Risk Factors

3. RISK FACfORS 3. RISK FACfORS KNM Group is subject to certain risks inherent in the industries its businesses are involved. Although the Group seeks to limit these risks, no assurance can be given that any changes to these factors will not have a material effect on the Group’s businesses. i) Competition KNM Group faces competition from local and overseas manufacturers, especially internationally recognised manufacturers of process equipments. While the Group will continue to offer quality products and services through their research and development capabilities, there can be no assurance that KNM Group will be able to maintain its existing market share in the future. ii) Global Oil Price FluctuatioDs Crude oil and gas is a commodity subject to internationallong-tenn and spot prices. Some of the factors that may cause global oil prices to fluctuate include wars and the threat of wars, interruption from major oil producing countries, price and production pressures from cartels e.g. Organisation of Petroleum Exporting Countries (“OPEC’) and significant drop in demand. Thus, an extended period of poor oil and gas prices may discourage exploration. At the same time, an extended high oil and gas prices may reduce the demand for oil, gas and petrochemical products. In such extreme cases, the demand for the Group’s products, being that of process equipments for the oil, gas and petrochemical industry may be affected. iii) Alternatives To Oil And Gas KNM Group will certainly be subjected to the inherent risks within the oil, gas and petrochemical industry, particularly the significant move towards fmding other energy sources as an alternative to oil and gas. However, it is not foreseeable that oil and gas will be significantly replaced by alternative energy resources within the immediate and medium term. In addition, regardless of the developments in alternative energy sources, industries throughout the world today and particularly, the manufacturing industry have grown highly dependent on oil and gas products. The high and continuing use of oil and gas products by industries is expected to provide growth opportunities for manufacturers of the process equipments for the oil, gas and petrochemical industries, such as KNM Group. It should also be highlighted that the Group’s products and services have many applications and uses outside of the oil, gas and petrochemical industries. For example, pulp and paper mills, palm oil mills and refineries, food and beverage processing plants and building, construction and infrastructure industries also require process equipments such as pressure vessels, boilers, drums, reactors, heat exchangers, air coolers and heat bundles, storage tanks and silos, specialized piping and pipeline systems and specialized steel structural systems which are manufactured by KNM Group. iv) Dependencies On Certain Customers, Maintaining Contracts/Agreements And Failnre OfOn-Going Relationships The KNM Group’s 34 customers represent 100% of its total customer base in 2002. Its largest customer, Toyo Engineering & Construction Sdn Bhd accounted for 36.2% of the sales for the financial year ended 31 December 2002. The top three customers aecounted for approximately 63% of sales in 2002. Although there is some reliance on the top three customers, these three companies are major operators within the oil, gas and petrochemical industries. The fact that KNM Group is able to win significant projects from these major operators is testament to the Group’s capabilities in being able to produce high quality work and achieve total customer satisfaction. 3. RISK FACTORS (ConI’d) In addition, the Group’s business is mainly based on contractual agreements between customel1l and KNM Group on a projoct to project basis. As such, there are no long term contracts per se. Eacb contract is awarded based on competitive bids {rom local as well as overseas companies. However. KNM Group has had a long established relationship with its customers and Ihis is reflected by the fact that 50% of all its 83 customers have been witb tbe Group for 5 to 12 years since its inception. The long length of customer relationship is a demonstration of KNM Group’s eIceUeoce in product and service quality that has been key to generating repeat orders from customers. Apart from that. the Group is also making inroads into overseas markets, namely North America (USA., Canada and Meltico), South America (Venezuela. Trinidad and Brazil). Europe (Norway. Germany and France), Africa (Algeria, Angola. Qlad. Sudan, Nigeria, South Africa and Egypt). West Asia CUM Saudi Arabia. Bahrain. Iran. Oman and Jordan). East Asia (China, Myanmar. Vietnam, Indonesia. Philippines and Russia), Australia and Oceania by having agents in each of the countries 10 tobby for projects. To date. tbe Group is already on the approved ~ of vendors for the manufacturing process equipment for tbe oil, gas and petrochemical indus(ries for several overseas companies. such as Kuwait National Petroleum Company. Kuwait Oil Company. Petrochemical Industries Co. (Kuwait). Petroleum Development Oman. Qatar Petroleum, Saudi Arabian Oil Company. Department of Petroleum Resources of Federal Republic of Nigeria, and Brunei Shell Petroleum Company Sdn Bbd, and in view of this, the risks of dependencies on certain customers by the Group are further mitigated. ,,) Skilled MaDpower The process equipment industry requires a high level of professionally qualified and skilled labour such as welders and machine operators. In this respect. KNM Group continually faces the potential threat of sbortages in laboor. However. to date. lhe shortage of labour has never been an issue for KNM Group. nor has it impeded on the Group’s business growth or forced KNM to miss on any manufacturing schedules. vi) Political AIid Eoooomk Coosidr….tioDS Adverse developments in 1he global political and economic conditions particularly in Malaysia and China could unfavourably affect the financial prospects of KNM Group. Other political and economic uncertainties that could unfavourably affed the Group include changes in interest rates, foreign exchange rales, methods of taxation, tariffs and duties. Whilst KNM Group will continue to take effective measures such as prudent financial management and effICient operating procedures, there is no assurance that adverse political and economic factors will not materially affeclthe Group. vii) Impact Of Fl.ctuadollS 10 Foreign Exchange Rates The process equipment for tbe oil, gas and petrochemical industry is subjected to fluctuations in foreign exchange ratcs in lerms of import of raw materials as well as undertaking business overseas. However, the risks of unfavourable fluctuations in the exchange rates have been somewhat mitigated due to the pegging of the Ringgit to the US Dollar in 1999. In addition, it is common within tbe ioduscry for operators to charge the total cost of raw materials directly to the customer. As such. eXp:lsure to foreign exchange fluctuation is commonly bome by the customer. There is no assurance however. that changes to the peg regime will not occur. 3. RISK FACTORS (Cont’d) viii) DepeDdence On Key PersODllei The Group believes that its continued success will depend significantly on the abilities and continued efforts of its existing Directors and senior management. 100 loss of any key members of the KNM Group could adversely affect the Group’s continued ability to compete. However. tbe Group has made efforts to train its staff and enjoy support of long-tenn management staff. The ICNM Group’s future success will also depend upon its ability to attract and retain skilled personnel. Measures and precautions have been taken in grooming younger members of lbe senior management team in assisting the more senior key personnel to operale and manage the Group’s activilies. The Public Issue Shares that have been allocated to key personnel of the Group is one of tile S1eps taken to ensure that the employees are given recognition for their contn”bution to the success of the Group. ix} Marketability orKNM Sham Prior to this Public [ssue. there has been no public market for KNM shares and there can be no assurance regarding to the future development of the market for the shares. The issue price of RM1.48 per ordinary share has been determined after taking into consideration a number of factors, including but not 1.i.r:n.ited to the Group’s fmancial and operating history and standing, the future prospects of tbe KNM Group and the industry in which the Group is involved, the net tangible assets of tbe Group and the prevailing market condition at the time of this Issue. x) Control By Substantaal Sharebolders Upon completion of tbe Rigbts Issue and Public Issue. the major shareholders of KNM include. inter-alia, IMSB and TKSB. Collectively, IMSB and TKSB will effectively hold 32,920,000 ordinary shares or 74.S2% of the equity interest in the Company and consequently, it is likely that they will be able to effectively influence tbe outcome of certain matters requiring the votes of tbe Company’s shareholders. xi) FhctuattOl15 In The Prict:s orRaw Materiliis The industry in wbich KNM Group is in, is subject to fluctuations in prices of raw materiaJs especially steel and this may have an impacl on tbe profil margin of the manufacturers. Hot rolled steel plales account for approximately 40% of lbe total raw materials used in Ihe manufacturing of process equipment. Prices of steel have been known to increase two to three times its orisinal prices. However, according 10 lhe management of KNM Group, it is a normal practice in the industry for any increases in the prices of raw materials. including Slee!, to be passed on to the customers. xii) Profll Forecast This Prospectus contains certain forecasts on KNM Group that is based on assumptions, which the Directors deem to be reasonable, but which are nevertheless subject to uncertainties and contingencies. Due 10 the subjective judgments used and uncertainties inherenl in profit forecasts, and bc<:ause events and circumstances frequently do not occur as Cltpected, there can be no assurance that the profit forecast contained herein will be realised. It should thus be highlighted that the actual results may differ materially from those shown in this prospectus. As such, investo~ should read and undeThtand the assumptions and uncertainties underlying the profit forecast contained herein. The contract income for tbe forecast year ending 31 December 2003 has been arrived at partly based 00 contracts which have not yet been awarded to the KNM Group. As these contracts are stiJl in the tendering process, there are significant uncertainties on tbe above assumption. In Ute evenl thai certain material projects tendered are not awarded to the Group. the consolidated forecasl resolls and operations of the KNM Groop may be adversely affected. However. the management of the Group is CODfideDt tbal these cool.racts will be awarded to the Group. 