J. RISK FACTORS J. RISK FACTORS THERE ARE A NUMBER OF RISK FACTORS, BOTH SPECIFIC TO THE MMSV GROUP AND RELATING TO THE GENERAL BliSINESS ENVIRONMENT, WHICH MAY HAVE AN IMPACT ON THE OPERATING PERFORMANCE AND FINANCIAL POSITION OF THE MMSV GROUP. INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) WHICH MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE PERFORMANCE OF THE MMSV GROUP IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE HEREIN, BEFORE APPLYING FOR THE ISSUE SnARES. 3.1 Business risks Business risks refer to the fundamental issues within the operational environment that create uncertainties. The Group is subject to inherent risks of the machinery and equipment industry such as raw material and skilled labour shortages, increases in operating costs., changes in government legislation as well as changes in general economic, business and credit conditions within Malaysia. Although no assurance can be given that changes to any of these factors will not have a material effect on the Group’s businesses, the Group seeks to limit these risks through, inter-alia, increasing the efficiency of its operations, increasing its product range, expanding its market base, developing and maintaining a diversified pool of suppliers and customers, improving its technological competence through R&D and applying conservalive management policies. 3.2 Competition The Group operdtes in the machinery and equipment industry, particularly the specialised industrial machinery and equipment market, a competitive market that is subject to rapid technological changes, new product development and competition from existing players as well as possible new entrants to the industry. Competition among manufacturers of machinery and equipment are largely based on product quality, manufacturing capabilities and capacities, ability to meet customers’ specifications, timely delivery, established track record, market reputation as well as cost competitiveness. Competition exists in the machinery and equipment industry in bOlh the local and global markcts. Within the local market, manufacturers such as the MMSV Group compete against other Malaysian manufacturers as well as imports from countries such as Germany, Japan, Taiwan and China. At the same time, Malaysian manufacturers which export to the global markets are also competing against foreign manufacturers as well as other Malaysian export-oriented manufacturers. However, the intensity of the competition among the manufacturers focusing on the manufacturing of automation machinery and equipment for the electrical and electronics industry, is moderate. Based on the Vital Factor Report. in 2004, there were approximately 30 companies in the manufacturing of automation machinery and equipment catering to the electrical and eloctronics industry in Malaysia. This represents a relatively small number of operators in an industry which exported RM257.1 billion worth of electrical and electronics products in 2004. As the group of operators in the automation machinery and equipment industry is relatively small, the intensity of competition among the operators in the industry is reduced. Further, the requirements of the electrical and electronics industfy, which is the focus of the Group, are more stringent to cater for specific o[lerating conditions requiring high speed. high precision and high sensitivity machinery and equipment. and clean environment. Hence. there 3re typically fewer manufacturers who are able to meet such stringent requirements, thereby moderating the intensity of competition within the industry. Nevertheless, the Group intends to remain competitive by continuously enhancing and expanding its product range and capabilities. At the same time, the Group intends to embark on R&D activities focusing on the areas of software and systems development. Such developments, if successful, will enable Ihe Group to enhance the functions of its Industrial Automation Systems and Machinery, hence differentiating itself ftom the products: offered by other compelitors. The MMSV Group also intends to increase ils competitiveness by enhancing its customer service lind technical support before and after sales, both locally and internationally. J. RISK FACTORS (Cont’dj Notwithstanding this, no a~unmce can be given that the Group will be able to maintain or increase its existing market share in the future. 3.3 Operating risks The Group’s operating results are difficult to forecast and could be adversely affected by many factors. These factol1:i include amongst others, fluctuations in demand for its products and services, changes in the Group’s operating expenses, the ability of the Group to develop new products and services and to control costs, general economic corxliliolls, market acceptance of llCW products or setvices, and other operating risks common to going concerns. In order to mitigate such risks, the Group continuously monitors the market acceptance of its existing products and services while its R&D team develops new products and services to meet the changing market demand. At the same time, the Group emphasises on continuous quality control to ensure that the products designed and manufactured meet customenl’ requirements and are of IUgh quality. Excellem before and after sales service is also provided as a means to build and maintain close relationships with its existing as well as potential customers. Further, the Group seeks to control its operating costs by continuously improving its productivity and operational efficiency such as through computerising its operating sys!ems, minimising stock levels, outsourcing low value added activities while focusing its efforts on acquiring orders for muhiple units, hence allowing mass production planning in order to benefit from economies ofscale. However, there is no assurance that the Group will be profitable in the future, or that it will achieve increasing or consistent levels of profitability.
3.4 Continuing demand for Ibe Group’s producis and services The Group’s future results will depend on the ability of the Group to generate continuing demand for its products and services which in turn is heavily dependent on the product lifecycles of the customers. The product lifecycles in the electrical and electronics industry, particularly in the consumer electronics markel, have shortened considerably over tl1e years due to continuous technological adv3ncemenl. This may potentially result in disruption or discontinuation of the customers’ products which may have a material impact on Ihe continuing demand for the Group’s existing products and services. On the other hand, the consumer electronics markets have also broadened tremendously through the invention of new products. This provides opportunities for the Group to offer new advanced engineering solutions to help its customers capilalise on such technological innovalion and making il possible for ils customers to produce new products through automated production systems. Apart from the risk of shortening of product Iifecycles, any economic slowdown may also cause the Group’s customers to defer or terminate purchases of the Group’s products and services or otherwise alter their usage patterns. Uncertainty in the economic envirorunent may also cause some businesses to curtail or eliminate spending on technology. In addition, the Group may ell.perience hesitancy on lhe pan of tile existing or potential customers to commit to continuing or new products and services ofthe Group. Notwithstanding the continuous efforts undertaken by the Group, no assurance can be given that the Group will be able to generate continuous or new demand for its products and services. The rest ofthis page has been intentionally Jeft blank 3. RISK FACTORS (Conf’dj Dependence on certain customers and suppliers For the financial year ended 31 December 2004, approximately 80.7% of the Group’s total revenue were contributed by J major customers of the Group, namely Agilent (44.3%), ASE (24.7°;.) and USI (11.70/.). The Group recognises the need to expand its customer base and thus seeks to minimise its dependency on certain customers by strengthening its relationship with other existing customers as well as expanding its customer portfolio to include new multinational companies operating in Malaysia and other global corporations. In this connection, the Group managed to expand its customer base from 19 active customers lor the financial year ended 31 December 2004 to 30 active customers for the 10 month period ended 31 October 2005. Further, for the 6 month period ended 30 June 2005, the Group was able to diversify the composition of its top 3 customers whereby 78.0% of the Group’s revenue was contributed by Flextronics (56.7%), Lumileds (11.3%) and Agilent (10.0%). Flextronics was a new customer secured by the Group in 2005 while Lumileds and Agilent were existing customers of the Group. Currently, the Group does not have any fornlal long-tenn contracts with ilS existing customers as it is a common industry practice to enter into shore tenn sales contracts via confinned purchase orders as and when the requirement for automation systems arises. Hence, the financial performance ofthe Group would be dependent on the ability of the Group to secure new contracts from its existing and/or new customers on a consistent basis. Consequently, the failure ofthe Group in securing new contracts from its existing and/or new customers in the future may have a material adverse financial impact on the Group. Despite the absence of long-tenn contracts with its customers, the Group has nevertheless been able to establish strong relationships and proven track: record in lenns of providing quality products and services, which has earned the confidence and recognition of its existing customers. The Group’s emphasis has always been in cultivating a stable business relationship with its customers. This is demonstrated by the fact that 4 out of ilS top 10 customers as at 3] December 2004 have been dealing with the Group for 3 or more years, notwithstanding the Group’s efforts to enlarge and diversify its customer base. Meanwhile, on the supply side, the Group is dependent on hardware (pneumatics, motors, electrical components) and services (tooling, machining, sheet metal works and wiring) as a source of raw material for its operations. The Group maintains a stable group of suppliers witn its (OP 10 suppliers mostly having established a relationship with the Group for 5 years or more. For the financial year ended J 1 December 2004, the top 10 suppliers of the Group accounted for 63.9010 ofthe Group’s 10lal purchases. The Group is of the view that it is not dependent on any single supplier as the Group can easily source its supply of materials which are widely available. This is demonstrated by the pattem of the Group’s purchases in the 6 month period ended 30 June 2005, where 45.8% of the Group’s purchases were fonester hardware from Elsoft Research Berhad, with whom the Group has a relationship of only 2 years. Further, the Group does not have any fonnal long-tenn contracts with its suppliers as the supply of materials required by the Group can be easily sourced, reMlering it unnecessary for the Group to enler into long-tenn contracts with its suppliers. Nevertheless, there is no assurance that the Group’s operations may not be adversely affected if the Group is unable to obtain adequate supply of raw materials on a timely manner or on viable commercial terms to the Group. The rest of this a e has been intentiollally left blank 3. RISK FACTORS (Cotlt’d)
3.6 Dependente on key personnel The Group believes that the continued success and future performance of the Grour depends to a significant extent upon the abilities and continued efforts of its existing Directors, key management and key technical personnel. The vast experience, knowledge and experti~ of the current management and key persolUlcl is all invaluable 3S$et to the Group. Hence. the loss of the servic~s of any of the Group’s Directors, key management or key technical personnel may have a material effect on the Group’s business, operating results and financial conditions. The Directors of MMSV recognise the importance of the Group’s ability to attract and retain ils key rersonnel and have in place human resource strategies, which include suitable compensation packages and training and personal development prognlmmes. In line with this, the Group has reserved 2,674,000 Issue Shares for subscription by its employees to motivate, retain and reward eligible key personnel and employees who have contributed to the growth and success ofthe MMSV Group. Further, in order to instil a high sense of belonging to the Group and teamwork amongst its employees, the GrQup maintains a Oal organisation structure, lhus creating a supportive working environment. This has enabled the Group to maintain a stable workforce and continuity in its management since the commencement of it~ operations in 1999. In addition, as part of the long-term plan to nurture its key management, the Group also undertakes various efforts to groom younger management staff to participate in the management ofthe Group. Notwithstanding its efforts to create a conducive working environment and providing motivation to the employees, there can be no assurance that the Group will be successful in attracting or retaining highly skilled, technical, R&D, managerial, sales and marketing personnel. 3.7 Adequ.cy of insurance eQverage The Directors of MMSV are aware of the adverse consequences anSlllg from inadequate insurance CQverage that could adversely affect its business operations. The Group has risk insurance coverage for its machinery and equipment, work.in-progress and inventories to indemnify the Group against loss or damage to its assets. Although the Group has taken necessary measures to ensure lhat all its assets are adequately covered by insurance, there can be no assurance that the insurance coverage would be adequate to compensate for tnc replacement cost of the assets or any consequential loss arising therefrom.
3.8 Risk of production stoppage and systems disruplions As the Group’s productiQn facilities are located ill one area, tllere is a risk of production stoppage due to the occurrence of unforeseen natural disaster, fire, Oood and electricity failure or loss ofdata due to corroption which will disrupt the manufacturing process of the Group, its operations and delivery schedules that may result in financial losses to the Group. Thus far, the Group has not experienced any major disruptions to its business that had an adverse effect on its operations. However, the Group has taken reasonable precautionary steps to minimise the occurrence and risk of such events by ensuring quick inventory turnover, thereby minimising storage of products at the production facilities, and maintaining regular backup copies of its database including its drawings, designs and prog.rammes which are stored at separate locations. The rest of this p.ge has been intentionally left blank 3. RISK FACTORS (Conl’d) 3.9 Intellectual property The products designed and manufactured by the Group are heavily dependent on the expertise and intelligent technological know-how of its technical pcrsonnel and R&D team. At the same timc, the Group’s success is also dependent on its ability to utilise industry standard third party proprietary technology and to protect its own technological know-how. Currently, the Group has not registered any intellectual property rights for the technological know-how involved in the design and manufacture of its products. This is because the Group’s products are not easy to duplicate due to their highly customised nature and the requirement for nmlti-disciplinary skills to integrate major designs such as mei:llanical and material properties, circuit design and soAware source codes, which are well-protected by the Group. Nevertheless, there can be no assurance that the Group will be able to proteCI its proprietary rights against unauthorised copying or exploitation of its technological know-how in the future, which could have material adverse effect on the Group’s business, operating results and financial conditions.
3.10 Economic, political and regulatory risks Changes in political. economic and regulatory conditions in Malaysia and other countries where the Group’s principal markets are located or where the Group may operate could materially and adversely affect the financial and business prospects of the Group. Political and economic uncertainties include (but are not limited to) changes in political Ie-ddership, changes in both monetary and fiscal policies, risks of war, expropriation, changes in rates of interest, nationalisation, renegotiation or nullification of existing contracts, financial crises and method ofta,o;ation and currency exchange controls. Accordingly, there is no assurance that any adverse political, economic and regulatory changes will not materially affect the perfonnance of the Group. 3.ll Technological ri,ks The Group operates in an environment which is subject 10 inherent risks due to rapid technological changes, evolving industry standflrds, swift changes in customer requirements, computer operating environments, software and hardware applications, and frequent new product introductions and enhancements. The Group’s future depends substantially upon its ability to keep pace with these technological changes to address the increasingly sophisticated needs of its customers. The Group seeks to minimise these risks by actively and continuously pursuing technology innovation and advancement, industry best practices and strategic business alliallCes to address the increasingly sophisticated needs of its customers. The Group also provides colltinuous staff development to align their skills and knowledge with the requirements ofthe latest technology in the industry. Continuous efforts are also rn3lde to increase the efficiency of the R&D team for the development ofnew products. Even though the Group is active in R&D of new products and technologies and RM2.5 million of the proceeds from the Public Issue will be dedicated for R&D, there is no assurance that the Group’s R&D efforts will lepd to the successful introduction of new and improved products. Further, there can be no assurance that these R&D programmes can be successfully completed on time so as to enable the introduction of new or enhanced products on a timely basis “iNI-\lis market requirements and expectation:; or such products may not be commercially successful or may exceed budgeted costs. Delays or deficiencies in development, manufacturing, delivery of or demand for new products may adversely affeci (he Group’s business, operating results or finaocial condition. The resl ofthis page has been intentionally left blank 3. RISK FACTORS (Conl’d) 3.1:Z Fluctuation of global semiconductor industry The MMSV Group’s business activities are mainly focused on the design and manufacture of Industrial Automotive Systems and Machinery. TIle eoo-user ioJustries for this sector ioclude the electrical, electronics, semiconductors aoo communication equipment and applications industries. Generally, the Group’s products automate a series of manufacturing tasks to produce end products incorporating semiconductors as a component. As such, MMSV is indirectly exposed to the vagaries of the semiconductor industry. The perfomlance of the Malaysian electronics industry, including the semiconductor industry is in linc with the perfonnance of the global semiconductor cyele. Between 2000 and 2004, the gross exports of electronics recorded a growth of an average annual rate of 3.1 %. In 2004, gross export of electronics increased by 12.7% to reach RM188.6 billion. For the first quarter of 2005, the gross export of electronics grew by 8.1% compared to the same period of 20()4, According to Bank Negara Malaysia, global demand for electronics is expected to remain favourable ill 2005. The growth may be driven from the increased application of chips in consumer electronics due to increasing convergence in computing, digital media and wireless technology. Notwithstanding the foregoing, the global semiconductor market may be volatile. As the Group’s business exposure is primarily in the capital goods relating to the global electronics sector, fluctuation in the global semiconductor industry can cause the capital expenditure in the eleclronics sector to fluctuate. In addition, the global semiconductor markel has from time to time experienced extreme price and volume fluClualions which may adve~ly affect the demand for the Group’s products. Nevenheless, rapid te<:hnological advancemenl and new applications for semiconductors has reduced such extreme market fluctuations. The demand for the Group’s products is also driven by new applications together with technological advancement and convergence relating to the end·products of the Group’s industrial customers. As a manufacturing solutions provider. the Group is constanlly exposed to these demand drivers in designing and producing customised Industrial Automotive Systems and Machinery for their industrial clients. The Group seeks to minimise these risks by actively and continuously pursuing technology innovation and advancement, industry best practices and strategic business alliances to enable it to exploit new electronic sub sectors in view of sustaining demand for its producls.
3.13 Foreign exchange risks MMSV Group’s products and services are presently sold in overseas market such as the US, China, Thailand, Australia and Taiwan. Sales to the overseas markets are often transacted in foreign currencies., mainly in USD, while the expelldilure of the MMSV Group in these markets will be incurred in RM. In such instances, the Group will be e:<posed to foreign exchange fluctuations. Fluctuations in the conversion rate of RM against USD and other currencies may have material impact on the Group’s financial performance. The risk of foreign exchange fluctuation is mitigated by the managed float mechanism by the Bank. Negara Malaysia adopted since 21 July 2005 on the RM·USD conversion rate wh.ich may prevent extreme exchange rate fluemalion. No assurance can be given that the managed Ooat mechanism will be maintained in the future and that if the said managed float mechanism is removed or revised, it will not have an adverse material effect on the performance ofthe Group, The rest of this page has been intentionall len blallk 3. RiSK FACTORS (Conl’d) 3.14 Marktl rt’pucatlon The MMSV Group is involved in new product development whereby a significant amount of pre-launch testing is conducted before a new product is officially marketcd. Howevcr, as the products of (he Group are dependent on the functionality of the mechanical and software components, lhe perfonnance of each product can only be truly assessed when the machinery arc being used in the production processes of its cu!>tomers. As such, there is a risk that the Group’s products may encounter varioll!> unforeseen problems, rc!>ulting in disruption ofcustolTlers’ operations, Such problems, unless immediatcly rectified, may affect the Group’s reputation and business opportunities. In order to minimise such risk, the Group place!> great emphasis on stringent quality control and management to ensure that all its products meet customers’ requirements and are of high quality. At the same time, the Group also undertakes R&D efforts to continuously improve the quality and performance of its products. Further, excellent technical support and aAer sales services are also given priorilY 10 assist cuslOmers in solving any PQrenlial problems arising lTom the usage ofthe new products. This helps ensure the smooth running of the customers’ operations while at the same time provides the opportunity for the Group to build and maintain good reputation and relationship with its customers.
3.15 Disclosure regarding forward-Iool.ing staleu1I;’nls Certain statements contained in this Prospectus are based on historical data, which may not be reflective of future results. Other statements which are forward looking in nature are subject to known and unknown risks. uncertainties and other factors which may cause the actual results, perfonnance or achieve~ents to differ materially from the future results, perfomlance or achievements e”pressed or implied in such forward looking statements. Although the Group believes that, the expectations reflected in such forward looking statements are reasonable at this time, there can be no assurance that such expectations will prove to have been correct. Their inclusion in this Prospectus should not be regarded as a representation or wamtnty by the Company. the Adviser or any other advisers that the plans and objectives of the Group will be achieved.
3.16 Ownnship and control by substantial shareholders Upon complelion of the Public Issue, Sia Teik Keat, Goh Kim Hock, Tan Beng Chuan and their respective related companies as well as Tan Beng Cheong, will collectively hold approx.imately 71.7% of the Company’s enlarged issued and paid up share capital. As a resull, these shareholders, if acting together, would be able to influence the outcome of certain matters requiring the votes of shareholders of tile Company unless they are required to abstain from voting by law and/or by the relevant autnorities. Nonetheless, MMSV has apfXlinted 2 independent directors which is in compliance with the MMLR to represent the interests of the minority shareholders.
3.17 No prjor market for the MMSV Shares Prior to the listing ofMMSV on the MESDAQ Market, there has been no public market for MMSV Shares. There can be no assurance that an active trading market will develop for lhe MMSV Shares or if developed, that such market will be sustained or that the MMSV Shares: will trade in the public market subsequent to the Public Is..”ue at or above the issue price ofRMO.27 per Issue Share. The rest o( this page has been inlenlionally left blank 3. RISK FACTORS (Cont’d)
3.18 Capital marL:et risks The issue price of RMO.27 per Issue Share was determined after taking into consideration a number of factors, including but not limited to, the Group’s operating and financial history, its future plans and prospects and the prospects for the industry in which the Group operates and the prevailing market conditions prior to the despatch of this ProspeCIUS. The market price of the Issue Shares following the Public Issue may be volatile. Factors such as competilion, regulatory changes, operating profit or loss and cash flow, general trends in interest rate~ Malaysian and international equity markets and the Malaysian economy, as well as other factors, can cause the market price of the MMSV Shares to fluctuate. In addition, the global stock markets have from time to time experienced extreme price and volume fluctuations which may adversely affect the market price of the MMSV Shares. Such fluctuations may materially or adversely affect the market price ofthe MMSV Shares following the Public Issue. There can be no assurance that the issue price will correspond to the price at which MMSV Shares willlTade on the MESDAQ Market upon or subsequent to its listing. 3.t9 FaJlureor delay in the Listine The success of the listing ofMMSVon the MESDAQ Market is also exposed to the risk that it may fail or be delayed should any of the following events occur: (i) ,he Cornp.ny o. lh, Und,,.,”,,, f.i1 ‘0 honour lh,i’ oblig”;on un<k’ lh’ undetwri,;ng ngre<rnent; Oi) the identified investors fail to subscribe to the portion of the Issue Shares allocated to them pursuant to the private placement despife having given irrevocable undertakings to subscribe; or (iii) MMSV is unable to meet the public shareholding spread requirements i.e. at leaSI 25% but not more than 49% of the issued and paid-up share capital of the Company must be held by a minimum of 200 public shareholders holding not less than 100 shares each at the time of the Company’s admission to the Official List ofthe MESDAQ Market. Although the Board of Directors of MMSV will endeavour to ensure compliance by MMSV with the applicable regulations for lhe Listing, including, inter-alia, the public spread requirement imposed by Bursa Securities for a successfullisling, no assurance can be given thatlhese events will not occur resulting in a delay or termination of the listing.
3.20 Uncertainty of the 5-year business development plan The success ofllle Group’s business development plan will be largely dependent upon continuous market acceptance of ils products, as well as the Group’s ability to successfully market its products, further develop and commercialise new products, maintain II cost efficient structure, availability of raw materials to meet the demand for its products, successful set-up of its new production plant as well as the ability to maintain and employ skilled technical personnel. In addition. Ihe Group’s fulure plans and prospects will also be dependent upon, amongst others, the ability of the Group to respond to market and technological changeg. competitively price its products, establish satisfactory arrangements with suppliers and customers, hire and retain skilled management as well as financial, technical. marketing and other persotulel, successfully manage growth (including monitoring operational, financial and other intemal systems) and obtain financing as when needed. There can be no assurance thaI Ihe Group will be able to successfully implement its business development plan or Ihat unanticipated change in the market forces or financial constraints will not occur which would result in a material deviation from its plans.