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 AND MAY OCCUR EITHER INDIVIDUALLY OR IN COMBINATION, AT THE SAME TIME OR AROUND THE SAME TIME) THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE PERFORMANCE OF OUR GROUP. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND INVESTMENT CONSIDERA TIONS SET OUT BELOW ALONG WITH OTHER INFORMATION CONTAINED HEREIN IN THIS PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION. IF YOU ARE IN ANY DOUBT AS TO THE INFORMATION CONTAINED IN THIS SECTION, YOU SHOULD CONSULT YOUR STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR OTHER PROFESSIONAL ADVISER. THE RISKS AND INVESTMENT CONSIDERATIONS SET OUT BELOW ARE NOT AN EXHAUSTIVE LIST OF THE CHALLENGES THAT WE CURRENTLY FACE OR THAT MA Y DEVELOP IN THE FUTURE. ADDITIONAL RISKS, WHETHER KNOWN OR UNKNOWN, MAY HAVE A MATERIAL ADVERSE EFFECT ON THE FINANCIAL PERFORMANCE OF OUR GROUP. 4.1 RISKS RELATING TO THE BUSINESS AND OPERATIONS OF OUR GROUP 4.1.1 We are dependent on our Executive Directors for continued success and the loss of their continued services may affect our business Our success will depend on the continuing contribution of our Co-Founders and Executive Directors, namely Lim Kon Lian and Mok Mei Lan, for the strategic direction, leadership, business planning and development, and management of our Group. Our Executive Directors have played a pivotal role in our day-to-day operations as well as charting, formulating and implementing strategies to drive the future growth of our Group. The loss of any of our Executive Directors, and our inability to find a suitable replacement in a timely manner, may adversely affect our ability to maintain and/or im prove our business performance. As such, our ability to retain and also attract competent and skilled personnel is crucial for our continued success, future business growth and expansion. We have currently put in place a management succession plan which includes taking a proactive approach towards addressing talent management in order to ensure that the key management personnel of our organisation has the capability to undertake leadership positions. Our key management personnel are constantly exposed to various aspects of our business activities to ensure that they have full understanding on the necessary responsibilities and decision-making process. Our Group General Manager, Lim Pak Hong, has been earmarked as the successor to our Managing Director, Lim Kon Lian, and is actively involved in overseeing the management and operations of our Group. Please refer to Section 7.8 of this Prospectus for details on our Group’s management succession planning.
4.1.2 We rely on foreign workers in our manufacturing operations We rely to a certain extent on foreign workers, particularly in our manufacturing operations. In the last three (3) FYE 30 April 2013 to 2015 and six (6)-month FPE 31 October 2015, our foreign workers have increased from 41 to 50 to 68 and decreased to 59 employees, representing 30.37%, 33.78%, 37.78% and 34.50% of our total workforce respectively. Our foreign workers are currently primarily from Nepal. As the standard of living in Malaysia improves over time, we have found it increasingly difficult to hire local production workers for our manufacturing operations, and this difficulty may increase in the future. Currently, we obtain one-year visit pass (temporary employment) for our foreign workers, which are renewed on a yearly basis. 4. RISK FACTORS (Cont’d) If foreign worker visitor’s pass or visa policies in Malaysia, or in the countries in which we employ our foreign workers from, were to change in any way resulting in difficulties for our Group to maintain a sufficient foreign labour workforce, our business, financial condition and results of operations could be materially and adversely affected. In addition, our Group’s anticipated business growth is also subject to the expansion in our manufacturing operations, which would require a subsequent increase in labour to meet increased manufacturing activities. In February 2016, the Government announced its decision to suspend the intake of foreign workers from all countries, in an effort to encourage the local workforce to meet existing demand. This may result in our Group facing difficulties in hiring new foreign workers, both to meet increased activities of our Group and as replacement workers. If this happens, our Group will endeavour to mitigate any adverse impact arising out of the inability to hire new foreign workers by hiring local workers. However, the hiring of local workers may come at a higher cost, at which our management will take necessary cost saving measures to minimise the impact on the financial performance of our Group. Further, as set out in Section 5.8.1 (iv) of this Prospectus, our Group aims to acquire new machinery to increase automation in our manufacturing processes, and as a result, this may also reduce our reliance on manual labour in our operations. 4.1.3 We are subject to fines and penalties if we fail to comply with applicable laws, regulations and licensing requirements We require various approvals, licences, permits and certificates to operate our business and facilities, which are set out in Section 5.7.9 of this Prospectus. We may be required to renew these approvals, licences, permits and certificates or to obtain new approvals, licences, permits and certificates. The medical bed, peripheral and accessory industry is subject to Government regulations pertaining to the quality of the products that are manufactured and sold. In Malaysia, the MDA regulates the industry by monitoring the quality and standards of all medical devices imported, exported or placed in the market. Under the Medical Device Act 2012 (Act 737), no medical device shall be imported, exported or placed in the market unless it is registered. Notwithstanding this, the Medical Device (Exemption) Order 2015 permits persons who made an application to register a medical device on or prior to 30 June 2016 to continue to import, export or place in the market such medical device pending registration. As such, we are permitted to import, export or place in the market such medical devices for which we have made applications, pending its registration. For any applications made after 30 June 2016, we will not be able to import, export or place in the market such medical devices without registration of such medical devices unless further exemptions similar to the Medical Device (Exemption) Order 2015 are made by the Minister of Health. The MDA will issue a certificate of registration for a medical device upon being satisfied that:(i) the medical device has been subjected to the conformity assessment procedures carried out by an independent conformity assessment body registered under the Medical Device Act 2012 (Act 737);
(ii) the applicant has complied with all requests by MDA to provide additional information, particulars or document on the application or sample of the medical device; and
(iii) the MDA having inspected the premises in which the medical device is being manufactured as it considers proper and necessary. 42 4. RISK FACTORS (Cont’d) If the above circumstances are not met, then we may not be awarded registration of our medical devices and we will not be able to import, export or place in the market such medical devices. We are also subject to various health, safety and environmental laws and regulations in Malaysia. These include requirements related to the emission and discharge of hazardous materials into the ground, air or water from our facilities, in particular with regard to the discharge of materials from our manufacturing activities. As these laws and regulations become more stringent, the relevant regulatory authorities may require us to purchase and install new or additional pollution control equipment or to make operational changes to limit actual or potential impacts on the environment or the health of our employees. While we have not experienced any significant difficulty in renewing and maintaining our approvals, licences, permits and certificates, we cannot assure that in the future the relevant authorities will issue or renew any required approvals, licences, permits or certificates in a timely manner or at all. Failure by us to renew, maintain or obtain the required approvals, licences, permits and certificates may interrupt our operations or delay or prevent the implementation of any capacity expansion or other such projects as undertaken by our Group. We may also be subject to the applicable penalties or fines under the relevant laws or regulations in the event we are deemed to be non-compliant with these licensing requirements. In addition, should there be any subsequent modifications of, additions or new restrictions to the current compliance standards, we may incur additional costs to comply with such new or modified standards. As a result, this may result in a material adverse impact on our business, financial condition and results of our operations. 4.1.4 We are subject to risks relating to the economic, political, legal or social environment in the markets in which we operate We operate principally in Malaysia and derive a portion of our revenue from businesses outside Malaysia, from over 30 countries across six (6) continents. For the last three (3) FYE 30 April 2013 to 2015 and six (6)-month FPE 31 October 2015, our overseas sales accounted for 22.57%, 21.97%, 19.49% and 25.37% of our total revenue of RM28.077 million, RM38.893 million, RM39.039 million and RM16.057 million respectively. As we continue to expand our business globally, it is reasonable to expect that our financial condition and results of operations would be affected by the economic, political, legal or social conditions in the countries where we operate, transact business or have interests, making us increasingly susceptible to the operational risks caused by these conditions. Conducting business in other markets also requires us to comply with foreign laws and regulations covering many aspects of our operations, including trade laws and licensing regulations, and these laws and regulations may change, or may be updated and amended, from time to time. Much of the above changes are beyond our control. Whilst we practise prudent financial management and efficient operating procedures, there can be no assurance that any adverse economic, political and legal developments will not materially affect the performance of our Group. 4. RISK FACTORS (Cont’d) 4.1.5 Our business is exposed to sudden and unexpected equipment failures and natural disasters which may lead to interruptions in our operations Our Group’s manufacturing activities are supported by steel working machinery and equipment such as welding, cutting, bending, punching, drilling and grinding machines. These machinery and equipment may, on occasion, be out of service as a result of unanticipated failures or damages sustained during operations. Further, our manufacturing plant is also subject to catastrophic loss due to natural disasters such as floods and fires. These unexpected events may cause interruptions in, or prolonged suspension of, any substantial part of our manufacturing activities; or any damage to, or destruction of, all or part of our manufacturing plant. In addition, as our manufacturing activities are dependent on continuous supply of electricity, any major disruptions to the supply of electricity may result in interruptions in our operations. Any prolonged interruptions in our business operations will affect our production schedules and timely delivery of our products to our customers. This could have an adverse impact on our business, financial conditions and results of operations. We mitigate the risk of machinery and equipment breakdown and failure by ensuring regular maintenance and routine servicing of the machinery and equipment is carried out. Our machinery and equipment suppliers also provide on-site support if required. As at the LPD, we have not encountered any major breakdown or failure in our machinery and equipment that had a material adverse effect on our Group’s operation and financial performance. 4.1.6 We may not be able to effectively manage our growth or successfully implement our business plans and strategies We plan to enhance our market presence through further expansion of our local and overseas businesses. In order to successfully implement our expansion plan, it is imperative that our Group remains competitive, and to do so, we are committed to increasing our operating efficiencies through increased automation and expansion of our manufacturing facilities, and the enhancement of our sales and marketing activities to support our growing network and product base. Please refer to Section 5.8.1 of the Prospectus for further details of our future plans and strategies. Our expansion plans involve a number of cost-related risks, including but not limited to, capital expenditures incurred in respect of expansion of our manufacturing plant, costs of amalgamating our land and properties, costs of purchasing and installing of new machinery, equipment and software systems, marketing and promotional expenses, as well as other working capital requirements. Whilst our Executive Directors and key management personnel are experienced in this business and we have sufficient resources at our disposal to execute our business expansion plans, we are not able to guarantee that we will be successful in executing our business expansion plans, nor can we assure that we will be able to anticipate all the business and operational risks arising from our future business plans. Any failure to do so, including any failure or inefficiencies in managing our business growth, may lead to a material adverse effect on our business operations and financial performance. 4. RISK FACTORS (Cont’d)
4.1.7 We are subject to the volatility in prices of our raw materials Our manufacturing process is dependent on obtaining adequate supply of raw materials on a timely basis and of the required quality. Our major raw material is steel materials (comprising sheets, tubes and bars) as well as electrical components. The prices of steel sheets, tubes and bars are, amongst others, subject to market supply and demand conditions, prices of raw materials for the production of steel, prevailing energy costs and Governmental regulations. Some of our electrical components are sourced directly from overseas, which is susceptible to foreign currency exchange fluctuations. Any material changes in the conditions of any of the above factors may cause an increase in the price of steel and electrical components, and this may lead to a rise in our cost of production. If we are unable to pass on this rise in raw material cost to our customers, we will be faced with bearing the increased costs and this may have a material impact on our results of operations and business performance. Currently, our Group neither hedges our exposure to the fluctuations in commodity prices and foreign currency exchange nor enter into any long-term raw material supply or foreign exchange contracts. Nevertheless, to-date, we have managed any fluctuations and volatility in steel material prices and foreign currency exchange through prudent management practices by:• keeping in close contact with our suppliers in respect of the movement of prices as well as keeping abreast of market conditions;
• purchasing in bulk and/or by cash, where possible, to optimise discounts from our suppliers and maintain acceptable stock levels; and
• maintaining foreign currency accounts for payment of our foreign purchases and/or receipt of export sales as mentioned in Section 4.1.10 of this Prospectus.
However, we are unable to guarantee that any future abrupt and unexpected increases in prices of raw materials will not materially affect our business and operating results.
4.1.8 Our insurance coverage may not be adequate to cover all losses or liabilities that may arise in connection with our operations We maintain insurance at levels that are customary in our industry to protect against various losses and liabilities. However, our insurance may not be adequate to cover all losses or liabilities that might be incurred in our operations. For example, while we are insured against losses resulting from fires, we do not maintain insurance against losses at our manufacturing plants as a result of burglary and/or natural disasters. Moreover, we will be subject to the risk that in the future we may not be able to maintain or obtain insurance of the type and amount desired at reasonable rates. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition and results of operations. 4. RISK FACTORS (Cont’d) 4.1.9 We may not be able to secure funding, especially on terms acceptable to us, to meet our future capital needs Our ability to obtain external financing and to make timely repayments of our debt obligations are subject to various uncertainties, including our future results of operations, financial condition and cash flows, the performance of the Malaysian economy and the markets for our products, the cost of financing and the condition of financial markets, and the continuing willingness of banks to provide new loans. We cannot assure that any required additional financing, either on a short-term or long-term basis, will be made available to us on terms satisfactory to us or at all. If adequate funding is not available when needed, or is available only on unfavourable terms, meeting our capital needs or otherwise taking advantage of business opportunities or responding to competitive pressures may become challenging, which could have a material and adverse effect on our business, financial condition and results of operations.
4.1.10 We are exposed to foreign exchange transaction risks Our export sales are predominantly in USD and SGD, whilst some of our purchases of raw materials are denominated in SGD, USD, GBP and EUR. As a result, we are exposed to fluctuations in foreign currency exchange rates and any adverse movements in the foreign exchange currency markets may have a negative impact on our business performance, financial position and operating results. Currently, we maintain foreign currency accounts (i.e. USD and EUR) for payments of our foreign purchases and/or receipts of export sales. Our management does not actively hedge our Group’s foreign currency exposure. We constantly monitor and review our Group’s need to hedge. Should this exposure become substantial, we will consider hedging our position. Please refer to Section 11.4.1 (d)(i) of this Prospectus for further information on our foreign exchange transactions. 4.1.11 We may not continue to be profitable in the future or be able to achieve increasing or consistent levels of profitability We have, over the years, practised sound financial management via efficient credit control measures, prudent cash flow management and careful consideration of operating expenditure as well as any proposed capital expenditure and its effect on our Group. For the past three (3) FYE 30 April 2013 to 2015 and six (6)-month FPE 31 October 2015, we achieved gross profit margin of 36.77%, 42.00%, 40.05% and 43.24% respectively and PAT margin of 15.81%,15.44%,15.27% and 11.10% respectively. Whilst we would exercise our best endeavour to maintain or increase our gross profit margin and/or our profitability, there is no assurance that our Group’s performance will not be adversely impacted by changing market conditions and an evolving competitive environment. We may be unable to sustain our gross profit margin and/or profitability due to continuous changes in market conditions and competitive environment, where our selling prices may be adversely impacted in our efforts to maintain market share. 4. RISK FACTORS (Cont’d) In addition, according to the IMR Report, the competitive environment of the medical bed, peripheral and accessory industry has evolved in the past in terms of a decrease in dominance of foreign medical bed, peripheral and accessory industry players relative to local industry players, as indicated through a reduction in percentage of imports of the medical bed, peripheral and accessory market size in Malaysia between 2008 and 2014, from 86.7% in 2008 to 40.5% in 2014. While in the past, the changes in the competitive environment of the medical bed, peripheral and accessory industry were in our favour, we are not able to provide assurance that future changes in the competitive environment will not disrupt our Group’s ability to continuously remain profitable or be able to consistently achieve our desired levels of profitability. 4.1.12 The lack of long-term contracts may result in the fluctuation in our Group’s performance Our Group’s sales are mainly based on purchase orders and occasionally other forms of confirmed orders. We have not entered into any long-term contracts with our customers. The lack of long-term contracts is mainly due to the nature of our business and prevail ing customer practices. The absence of long-term contracts may result in the fluctuation of our Group’s sales and overall business performance. However, our Group has established long standing and strong relationships with our customers, including Agents, Distributors and project consultants, and have not, to-date, faced any material fluctuations in our sales as a result of the absence of long-term contracts. Our established relationships with our customers will also provide us with the platform for sustained business continuity and growth. 4.1.13 We are dependent on the healthcare services industry for our success and growth We serve the healthcare services industry, as our end-users are mainly hospitals and medical centres in the public and private sectors as well as other healthcare-related facilities. Growth in the healthcare services industry depends on various factors, particularly in the number of patient admissions (which are driven by factors such as a rise in incidences of chronic diseases, growing ageing population, and increased accessibility to healthcare services due to growth in income and/or uptake of medical insurance), as well as increases in public and private healthcare expenditure. Any decrease or reduction in public and private healthcare expenditure may have an impact on the spending on hospital supplies and equipment. In private hospitals, the purchase of our products could be reduced due to lowering or tightening of hospital budgets. In addition, any cutbacks on public healthcare expenditure could negatively impact the sales of our products. Any of the above factors could decrease demand for our products, leading to reduced sales volume and impacting our Group’s revenue and profitability. Nevertheless, the healthcare services industry is resilient, as demonstrated by its uninterrupted growth. Globally, total healthcare expenditure on healthcare services grew from USD4.3 trillion (RM16.3 trillion) in 2004 to USD7.5 trillion (RM23.6 trillion) in 2013, registering a CAGR of 6.4% during the period. In Malaysia, during the same period, total healthcare expenditure increased from RM17.8 billion in 2004 to RM41.0 billion in 2013, at a CAGR of 9.7%. More notably, in both the global and local healthcare services industries, growth in healthcare expenditure has been uninterrupted during this period. (Source: IMR Report) 4. RISK FACTORS (Cont’d)
4.1.14 We face competition from other industry players We compete with other manufacturers of medicallhealthcare beds, peripherals and accessories as well as agents, trading companies and distributors who carry either third party branded products or third party manufactured products, inclUding imports. As such, we compete with both locally manufactured and imported products. Hospitals and medical centres place utmost importance on patient safety, and as a result, they are careful and diligent when selecting manufacturers and/or suppliers. Products need to be of high quality, reliable and equipped with relevant safety features, besides providing comfort with user-friendly features, and manufacturers and/or suppliers must place emphasis on strong after-sales service. Hence, to remain competitive, our Group must continuously ensure that our products maintain all of the above attributes, as failure to do so may negatively impact our Group’s track record and industry reputation, leading to a loss of business to our competitors and damage to our overall business performance. Our Group strives to manufacture products that are of high quality by ensuring that our manufacturing processes undergo stringent quality control procedures. Our Group also ensures that our products are reliable by using high quality raw materials from our trusted suppliers. Furthermore, we undertake R&D activities to ensure that we stay upto-date with the latest market trends and demands, in order to provide products with the relevant safety and user-friendly features and to ensure that we are prepared to carry out product customisations as and when required by our customers. Our Group also has a dedicated after-sales team to provide after-sales support. 4.1.15 We may be adversely affected by product defects, and this may lead to liability claims and may result in negative perception towards our products and/or our Group Our products have warranty periods between one (1) to four (4) years from the date of purchase and/or date of successful testing and commissioning and during this warranty period, we are liable to repair and/or exchange our products should our customers experience any product defects. We are thus obligated to ensure that the final product, which comprises components and parts which we manufacture such as steel frames and fittings, as well as fittings and accessories sourced from suppliers and outsourced manufacturers, are functioning as per design plans and customer requirements, before it is delivered. Failure to do so could result in losses from repair costs and/or product warranty claims, and may damage our industry reputation as a reliable and trusted manufacturer of medicallhealthcare beds, peripherals and accessories. An adverse reputation or negative perception regarding the safety or quality of products that we manufacture, or our Group in general, could also result in substantially lower demand for our products. Further, any significant product defects which may impact the safety of patients or healthcare professionals could result in product liability claims and loss of customer confidence in our products, and this would materially impact future demand, which in turn could have an adverse effect on our financial position, results of operations and prospects. Nevertheless, we are committed towards stringent quality control procedures for our manufacturing processes given our compliance to ISO 9001 :2008 and EN ISO 13485:2012 since 2001 and 2005 respectively, as well as our CE registration since 2009. We also inspect, test and calibrate fittings and accessories, particularly electrical components and hydraulic parts, before they are assembled into the final product to ensure these parts are in proper working condition. Instances of product defects were less than 5% of the total number of medicallhealthcare beds sold in each of the last three (3) FYE 30 April 2013 to 2015. For the six (6)-month FPE 31 October 2015, the instances of product defects were less than 10% of the total number of 4. RISK FACTORS (Cont’d) medical/healthcare beds sold during the period. This was mainly due to a one-off incident where our customer had provided feedback on a medical bed with a particular defect. As a preventive measure, our Company had also rectified all the medical beds in the same batch that was delivered to the customer. For the past three (3) FYE 30 April 2013 to 2015 and six (6)-month FPE 31 October 2015, product warranty claims made against our Company amounted to RMO.010 million, RMO.015 million, RMO.014 million and RMO.008 million respectively, which is accounted for in our selling and distribution expenses. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK