4. RISK FACTORS 4. RISK FACTORS You should evaluate and consider carefully, along with other matters in this Prospectus, the risks (which may not be exhaustive) below. Additional risks, whether known or unknown, may in the future have a material adverse effect on us or our Shares. 4.1 RISKS RELATING TO OUR BUSINESS AND INDUSTRY 4.1.1 We are exposed to inherent risks in the property development industry Our Group is subject to inherent risks in the property development industry, which may include changes in economic and political conditions, inflation, changes in business conditions such as shortage of labour supply, increase in labour and raw material costs, rise in financing costs and fluctuating demand for properties. We seek to minimise these risks through, inter-alia, careful identification of the type of property development projects to be undertaken, prudent financial policy, careful planning and close monitoring of our projects, effective human resource management and providing competitively priced properties with attractive designs. 4.1.2 Delay in completion of projects may adversely affect our business performance and financial position The timely completion of property development projects may be subject to external factors which may be beyond the control of our Group, such as obtaining licences, permits or approvals from relevant regulatory authorities, availability and adequacy of raw materials and labour, weather conditions and changes in government policies. In the event the delay in delivery extends beyond the contractually specified period, the purchasers may also be entitled to claim liquidated ascertained damages under the terms of the sale and purchase agreements or they may choose to terminate the sale and purchase agreement and claim refund of all monies paid and/or damages for failure of delivery. There is no assurance that we will not experience significant delays in completion of our projects which may adversely affect our Group’s reputation and financial performance. To mitigate such risks, our Directors and management monitor the project schedules closely to minimise any delay in the completion of our projects. Our Group had implemented measures such as the launching of projects in phases and the monitoring of work done block by block or precinct by precinct to minimise any delay. In addition, our Group has also ensured that the infrastructure works are completed on a general basis before the officiai launch of a project. Nevertheless, as at the LPD, our Group has not experienced any delays in the completion of our development projects. Notwithstanding this, there can be no assurance that the aforementioned factors will not lead to delays in the completion of our property development projects.
4.1.3 Difficulty in sourcing strategically located land banks The success of our Group in the property development industry is very much dependent on the location and size of our land bank in order to sustain our future growth. Failure to do so would impair our ability to compete effectively with other property developers which in turn may have a material adverse impact on our business and financial performance. 4. RISK FACTORS (Coni’d) Although our Group possess strategic land banks and was able to purchase or jointly developed relatively attractive and sizeable land bank in the past, there can be no assurance that our Group will be able to continue to do so at commercially viable prices or terms in the future. As at the LPD, our Group has approximately 1,558 acres of land located in Negeri Sembilan and Johor held for on-going and future development. The said land bank is expected to be sufficient for our on-going and future development needs for the next six (6) years. Nevertheless, our Group will continue to identify strategic land bank for future acquisition and seek for opportunities with land owners to jointly develop such land on commercially viable profit sharing terms to ensure sustainability of our future grow1h. 4.1.4 Our business and operations may be affected by cost of development for property projects Appreciation of land costs and fluctuation of construction costs are inherent risks in the property development industry.· Higher cost of land and construction costs, such as cost of building materials, labour costs, sub-contractors fees and overheads, will affect the profit margin of property developers where the selling prices of its development properties and demand for these properties may be adversely affected. Our Group’s project management division which undertakes planning and management of projects enables u? to better manage our development costs. In addition, we have a large pool of suppliers and sub-contractors which enables us to source for building materials and sub-contractors at reasonable prices. Fluctuation in cost of raw materials such as iron and steel materials is an inherent risk in the property development industry. The building materials used in our property development projects represent a significant proportion of the total construction costs such as steel bars and metal, concrete, clay materials, concrete materials, premix, crusher run, aggregates, and quarry dusts, cement, wood materials and hardware materials. Any increase in the costs of these