5. RISK FACTORS 5. RISK FACTORS An investment in our Shares involves risks. You should carefully consider the risks described below and the other tnformation in this Prospectus before making a decision to invest. If the events underlying these risks occur, the trading price of the Shares could decline, and you could lose all orpart ofyour investment. Additional risks not currently known to us or that we now believe are immaterial could also harm us or affect your investment. This document also contains forward-looking statements that involve risks and uncertainties. The actual results of our operations could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this document. See “Forward-Looking Statements”. 5.1 Risks relating to the heavy engineering and marine services industry 5.1.1 Our business activities are subject to business fluctuations and cyclical changes Our engineering and construction, and marine conversion activities and our marine repair activities for energy-related vessels are subject to certain risks inherent in the oil and gas industry, while our marine repair activities for non-energy-related vessels are subject to certain risks inherent in the shipping industry. Our engineering and construction, and marine conversion activities and our marine repair activities for energy-related vessels depend heavily on the levels of actiVity in oil and gas exploration, development and production. Historically, activity in the oil and gas industry has fluctuated based on macroeconomic factors and global political events, in particular, changes in oil and gas prices. Demand for oil and gas structures and facilities is highly dependent on the ability and willingness of oil and natural gas companies to make capital expenditures to explore for, develop and produce crude oil and natural gas. Exploration, development and production of crude oil and gas reserves tend to decline when oil and gas prices fall to levels where these activities are no longer viewed as commercially viable for oil and gas operators. Capital expenditures by oil and gas companies may also decline as a result of other factors, including changes in exploration, production and delivery costs; the improved attractiveness of and demand for alternative energy sources such as biofuels, solar power, wind power and nuclear power; and technological advances affecting oil and natural gas consumption. Lower levels of capital expenditure by the oil and gas industry may result in falling demand for our heavy engineering and marine conversion business, which would adversely affect our business, financial condition and results of operations. Our marine repair activities are dependent on the level of maintenance expenditures by vessel owners. Vessels are generally required by maritime classification societies and international maritime regulations to undergo a dry-docking at least twice during a five-year period. The first dry-docking during the five-year period, which normally occurs after two and a half years, may be delayed by up to three months. When freight rates are low, vessel owners may opt to delay the dry-docking within the requirements of the classification societies, and even when their vessels are in drydock, may opt for minimum levels of maintenance and repairs needed to meet regulatory requirements, which may adversely affect our marine repair business. 5. RISK FACTORS (Cont’d)
5.1.2 We face keen competition in our markets The heavy engineering and marine services industries are highly competitive, and our failure to successfully compete would adversely affect our market position, results of operations and financial condition. We face keen competition. both domestically and internationally. Some of our competitors may have more experience. greater financial resources to invest in their capacity and capability to deliver innovative products, or greater economies of scale. Some of our projects require the use of advanced technology. and for such projects we source the necessary technology from third parties that possess the technology. Our competitors may have, or may obtain, more advanced technology or be more successful in establishing and maintaining relationships with third parties that have such technology. As a result, our competitors may be in a better position than us to compete for future business opportunities. and if they are able to deliver more technically advanced products and services, there may be reduced demand for our products and skills. New market entrants with access to low-cost skilled labour could also provide significant competition if they were to acquire sufficient technology and experience to compete for the higher margin products and services that are our primary target markets. We are one of seven licensed contractors of offshore structures that are eligible to bid for engineering and construction contracts tendered by PSC operators in Malaysia. If the PETRONAS Group were to change its policies by either increasing the number of licensed companies or allowing non-Malaysian companies to bid for these engineering and construction contracts. we would face materially increased competition, especially from new entrants with advanced technology. 5.1.3 We operate in a highly regulated industry, and this may require us to incur additional costs to meet new regulations, limit our ability to do business or subject us to litigation or penalties The heavy engineering and marine services industries are highly regulated, and our operations are affected by extensive and evolving environmental protection, health, safety and other laws and regulations in Malaysia and Turkmenistan. Compliance with these laws and regulations may entail significant expenses, including changes in operating procedures. In particular, our operations are subject to extensive environmental laws and regulations governing, among other things, the discharge of pollutants into the air and water. the handling, storage and disposal of solid or hazardous materials or wastes and the remediation of contamination. Breach of, or non-compliance with, these laws and regulations may result in the suspension. withdrawal, non-renewal or termination of our business licenses or permits, or the imposition of penalties, by the relevant authorities. We may also be subjected to stricter enforcement or interpretation of eXisting laws and regulations. In addition, existing laws and regulations may become more stringent. The suspension, withdrawal, non-renewal or termination of our business licenses or permits, the imposition of penalties or increased compliance costs could have a material adverse effect on our business, results of operations and financial condition. Litigation arising from incidents involving personal injury, loss of life or environmental damage may result in our incurring primary or secondary liability for significant amounts of damages. For example, a catastrophic oil or gas spill or other significant incident involving our vessels, conversions, platforms or other structures could result in liabilities that exceed our insurance coverage and have a material adverse effect on our financial condition and results of operations. In addition, due to increased concerns about environmental or other risks, we cannot guarantee that any particular insurance claim we may have will be paid, and we may sustain other damages, such as loss of business or injury to reputation. 42 5. RISK FACTORS (Conf’dj 5.1.4 Our business is dependent on the ability of the offshore oil and gas industry to operate its rigs in compliance with government regulations Most of our business and facilities are structured to service, and most of our revenue is received from, the offshore oil and gas industry. The extraction and transport of oil and gas at sea is subject to inherent risks, such as blow-outs, equipment defects, malfunctions, failures and misuses that could cause large amounts of environmental damage, personal injury or loss of life. The offshore oil and gas industry is subject to regulations controlling the discharge of pollutants into the environment, requiring removal and cleanup of pollutants that may harm the environment or otherwise relating to the protection of the environment. The laws and regulations protecting the environment and applicable to the offshore oil and gas industry have generally become more stringent, and penalties and potential liability have increased and may increase further in the future. Any additional regulations could increase the cost of operations, limit the operational capabilities of offshore rigs or reduce the area of operations for the offshore oil and gas industry, which could, in turn, materially and adversely affect our business, financial condition, results of operation and prospects by reducing demand for our services.
5.1.5 Rising cost of materials may have a material adverse effect on our business The cost of materials represents a significant part of our aggregate operating costs and the overall costs of each project. One of the major materials we use in each of our business segments is steel, in the form of plates, sheets, pipes, beams and fittings, comprising approximately 6.1 % of total purchases in the FYE 31 March 2010. The world steel prices have fluctuated substantially in recent years as depicted in the graph below, based on the monthly average prices of various steel prodUcts from January 2006 to November 2009. WORLD STEEL PRICES (JAN 06 -NOV 09) DENOMINATED IN USD: _ ASIA-HOTROllEDPLATE USD/MT EU/MT __ ASIA-SS316 $9,000 T-.—————–..——..——-..–..——-.—-.———.—————————–, €9,OOO -.ASIA -SS304 $8.000 .;..–.–..—–.. ——- —..-./-‘\;;; —– – –..—-.–..- – –....——- –; €8,OOO $7,000 ,—-..—-..….——…r-I’ I\ii:::;~::._~a::-~;—- —––..–..– - €7,OOO DENOMIN.6,lED IN EU: -T–EU-HOTROLLEDPLATE $6,000 -;—-.. —-..–..—……..~ tII·-..· ·· ·..·..· -.... ··-; €6,OOO –+-EU-SS316 $5.000 + – ,.. • –.. - + €5,OOO __ EU-SS304 $4,000 -,…..•-,…….. : €4,ooo $3,000 +—-..–..,_i” $2,000 -.
(Source: MEPS (International) Ud, www.meps.co.uk) Under our fixed-price contracts and contracts with limited price escalation provisions, we bear all, or at least a portion of, increases in the price of major materials. Although we attempt to anticipate price increases when entering into such contracts, we are exposed to escalation in major-material prices from the time we execute these types of contracts to the time we place our order for the relevant materials. This exposure to price risks may have an adverse impact on our results of operations. 5. RISK FACTORS (Cont’dj 5.1.6 We may be unable to complete contractual obligations to customers in a timely manner or within our cost constraints We undertake projects on a contract-basis, subject to specific terms and conditions. If our projects are delayed as a result of factors that we are contractually responsible for, some of which are outside of our control, we are liable to pay liquidated and ascertained damages on termination. Such factors include late deliveries of critical equipment and adverse weather conditions that are more severe than our expectations. We also may encounter construction problems that cause our costs to exceed our estimates. Under the terms of most of our contracts with our customers, customers may request changes to the contract specifications that result from changes in field design or other unanticipated events affecting a project. Our contracts generally provide that the additional direct costs resulting from these types of changes in specifications are borne by the customer. However, the delays caused by these types of changes in specifications may also affect the utilisation of capacity at our Pasir Gudang yard and the Kiyanly yard, and our plans to commence new projects at a particular facility in the yards may be delayed to accommodate the additional time required to complete the current project. Any delays may interfere with our ability to complete our existing and future projects and execute our business plans, and difficulties in executing our construction projects can result in us incurring higher costs. These types of development may, in turn, have an adverse effect on our business, financial condition and results of operations. 5.1.7 We rely on sub-contractors for a significant portion of our work, and if these sub-contractors are unavailable or their work does not meet applicable standards, we may experience project delays, increased costs and reduced profits We rely extensively on sub-contractors to perform much of the work on many of our projects. We currently engage sub-contractors to provide construction and related services, including structural, welding, fitting, piping and painting services. On average, subcontracted labour represented 49.5% of our cost of sales per financial year for the last three FYE 31 March. If we were to lose the services of one or more sub-contractors, the resulting loss of manpower, in some cases highly skilled manpower, may result in delays in completing our projects. The services to be rendered by any of our sub-contractors may not be completed in a timely manner. We may therefore face delays in the completion of our projects or may incur substantial costs to complete the projects on time, and our reputation could be significantly harmed. In addition, if the work performed by our sub-contractors does not meet contractual quality standards, the work will likely have to be redone, which may result in delays and higher costs. These costs may lead to our costs exceeding our estimates and we may not be able to pass on these higher costs to our customer, and this could result in our costs rising in ways that affect our profitability. We generally obtain firm quotes from our sub-contractors for our client projects, pursuant to which a SUb-contractor cannot charge us a price that exceeds the quote except where we have changed the scope of the work reqUired. We could experience an increase in our costs if our sub-contractors defaulted on their obligations or if we could no longer enter into firm-quote contracts with our sub-contractors. 44 5. RISK FACTORS (Cont’dj 5.1.8 Inaccurate estimates by us in applying stage-of-eompletion accounting could result in a reduction of previously reported profits and have a significant impact on period-to-period results of operations As with other engineering and construction companies, we use the stage-ofcompletion method to recognise and account for revenues derived from our fixedprice contracts in progress. Under this method, the stage of completion is measured by reference to the proportion of physical completion of a fixed-price contract. If the outcome of a construction contract cannot be reliably estimated, we recognise revenue to the extent of the contract costs incurred at that point in time. As a result, the timing of recognition of net sales that we report may differ materially from the timing of actual contract payments received. This revenue recognition policy, and the corresponding impact on the amount and timing of recognising net sales and cost of sales, provisions for estimated losses, charges against current earnings, trade receivables and advance receipts, is primarily affected by our ability to reliably measure the stage of completion and to reliably estimate the total costs required to complete the contract. If there are inaccuracies or flaws in measurements for any given project or in the estimation methodology as a whole, it could have a material adverse effect on the amount and timing of recognising net sales and cost of sales and related financial items. We expense estimated losses on uncompleted fixed-price contracts in the period in which the losses are determined, resulting in a charge against our current earnings. These charges may significantly reduce our earnings, depending on the size of the contract and the estimated losses. In addition, because many of our fixed-price contracts are completed over a period of several months or years, the timing of the recognition of related net sales could have a significant impact on our results of operations. . 5.1.9 Information relating to our orderbook may not be representative of our future results The contracts that make up our orderbook as of 30 June 2010 totalled RM5,951.9 million. Our orderbook as of any date represents the total stated contract value of orders not yet delivered less the portion of revenue in respect of’these orders that we have recognised~ For contracts involving cost-plus arrangements, these contract values include cost estimates. Given the forward-looking nature of the orderbook, the amount in it is not necessarily indicative of our future earnings. For example, we may not achieve our expected margins, or we may suffer losses on one or more of these contracts, in which case our income would be reduced. In addition, although we consider the commitments in the orderbook firm, in the case of certain projects we enter into with PETRONAS Group of companies, the amounts are included in the orderbook on the basis of letters of intent or letters of award that do not prohibit the customers from cancelling these projects. If these projects were to be cancelled, we may only be able to recover expenses incurred up to the date of cancellation. Because of these uncertainties, we cannot predict when or if the projects in our orderbook will be performed and generate revenue. Any operational issues with the performance of contracts in the orderbook, cancellations or delays could adversely affect our business, financial condition and results of operations. 5. RISK FACTORS (Cont’d) 5.2 Risk relating to our Company 5.2.1 We derive a substantial amount of revenue from the PETRONAS Group In the FYE 31 March 2010, 92.9% of our revenue and 73.4% of our PBT and for the three-month FPE30 June 2010 approximately 94.0% of our revenue and 58.6% of our PBT was, in each case, derived from projects commissioned by the PETRONAS Group, including. MISC. This included, for the FYE 31 March 2010 and the threemonth FPE 30 June 2010, approximately 67.0% and 40.3%, respectively, of our PBT from engineering and construction services and approximately 6.4% and 18.3%, respectively of our PBT from marine conversion and marine repair services. We expect that the PETRONAS Group will continue to be a major customer for us, and, as a result, changes in the business of the PETRONAS Group or our relationship with the PETRONAS Group could have a material adverse effect on our prospects. It is an important part of our business strategy to increase our total business with the PETRONAS Group while at the same time expand our business with other customers. Our results of operations and financial condition may be materially adversely affected if the PETRONAS Group materially decreases its business with us and we are unable to increase our business from other customers to offset the decreases in business from the PETRONAS Group. 5.2.2 Adverse events affecting the operations of the PETRONAS Group in projects outside Malaysia may also adversely affect us We participate in PETRONAS’ oil and gas projects outside of Malaysia by providing services on an EPC or an EPCIC basis to the PETRONAS Group of companies operating overseas. We are currently the EPCIC contractor for Phase 1 of the Turkmenistan Block l’ gas development project undertaken by PCTSB in Turkmenistan, and we recently completed projects for a PETRONAS company in Vietnam. It is our strategy to continue working with the PETRONAS Group, including in other countries into which it expands its operations. If the operations of the PETRONAS Group in foreign countries are adversely affected by, among other things, the actions of the host country’s government or political, social, economic, military or other factors, these developments would have an adverse effect on our business servicing such projects and also on our results of operations and financial condition. [The rest of this page is intentionally left blank] 5. RISK FACTORS (Cont’dj 5.2.3 Upon a successful IPO, MISC, which is a subsidiary of the Malaysian government-owned PETRONAS, may intervene in our operations as it would hold between 64.6% and 66.5% equity interest in our Company Upon completion of the IPO, MISC will own between 64.6% and 66.5% of the Shares and thus will continue to be the controlling shareholder of our Company. As of LPD, MISC was 62.7% owned by PETRONAS. The Malaysian government holds a preference share of MISC that gives it the right to approve certain extraordinary matters as provided in the Memorandum and Articles of Association of MISC, and the Malaysian government is also the sole shareholder of PETRONAS. As the controlling shareholder of our Company, other than in respect of certain votes regarding matters in which it is an interested party and must abstain from voting under the Listing Requirements, MISC controls the approval of all corporate matters requiring a shareholder resolution under the Companies Act. This includes the approval of all final dividends and the appointment of directors. As the majority shareholder of MISC, PETRONAS exercises similar control over MISC in respect of shareholder resolutions requiring a majority vote, and as the sole shareholder of PETRONAS, the Malaysian government exercises similar control over PETRONAS, and thus PETRONAS and the Malaysian government also indirectly exercise control over our Company. While to date the relationship between our Company on the one hand and MISC, PETRONAS and the Malaysian government on the other has generally been commercially oriented, there can be no assurance that MISC, PETRONAS or the fv1alaysian government will not intervene in our commercial affairs in a manner that would have an adverse effect on us. 5.2.4 We may face constraints in our fabrication, construction and marine repair activities beca~se of our yard capacity Our capacity for fabrication, construction and repair work is limited by, among other things, the size ofour Pasir Gudang yard and the Kiyanly yard, which we operate and manage on behalf of PCTSB, the number, size and capacities of our slipways, berths, docks and our plant and equipment. Currently, the Pasir Gudang yard encompasses an area of 150.6 hectares and can simultaneously accommodate the construction of marine structures with a total tonnage of 69,700 mt and dry-docked vessels of up to 450,000 dwt. The Kiyanly yard encompasses an area of 43.6 hectares and can accommodate the construction of structures with a total tonnage capacity of 25,000 mt at any single point of time. If we are unable to accommodate the yard capacity requirements of other projects and may have to work with one or more contractors to access additional yard capacity, which typically results in lower profit margins, or we may be unable to successfully bid for tho¥ projects. In either of these events, our revenue and profits could be affected. 5.2.5 Our operations in Turkmenistan may not operate as efficiently as planned due to the infancy of the oil and gas industry in that country and a limited supply of skilled workers We have expanded our engineering and construction operations into Turkmenistan, where we have been operating and managing the Kiyanly yard on behalf of PCTSB since 2007. The engineering and construction industry for oil and gas is a relatively new industry in Turkmenistan, with a limited supply of qualified local workers and other supporting infrastructure. In addition, we do not have a long history of doing business in the country. If we are not able to hire a sufficient number of workers with the requisite skills or train local workers, obtain key equipment required for our operations or acquire local knowledge and networks within a reasonable period of time, the Kiyanly yard may not function as efficiently as intended and the utilisation of the Kiyanly yard may not be optimal. 47 5. RISK FACTORS (Cont’d) 5.2.6 We may not be able to complete our Yard Optimisation Programme in a timely manner We began implementing the Yard Optimisation Programme at our Pasir Gudang facilities in 2006 and expect the construction and reconfiguration to be completed by 2014. This project involves the purchase of new equipment, the dismantling of facilities and the construction of new facilities at a cost of approximately RM2,721.5 million, which does not include costs resulting from disruptions to our business and a decrease in our operational capacity at times during the project. Our ability to successfully complete the Yard Optimisation Programme is subject to various risks and uncertainties, including: • the need to procure materials, equipment and services at reasonable costs and on a timely basis;
• reliance on third party providers and consultants for aspects of the project where we have limited experience;
• the possible need to raise additional financing to fund the project, which we may be unable to obtain on commercial terms satisfactory to us or at all;
• errors or delays in the design, engineering, construction, installation, inspection or commissioning of each new or upgraded facility;
• costs resulting from disruptions to our business and a decrease in our operational capacity during the project; and
• delays or denials of required approvals, including required environmental approvals.
As a result of factors such as those listed above, we may fail to complete the Yard Optimisation Programme as scheduled, which could have a material adverse effect on our business, results of operations, and financial condition. In addition, the facilities, once completed, may not attract, or we may not be successful in obtaining contracts for, the large, complex projects that the Yard Optimisation Programme is designed to facilitate. 5.2.7 We may not be able to attract and retain key management personnel and employees with specialised skills We depend on our Directors, key management personnel and workers with specialised skills, particularly in design and engineering, project management and quality and safety assurance. The loss of any of these individuals, or our inability to attract, recruit and retain appropriate replacements and successors, may adversely affect our business prospects, financial condition and ability to compete. There is currently a shortage of manpower in the oil and gas industry, and we have implemented human resource management and development plans that attempt to manage issues involving recruitment, retention, succession planning, compensation, benefits and learning and development. These programmes and policies may not be successful, which could have a material adverse effect on our business and operations. 48 5. RISK FACTORS (Cont’d) 5.2.8 Our insurance may not cover all risks to which we are exposed, and we may not be able to maintain our existing insurance coverage Our marine and ~eavy engineering activities are subject to inherent risks, such as equipment defects, malfunctions, failures or misuse, which could cause environmental pollution, leaks or spills. personal injury or loss of life, as well as damage to and destruction of the environment The failure of a vessel, offshore structure or architectural or civil engineering works provided by us could result in similar injuries and damages to the environment. We could also be adversely affected by business interruption caused by war, terrorist activities, mechanical failure, human error, political action, labour strikes, fire and other circumstances or events. While we have insurance coverage for various aspects of our business, our insurance coverage may be insufficient to cover all losses that we suffer. Claims arising from incidents involving an accident, failure or other incident arising from our operations may result in our incurring primary or secondary liability for significant amounts of damages, including from tort, statutory, regulatory or other types of claims that may be significantly in excess of our insurance coverage. If we incur substantial liability and the damages are not covered by insurance or exceed policy limits, or if we are not able to obtain liability insurance, our business, results of operations and financial condition could be materially adversely affected. Even if certain risks are currently covered by insurance, there is no assurance that such insurance will be generally available in the future or that premiums will be commE;lrcially justifiable. More stringent environmental and other regulations may also come into force, expanding the liability we face under our operations, and insurance against this new degree of risk may not be available at commercially reasonable rates, or at all. If our insurance is insufficient to cover these large claims and liabilities, our assets could be subject to attachment, seizure or other judicial processes. For further details on the insurance coverage, please refer to Section 7.14 of the Prospectus. 5.2.9 We may face claims and incur additional rectification costs during the warranty period for defects and warranties arising from services we have performed We may face claims by our customers in respect of defects, poor workmanship or non-conformity to our customers’ specifications in respect of services we have performed. We typically grant a warranty of twelve months, and during the warranty period, we are required to provide corrective services to resolve any problems that may arise from defects. We recognise a provision at the end of each financial year for expected warranty claims based on our past experiences of required levels of repairs and returns. These warranty provisions, or our insurance coverage, may not be sufficient to cover costs incurred that are in excess of our warranty provisions. If the costs of any rectification works exceed our warranty provisions and are not covered by our insurance policies, our business, financial condition, results of operations and prospects may be adversely affected. 5. RISK FACTORS (Cont’d)
5.2.10 A significant portion of our employees are unionised As at LPD, 418 or approximately 22.3% of our employees were members of a labour union. We can provide no assurance that we will be able to maintain a good relationship with our employees, including our unionised employees, and we may be adversely affected by future industrial action. We previously had a dispute with Kesatuan Pekerja-Pekerja Malaysia Marine and Heavy Engineering Sdn Shd (“KPPMMHE”) relating to the alleged retrenchment of certain unionised members. The High Court on 28 March 2000 decided the matter in our favour and the Court of Appeal on 10 February 2010 struck-off KPPMMHE’s appeal against the decision of the High Court. KPPMMHE subsequently made applications to the Federal Court for leave to appeal against the decision of the Court of Appeal. On 31 May 2010, the Federal Court dismissed both applications. We are a party to a collective bargaining agreement with employees represented by the union. The terms of these agreements are generally for three years or until the agreements are terminated or renegotiated. We may not be able to favourably negotiate the terms and conditions of new labour agreements, and strikes or disruptions may occur in the future as a result of such failure. 5.2.11 Changes in the exchange rate between the RM and other currencies could have a negative impact on our results ofoperations and financial condition The functional currency for all our financial reporting is the RM, a currency that appreciates and depreciates against other currencies under a managed float regime in response to various economic factors. Appreciation of the RM may materially and adversely affect our results of operations because, among other things, it may cause our products and services to be less competitive by raising prices for our products and services against other currencies. On the other hand, the depreciation of the RM may lead to foreign exchange losses and increase, in RM terms, the cost of raw materials and equipment that we purchase from overseas sources, including steel. Many of our marine repair contracts are denominated in SGD and we have several significant engineering and construction contracts denominated in USD. We are particularly sensitive to fluctuations in the exchange rate between the RM and the USD. We estimate that, as of 30 June 2010, our PST would have increased by RM10.7 million, or 11.3%, if the RM had depreciated by 5% relative to the USD with all other variables being constant. In addition, as of 30 June 2010, our net unhedged financial assets not denominated in RM were RM376.8 million, with the largest exposure being RM214.3 million (in RM equivalent as of that date) in net financial assets held in USD. We generally do not enter into foreign currency forward contracts to hedge against fluctuations in the foreign exchange currency but rely on natural hedging to manage the risks arising from the movements on the foreign exchange. We maintain a natural hedge, wherever possible, by matching the cash inflows (revenue stream) and cash outflows used for purposes such as capital expenditures, operational expenditures and debt service requirements in the respective currencies. However, there can be no assurance that such natural hedging will be successful in mitigating the risk that foreign exchange rate fluctuations will have an adverse effect on our financial condition and operating results. 5. RISK FACTORS (Cont’d) 5.2.12 Transactions with our affiliates may be subject to adverse rulings or government actions Under Malaysian tax law, there is an inherent risk that our transactions with our affiliates or other companies within the PETRONAS Group or any other person or company that is related to us may be challenged by the Malaysian tax authorities if the terms of these transactions are viewed as having not been made on an arm’slength basis. If the Malaysian tax authorities determine that any of our transactions with related parties were not made on an arm’s-length basis, such determination may have adverse tax consequences for us. As of the LPD. our transactions with related parties have not been challenged by the Malaysian tax authorities but we cannot assure you that they will not be challenged in the future. 5.2.13 Failure to obtain certificates of completion and compliance in respect of certain of our structures or to obtain extensions of the temporary permits we currently rely on could restrict our ability to use these structures Our subsidiary, MMHE, has certain quays, dry-docks, workshops, offices, storage rooms and other miscellaneous erected structures at our Pasir Gudang yard that we are currently using pursuant to temporary permits issued by the Pasir Gudang local authority pending the issuance of formal certificates of completion and compliance. These temporary permits are valid until 31 December 2011. We are in the process of applying for the formal certificates of completion and compliance. We have appointed a consultant to assist with this application and expect to obtain the formal certificates by third quarter of 2011. In the event the formal certificates are not issued before the temporary permits expire, we intend to renew the temporary permits. However, we cannot assure you that we will receive formal certificates or that we would be successful in obtaining extensions of our temporary permits. If our temporary permits were to expire before we obtain formal certificates or if we were to be unable to renew our temporary permits, we may not be able to use these structures. In the event that we are not able to use these structures, our operations at the Pasir Gudang yard could be significantly affected, which could materially and adversely affect our business, financial condition, results of operation and prospects.
5.3 Risks relating to the IPO 5.3.1 An active trading market for the Shares may not develop, and their trading price may fluctuate significantly Prior to the IPO, no public market for our Shares existed. On 21 September 2010, we obtained the approval of Bursa Securities for the listing of and quotation for our Shares on the Main Market of Bursa Securities. However, a listing on the Main Market of Bursa Securities does not ensure that there will be a liquid public market for the Shares after the IPO. If an active public market for the Shares does not develop after the IPO, the market price and liquidity of the Shares may be adversely affected. 5. RISK FACTORS (Cont’d) The Institutional Price and the Retail Price were determined through negotiations among us, the Offeror, the Joint Global Co-ordinators and Joint Bookrunners, and they may not necessarily be indicative of the market price after the IPO is complete. The prices at which the Shares will trade after the IPO will be determined by the marketplace and may be influenced by many factors, including: • our financial results; • the history of, and the prospects for, our business and the industry in which we compete;
• an assessment of our management, our past and present operations, and the prospects for, and timing of, our future revenue and cost structures;
• the present state of our development;
• the valuation of publicly-traded companies that are engaged in business activities similar to us; and
• volatility in the securities markets of Malaysia.
You may be unable to resell the Shares at or above the Final Retail Price and, as a result. you may lose all or part of your investment. 5.3.2 Sales of substantial amounts of the Shares in the public or private market, or the perception that those sales may occur, could materially and adversely affect the prevailing market price of the Shares Upon completion of the IPO, MISC will own between 64.6% and 66.5% of our Shares. MISC has agreed not to transfer its Shares for a period of six months after the completion of the IPO. However, upon completion of this six-month lock-up period, w~ cannot provide any assurance that MISC will not dispose of any large blocks of the Shares in the future to the public or to a strategic or financial investor. Sales of substantial amounts of the Shares in the public or private market, or the perception that these sales_ may occur, could materially and adversely affect the prevailing market price of the Shares. 5.3.3 If there is significant volatility in the price of the Shares following the IPO, you may lose all or part of your investment, and securities litigation or enforcement action may be brought against us Following the IPO, the price at which the Shares will trade may be volatile. The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices of securities. These fluctuations often have been unrelated or disproportionate to the operating performance of publicly-traded companies. In the past, following periods of volatility in the market price of a particular company’s securities, securities litigation or securities enforcement action has sometimes been brought against that company. If similar litigation or enforcement action were instituted against us, it could result in substantial costs and divert management’s attention and resources from our core business. . 5. RISK FACTORS (Conf’d) 5.3.4 Because the Retail Price is higher than our NTA value per share, purchasers of the IPO Shares in the IPO will experience immediate and substantial dilution. Purchasers of the IPO Shares may experience further dilution if we issue additional Shares in the future The Retail Price is higher than the NTA value per Share. Therefore, purchasers of the IPO Shares in the IPO will experience an immediate dilution in NTA value per Share at the Retail Price of RM3.61, and our existing shareholders will experience an increase in the NTA value pe~ Share. In order to expand our business, we may consider offering and issuing additional Shares or equity-linked securities in the future. Purchasers of the IPO Shares may experience further dilution in the net tangible book value per share if we issue additional Shares or equity-linked securities in the future.
5.3.5 Certain transactions may dilute the ownership of shareholders in the Shares As a result of adjustments from rights offerings, certain issuances of new Shares and certain other actions we may take to modify our capital structure, shareholders may experience a dilution in their ownership of the Shares. There can be no assurance that we will not take any of the foregoing actions. Similar actions in the future may adversely affect the market price of the Shares.
5.3.6 There may be a delay or cancellation of the Listing The occurrence of anyone or more of the following events may cause.a delay in or cancellation of the Listing: • the identified investors fail to subscribe to the portion of the Shares intended to be placed to them;
• the Joint Bookrunners exercise their rights pursuant to the Underwriting Agreement, the Malaysian Placement Agreement or the International Placement Agreement to discharge themselves from their obligations;
• we and our Promoter decide in our absolute discretion not to proceed with the Listing; or
• we are unable to meet the public spread requirements as determined by the Bursa Securities, including a minimum of 1,000 pUblic shareholders holding not less than 100 Shares each upon completion of the IPO and at the point of listing.
5.3.7 There may be a delay between admission and trading of the Shares The date of admission will normally occur at least two clear market days after the Shares have been allocated to investors’ respective CDS accounts in the Bursa Depository. In the event of a delay in the admission and the commencement of trading in Shares on the Bursa Securities, monies may be returned to investors in respect of the IPO Shares following their allotment and issue. A reduction of our share capital would then be required. This would require a special resolution of our shareholders and this resolution would have to be confirmed by the Malaysian High Court. There can be no assurance that monies can be recovered within a short period of time or at all. If the Bursa Securities does not admit the Shares for listing, the market for the Shares will be illiquid and it may not be possible to trade the Shares. This may have a material adverse effect on the value of the Shares. 53 5. RISK FACTORS (Cont’dj 5.3.8 We have significant discretion as to how we will use the net proceeds of the Public Issue, and you may not necessarily agree with how we use them The net proceeds to be received by us from the Public Issue will be RM945.8 million. We plan to use the net proceeds from the Public Issue for the Yard Optimisation Programme and the capital expenditures in Turkmenistan. We will have discretion as to the actual application of our net proceeds, further details of which are described in Section 4.7 of this Prospectus, and you are entrusting your funds to us, upon whose judgement you must depend, for the specific uses we will make of the net proceeds from the IPO. 5.3.9 We are a holding company and rely on dividend payments from our subsidiaries for funding and for paying dividends on the Shares Our Company is a holding company incorporated in Malaysia and operates its business through our subsidiaries. Therefore, the availability of funds to pay dividene:ts to our shareholders and to service our indebtedness depends upon dividends received from our subsidiaries. If our subsidiaries incur debt or losses, this indebtedness or loss may impair their financial ability to pay dividends or other distributions to us. In addition, restrictive covenants in bank credit facilities, bonds instruments or other agreements that we or our subsidiaries may enter into in the future may restrict, as a contractual matter, the ability of our subsidiaries to make contributions to us and our ability to receive distributions and pay dividends. Our ability to declare dividends in relation to the Shares will also depend on our future financial performance, which, in turn, depends on the successful implementation of our strategy,·· on financial, competitive and regulatory factors, general economic conditions, demand and prices for our products and services, costs of raw materials and other factors specific to our industry or specific projects, many of which are . beyond our control. The receipt of dividends from our subsidiaries may also be affected by the passage or adoption of new laws or regulations, changes to existing laws and regulations or in their interpretation or implementation, and other events outside our control. Malaysian laws require that dividends be paid only out of the net profit calculated according to Malaysian FRS, which differ in many respects from generally accepted accounting principles in other jurisdictions. rrhe rest of this page is intentionally left blank]