4. RISK FACTORS 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS BEFORE INVESTING IN OUR SHARES. If you are in any doubt as to the infonnation contained in this section, you should consult your stockbroker, bank manager, solicitors, accountants or other professional adviser. 4.1 RISKS RELATING TO OUR BUSINESS AND INDUSTRY 4.1.1 Fluctuation in Price of Steel Materials One of the key issues encountered in the steel industry is the fluctuations in the prices of steel materials. Fluctuations in the prices of steel materials are often driven by factors such as global economic conditions, level of industrial development, production volume of steel mills and the industry’s supply and demand. Such fluctuations may, to a certain extent, impact our direct operating costs and profit. We consistently monitor the prices of steel materials and our inventory levels to minimise any adverse impact on our profitability. We also quote our selling prices based on current market prices, hence we are able to pass on some of the increase in steel prices to OUf customers. We had experienced fluctuations in price of steel materials in the past. In some instances it had affected our revenues, for example when prices were low and sales volume remained approximately the same. In FYE 31 December 2009, our revenue from steel products declined by RM74.05 million despite an increase in tonnage sales by approximately 15,000 tonnes. This was due to a decrease in our selling prices in FYE 31 December 2009, which decreased from approximately RM4,225 per tonne in FYE 31 December 2008 to RM3,047 per tonne in FYE 31 December 2009. To a celtain extent, it had affected our profitability, for example when we held inventory purchased at a certain price but subsequently market prices of steel fell. In FYE 31 December 2009, gross profit margin from our processing of steel products recorded a decline of 1.17 percentage points as a result of decrease in steel prices. Nevertheless, under such circumstances we had been able to minimise the negative impact on our business through careful monitoring of prices and planning our inventory. However, there is no assurance that our operating results will not be affected by any major fluctuations in steel prices as steel materials constitute the bulk of our direct operating costs.
4.1.2 Dependency on Major Suppliers We are dependent on our major suppliers, as disclosed in Section 6.13 of the Prospectus, which collectively contributed 48.97%, 59.05%, 61.78% and 41.46% of our total purchases for the FYE 31 December 2009 to 2012. For the FYE 31 December 20 12, we have two (2) suppliers which contributed above 10% of our purchases, namely Megasteel Sdn Bhd and Bright Steel Sdn Bhd. Notwithstanding that Megasteel Sdn Bhd and Bright Steel Sdn Bhd are our two (2) single largest suppliers, we have managed to maintained a stable business relationship with Megasteel Sdn Bhd and Bright Steel Sdn Bhd for whom we have been dealing with for approximately fourteen (14) and sixteen (16) years respectively. To further mitigate this risk, we also source from several other suppliers for our steel materials including Ann Joo Metal Sdn Bhd, Hiap Teck Hardware Sdn Bhd, CMC S.E. Asia Pte Ltd, Hyosung Corporation, Aperam Stainless Europe. S.A., Sumikin Bussan Corporation, Shijiazhuang Iron & Steel Co., Ltd and Stemcor (S.E.A.) Pte Ltd for the FYE 31 December 2012. 4. RISK FACTORS (Cont’d) Although we do not foresee any difficulty in the procurement of steel materials and have not previously experienced any material disruption in the supply of these materials nor are we overly dependent on a single/particular group of suppliers, no assurance can be given that we can continue to source sufficient quantities of steel materials at competitive prices from our current sources. 4.1.3 Regulatory Changes and Permits required by the Steel Industry Regulatory changes to the overall steel industry such as the possible imposition of the following trade restrictions may have an impact on the rolled steel industry: Steel products that are currently exempted from import and export duties may have duties imposed on them. Some of the steel products that are currently exempted from import and export duties include the following: • Flat steel products used as raw materials for the production of finished goods for the export market; • Flat steel products for which grades and specifications are not produced locally;
• Flat steel products used as raw materials for non-dutiable finished goods;
• All rolled steel products are exempted from export duty requirements.
Steel products that are currently subjected to duties, may have additional duties imposed.
