5. RISK FACTORS 5. RISK FACTORS Our business is sUbject to a number of factors, many of which are outside our control. Prior to making an investment decision, prospective investors should carefully consider, along with the other matters set out in this Prospectus, the risk factors set out below. These risk factors set out below are not an exhaustive list of the challenges we are currently facing or that may develop in the future. Additional risks, whether known or unknown, may in the future have a material adverse effect on us or our Shares. RISKS RELATING TO THE PETROCHEMICAL INDUSTRY 5.1.1 Cyclicality in the petrochemical industry and fluctuations in crude oil prices have in the past, and may in the future, adversely affect our business, operating results, cash flows and financial condition The petrochemical industry is capital intensive and the operating rates and margins in this industry have historically been cyclical. Operating and profit margins are sensitive to supply and demand balances, both domestically and internationally. Demand for our petrochemical products is generally linked to the level of economic activity, and weak economic conditions tend to reduce demand. Typically, higher demand during peaks in the industry business cycle leads producers to increase their production capacity. Although peaks in the business cycle have been characterised by increased selling prices and higher operating margins, in the past, such peaks have led to overcapacity with supply exceeding demand. Low periods during the industry business cycle are characterised by a decrease in selling prices and excess capacity, which can depress operating margins. In short, the petrochemical industry’s cycles are characterised by periods of tight supply, leading to high operating rates and margins, followed by periods of oversupply primarily resulting from significant capacity additions, leading to reduced operating rates and margins. Our historical operating results reflect the cyclical and volatile nature of the petrochemical industry. The petrochemical industry is also considerably affected by fluctuations in crude oil prices. The international market for crude oil is volatile, and has in recent years been characterised by significant price fluctuations which is subject to a variety of factors beyond our control. While lower crude oil prices in recent years have contributed to increased profit margins for us, there can be no assurance that the lower crude oil prices will sustain in the future. Any increase in crude oil prices may not always translate into an increase or similar increase in the prices of our petrochemical products. As a consequence, such increase in crude oil prices may reduce our profit margins if such increase cannot be completely passed on to our customers by increasing the prices of our petrochemical products by the same amount. Volatility and future increases in crude oil prices may reduce our profit margins and in turn, have a material adverse effect on our business, financial condition, results of operations and prospects. 5. RISK FACTORS (Cont’d) 5.1.2 We sell our products in highly competitive markets that may not allow us to preserve our market position We sell our products in highly competitive markets. Due to the commoditised nature of many of our products, competition in these markets is based to a large extent on price. Price remains one of the key competitive factors for our commoditised products because although there are benchmark prices that apply to commodities, it is not mandatory for exports or imports to adopt such benchmark prices as international trade is often based on supply and demand, proximity and competitive pricing. Competition is also based on, to a lesser extent, product reliability and quality, product deliverability and customer service. While we have in the past been able to differentiate ourselves to a certain extent in our domestic markets of Malaysia and Indonesia by the range and quality of our products, speed of our delivery as well as our level of customer service, there can be no assurance that our customers will continue to value such factors. As a result, we may not be able to preserve our market position for such products by product differentiation or other non-price related factors. We command a sizeable market share in the sale of polyethylene and polypropylene in Malaysia and polyethylene in Indonesia. In Malaysia, we compete against a number of overseas producers and Petronas Chemicals Group Berhad (“Petronas Chemicals”), which has several joint-venture production facilities. In Indonesia, our main competitor in polyethylene production is PT Chandra Asri. Although we are one of the leading producers in Malaysia and Indonesia for polyolefin products, there can be no assurance that we will be able to maintain our market share against domestic and foreign competitors or against new entrants in the Malaysian or Indonesian markets. This may also adversely impact our ability to continue to sell our products in domestic markets at prices typically higher than our export prices, which we attribute to a premium placed on our goods in the domestic markets based on recognition of our product quality, services and efficient delivery. We may also face competition from Petronas Chemicals’ RAPID project in Johor, which is anticipated to complete by 2020. Based on media reports, the RAPID project involves the construction of a refinery and integrated petrochemical complex and is expected to have a production capacity of up to 7,700 KTA of petrochemical products. Its close proximity to our Pasir Gudang and Tanjung Langsat sites may result in increased competition in the future and there can be no assurance that we will be able to maintain our market share of polyolefin products in Malaysia and within Southeast Asia. We also compete with other petrochemical producers, many of which are larger than us and may have greater financial resources than us. Such competitors may also benefit from greater economies of scale and operating efficiencies, or access to cheaper feedstock. Some of these competitors also have a broader range of products which makes them less susceptible to cyclical downturns. There can be no assurance that we can continue to effectively compete with such producers in the future which may have a material adverse effect on our business, financial condition, results of operations and prospects. 5. RISK FACTORS (Cont’d) 5.1.3 Demand for, and the supply of, petrochemical products are dependent on general economic and market conditions, changes in consumer sentiment and preferences and other external factors Demand for petrochemical products typically depends on the level of general economic activity as petrochemicals are used across a wide range of industries in both industrial and consumer products. If general economic conditions are weak, demand for our petrochemical products will be adversely affected. The supply of petrochemical products is affected by expansion of production capacity by petrochemical companies and their ability to expand their capacity depends significantly on the general health of the economy. There can be no assurance that future changes in the supply and demand for our products will not adversely affect our operating margins and profitability. It is also not possible to accurately predict supply and demand balances, general economic and market conditions, and other factors that may affect the future operating rates and margins in the petrochemical industry. It is not clear if economic growth in Malaysia, Indonesia or globally will remain strong. The uncertainty as to the growth trend of international trade and the general global economic climate may continue to have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, demand for our products may be susceptible to changes in consumer sentiment towards the use of plastic goods as a result of individual preferences or concerns for the environment. Such changes in consumer sentiment and preferences, which are largely beyond our control, may affect the future levels of demand for our polyolefin products which in turn may have an adverse effect on our business, financial condition, results of operations and prospects. External factors beyond our control can cause volatility in, and adversely affect, feedstock prices, demand for our products, product prices and operating margins. Examples of such external factors include: • currency fluctuations;
• international events and circumstances such as wars, terrorist attacks and political instability, including continued hostilities in the Middle East that may cause disruptions in the supply of feedstock and affect feedstock prices;
• changes in legal regimes and governmental regulations such as taxation, duties and tariffs, in Malaysia, Indonesia and abroad in our key export markets;
• disruption in the supply of feedstock; and
• recurrence of epidemics such as SARS, avian flu or MERS that constrain demand temporarily.
5. RISK FACTORS (Cant’d) 5.1.4 Limitations on, or disruptions in, the supply of naphtha, and fluctuations in naphtha prices may result in increased operating expenses and adversely affect our results of operations, cash flow and margins We purchase significant amounts of naphtha to manufacture our products and the cost of naphtha represents a substantial portion of our total cost of goods sold, accounting for about 69.1 %, 58.9% and 53.5% for the years ended 31 December 2014,2015, and 2016, respectively. The price of naphtha generally follows the price trend of, and varies with market conditions for, crude oil, which in recent times have been highly volatile. Naphtha price increases are not always of the same magnitude or direction as changes in the prices we receive for our products. As a result, increases in naphtha prices may have a material adverse effect on our margins and cash flows if such increases cannot be passed on to the price of the products we sell. Significant volatility in naphtha costs also affects our procurement costs and puts pressure on our margins as any sales price increases for our products may lag behind naphtha price increases. Naphtha price increases may also increase our working capital needs and cash flow requirements and, if significant, may also affect our liquidity. While naphtha is a globally traded commodity and can be obtained from various sources, if external events beyond our control result in a disruption in the global supply of naphtha, this would have a material adverse effect on our operations. At times, we may also face issues relating to the quality of naphtha feedstock obtained from our suppliers such that there can be no assurance that feedstock quality can always be maintained. We currently purchase our naphtha supply from a variety of sources through contracts that are typically renewable annually. In the event we cannot renew the supply agreements with our suppliers on acceptable terms, or at all, or our suppliers fail to deliver on their volume commitment, we will need to seek alternative supply sources, which may not be on acceptable terms. We also purchase a portion of our naphtha feedstock from the spot market. While we have not experienced any significant difficulties to-date in obtaining naphtha to satisfy our production requirements, there can be no assurance that we will be able to satisfy any shortfall in our naphtha requirements on the spot market on acceptable terms or at all. Our inability to obtain naphtha in sufficient quantities on a timely basis on commercially acceptable terms may also impair our ability to manufacture our products or could increase our production costs, which could have a material adverse effect on our business, financial condition and results of operations. The stability of operations and business strategy of our major naphtha suppliers, which are beyond our control, will also affect us. Any material disruption to their operations due to causes such as weather, riots, political instability, natural disaster, fire or other technical or mechanical problems could adversely affect our procurement process, such as causing non-delivery or delays in the delivery of feedstock to us. If that occurs, our results of operations could be adversely affected. Similarly, if our major naphtha suppliers change their business strategies substantially, for instance, with regards to their product portfolio and distribution channel, they could reduce their volume of supply to or cease business relationship with us, which in turn could materially affect our business and results of operations. 5.1.5 Our operations and production processes are subject to significant operating hazards and risks, for which we may not be fully insured We are subject to operational risks that are common among companies in the petrochemical industry, including but not limited to, the following: • risks relating to leaks and ruptures to our facilities, including pipelines and storage tanks;
5. RISK FACTORS (Cont’d) • risks relating to mechanical failure and power outages;
• risks relating to prolonged equipment breakdown or plant shutdown;
• risks relating to labour difficulties; and
• risks relating to terrorist attacks.
In particular, our business is subject to significant risk of fire, explosion, leakage, release of toxic fumes and other unexpected or dangerous conditions that may cause personal injuries or death, property damage, environmental damage and interruption of operations. On 8 June 2015, a fire occurred at one of our plants caused by the unauthorised opening of a manhole cover by an external contractor while carrying out blinding works, resulting in the deaths of two external contractors. While we are prepared and our personnel are trained to deal with such hazards, if we are unable to quickly fix any resulting damage, our plant production schedules and operations could be materially delayed and our financial condition and results of operations would be materially and adversely impacted. Our employees, as well as employees of our contractors, suppliers and customers, and residents in the vicinity of our sites and facilities are exposed to these hazards. These type of risks cannot be completely eliminated through preventive efforts, including through preventive measures that we have taken and insurance coverage that we have obtained. There can be no assurance that accidents at our sites or supporting facilities (which may result in property damage, litigation claims, severe personal injuries or fatalities) will not occur in the future. Our earnings and cash flow may be adversely affected by any disruption of operations of, or damage to, our existing production facilities that are not fully covered by insurance. Our insurance policies include all risks property damage (including machinery breakdown and business interruption) for both our facilities in Malaysia and Indonesia, additional comprehensive general liability insurance policy for Malaysia and Indonesia, charterers’ legal liability for Malaysia, terminal operators’ liability for Malaysia and a further excess liability coverage for Malaysia, and marine open cover policy. However, these insurance policies are subject to certain limits. For example, disruptions to our operations may not be covered by our business interruption insurance policy if the number of shutdown days falls below the insurance deductible period of 45 days for losses related to machinery breakdown and 45 days following property damage. In addition, as a result of the terrorist attacks of 11 September 2001 and other events, our insurance carriers have created exclusions for losses from terrorism from our “all risk” property insurance policies. To the extent that we suffer loss or damage that is not covered by insurance or exceeds our insurance coverage, our results of operations and cash flow may be adversely affected. There can be no assurance that material losses in excess of insurance proceeds will not occur in the future or that adequate insurance coverage will be available to us in the future on commercially reasonable terms or at all. 5. RISK FACTORS (Cant’d) 5.1.6 We are subject to health and safety laws and regulations and are exposed to environmental compliance and cleanup costs Our business involves the handling, production and use of substances and compounds that may be considered toxic or hazardous within the meaning of environmental laws. Furthermore, our production processes generate gaseous chemical wastes, liquid wastes, wastewater and other industrial wastes at various stages of the manufacturing process. We are subject to stringent environmental, health and safety laws and regulations in the jurisdictions where our sites are located, including regulations in relation to air pollutant emissions, discharge of treated waste, solid waste management and other aspects of our operations. Some of these laws and regulations require our plants to operate under permits that are subject to renewal or modifications. Typically, these laws provide for substantial fines and potential criminal sanction for violations. Violations of these laws can also result in permits being revoked and/or plants being shutdown. For example, LCTM was fined a total of RM20,000 for violations of Malaysian health and safety regulations in connection with the fire incident that occurred on 8 June 2015. In addition, we may face civil liability for alleged personal injury or property damage due to exposure to chemicals or other hazardous substances at our plants or chemicals that we otherwise produce, handle or own. Such claims can be substantial and could materially adversely affect our business, financial condition, results of operations or cash flows, if they are not adequately covered by insurance. We also incur and expect to continue to incur capital and costs to comply with environmental, health and safety laws and regulations. In addition, new laws and regulations, stricter enforcement of, or changes to, existing laws and regulations, or the imposition of new clean-up requirements could in the future require us to incur costs, or affect our production or revenues in ways that may have an adverse effect on our financial condition or results of operations. There can be no assurance that material capital expenditure, costs or operating expenses beyond those currently anticipated will not be required under applicable environmental, health, and safety laws and regulations, or that developments with respect to such laws and regulations will not materially adversely affect our production or revenues.
5.2 RISKS RELATING TO OUR BUSINESS AND OPERATIONS 5.2.1 A significant interruption in our operations such as a power outage or interruption in water supply, mechanical failures or natural disasters could reduce our production In October 2014, our plants in Malaysia suffered an emergency shutdown period of an aggregate of 38.3 days caused by a power outage and as a result, all our production in Malaysia ceased during this period. This led to a fall in production volume for the year ended 31 December 2014. For further information on the incident, please refer to Section 7.12 of this Prospectus. In April 2017, our plants in Malaysia suffered a controlled shutdown period caused by an interruption in water supply. For further information on the incident, please refer to Section 7.6.18 of this Prospectus. As our plants are dependent on a continuous supply of electricity and water to maintain stable operations, any significant power outages or interruptions in water supply could materially and adversely affect our business, financial condition and results of operations. Similarly, any interruption to our operations as a result of mechanical failures or natural disasters will also materially and adversely affect our business, financial condition and results of operations. 5. RISK FACTORS (Cant’d) While we currently have in place systems to monitor our plant equipment and support facilities to reduce the risk of emergency shutdowns, there can be no assurance that these systems will always function in a reliable manner. 5.2.2 We may not be able to obtain, renew or maintain our licences, permits, approvals or technology licences required to operate our business due to reasons beyond our control We require certain licences, permits and approvals to operate our business. We will be required to renew such licences, permits and approvals and/or to obtain new ones. For a description of our licences, permits and approvals, inclUding applicable approving authorities, expiration dates and non-compliances, please refer to Annexure A of this Prospectus. In addition, the operation of our plants relies on technology that is licensed to us by certain third parties. There can be no assurance that we will not breach the terms of the technology licences. Failure by us to renew, maintain or obtain the required permits, approvals or technology licences due to reasons beyond our control may result in the interruption of our operations or delay or prevent our product enhancement or capacity expansion programme, or require us to renew or obtain technology licences from third parties on less favourable terms and may have a material adverse effect on our business, financial condition, results of operations and prospects. For more information on our permits, approvals and technology licences required for our business and operations, please refer to Section 7.10 and Annexure A of this Prospectus. 5.2.3 If our existing and proposed expansion plans are not completed on schedule or within budget, this may have an adverse effect on our future growth and prospects We are currently implementing certain expansion plans as described in Section 7.6.8 of this Prospectus. As at the LPD, we have four on-going projects as part of our longterm plan for growth. These expansion projects are expected to provide additional value by increasing our production of polyethylene, polypropylene and derivatives from by-products through increased production efficiencies and an improved ability to crack raw feedstock material. If any of our expansion projects are not completed on schedule or within budget or at all, this may have an adverse effect on our operations and results. In addition, there can be no assurance that even if our expansion plans are completed, we will be able to achieve the expected increase in production volumes or sell our products profitably. In addition, any new projects and capital expenditures we decide to undertake in the future may expose us to large-scale, project-related risks that may be beyond our control. Actual costs and expenditures related to any project could exceed planned costs and expenditures, and any delay in completion of these projects could adversely affect our operations and financial condition. 5. RISK FACTORS (Cant’d) 5.2.4 Limitations on or disruptions in, the supply of feedstock for our Indonesian plants and cracker may adversely affect our business, results of operations, cash flow and margins Our Indonesian plant uses ethylene as feedstock to produce polyethylene products. We may not always be able to obtain sufficient ethylene from the Indonesian market to supplement the portion of ethylene produced by our Malaysian crackers for our Indonesian plants to consume as feedstock. For example, in 2015, there were constraints in the supply of ethylene in Indonesia due to increased ethylene prices and tightened ethylene supply, which resulted in a decline in the sales volume of polyethylene produced from our Indonesian plants from 361.2 million KT to 320.0 million KT between the years ended 31 December 2014 and 31 December 2015. We may also face difficulty securing sufficient naphtha as feedstock for our Indonesian cracker that will form part of the Integrated Petrochemical Facility when completed. ShortC\ges of ethylene and naphtha feedstock can lead to our Indonesian plants and cracker operating at under-capacity levels that in turn may adversely affect our volume of production, operational efficiency and overall profit margins. 5.2.5 We may be affected by negative publicity or other matters arrslng from the actions of LCC and/or the Lotte group of companies or other investigations or allegations involving their officers or major shareholders We may be affected by negative publicity surrounding LCC and/or the Lotte group of companies of which we are a member. The negative publicity surrounding the criminal trial in South Korea to hear charges of corruption and embezzlement against Shin Dongbin, a director of our Promoter, LCC, and other executives in the Lotte group of companies, commenced on 21 March 2017. As part of these trials, our former Chairman and the current chairman and director of LCC, Huh Soo Young, is facing five charges, including allegations of tax fraud, breach of trust and corruption. We may also be affected by the following: (i) the boycott of Lotte supermarkets in China as a result of a Lotte group company handing over its land in Seongju, South Korea, for the deployment of the United States Terminal High Altitude Area Defence anti-ballistic missile system;
(ii) the KRW42.3 million (equivalent to approximately RIVI163,067) fine imposed on LCC by the Korea Fair Trade Commission for violating the Monopoly Regulation and Fair Trade Act;
(iii) the civil lawsuit filed by the Korean Government against LCC claiming for approximately KRW24.8 billion (equivalent to approximately RM95.6 million) in damages for fraudulent corporate tax refund; and (iv) the KRW2.8 billion (equivalent to approximately RM1 0.8 million) consumption tax imposed on LCC by the head of Yeosu tax office under the National Tax Services of Korea on the grounds of consumption tax evasion. Please refer to Section 9.5 of this Prospectus for further information on the matters described under items (ii) to (iv) above. These matters could adversely affect our business reputation and public image and consequently, lead to a reduction in the demand for our products or loss of business opportunities. These instances of negative publicity or other matters arising from the actions of LCC and/or the Lotte group of companies or other investigations or allegations involving their officers or major shareholder(s) could affect the demand for our products, lead to lost business opportunities or have a material adverse effect on our business, financial condition, results of operations and prospects. 5. RISK FACTORS (Cont’d) 5.2.6 We rely on third party logistics providers for the transportation of feedstock and our products We primarily utilise third party logistics providers to transport feedstock and our products, to and from our sites. We rely on third party logistics providers for substantially all of our product transport requirements. This is particularly so in Indonesia where our plants do not have pipelines similar to those that link our Pasir GUdang and Tanjung Langsat sites in Malaysia, such that the plants are totally dependent on third party logistics providers for their supply of feedstock. The costs of these services are significant and prevailing rates can be volatile depending on market conditions. Increases in transportation rates can result in increased feedstock costs or product distribution costs. We may experience an interruption of supply or increase in costs to deliver our products to the market if the ability of vehicles or vessels to transport our required feedstock or our products is disrupted due to inclement weather, natural disasters, accidents, governmental regulations or unanticipated third party actions, including terrorist attacks or piracy. Our transport network is dependent on our ability to continue to renew our contracts with these third party logistics providers or to enter into new contracts on acceptable terms and on a timely basis. Any prolonged or unanticipated disruption in the transportation of our required feedstock or our products could have a material adverse effect on our business, financial condition and results of operations. 5.2.7 Our sites in Malaysia are interconnected and interdependent, and factors adversely affecting one site may affect the operations of the other Although our Pasir Gudang and Tanjung Langsat sites are 12 kilometres apart, the two sites have many shared services such as land transportation, medical personnel and other operational resources. Additionally, the two sites are connected through underground pipelines that deliver feedstock from Pasir Gudang to Tanjung Langsat, . and purge gas from Tanjung Langsat to Pasir Gudang. The two sites are therefore largely interdependent on one another. As such, internal or external factors that affect one site will likely affect the other, which may have a material adverse effect on our business, financial condition and results of operations as we derive a substantial portion of our revenue from sales of products produced from our sites in Malaysia. 5.2.8 Our development and operational plans require sufficient funding and capital resources, which are subject to risks and uncertainties The petrochemical business is capital intensive. Our ability to maintain and increase our revenues, net income and cash flows depend upon continued capital spending. Our current business strategy contemplates capital expenditures for the year ending 31 December 2017 of about RM2,793.3 million, which we expect to fund using funds generated from our operations, financing activities and net proceeds from our IPO. For further information on the use of proceeds from our IPO, please refer to Section 4.7 of this Prospectus. Our actual capital expenditures may vary significantly from these planned amounts due to various factors, such as our ability to generate sufficient cash flows from operations to finance capital expenditures, ability to finance such expenditures through borrowings, other necessary investments and other factors that may be beyond our control. In addition, there can be no assurance whether, or at what cost, our capital projects will be completed or the success of these projects if they are completed. 5. RISK FACTORS (Cont’d) We may incur substantial capital expenditures from time to time in connection with projects intended to expand our production capacity or operational capabilities and improve our business. These projects may include, but are not limited to, debottlenecking, increasing the production capacity of our existing manufacturing plants and constructing new facilities. Failure to successfully complete these projects due to inadequate capital resources or otherwise may have an adverse effect on our operations and our development plans. In addition, if we are not able to obtain sufficient funding for our planned capital expenditures, our business, results of operations and prospects could be adversely affected. Our ability to obtain external financing and make timely repayments of our debt obligations are subject to various uncertainties, including our future results of operations, financial condition and cash flows, the condition of the Malaysian and Indonesian economies and the markets for our products, the cost of financing and the condition offinancial markets, the issuance of relevant government approvals and other project risks associated with the development of infrastructure in Malaysia and Indonesia, and the continuing willingness of bahks to provide new loans. There can be no assurance that any required additional financing, either on a short-term or long-term basis, will be available to us on satisfactory terms, if at all. If adequate funds are not available on satisfactory terms, we may be forced to defer or cease our expansion plans, which could result in a loss of customers, inability to successfully implement our business strategies and limitations on the growth of our business. In addition, our investments in our associates could require us to make significant additional capital contributions, shareholder financing or contingent support, such as the provision of guarantees for bank financing activities, to fund our associates’ operations or expansion. For example, in March 2017 we injected a further USD168.0 million (equivalent to RM724.2 million) into LC USA to meet its on-going funding requirements. The US Shale Gas Project is expected to require substantial external financing to become operational. The on-going negative publicity surrounding the Lotte group of companies, of which we are a member, could make it more difficult for us to obtain external financing for this or other projects. 5.2.9 Our operations are dependent on our ability to obtain, maintain and renew land rights and location permits Our operations are dependent on our ability to obtain, maintain and renew relevant land rights over the land where our plants and supporting facilities are located. The Government of Malaysia and Indonesia may change the authorised land use of any part of our land. If we are unable to obtain, maintain or renew land titles over the relevant parcels of land, if we have to incur significant additional costs to obtain or renew such land titles, or if we are adversely affected by changes in land use, this could have a material adverse effect on our business, financial condition, results of operations and prospects. We currently operate 14 plants across three sites in Malaysia and Indonesia. For our two integrated industrial sites at Pasir Gudang and Tanjung Langsat in Malaysia, we hold land rights under temporary occupational licenses and have the right to use the land for our production operations. We lease our approximately 122-acre Pasir GUdang site from the State Authority and hold them under four separate 60-year leases. Two of these leases will expire in 2051 while the other two will expire in 2050. We lease our 100-acre Tanjung Langsat site from the State Authority under a 60 year lease which expires in 2061. Our two naphtha and tank farm sites are under 36-year leases, which expire in 2052 and are leased from the Johor Port Authority. Another tank farm is located on a 20-acre site leased from TNB under a 30-year lease expiring in 2028. In Indonesia, we have acquired additional plots of land for the construction of the Integrated Petrochemical Facility, covering an area of approximately 46.52 hectares in total (“Land Plot”). 5. RISK FACTORS (Cont’d) The Land Plot is registered under the right to manage (hak pengelo/aan) owned by PT Krakatau Industrial Estate Cilegon. Pursuant to the Minister of Agrarian Regulation No. 9 of 1999 on Procure of Issuance and Revocation of Right Over State Land and Right to Manage (“MAR 9/1999”), the right to manage may only be revoked because of an administrative defect during the issuance process or a final and binding court decision. However, any overlap in ownership or any claim by a third party may lead to an application for revocation either by alleging an administrative defect or obtaining a court decision. Further, based on feedback from the Ministry of Agrarian, other than the reasons stated under the MAR 9/1999, the Indonesian Government is also entitled to revoke the right to manage due to an emergency interest such as for national security or for military purposes. If such revocation occurs, it may have a material adverse effect on our expansion plans in relation to the Integrated Petrochemical Facility. In order to utilise the Land Plot, we need a valid right to build certificate. We obtained this certificate on 14 February 2017 which is valid until 8 February 2047. Upon its expiry, we can apply for a first renewal for a maximum period of 20 years and subsequently, a second renewal for a maximum period of 30 years. The issuance of an extension or renewal for a right to build certificate shall be subject to (i) the recommendation from PT Krakatau Industrial Estate Cilegon as the owner of the right to manage certificate; and (ii) approval of the local land office. If we are unable to obtain the requisite recommendation and approval, ownership of the Land Plot may be terminated and the Integrated Petrochemical Facility may need to be disassembled. We require from the local authorities (i) building permits (Izin Mendirikan Bangunan) for us to construct the Integrated Petrochemical Facility and (ii) certificates of function worthiness (Sertifikat Laik Fungst) for us to commence the operation of the Integrated Petrochemical Facility. If we are unable to obtain the relevant location permits or if such process is delayed, we will not be able to commence the construction or commence the operation, as the case may be, of the Integrated Petrochemical Facility which may have a material adverse effect on our plans for expansion and our prospects. As at the LPD, we currently do not have the certificates of function worthiness from the local authority for our Indonesian plants. For further information, please refer to note 1 of Annexure B.1 of this Prospectus. If we are unable to obtain such certificates and receive a suspension order from the local authority, we will not be able to operate the Indonesian plants and this may have an adverse effect on our business, financial condition, results of operations and prospects and upon the commencement of the commercial operation of the Integrated Petrochemical Facility, the ethylene produced by the Integrated Petrochemical Facility which is meant to meet the requirements of the Indonesian plants have to be sold to third parties instead. 5.2.10 Our performance may be affected by the loss of key members of our management or our inability to hire or retain qualified personnel Our business and the implementation of our strategy are dependent upon our management team. If one or more members of our management team is unable or unwilling to continue in their present positions, such persons may be difficult to replace because of their experience and expertise, and our business, prospects and results of operations may be materially adversely affected. In addition, our business is also dependent on our ability to attract, retain and motivate qualified industry personnel. In particular, our PTC, which supports our growth and business strategies, requires skilled and experienced engineers and technical personnel. Currently, we rely in part on expertise from LCC for product development support. Any failure to successfully manage our personnel needs or coordinate with LCC’s research and development team could adversely affect our business, results of operations and prospects. These risks could be heightened to the extent we invest in businesses or geographical regions in which we have limited experience which could materially affect our business, financial condition and results of operations. 5. RISK FACTORS (Cont’d) Specifically, we may face difficulty in hiring or retaining qualified industry personnel in Malaysia and Indonesia. Our business depends on our ability to attract, train and retain highly qualified individuals for positions that require specialist experience and in some cases specific certifications, such as certified engineers and technical experts in the operation of petrochemical facilities, and we compete for such personnel with other companies, including our competitors. For example, we expect to face competition for qualified industry personnel from Petronas Chemicals’ RAPID project. Increased competition for skilled personnel may result in shortages of such personnel, which could also result in increases in wages that we need to pay to hire and retain these personnel. In addition, some of our key personnel could leave us to join our competitors. The loss of the services of key personnel or the inability to attract qualified personnel or to retain existing personnel could have a material adverse effect on our business, financial condition, results of operations and prospects. 5.2.11 Some of our employees are represented by labour unions, and we may be SUbject to labour disputes that disrupt our operations or be affected by changes in labour law or increases in labour cost Approximately 90% of our employees in Indonesia are members of a labour union and have signed the relevant collective bargaining agreement which is negotiated every two years and is due to be renegotiated on 30 June 2018 with wage adjustments occurring every year in April. The employment of union-affiliated employees and industrial action limits our flexibility in dealing with employees and may lead to increased operating costs and reduced production levels in our Indonesian plants. Any prolonged work stoppage or strike at our Indonesian site, or any significant increase in employee costs, including wages, could have a material adverse effect on our business, financial condition, results of operations or prospects. In the past three years, there has been no incident of collective union action on our Indonesian plant operations. However, labour disputes are common in Indonesia and there can be no assurance that such disputes will not arise in the future. Changes in labour law may occur due to the enactment of new labour laws by the Indonesian Parliament or any judicial review by the Indonesian Constitutional Court. To-date, Indonesian Labor Law No. 13 of 2003, a key piece of legislation that provided a statutory basis for increased worker rights, has been SUbject to several judicial reviews, which resulted in the invalidation and amendment of certain labour law provisions relating to worker rights. Changes in labour law are frequently the SUbject of significant political disagreement. Labour unrest and activism in Indonesia could disrupt our Indonesian plant operations and the operations of our suppliers or contractors and could affect the financial condition of Indonesian petrochemical producers in general. Such events could materially and adversely affect our business, financial condition, results of operations and prospects. In addition, general inflationary pressures in Malaysia and Indonesia could increase labour costs, which could have a material adverse effect on our results of operations and financial condition. 5.2.12 We are controlled by LCC whose interests may not be aligned with those of the other shareholders of our Company and whose business in petrochemical products may compete with our business Following completion of our IPO, LCC will own no less than 67.75% of our Shares and will continue to be our controlling shareholder. As our controlling shareholder, other than in respect of certain votes regarding matters in which LCC is an interested party and must abstain from voting under the Listing Requirements or matters that require the passing of a special resolution, it will be able to influence the approval of all corporate matters requiring a shareholder resolution under the Act without the approval of other shareholders of our Company. 51 5. RISK FACTORS (Cont’d) This includes the appointment of directors. Through LCC’s ability to vote in the election of our directors, it will have influence over matters concerning our Company determined at the level of our board of directors. Currently, three of the six directors are NonIndependent Directors who are representatives of LCC on our Board and have spent substantial portions of their careers working for LCC or its subsidiaries. Furthermore, due to the complex nature of shareholdings within the Lotte group of companies, we may be unable to identify who its ultimate beneficial owners are. In some circumstances, this may make it harder for us to clearly identify and address any potential conflicts of interests. In addition, LCC is in the business of producing and selling a diverse range of petrochemical products, including certain petrochemical products that we produce and sell in our existing operations. While we focus on Southeast Asia, including in our domestic markets of Malaysia and Indonesia, and LCC focuses primarily on other markets such as Northeast Asia, Europe, Africa and South America, there are other markets where we and LCC are both active, such as China and Turkey. There can be no assurance that in the future, LCC will not compete with us as a result of changes in supply and demand conditions in markets where we and LCC are both active. Accordingly, any increased competition from LCC may have a material adverse effect on our business, financial condition, results of operations and prospects. 5.2.13 Certain tax incentives or exemptions from the Government of Malaysia may no longer be available in the future We are the recipient of the PHI, a tax incentive introduced under the Malaysian 2015 Budget, and subsequently established by MIDA on 1 May 2015. Under the PHI, we are entitled to the following: (i) full income tax exemption on the services income and trading income arising from the principal hub activities for five years, lasting from 2017 to 2021; and
(ii) income tax exemption equivalent to a tax rate of 10% on the services income and trading income from the principal hub activities, lasting from 2022 to 2026.
There can be no assurance that such tax incentive will not be prematurely terminated by the Government of Malaysia or that we will continue to enjoy similar benefits after its expiry in 2026. If the PHI is prematurely terminated, this may have a material adverse effect on our cash flows and impact our after tax profitability. 5.2.14 Changes in laws, regulations or governmental policies could reduce supply and demand in countries where we produce and sell our products or results in failure to renew, maintain or obtain the reqUired licences, permits or approvals for us to operate our business The conduct of our business, including production, storage, distribution, sale, advertising, marketing, labelling, health and safety practices, transportation and use of many of our products, is subject to various laws and regulations administered by the government in countries where we sell our products. These laws and regulations and interpretations thereof may change as a result of political, economic or social events. Such changes may include changes in advertising and marketing practices, laws relating to the import of feedstock used in our products, laws relating to the import or export of our products, laws directly relating to some of our products, taxation requirements including taxes that will increase the cost of our products to our customers, competition laws, employment laws, laws regulating the price we may charge for our products, laws regUlating our access to and use of water or utilities, and environmental laws including laws relating to the regulation of water rights and treatment. 5. RISK FACTORS (Cant’d) New laws, regulations ar governmental policies and their related interpretations, or any changes thereof, may change the environment in the markets where we conduct our business, affect demand in countries where we sell our products, and affect our operations or increase our costs or liabilities. In particular, Indonesia is a developing market and its legal and regulatory regime may be less certain than in more developed markets and may be subject to unforeseen changes. At times, the interpretation or application of laws and regUlations may be unclear and the content of applicable laws and regulations may not be immediately available to the public. Under such circumstances, consultation with the relevant authority in Indonesia may be necessary to obtain a better understanding or clarification of applicable laws and regulations. There can be no assurance that such clarification will be available in a timely manner. Further, there can also be no assurance that the introduction of new laws, changes to existing laws and the interpretation or application thereof will not have an adverse effect on our business or prospects. Separately, imposition of anti-dumping or countervailing duties, import quotas or tariffs, whether adopted by individual governments or addressed by regional trade blocs, may affect the competitive position of our products or prevent us from being able to sell our products in certain countries. Such measures may have a material adverse effect on our sales, which in turn will have a material adverse effect on our business, financial condition and results of operations. In addition, we require certain licences, permits and approvals to operate our business. New laws, regulations or governmental policies and their related interpretations, or any changes thereof may result in our failing to renew, maintain or obtain the required licences, permits or approvals. This may cause the interruption of our operations or delay or prevent our product enhancement or capacity expansion programme and may have a material adverse effect on our business, financial condition, results of operations and prospects. 5.2.15 Legal disputes or proceedings could expose us to liability, divert our management’s attention and negatively impact our reputation As we are one of Southeast Asia’s largest petrochemical producers with complex operations across Malaysia and Indonesia and sales to over 60 countries, we may at times be involved in potential legal disputes or proceedings relating to, among other things, product or other types of liability, employees’ claims, labour disputes or contract disputes that could have a material and adverse effect on our reputation, business, financial condition, results of operations and prospects. We are currently not involved in any material legal proceedings or governmental investigations or enquiries and we are unaware of any material pending claims or legal proceedings. If we become involved in material or protracted legal proceedings or other legal disputes in the future, the outcome of such proceedings could be uncertain and could result in settlements or outcomes which adversely affect our financial condition. In addition, any litigation or legal proceedings could incur substantial legal expenses as well as significant time and attention of our management, diverting their attention from our business and operations.
5.3 RISKS RELATING TO OUR SHARES 5.3.1 The offering of our Shares may not result in an active liquid market for our Shares There can be no assurance as to the liquidity of any market that may develop for our Shares, the ability of holders to sell our Shares or the prices at which holders would be able to sell our Shares.