raw materials may adversely affect our Group’s profit margin where the selling prices of our properties are fixed. Even if we are able to increase the selling price of our development properties, the demand may be adversely affected. In a situation where we have already launched our project and the cost of raw materials increased more than what we had planned for, then it will result in a lower gross profit margin for us. This is because we are unable to change our selling prices once we have published them and taken sales bookings. For illustration purposes, assuming an increase in construction costs by 10%, it will cause our GP margins to decrease by approximately 5% based on our financial results for FYE 31 December 2012. Notwithstanding this, during the FYE 31 December 2012, we were not affected by any substantial increase in material costs. However, as some of the building materials such as iron, steel and cement, are commodities where prices of these raw materials are subject to fluctuations in global market prices, all property developers that use these materials are equally affected. There can be no assurance that any change in the cost of development for our Group’s property projects will not have a material impact on our performance. As such, our Board seek to limit these risks by prudent management of our projects and closely monitoring the development costs while making reasonable efforts to maintain quality. 4. RISK FACTORS (Cont’d)
4.1.5 Property overhang Property overhang is commonly caused by oversupply andlor low take-up rate of new launches by developers. A continuing rise in property overhang will have an impact on property developers within the industry. In 2012, the number of completed and unsold residential units reached 15,000 units, amounting to RM4.7 billion in Malaysia (Source: Independent Assessment of Property Development Industry in Malaysia prepared by Vital Factor). The property development industry is dependent on the economic and political conditions of Malaysia, and is usually one of the first few sectors to reflect the recovery or downturn in the economy. However, some of the Government’s initiatives would help to mitigate the property overhang risks. These include My First Home Scheme programme launched by the Government under the 2012 BUdget to help young adults with earnings below RM3,OOO per month to purchase their first home. Subsequently in the 2013 BUdget, the Government announced that the income limit would be raised to RM5,OOO per month for individual loans and RM10,OOO per month for joint loans of husband and wife. Home buyers under this programme are allowed to obtain 100% financing loan from financial institutions and they do not have to pay a 10% down payment. According to the Budget 2012, the maximum property value allowed under the scheme had been increased from RM220,OOO to RM400,OOO effective form 1 January 2012. The aforementioned is aimed at stimulating the demand for properties and house ownership in Malaysia, which is expected to have a favourable impact on our Group’s business. Our Group will continue to implement various measures to ensure the viability and ability of our Group to withstand the effects arising from the property overhang risks. These include, inter-alia, delivering quality services and timely project completion, strengthening of our Group’s credit control policies, close monitoring of project costs and sub-contractors’ performance to ensure the profitability of our Group is sustained. We have also put in place a detailed in-house market study to determine the market demand and response for any projecllaunched or to be launched by our Group.
4.1.6 We are exposed to competitive risk Our ‘Group is exposed to competition from other property development companies in Malaysia. There are a large number of local and foreign property developers undertaking property development in Malaysia and many of these property deveiopers have significant financial, managerial, marketing and other resources. The competition arises in respect of the availability of strategically located and reasonably priced land for development, the supply of labour and raw materials and the selling prices of developed properties. Intense competition may result in highly competitive. pricing which may consequently affect our Group’s financial performance. Our Group has taken pro-active measure to mitigate competitive risks by constantly reviewing our marketing strategies and monitoring market conditions. We also keep abreast of new architectural and engineering designs and trends to stay ahead of competition and to better meet the requirements of our customers. Furthermore, our Group is already in an advantageous position compared with our competitors as our land banks in Negeri Sembilan and Johor are strategically located within the vicinity of respective city centres or townships. Over the years, the value of houses and shop offices in these areas have been appreciating and our Board believes that this trend will continue in the future. 4. RISK FACTORS (Cont’d) Notwithstanding this, there is nO assurance that our pro-active measures can effectively mitigate the potential adverse effects of competition on our Group’s financial performance and position. 4.1.7 We depend on key management personnel for our continued success Our Group’s success to-date can largely be attributed to the contributions and expertise of our existing Directors and key management personnel, some of whom have more than 20 years of experience in the property development industry. Our continued success will depend, to a significant extent, On our ability to retain the services of our Directors and key management personnel. The loss of the services of our Directors and key management personnel without suitable and timely replacement, or the inability to attract and retain other qualified personnel, could adversely affect our business operations. As such, we have taken steps to ensure that our Group’s employees· are given recognition and adequately rewarded for their contribution to the success of our Group. We have also made continuous efforts to train and groom the junior members of our management team to gradually assume more responsibilities as part of our management succession plan. 4.1.8 Non-renewal and/or failure to obtain licences and permits Our Group has obtained certain licences and permits from various governmental authorities and quality accreditations from internationally recognised bodies. However, some of these approvais, licences, permits and quality accreditations are subject to periodic review and renewal by the relevant governmental authorities. In addition, the standards of compliance required may from time to time be SUbject to changes. Nonrenewal or revocation of our Group’s approvals, licences, permits and quality accreditations may have an adverse impact On our operations, business and reputation, hence affecting our financial performance. Our Group may also need to apply from time to time for new licences or permits for the new property development projects. Failure to obtain such licences or permits may cause disruption or delay in the progress of the new property development projects. Although our Group has not experienced any revocation and/or non-renewal of the requisite approvals, licences, permits or quality accreditations, there is nO assurance that the existing approvals, licences, permits or quality accreditations for certain subsidiaries will be renewed and obtained in a timely manner. 4.1.9 We are exposed to the risk of termination of our joint venture agreements Due to the majority of our Group’s projects being embarked upon On a joint venture basis, we are exposed to the risk of the termination of our joint venture agreements. However, based On our past track record, we have never faced the termination or abortion of any joint venture development projects that we have Undertaken in the past as a result of any default of obligations or breach of responsibilities by us or our partners. We have always met our responsibilities as and when they are due and have never defaulted on any obligations. Although our Group has never experienced any termination of our joint venture agreements as a result of any default of obligatiOns by us or our partners, there is no assurance that we will not face any such risks in the future. 34 4. RISK FACTORS (Cont’d)
4.1.10 We may be affected by financial risks Our working capital and capital expenditure requirements are funded by internally generated funds and external financing in the form of borrowings and credit arrangements with our suppliers and sub-contractors. We generally have credit terms of up to sixty (60) days with our suppliers and sub-contractors. Save as disclosed in Section 12.5.3 of this Prospectus, we do not have any other borrowings and indebtedness. As our Group has interest-bearing borrowings which are dependent on the prevailing interest rates, future fluctuations in interest rates could materially affect our Group’s debt repayment obligations. Currently, we enjoy good credit standing with our bankers and have adequate credit facilities for our operations. Our credit facilities may also be subject to periodic review and we are also bound by certain restrictive covenants pursuant to the credit facility agreements that we have entered into with our bankers and financiers, which may limit our Group’s operating and financial flexibility. Such covenants are commonly contained in credit facility agreements of such nature. Any breach of such covenants may give rise to a right by the bankers or financiers to terminate the relevant credit facilities and/or enforce any security granted in relation to the particular credit facility. Our Directors and relevant key management personnel will continue to monitor our Group’s compliance with all the covenants and take all precautions necessary to prevent any breaches. In order to ensure our funding requirements are adequately met and external financing, where necessary, is secured on a timely basis, our Group practises prudent financial management. In addition, our Listing will enabie us to tap the capital markets in the future to meet our funding requirements when the need arises. However, there is no assurance that we will have sufficient credit facilities for our working capital and capital expenditure requirements or that future fluctuations in interest rates will not adversely affect our ability to meet financial obligations as and when they become due and payable.
4.1.11 Defects liability In line with industry practice and the nature of our development projects, our Group extends a defect liability period which ranges from 12 to 24 months from the official handing over of the completed projects, depending on the nature of the contract. During the defects liability period, we are liable for any repair work, reconstruction or rectification of any defects which may surface or identified during this period at our own cost. If we are reqUired to rectify defects during the defects liability period, it may result in an increase in development costs and affect the profitability of that partiCUlar ·project. Our Group had implernented various measures to mitigate this risk such as strict quality control procedures at various stages of our development projects to ensure that all the work specifications are met and defects are minimal. Furthermore, our project management team monitors and supervises the sub-contractors in order to ensure the timeliness of completion and the quality of the development projects. Todate, our Group has not been subject to any material defect liability claims. Nevertheless, there is no assurance that any repair, reconstruction or rectification works to be carried out during the specified defects liability period will not have a material and adverse impact on our Group’s financial performance. 4. RISK FACTORS (Cont’d) 4.1.12 The accounting outcomes of our Group may be affected as a result of any change to the FRS and related interpretations after the date of this Prospectus Recent developments in the financial reporting framework have seen many changes and updates made to the International Financial Reporting Standards (“IFRS”) recently adopted by the Malaysian Accounting Standard Board (“MASS”). Hence, Dur GrDup is nDt excluded from the impact of new IFRSs and interpretatiDns by the International Financial Reporting Interpretations CDmmittee (“IFRIC”). FurthermDre, there is a specific interpretation by IFRIC namely IC Interpretation 15: Agreements fDr the CDnstruction of Real Estate (“Ie 15”) which would significantly affect the annual financial repDrting Df all property develDpment cDmpanies. The effective date of this IC 15 tD all public companies engaged with property development activities is fDr the financial periDd beginning On Dr after 1 January 2014. Adoption of IC 15 wDuld resun in significant changes tD the recognition of Dur Group’s revenue. With the adDption of IC 15, our Group’s revenue and correspDnding develDpment CDSt will only be recognised upon completion Df Dur respective develDpment projects, as oppDsed to the percentage Df cDmpletiDn method presently adDpted by Dur Group. In the event Dur Group does nDt cDmplete any property development project in any given financial year, compliance with IC 15 may result in our Group’s profit for the said financial year to be materially and adversely affected. TherefDre, with the adoptiDn Df IC 15, the timing fDr the cDmpletiDn of our property develDpment projects will be crucial in ensuring the recognition Df revenue and the eventual financial result Df our Group is maintained. The financial impact of the adoption Df IC 15 is Dn the different basis Df recognitiDn Df revenue by the Group from percentage Df compietiDn method tD completiDn methDd. As the IC 15 is scheduled to be effective for the financial periDd beginning On or after 1 January 2014, it will have nO financial impact Dn the Group fDr the FYEs 31 December 2009,2010,2011,2012 and 2013. However, the potential financial impact for the FYE 31 December 2013 is a restatement Df the audited financial statements tD reflect the adDption Df IC 15 as thDugh it has been adopted in the FYE 31 December 2013 and is merely fDr comparisDn purposes. The actual financial impact Dn the adDption Df IC 15 Dn the Group cannDt be reasDnably and reliably quantified at this juncture.