The imposition of such restrictions on rolled steel products will have a negative impact on operators within the industry. This is because local operators may have to import affected steel products at higher
prices. The Malaysian goverrunent had announced in January 2013 the removal of import duty exemptions on 18 grades of hot-rolled steel coils except for those used as raw materials in the production of finished goods for the export market and non-dutiable finished goods starting from 1 February 2013. Operators, particularly manufacturers that have previously enjoyed the import duty exemption for the 18 respective grades of hot-rolled steel coils would be affected by the removal of these import duty exemptions. However, this policy is less likely to impact on operators who are in the trading of rolled steel products as they were not entitled to previous import duty exemptions on these 18 grades of steel. (Source: fMR Report) Our Group is not affected by the removal of the import duty exemption for the 18 grades of hot-rolled steel coils as we are involved in trading of rolled steel products. We currently operate under the jurisdiction of MITI, which seeks to regulate amongst others the importation of steel materials. As at LPD, MITI has granted us the required permits for the import of our steel materials. Although we do not foresee any major difficulties in obtaining the permits for the import of our steel materials, there can be no assurance that MIT! will continue to grant us the necessary permits for the import of our steel materials requirements in future. Further thereto, we are subject to import duties for purchases overseas. As import duties are subjected to regulatory changes, there is a risk that changes in import duties may affect Leon Fuat’s operations. For example, steel products that are currently subjected to import duties, may have additional import duties imposed while steel products that are currently exempted from import duties may also have
duties imposed on them. For the FYE 31 December 2009 to 2012, import duties on our business operations were minimal, which amounted to 0.65%, 0.94%, 0.64% and 0.19% of our total purchases respectively. 4. RISK FACTORS (Cont’d) In addition, supply of various steel products that are subjected to import duties may also be sourced from local suppliers. Furthermore, any changes in import duties would equally affect all operators within the affected segments of the iron and steel industry. Although the impact of changes in import duties on our business operations was minimal, there is no assurance that changes in import duties will not affect our future business performance. Hence, we have not previously experienced any regulatory changes that materially affect our business. However, there is no assurance that regulatory changes to the steel industry will not affect our future business performance. 4.1.4 Dependency on Imports The main materials required for our trading and processing of steel product operations are rolled steel products. Rolled steel product refers to primary steel products that have undergone hot-rolling and/or cold-rolling processes. Examples of rolled steel products include hot-rolled and cold-rolled flat and long products such as coils, plates, sheets/strips, bars, rounds, sections and wire rods. For the FYE 31 December 2012, our import of materials accounted for 36.85% of our total purchases. In addition, for FYE 31 December 2012, we also purchase from local stockists such as Hiap Teck Hardware Sdn Bhd and Ann Joo Metal Sdn Bhd whose supplies include imports. In Malaysia, Megasteel Sdn Bhd is the country’s sale producer of hot-rolled steel coils. Hot-rolled steel coil refers to a coil of steel that has passed through a pair of rollers to reduce its thickness at high temperatures above its re-crystallisation temperature. Megasteel Sdn Bhd does not produce an exhaustive range of hot-rolled coils. Hence, local operators are reliant on imports of hot-rolled coils for grades and specifications that are not produced locally. In addition, Megasteel Sdn Bhd may not be able to meet all the demands for hot-rolled coils and subsequent downstream products derived from hot-rolled coils like cold-rolled coils, plates and sheets. This is substantiated by the fact that in 2012, approximately three (3) million tonnes of flat-rolled steel products, which include hot and cold-rolled coils, plates and sheets, were imported. In 2012, Japan was the largest source of imports of flat-rolled steel products based on quantity, representing approximately 26% of Malaysia’s total imports of flat-rolled steel products. This was followed by Taiwan, South Korea and China, which accounted for approximately 22%, 19% and 17% respectively. Thus, local operators are reliant on imports to supplement local production which amounted to approximately two (2) million tonnes in Malaysia in 2012. As for rolled long steel products, there are a number of producers in Malaysia such as Amsteel Mills Sdn Bhd and Antara Steel Mills Sdn Bhd (both are part of Lion Industries Corporation Berhad), Kinsteel Bhd and Malaysia Steel Works (KL) Bhd. Hence, local operators are not over-reliant on imports ofrolled long steel products. This is substantiated by the fact that local production of long steel products, which include bars and rods, amounted to 2.7 million tonnes while imports amounted to 1.4 million tonnes in 2012. (Source: IMR Report) We have been dealing with Megasteel Sdn Bhd since 1999. Despite our dependency on imported materials, steel materials are commodity items and can be easily sourced from various local and overseas suppliers and manufacturers. Although we have not previously experienced any disruption in supply of imported products, there is no assurance that our dependency on imports will not affect our future business performance. 4. RISK FACTORS (Conl’d) 4.1.5 Disruptions to Processing Facilities and Business Operations OUf processing activities are dependent on the continued operation of our processing facilities. Any disruption to our processing facilities, such as breakdowns, failures, sub-standard performance of our machineries, fire or power failure, will have an adverse impact on our business operations. To mitigate this risk, we carry out regular maintenance of our machineries, such as lubrication of machines as well as timely replacement of components which are subject to daily wear and tear. As at LPD, we have not encountered any major disruptions to our processing facilities. However, there can be no assurance that any breakdown in our machineries in the future would not severely disrupt our operations. We are also aware of the consequences arising from inadequate insurance coverage for any accident and outbreak that could disrupt our business and seek to limit this risk through annual reviews of our insurance policies. Hence, we ensure the continuity of our insurance by renewing all the insurances annually. As at LPD, the total amount insured (comprising of various fire, vehicle, all risk and material and data damage insurances for our assets) is RM72.96 million representing approximately 130.45% of the NBV as at 31 December 2012 of the assets (net of NBV for land amounting to approximately RM27.36 million). Whilst we have taken the necessary steps to ensure that our assets are adequately covered by insurance and although we have not previously experienced any disruptions to processing facilities and business operations, there can be no assurance that any occurrence of such disruptions will not affect our future business performance. 4.1.6 Credit risk We generally grant our customers credit periods of between 30 days to 120 days. We are exposed to credit risks arising from trade receivables which may arise from events and circumstances beyond our control or events which are difficult to anticipate or detect, such as economic downturn or deterioration. In the event of significant delay or default in payment by our customers or where our customers face significant financial difficulties, we will have to provide for impairment loss on trade receivables or write off trade receivables as bad debts, which may adversely affect our financial perfonnance. We made additional provision for doubtful debts ofRM1.39 million and RMO.85 million for FYE 31 December 2010 and 2011 respectively and wrote off bad debts amounting to RM0.32 million, RMO.OI million, RMO.67 million and RMO.02 million for FYE 31 December 2009 to 2012 respectively. The amount written-off represented 0.09%, 0.002%, 0.01% and 0.005% of the total revenue for FYE 31 December 2009 to 2012. As at FYE 31 December 2009 to 2012, our provision balance is nil, RM1.39 million, RM1.82 million and RMl.72 million, respectively. Whilst there have been instances of writing off of bad debts, it had not had any material adverse effect on our financial performance. However, there is no assurance that we will not encounter significant impainnent loss or bad debts in the future. 4.1.7 Competition We face competition from existing competitors and potential new market entrants in the steel industry. To mitigate this risk, we leverage on our competitive strengths such as our broad range of facilities and products, our ability to provide reliable and consistent supplies of quality steel products and our experienced Board and key management personnel as set out in Sections 8.2.1 and 8.4.1 of this Prospectus. 4. RISK FACTORS (Conl’d) In line with our strategy to broaden our range of facilities and products, we are also expanding our processing activities as detailed in Section 6.18.1, which have certain barriers to entry such as capital investment requirements and technical expertise. Whilst we face industry competition, we continually maintain and adopt appropriate strategies to remain competitive. However, there can be no assurance that a change in the competitive environment would not have a material adverse impact on our business and fmancial performance. 4.1.8 Absence of Long Term Contracts We do not have any long-term contracts with our customers as the majority of our sales are based on purchase orders, which is a common practice in the industry. However, we have an established customer base and good business relationships with our customers, whereby six (6) of our top ten (10) customers have been dealing with us for at least seventeen (17) years. Although we have not previously experienced any material effect from the absence of long term contracts, there can be no assurance that such relationships will continue or that our customers will continue placing orders for our products. 4.1.9 Dependency on Executive Directors and Key Management Personnel We believe that human capital is one of our key success factors. Over the years, we have built a strong management and operations team that has vast experience in the steel industry and knowledge of our business as well as understanding of our customers’ needs and requirements. As such, any loss of our key personnel, without a suitable and timely replacement, may have a material adverse impact on our business and our continuing ability to compete effectively. The profiles of our Board and key management personnel are set out in Sections 8.2.1 and 8.4.1 of this Prospectus. As part of our strategy to retain our employees, we offer competitive remuneration packages for their contribution towards our success. In addition, we provide a healthy working environment, practise good workplace culture and uphold work ethics to create a sense of belonging and foster good working relationships amongst our employees. We also have in place a management succession plan and provide training and career development opportunities for our employees. Further, in conjunction with our Listing, we have allocated a portion of our Public Issue Shares to our eligible employees, including our key management personnel. Should these employees subscribe for our Shares, they will become shareholders of our Company and may therefore be further motivated to contribute to our success. Whilst we depend on the Executive Directors and key management personnel, we are not overly dependent on a single Director and/or key management personnel. Nonetheless, there can be no assurance that the above measures will be successful in attracting and retaining our key management personnel or ensuring a smooth transition should changes occur. 4.1.10 Borrowings and Financing Risk Our proforma total outstanding borrowings as at 31 December 2012 amounted to approximately RM134.74 million, comprising mainly trade facilities for purchases of materials, hire purchase, term loans and overdrafts. This translates to a gearing level of approximately 0.92 times, based on our proforma shareholders’ funds before our Public Issue ofRMI46.64 million. Assuming our Public Issue and utilisation of proceeds had been completed on 31 December 2012, our proforma gearing would be reduced to 0.67 times. 4. RISK FACTORS (Cont’d) In view that interest charged on the bank borrowings is dependent on prevailing interest rates, futnre fluctnations of interest rates could have a material effect on our profitability. In addition, the agreements for loan facilities may contain covenants which may limit onr future operating and financing flexibility and a breach of such covenants may result in the termination and/or enforcement ofsecurities granted for the relevant credit facility. We are aware of such risks and hence, shall take all necessary precautions to prevent the breach of onr financial obligations, whilst adhering to strict financial management and cash flow practices. In addition, our Group has continuously maintained a cordial relationship with onr principal bankers. Although we have not previously experienced any material adverse effect arising from interest rate increases on our financial perfonnance, the impact of an increase in interest rate charged by financial institutions (i.e BLR) in FYE 31 December 2010 and 2011 has resulted in an estimated increase in onr interest expenses by approximately RM0,44 million and RMO.16 million respectively. Nonetheless, there can be no assurance that our performance would remain favourable in the event of any adverse change in interest rates. 4.1.11 Political and Economic Risks Any adverse developments in the political and economic conditions, globally or locally, could materially and adversely affect our financial performance. These include risks of war, natnral disasters, global economic downturn, and unfavourable changes in government policies and regulations such as exchange rate and taxation controls. Although we have not previously experienced any adverse effect arising from the global and local political and economic changes in the past four (4) FYE 31 December 2009 to 2012 and whilst we continue to adopt effective measnres such as prudent financial management or efficient operating procedures, there can be no assurance that any adverse political and economic conditions would not materially affect our perforrnance. 4.1.12 Foreign Exchange Transaction Risk We source flat and long stainless steel, alloy steel and carbon steel from Europe, Japan, China and Korea among others. Therefore fluctuations in foreign exchange rates will have an impact on cost of materials. An unfavourable foreign exchange movement against RM may have an impact on our profitability. For FYE 31 December 2012, our purchases that are denominated in foreign currencies accounted for 37.87% of onr total purchases of which 37.68%, 0.13%, 0.05% and 0.01 % were transacted in USD, EUR, RMB and SGD respectively. However, we have in place certain hedging facilities with our bankers such as forward contracts and foreign currency accounts which can be utilised should the need arises. Notwithstanding the above and although we have not previously experienced any material adverse effect arising from foreign exchange fluctuations on our financial performance in the past four (4) FYE 31 December 2009 to 2012, there is no assurance that any foreign currency exchange fluctuations in the future will not adversely affect our financial performance. 4.1.13 Slowdown in the Manufacturing and Construction Sectors The manufacturing sector is a key user industry of flat steel products, while the construction sector is a key user industry of long steel products. Hence, any downturn in these sectors will have a negative impact on the overall rolled steel industry. Companies that supply both flat and long steel products would be in a better position to mitigate the slowdown in anyone of these sectors compared to companies that primarily provide either flat or long steel products. 4. RISK FACTORS (Cont’d) In addition, both the manufacturing and construction sectors are very large. Iu 2012, GDP of the manufacturing sector amounted to RM227.5 billion while GDP of the construction sector amounted to RM34.9 billiou. As such, the large size of each sector would provide some cushioning effect to operators during a slowdowu. (Source: IMR Report) We carry a range of products of various steel materials, including carbon, stainless and alloy steel. Our steel products consist of flat products such as coils, plates, sheets, welded tubes and pipes, sections (such as welded rectangular and square sections), and loug products such as bars (such as round, square, flat aud hexagon bars), rods, shafts, sections (such as rolled I-beams), augles and channels (such as rolled augle bars, and lip channels) and seamless tubes and pipes. Although our revenue for the past four (4) FYE 31 December 2009 to 2012 was largely contributed by flat products, we also have a long history of tradiug and processing of long products. Moreover, the diversity of our steel products enable us to meet the ueeds of a large customer base for a wide rauge of industry applicatious. For the FYE 31 December 2012, we had a base of approximately 3,700 active customers including manufacturers of metal products and components, fabricators of machinery, equipment and metal structures, companies in building, construction and infrastructure industries as well as hardware wholesalers and retailers. OUf diversity in product range and large customer base would serve as mitigating factors against slowdown in the manufacturing and/or construction sector. Although we have not previously experienced any material adverse effect from the slowdown in the manufacturing and construction sectors for the past four (4) FYE 31 December 2009 to 2012, there is no assurance that a slowdown in these sectors will not affect our future business perfonnance. 4.1.14 High Inventory Holding Cost We usually experience high inventory holding cost due to our position as an intermediary between the steel millers and industrial end-users. Delivery of supplies from local aud foreign suppliers range from oue (I) week and up to six (6) months respectively, while our customers usually expects delivery of our products uuder short notice. Hence, we keep sufficient level of inventory to provide timely delivery to our customers. Our inventory turnover for FYE 31 December 2012 is 96 days. The cost of inventory holdings in our warehouse may affect OUf financing cost. As most of our purchases are financed by trade fmancing facilities, in the event of slow demand for our products due to uncertain future direction of steel prices, our iuventory holding level may iucrease and inveutory holding period may lengthen, thus increasing its interest charges which may affect our financial perfonnance. Moreover, in the event there is a drop in steel prices, we may experience an exceptional write down in the carrying amount of our inventories to the net realisable values which may affect our financial perfonnance. Although we experience high inventory holding cost, our steel products do uot have a definite shelflife and do not become obsolete and hence we have not previously experienced any material adverse effect arisiug from high inventory holding cost on our fiuancial performance iu the past four (4) FYE 31 December 2009 to 2012. 4.1.15 Government Regulations Our activities and premises are governed by the conditions set forth in our manufacturing licenses, permits, registrations, certifications and conditions imposed by the relevant authorities. We have reuted a property bearing the address Lot 401-405, Jalan Tiga, Off Jalan Chan Sow Lin, 55200 Kuala Lumpur (“Property”) which houses au office and steel processing plant. The Property has been issued a temporary certificate of fitness (“TCF”) by the Dewau Baudaraya Kuala Lumpur 4. RISK FACTORS (Conl’d) (“DBKL”) since 1999 and the TCF has been renewed on a yearly basis. The current TCF expires on 16 December 2013. Whilst the TCF has been issued for the Property, there was a temporary staircase that linked to a store room which encroached into the site boundary the Property (“Extension I”). As at LPD, we have dismantled Extension 1 and we are unaware of any penalties imposed by the relevant authorities for Extension 1. In the event that the relevant authorities impose penalties due to Extension 1, we are ofthe view that such penalties will not have a material effect on our operations or finances. Our property bearing the address No. 6A, Jalan Tiga, Off Jalan Sungai Besi, Kawasan Perusahaan Sungai Besi, Kuala Lumpur (“Property 2”) is currently rented out to Supreme Steelmakers and used as a steel processing plant. Property 2 has been issued certificate of fitness by the DBKL since 1998. There was an unapproved extension in Property 2 whereby it involved an extended shed within Property 2 (“Extension 2”). As at LPD, we have dismantled Extension 2 and we are unaware of any penalties imposed by the relevant authorities for Extension 2. In the event that the relevant authorities impose penalties due to Extension 2, we are of the view that such penalties will not have a material effect on our operations or finances. We have also on 3 April 2013 obtained a confirmation letter from a civil and structural consultant to reaffirm that all our properties and rented properties as listed in Section 6.17.1 (save for the newly acquired land with building bearing the address of No. 16, Lorong Keluli IB, Kawasan Perindustrian Bukit Raja Selatan, Seksyen 7, 40000 Shah Alam) and 6.17.2 of the Prospectus are in compliance with its respective approved building plans. For the newly acquired land with building, we intend to build a new processing plant together with warehousing facilities on the said property, as disclosed in Section 6.18.1 of this Prospectus and will obtain the certificate of completion and compliance prior to occupying the said property. The Government does, from time to time, adopt policies and implement guidelines that may affect our business activities, such as new building regulations. Whilst we will take necessary steps to comply with the current regulations and its subsequent amendments, there can be no assurance that any change or amendments to the law, policies and regulations will not adversely affect our Group’s performance and profitability. 4.1.16 Penalties for Non Compliance of Government Regulations Our revenue from trading and processing businesses are dependent on our continued operation. Any delay in obtaining the necessary licenses or permits may affect the continued operations of our business. We only obtained our manufacturing licences in 2012 as our subsidiary companies were principally involved in the trading of steel and steel related materials prior to 1983. In 1983, our subsidiary companies purchased machineries to cut steel products to smaller sizes. There were no modifications to the steel material. Upon embarking on the Listing exercise, we were advised that our activities may be construed as manufacturing activities following which we applied to the MITI for the respective manufacturing licenses under the Industrial Coordination Act, 1975 (“lCA”) on 21 December 2011. We obtained our manufacturing licenses on 20 March 2012 (LF Klang), 26 March 2012 (LF Klang), 20 June 2012 (ASA Steel), 27 June 2012 (Supreme Steelmakers) and 24 July 2012 (LF Hardware) (“Granting Dates”). 4. RISK FACTORS (Cont’d) Section 3(1) ofthe ICA prohibits any person to engage in any manufacturing activity unless the person is issued a license in respect ofsuch manufacturing activities. Manufacturing activities as defined in the ICA is the making, altering, blending, ornamenting, finishing or otherwise treating or adapting any articles or substances with a view to its use, sale, transport, delivery or disposal and includes the assembly ofparts and ship repairing but shall not include any activity normally associated with retail or wholesale trade. Pursuant thereto and as stated in Section 3(2) of the ICA, a maximum penalty for the non-compliance of tlIe Section 3(1) of the ICA would carry a penalty of two thousand ringgit fine or 6 months imprisonment and to a further fine not exceeding one thousand ringgit for every day during which such default continues. We have already obtained manufacturing licences for all our subsidiary companies, without any fine or penalty imposed by MITior MIDA. Thus, our Board is of the opinion that the delay in the application for the said manufacturing licenses did not impact the operations ofour Group. There is no specific provision which deals with the delay in application for MITI licenses apart from the above and there is no precedent case law in relation to the application of Section 3(3) of the ICA for the imposition of penalties on companies which have delayed in their application for such manufacturing licenses. The essence of the lCA is to promote an orderly development of manufacturing activities in Malaysia. The absence of MITI licenses prior to the Granting Dates has not affected the legality of our operations and has not attracted any penalties. The licenses have been granted to the respective subsidiary companies, of which, during the process, we were not imposed witlI any penalties by MITI through MIDA. Save as disclosed above) we have complied with all the regulations and requirements imposed in the manufacturing licenses and we are unaware of any breach of such regulations. As at the LPD, there were no actions being taken by MITior MIDA pursuant to the above. Nevertheless, there can be no assurance that MITior MIDA will not impose such penalties in tlIe future. Whilst we continuously ensure compliance with relevant government regulations, there can be no assurance that any penalties) if imposed, will not adversely affect our Group’s performance and profitability. Notwithstanding the above measures, steps and efforts undertaken by our Company to mitigate the abovementioned risks relating to our business and industry, there can be no assurance and guarantee that we can successfully manage all the risks including our ability to compete successfully in the future, and our ability to obtain sufficient supply of raw materials from our regular suppliers. Further, there is no assurance that our customers will continue to place orders with us in the future and at the same levels as they had previously, or our ability to successfully manage our exposure to exchange rate fluctuations and financial risks or our ability to attract and to retain our key management personnel with similar level of experience and capabilities. Failure to do so could have a material and adverse impact on our business, financial condition and the results of our operations. 4. RISK FACTORS (Con/’,l) 4.2 RISKS RELATING TO INVESTMENT IN OUR SHARES 4.2.1 Delay or abortion of our Listing Our Listing may be potentially delayed or aborted in the event of the following: (a) our Underwriter exercising its rights pursuant to the Underwriting Agreement to discharge itself from its obligations; or
(b) we are unable to meet the public spread requirement of at least 25% of our enlarged issued and paid-up share capital to be held by a minimum of 1,000 public shareholders holding not less than 100 Shares each, at the time of our Listing.
We expect to meet the public shareholding requirement at the point of Listing by allocating the IPO Shares to the required number of public shareholders during the balloting/private placement processes. However, in the event that we are unable to meet the above requirement, monies paid in respect of any application accepted will be returned to you without interest within fourteen (14) days after we become liable to repay it. If any such monies are not repaid within 14 days after we and the Offeror become liable to repay it, then the provisions under sub-section 243(2) and 243(6) of the CMSA shall apply. 4.2.2 No prior market for our Shares and possible volatility of our Share price There is no prior market for our Shares. Accordingly, there can be no assurance that an active market for our Shares will develop upon our Listing or if developed, that such market will be sustained. In addition, our Shares could trade at prices that may be lower than our IPO Price as a result of many factors, some of which are not within our control and may be unrelated or disproportionate to our operating results. These include, amongst others, prevailing global and local economic conditions, the deptlt and liquidity of the market for our Shares and investors’ individual perceptions of our Group. 4.2.3 Control by Promoters Upon Listing, our Promoters will collectively hold approximately 71.38% of our enlarged issued and paid-up share capital. Depending on how they cltoose to vote and because of their shareltoldings, our Promoters will generally be expected to have significant influence on the outcome of certain matters requiring the vote of our sltareholders, unless they are required to abstain from voting by law and/or as required by the relevant authorities. Nevertheless, as a step towards good corporate governance, we have appointed one (I) Independent Non-Executive Chairman and three (3) Independent Non-Executive Directors and set up an Audit Committee to ensure that, inter-alia, any future transactions involving related parties are entered into on ann’s lengtlt basis and on nonnal commercial tenns whiclt are not more favourable to tlte related parties titan tltose generally available to the public and are not detrimental to our minority shareholders. 4.2.4 Dividend payments Our Company, being an investment holding company derives income mainly from dividends received from our subsidiary companies. Hence, our ability to pay future dividends is largely dependent on tlte performance of our subsidiary companies. In detennining the size of any dividend recommendation, we will also take into consideration a number of factors, including but are not limited to our financial performance, cash flow requirements, debt servicing and financing commitments, future expansion plans, loan covenants and compliance with regulatory requirements. Whilst we endeavour to make payments of dividends, no assurance can be given tltat we are able to pay any dividends in the future as a result of factors stated above. Please refer to Section 12.5 of this Prospectus for further infOlmation on our dividend policy.