36 3. RISK FACfORS (Conl’d) :ub”) Impllct orTlte War In Iraq The war in Iraq may have aD impact on the oil, gas and petrochemical industries with the possibility of increase in oil prices which may result in a global economic slowdown and a drop in consumer demaDd, xiv) Ea,.ironmental Risks KNM Group’s manufacluring process generales steel scraps as bulk waste. However, the scraps are regularly sold (or recycling and thus does not Ilave any material environmental impact. xv) Fire, Energy Crisis ADd Otber Emerge~y Risks KNM Group manufacturing plants have to some extent flammable items which in the case of a fue breakout, the Group’s operation may be affected to the extent of the warehouse or specific area of operation. To mitigate this risk, KNM Group maintains a strict safety policy in storing all flammable itcms in its manufacturing plants and employs twenty four (24) hours security within the plants. KNM Group’s manufactured products are made of steel which is not flammable, The flammable items used in KNM plants are mainly paint materials wl’lich are easily replaceable at shor1 notice. The Group has adequate insurance coverage for all its manufacturing plants to cover any risk of fire breakout. Floods are tbe only natural risk that may affect KNM Group’s operations a1thougb the Group’s plants are located in areas witb no history of flooding or any other environmental risks. However, in the event of flood, the Group is adequately covered under the Force Majeure clause in its contracts with the Group’s cuslomers. Furthermore, KNM Group’s plants are adequately designed with proper drainage in order to miligate any flooding. In respect of energy crisis i.e. electricity. KNM Group’s operalions will be affected since electricity is used in the manufacturing process. However, this may be overcome by using diesel generator sets as backup which tbe Group has previously used during a power failure or black:-oul. 1be KNM Group operations will also be affected by a waler crisis as water is used for lhe lesting process al (he end of manufacturing. Nevertheless, this may be overcome by oblaining water through water tankers as the amount of water needed is ootlarge. In respect of other emergency risks., such as riot and labour strikes, KNM Group is adequately covered under the Force Majeure clause in its contracts with lhe Group’s customers. (n addition, KNM Group promotes sports and recreational activities for all the employees and management of the Group. KNM Group’s manufacturing plants are all located on private land owned by tbe Group and as such will not be affected by any extemal factors. The recent outbreak of Severe Acute Respiratory Syndrome (“SARS”) may have an impact on the potential orders for KNM Group especially from foreign markels as potential clients may be reluctant to travel to South-East Asia as a precaution against infection. This may also result in potential orders being placed with American, European or Australian manufacturers instead of the Group. There is no assurance however, tbat SARS will not have an impact on the Group’s products or services. 3. RISK FACfORS (Com’d) xvi) Forward Looldag Stattments Certain statements iu this Prospectus are based on b~orical data which may not be reflective of the future results, and any forward-looking statements in nature are subject to uncertainties and oontingencies. AU forward-looking statements are based on forecasts and assumptions made by the Company, and although believed to be reasonable, are subjeclto unkoown risks, uncertainties and other factors which may cause the actual results. performance or achievements to differ materially from the future results., performance or achievements ex.press or implied in slIen forward-looking statements. Such factors include, inter·alia. general economic and business conditions, competition aoo t~ impact of new laws and regulations affecting KNM Group. In the light of these and oilier uncertainties, the inclusion of any forward-looting statements in this Prospectus sAould oot be regarded as a representation of KNM or its adviser that tbe plans and objectives of KNM Group will be achieved. xvU) Delay 10 Or AbortioD Of Listing The success of tbe listing exercise is also exposed to the risk that it may be delayed or aborted should the following events occur: i) The Underwriters faB to bonour their obligations under the Underwriting Agreement; jj) The plaeces fail to honour their obligations under the placement agreements despite baving given irrevocable undertakings to acquire the Placement Shares allocated to tbem; and iii) Tbe Company is unable 10 meet tbe public spread requiremet’llS i.e. at least 25% of lhe issued and paid-up capital oftbe Company must be held by a minimum Dumber of 1,000 public sharebolders holding not less Ihan 100 KNM sbares eacb of wbicb at least 500 shareholders are members of the public who are nOI employees of KNM Group at the !Xlint of listing. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK

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