4.1.13 Our operations may be affected by material litigations, claims or arbitrations As at the LPD, our Group is not engaged in any material litigatiDn Dr material arbitratiDn proceedings, which have Dr may have material effects On Dur business Dr financial pDsitiDn, and our DirectDrs are unaware Df any proceeding pending or threatened Dr of any fact likely to give rise to any proceedings, which may materially affect Dur Group’s business Dr financial pDsitiDn. However, there can be no assurance that there will be nD proceedings in the future that could adversely affect the operations and profitability Df Dur Group. 4. RISK FACTORS (Cont’d)
4.1.14 We are subject to government policies, legislations and regulations The property development and construction industry in Malaysia is governed by regulations, acts and requirements which have been established to control and protect individual consumers as well as to set minimum standards for the property development and cOnstruction industries. The legislations, regulations and requirements that govern the property development and construction industries include, but are not limited to, the Malaysian Construction Industry Development Board Act 1994, the Housing Development (Control and Licensing) Act 1966, the Housing Development (Control and Licensing) Regulations 1989, the Housing Development (Housing Development Account) Regulations 1991, the Strata Tilles Act 1985, the Building and Common Property (Maintenance and Management) Act 2007, the Street, Drainage and Building Act 1974, the Uniform Building By-laws 1984, the Architects Act 1967, the Town and Country Planning Act 1976, the Local Government Act 1976 and the Environmental Quality Act 1974. Typically, these laws and regulations provide for substantial fines and potential criminal prosecution for breach. Breach of these laws can result in permit revocation, cessation of or restriction in operations and remedial work required to be carried out. In addition, new laws and regulations could in the future, require us to incur additional costs, or affect our business, in ways that may have an adverse effect On our financial position. We are also subjected to changes in Government policies for instance, the tighter housing loan policies imposed by Bank Negara Malaysia (“BNM”) that may discourage demand for residential properties from potential home buyers such as the following: (i) Implementation of a maximum loan-to-value (LlV) ratio of 70% On 3 November 2010, which will be applicable to financing facilities taken out by borrowers On their third home onwards; and
(ii) Requirement for financial institutions to assess borrower’s net income and debt obligations before approval starting from 1 January 2012.
The tighter housing loan policies are mitigated by the fact that financing facilities for the purchase of the first and second homes by individuals are not affected and borrowers will continue to be able to obtain financing for these purchases at the present prevailing LlV level applied by individual banks based On their internal credit policies. As such, demand from individuals purchasing their first or second homes using financing facilities will not be affected by the new ruling. Furthermore, the new method to assess a borrower’s debt paying ability will curb speculative activities in property transactions that create large number of unoccupied homes. This in turn protects the interest of property developers including our Group by preventing property bubble. The tighter housing loan policy imposed by BNM only applies to Individuals who are buying their third residential property onwards. This policy is not expected to have any material financial impact On the Group as the majority of our customers are first time buyer and owner-occupiers. Although our Group has and will continue to comply strictly with all of these laws and regulations under which our Group operates, there can be no assurance that changes to the present laws and regulations or the introduction of new ones will not adversely affect our Group’s business. 37 4.. RISK FACTORS (Cont’d)
4.1.15 We are subject to political and local and global economic considerations Adverse developments in political and local and global economic conditions may materially affect the financial prospects of our Group. Political and economic uncertainties include, amongst others, risks of war, terrorism, riots, expropriation, nationalisation, renegotiation, and nullification of existing contracts, changes in interest rates and method of taxation may affect consumer and business confidence and spending. This will in turn impact on investment in properties developed by our Group. While our Group seeks to mitigate such risks through prudent financial management and efficient operating procedures, there can be no assurance that any changes to these factors will not have a material adverse impact on the financial performance and position of our Group. 4.2 RISKS RELATING TO OUR SHARES 4.2.1 There is no prior market for our Shares Prior to our IPO, there has been no public market for our Shares. Our Promoters, Managing Underwriter and Co-Underwriters cannot assure that an active market for our Shares will develop upon its Listing or, if developed, that such market will be sustained. We also cannot assure that the IPO Price will correspond to the price at which our Shares will be traded on the Main Market upon or subsequent to its Listing. The IPO Price was arrived at after taking into consideration, inter-alia, our Group’s financial and operating history and conditions, our competitive strengths and advantages, our future prospects and the prospects of the industry in which we operate in and the prevailing market conditions at the time of the Listing. The IPO Price may not be indicative of prices that may prevail in the trading market after the Listing. In recent years, the stock market in general, and the market for the securities of many companies in particular, has experienced volatile price movements which to a certain extent, driven by local and global market sentiments. Such fluctuations may increase the market risk of our Shares. 4.2.2 Our Listing is exposed to risk of failure or delay The success of our Listing Is exposed to the risk that it may be aborted or delayed on the occurrence of anyone or more of the following events: (i) the eligible Bumiputera investors approved by the MITI and placees under the placement fail to acquire the IPO Shares allocated to them;
(ii) our Co-Underwriters exercising their rights pursuant to the Underwriting Agreement in discharging themselves from their obligations; and
(iii) we are unable to meet the public shareholding spread requirements i.e. at least 25% of our enlarged issued and paid-up share capital must be held by a minimum number of 1,000 pUblic shareholders holding not less than 100 Shares each at the time of our admission to the Official List. However, our Board endeavours to ensure that our Company complies with the various provisions of the Listing Requirements and the SC’s Equity GUidelines, whichever is applicable and relevant to the above factors. 4. RISK FACTORS (Cont’d) In the event of the failure of our Listing, all monies paid in respect of any application accepted from you will be returned in full without interest within 14 days, failing which, the provision of sub-section 243(2) of the CMSA shall apply accordingly. In the event that the Listing is aborted after our Shares have been allotted to new investors, the return of monies to the holders of our Shares could only be achieved by way of cancellation of share capital as provided under the Act and its related rules. Such cancellation requires the sanction of our shareholders by special resolution in a general meeting, consent of our creditors (unless dispensation with such consent has been granted by the High Court of Malaya) and the confirmation of the High Court of Malaya. There can be no assurance that such monies can be recovered within a short period of time or at all in such circumstances. 4.2.3 Control by the Promoters Upon Listing, our Promoters will collectively hold, directly and indirectly, 184,808,780 Shares, which represent approximately 61.6% of the enlarged issued and paid-up share capital of our Company (excluding Public Issue Shares allocated to our Promoters under the pink form allocations and the exercise of ESOS Options) as set out in Section 9 of this Prospectus. As a result, our Promoters may be able to influence the outcome of certain matters such as election of Directors and the approval of business ventures requiring the vote of the shareholders unless they are reqUired to abstain from voting by law and/or the relevant authorities. The introduction of corporate governance code that requires the formation of an Audit Committee, which includes 2 independent non-executive Directors, may effectively help to promote transparency in all material transactions and our Company’s accountability, thereby safeguarding the interests of the minority shareholders. Our Promoters would also be reqUired to abstain from voting if there are any related-party transactions, which may pose a conflict of interest to our Company. 4.2.4 Investment in the capital market exposes the investor to capital market risk The performance of the local bourse is very much dependent on external factors such as the perfomnance of the regional and global bourses and the inflow or outflow of foreign funds. Sentiments are also largely driven by internal factors such as the economic and political conditions of the country as well as the growth potential of the various sectors of the economy. These factors invariably contribute to the volatility of the local bourse. The market price of our Shares may fluctuate as a result of, amongst others, the following factors, some of which are beyond our control: (i) variations in our operating results;
(ii) changes in securities analysts’ estimates of our financial performance and recommendations;
(iii) announcements by us of significant acquisitions, disposals, strategic alliances or joint ventures; (iv) fluctuations in stock market prices and volume;
(v) change in market valuation of similar companies;
39 4. RISK FACTORS (Cont’d) (vi) involvement in material litigation, arbitration or other forms of dispute resolution; (vii) additions or departures of key personnel; and (viii) changes in general economic, political and regulatory conditions and stock market sentiments. 4.2.5 Future sale or issuance of our Shares could adversely affect our Share price Any future sale, issuance or availability of our Shares can have an adverse effect On our Share price. The sale of a significant amount of our Shares in the public market after the IPO, or the perception that such sales may occur, could adversely affect the market price of our Shares. These factors also affect our ability to raise funds from the issue of additional equity securities. . If our Promoters sell, or are perceived to sell, substantial amounts of Shares in the pUblic market following the expiry of the moratorium period, this may result in a dampening effect on our Share price. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK