fixed assets of our manufacturing facilities in Port Klang with a value of RM6.92 million as at 30 June 2013. However, there may be complication to insurance claims pertaining to the outbreak of fire due to the lack of fire certificate. Therefore,~e are working closely with the Fire and Rescue Department for our Property Application and do not foresee any issues in getting the approval from the Fire and Rescue Department. Please refer to Section (b) of Annexure B for further details of our Property Application. Any revocation of our certifications, approvals, permits and licenses could materially and adversely affect the financial and operational conditions and the overall profitability of our Group. Apart from that, our Group has not encountered any difficulties in maintaining and renewing the relevant certifications, approvals, permits and licenses in the past. To date, none of these certifications, approvals, permits and licenses have been revoked and we will continue to take preventive measures such as implementation of OMS, human, safety and environment system as well as operational procedures in our daily operations. However, there can be no assurance that the regulatory authorities will not attempt to vary, modify or impose further conditions on us.
(v) There is a risk that there may be alternatives to or substitutions for our core product We may face product substitutions from new technologies that may arise in the future. This may affect the demand for our products in the market and could materially and adversely affect the financial and operational conditions and the overall profitability of our Group. There is no impact on our Group’s financial and operational conditions and the overall profitability as a result of the availability of alternatives or substitutions for our core product (condoms) for the last four (4) FYEs. Nonetheless, condom is the single most efficient, available technology in the world to reduce the sexual transmission of STI and HIV as well as offers dual protection for prevention of unintended pregnancy. (Source: IMR Executive Summary) 5. RISK FACTORS (Cont’d) (vi) There is a risk that our manufacturing facilities may be underutilised after our planned expansion We plan to expand our manufacturing facilities as stated in Section 7.21 of this Prospectus. Our expansion programmes are expected to double our annual manufacturing capacity of approximately three (3) billion pieces presently to six (6) billion pieces by 2015. Our manufacturing outputs and approximate global market share for the last three (3) FYEs are as follows: Manufacturing Global demand of Global market output condoms share(2) (billion pieces) (billion pieces) (%) FYE 2011 2.40 21.20 11.3 FYE 2012 1.95 22.80 8.6 FYE 2013 2.42 24.50(1) 9.9 Notes: (1) Forecasted based on a CAGR of 7.5%.
(2) Estimated based on pieces of condoms manufactured during our financial year over the global demand for the respective calendar years
The global demand for condoms is expected to increase from 22.8 billion pieces of condom per year in 2012 to 30.4 billion pieces of condoms per year in 2016 (as illustrated in Section 1.10 of the IMR Executive Summary). To attain an 80.0% utilisation rate of our expanded manufacturing capacity in 2016, we will have to manufacture 4.8 billion pieces of condoms per year. These 4.8 billion pieces of condoms represent 15.8% of the forecasted global market share of condoms for 2016, a 59.6% increase from our global market share of 9.9% in the FYE 2013. As such, there is a risk that our manufacturing facilities may be underutilised after our planned expansion if we are not able to increase our global market share by achieving the required sales. To minimise this risk, we will continue to adopt marketing strategies such as .participating in various medical exhibitions and trade shows as well as conducting sales calls and product demonstrations in order to sustain and expand our sales. For more details on our marketing strategies, please refer to Section 7.10(i) of this Prospectus. (vii) There is a risk that there may be a cure or vaccine for HIV/AIDS In the event there is a cure or vaccine for HIV/AIDS in the future, this may affect the demand for our products in the market and could materially and adversely affect the financial and operational conditions and the overall profitability of our Group. Nonetheless, condom is the single most efficient, available technology in the world to reduce the sexual transmission of STI and HIV and offers dual protection for the prevention of unintended pregnancy. (Source: IMR Executive Summary) 39 5. RISK FACTORS (Cont’d) 5.3 Risks relating to our Listing and investment in our Shares (i) There may be a delay to or failure of our Listing Our Listing may potentially be delayed or aborted upon the occurrence of certain events, including the following: (a) the Underwriter exercises its rights pursuant to the Underwriting Agreement to discharge itself from its obligations;
(b) failure of our institutional and selected investors under the Institutional Offering fail to pay for the subscription of our Shares allocated to them;
(c) we are not able to meet the public spread requirements of at least 25% of the enlarged issued and paid-up share capital of our Company being held by a minimum of 1,000 public shareholders holding not less than 100 Shares each at the point of Listing;
(d) the revocation of the approval by Bursa Securities for the listing and/or admission to the Official List for whatsoever reason; and
(e) any unexpected and uncontrollable event(s), which are beyond our control before our Listing.
The above risks are mitigated by the following: (a) the institutional and selected investors in Malaysia, Singapore and Hong Kong have provided written undertakings to subscribe for the respective portion of the Issue Shares and Offer Shares to be placed to them;
(b) the portion of the Issue Shares allocated to the Malaysian Public are fully underwritten; and
(c) our Directors and RHB Investment Bank as the Principal Adviser, Underwriter and Joint Placement Agent will endeavour to ensure that our Group is able to meet the public spread requirement by allocating the Issue Shares applied for by the Malaysian Public to the required number of public shareholders during the balloting process.
If our Listing is aborted, investors will not receive any Shares and the Selling Shareholders and our Company will return in full, without interest, all monies paid in respect of any application for our Shares. If any such monies are not repaid in full within 14 days after the Selling Shareholders and our Company are liable to repay, the provisions of subsections 243(2) and 243(6) of the CMSA shall apply accordingly. In the event our Listing is aborted and our Shares have been allotted to the shareholders, a return of monies to holders of our Shares could only be achieved by way of a cancellation of share capital as provided under the Act and its related rules. Such cancellation requires the sanction of our shareholders by special resolution in a general meeting, consent of our creditors (unless dispensation with such consent has been granted by the High Court of Malaysia) and the confirmation of the High Court of Malaysia. There can be no assurance that such monies can be recovered within a short period of time or at all in such circumstances. 5. RISK FACTORS (Cont’d) (ii) There has been no prior market for our Shares There has been no prior market for our Shares and it is uncertain whether a market will develop or, if a market does develop, whether it will be sustained. There is no assurance to the liquidity of any market that may develop for our Shares. Our Shares could be trade at prices that may be lower than the IPO Price depending on various factors including prevailing economic conditions in Malaysia, our operating results and the markets for similar securities. In addition, there can be no assurance that the market of our Shares is not subjected to disruptions that may cause volatility in the prices of our Shares. Please refer to Section 4.5 of this Prospectus on the basis for the determination of the IPO Price. (iii) Volatility in our share price and trading volume Shares of other companies listed on Bursa Securities have experienced considerable price volatility in the past. It is possible that our Shares will be subject to price volatility, which may have no direct correlation with our Group’s NA value, financial results or performance. Price volatility may also affect the ability of our shareholders to sell and the price at which our Shares can be sold. The market price of our Shares may fluctuate as a result of variations in the liquidity of the market for our Shares, differences between our actual financial operating results and those expected by investors and analysts, changes in analysts’ recommendations or projections, changes in general market conditions and broad market fluctuations. The market price of our Shares is also susceptible to certain new developments within the condom industry, acquisitions or strategic alliances by our competitors. In addition, many of the risks described in Section 5 of this Prospectus could materially and adversely affect the market price of our Shares. On the other hand, the performance of our Shares on the Main Market could be affected by external factors such as the performance of the regional and world bourses and the inflow or outflow of foreign funds. These are also largely driven by internal factors such as the economic and political conditions of the country as well as the growth potential of the various economic sectors. These factors invariably contribute to the volatility of trading volumes witnessed on Bursa Securities, thus adding risk to the market price of our Shares, which could potentially result in losses for investors in acquiring our Shares. (iv) Control by our Promoters Upon completion of our IPO, our Promoters as set out in Section 9.1 of this Prospectus will collectively control 63.31 % of our enlarged issued and paid-up share capital. By virtue of such joint control, our Promoters will be able to exercise some extent of influence on the outcome of certain matters requiring the vote of our shareholders unless they are required to abstain from voting by law, covenants and/or by the relevant authorities. The interests of our Promoters may individually or collectively differ from or conflict with the interests of other shareholders of our Company. Nevertheless, our Group has appointed four (4) independent non-executive directors and set up of an audit committee to monitor that any future transaction involving related party(ies) are entered into based on arm-length terms and conditions which are not detrimental to our Group and to facilitate good corporate governance whilst promoting greater corporate transparency. 41 5. RISK FACTORS (Cont’d) (v) We are dependent on dividends from our Subsidiaries We conduct all of our operations through our Subsidiaries. Accordingly, dividends and other distributions received from our Subsidiaries are our principal source of income. The factors below may hinder our Company and our Subsidiaries’ ability to pay dividends or make other distributions and to meet our financial obligations: (a) availability of our Subsidiaries’ distributable reserves and them having sufficient funds that are not needed to fund their operations, other obligations or business plans;
(b) changes in applicable accounting standards;
(c) our claims as a shareholder will generally rank junior to all claims of our Subsidiaries’ creditors and claimants. In the event of a liquidation of a Subsidiary, there may not be sufficient assets for us to recoup our investment in that Subsidiary; and
(d) our Company and/or our Subsidiaries may not obtain the consent of certain financial institutions for the payment! distribution of dividends (as disclosed in Section 13.2.11 (iii) of this Prospectus).
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