5. RISK FACTORS 5. RISK FACTORS Before investing in our Shares, you should pay particular attention to the fact that we, and to a large extent, our operations are subject to the legal, regulatory and business environment in Malaysia. Our business is subject to a number of factors, many of which are outside our control. Before making an investment decision, you should carefully consider, along with the other matters in this Prospectus, the risks and investment considerations set out below. The risks and investment considerations set out below are not an exhaustive list of the challenges that we currently face or may develop in the future. These and other risks, whether known or unknown, may have a material adverse effect on us or our Shares. 5.1 RISKS RELATING TO THE SUGAR INDUSTRY 5.1.1 The sugar industry in Malaysia is regulated by the Malaysian government, and we are affected by government policies and regulations relating to the sugar industry, including price controls and subsidies As in many countries, the sugar industry in Malaysia is regulated by the Malaysian government. Pursuant to the Price Controls Act 1946, the Malaysian government has historically set price ceilings for refined white sugar products, taking into account various factors. In recent years, there has been a sharp increase in the price of raw sugar in the international markets. For example, the average price of raw sugar was 27.03 cents per pound in 2010 compared to 13.84 cents per pound in 2008, based on the Sugar No. 11 futures contract traded on the New York Board of Trade. For additional information about international raw sugar prices, see “Section 2.5 -Industry Risks and Challenges” of Section 6 of this Prospectus. Following such increases in raw sugar prices, the Malaysian government introduced a sugar price subsidy in 2009 so that the increase in the price of raw sugar would not be fully passed on to consumers of refined sugar products in Malaysia. Our financial performance, like the financial performance of other refined sugar producers in Malaysia, thus depends to a large extent on the government’s policies with respect to the sugar industry, such as the level of price ceilings and sugar subsidy, which are beyond our control. Starting in 2010, the Malaysian government has gradually adjusted the level of sugar subsidy and the sugar price ceiling, with the sugar subsidy amount generally being decreased and the price ceiling being increased. There can be no assurance that the Malaysian government will not decide to further decrease or eliminate its sugar subsidy or narrow its application in the future without a corresponding commensurate increase in the price ceiling. Because a substantial portion of our revenue is derived from sales of refined sugar products that are price controlled, if international raw sugar prices remain high or increase further and the Malaysian government decreases or eliminates the sugar subsidy without increasing or eliminating the refined sugar price ceilings, our profit margin, financial condition and results of operations would be materially and adversely affected. For details on the regulation of the sugar industry in Malaysia, see Section 7.13 of this Prospectus. 5.1.2 We are highly dependent on imported raw sugar to operate our refineries, and our financial performance could be impacted by fluctuations in the global supply and price of raw sugar and the availability of long-term raw sugar supply contracts We are highly dependent on the supply of imported raw sugar to operate our business. Apart from the raw sugar produced from sugar cane harvested at the Chuping Plantation, all the raw sugar used by our refineries is imported, and the volatility of global raw sugar prices is high. The supply and price of raw sugar are influenced by a number of factors that we may not be able to predict or have any control over, such as adverse weather conditions and changes in agricultural or export policies affecting the exporting country. A significant portion of the total worldwide sugar production is traded on exchanges and thus is subject to speculation, which could affect the price of raw sugar. 5. RISK FACTORS (Cont’d) The Malaysian government, represented by MITI, has historically participated in negotiations for long-term raw sugar supply contracts. Pursuant to these negotiations, MITI and all the refined sugar producers in Malaysia, including MSM and KGFP, collectively enter into supply contracts with foreign raw sugar suppliers typically covering a three-year period, and such contracts have helped us secure a consistent supply of raw sugar at prices that are usually lower than those available otherwise on the international spot market. Typically, the pricing terms of these contracts take into account the then-prevailing global market prices at the time of the contract, which in the first quarter of 2009 were lower than the current prices on the international spot market. A substantial portion of our imported raw sugar supply is sourced from such long-term supply contracts, and accordingly, if we do not continue to receive the benefit of such contracts in the future, we may not be able to secure raw sugar on as favourable terms to us. From 2008 to 2010, we purchased on average approximately 49% of our annual imported raw sugar volume pursuant to such long-term supply contracts. The current long-term supply contracts were entered into in the early part of 2009 and are scheduled to expire at the end of 2011. There can be no assurance that these long-term supply contracts will continue to be renewed as they expire, that they will be renewed with pricing or quantity terms that are as favourable as our previous contracts or that the duration of the contacts will be similar to previous contracts. If these contracts are not renegotiated and renewed on a timely basis prior to their scheduled expiry, we will have to purchase virtually all of the raw sugar we use from the international market at prevailing market prices that may be higher than those under long-term contracts, thereby increasing our exposure to the volatility in market prices of raw sugar and to higher costs of production. Furthermore, if global raw sugar prices decrease in the future to levels below the purchase price under our long-term supply contracts, we would be obligated to purchase a substantial portion of our raw sugar supply at a higher price than that on the international spot market. If any of the foregoing occurs, our profit margins, financial condition and results of operations could be adversely affected. For a more detailed description of long-term supply contracts for raw sugar, see Section 7.21 of this Prospectus. 5.1.3 Adverse weather conditions and general effects of global climate change may reduce the availability, increase the price and impact the quality of raw sugar we import A substantial portion of the raw sugar we purchase is produced in Australia, Brazil and Thailand. Adverse weather conditions in these countries and worldwide could result in less sugar cane crop being harvested or lower sucrose content of sugar cane, leading to decreased volume of raw sugar produced in a given harvest. Globally, sugar cane crop yields and sucrose content depend primarily on weather conditions such as rainfall and temperature as well as other factors such as instances of crop disease and pestilence, all of which may be influenced by global climate change. Weather conditions have historically caused volatility in the sugar industry as a result of crop failures or reduced crop in a given harvest. Cyclones, floods, droughts or other severe weather conditions in sugar growing countries, such as those recently experienced in Australia, Thailand and India, can adversely affect the global supply of raw sugar and consequently increase the price of raw sugar in the global market. There can be no assurance that these severe weather conditions impacting the sugar growing countries will not occur again in the future or that they will not occur more frequently due to potentially changing weather patterns brought on by global climate change. If the global supply and quality of raw sugar are affected by these factors or if there is an acute global shortage of raw sugar, we may not be able to secure an adequate supply of quality raw sugar to efficiently and cost-effectively operate our refineries, which could decrease our profit margin and/or production volume, and our business, financial condition and results of operations could be adversely affected. 5. RISK FACTORS (Cont’d) 5.1.4 We currently face competition in our domestic and export markets, which may adversely affect our market share and profitability, and we may face even greater competition in the Malaysian market if the restrictions on the import of refined sugar products is relaxed or eliminated in the future We compete primarily with other domestic sugar producers in Malaysia and foreign sugar producers in overseas markets. The import of refined sugar into Malaysia is restricted by the Malaysian government, with such imports only being allowed for industrial consumers with approved permits issued by the Malaysian government. At present we are not aware of any permits for the import of refined sugar having been approved and issued by the Malaysian government, thus our primary competitors in the domestic market are the operators of the other sugar refineries in Malaysia, namely CSR and GPT which are controlled by Tradewinds (M) Berhad. However, there can be no assurance as to whether the restriction on the import of refined sugar products into Malaysia will be maintained in whole or in part. If the Malaysian government relaxes its restrictions on the import of refined sugar products or eliminates such restrictions so that importation is freely permitted, we will be required to compete in the domestic market with refined sugar producers based outside Malaysia, which may have a material adverse effect on our market share, profit margins, financial condition and results of operations. In the domestic market for refined sugar products that are price-controlled, we compete primarily on the basis of product offerings, product quality, the ability to meet timely delivery requirements and overall customer service, while in markets that are not subject to price control, we also compete on the basis of price. If our ability to service customer requirements is disrupted, some of our customers may seek supply from alternate sources during such periods, and there can be no assurance that prior levels of business with those customers will be fully restored following the disruption. In addition, our competitors in Malaysia rely entirely on imported raw sugar to produce their refined sugar products. As such, we also compete with them for imported raw sugar other than the raw sugar we purchase pursuant to long-term supply contracts negotiated with the Malaysian government’s participation. In overseas markets where our products are sold, our main competitors include local sugar producers in those markets, such as SIS ’88 Pte Ltd in Singapore, as well as global sugar companies such as ED & F Man Holdings Limited, Wilmar International Limited and Mitr Phol Sugar Group. Some of our competitors in overseas markets, and potential competitors in the domestic market if imports of refined sugar become more widely permitted in Malaysia, are divisions of larger enterprises and have greater financial and marketing resources and broader product ranges than we do, and therefore may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. Moreover, some competitors in the export market may be able to sell their product at lower prices because their costs are less than ours, they have greater financial, technological and other resources than we have or their production facilities may be geographically closer to certain export markets. If we are unable to compete effectively in domestic or export markets, our market share and results of operation may be adversely affected. 5. RISK FACTORS (Cont’d) 5.1.5 If demand for refined sugar in Malaysia decreases in the future, lower sales volumes and lower prices could result, which would affect us adversely Demand for refined sugar in Malaysia could decrease in the future as a result of one or a combination of many different factors that we cannot predict and may not have any control over, including: (i) changes in the Malaysian government’s policies regarding its sugar subsidy and price ceilings that may result in higher retail prices for refined sugar products;
(ii) the Malaysian government’s nutritional guidelines and labeling laws;
(iii) changes in consumer sweetener preferences, including impact of dietary trends; (iv) changes in population demographics;
(v) impact of a weaker domestic and global economy; and
(vi) changes in the availability, development or potential use of various types of alternative sweeteners.
If demand for refined sugar products in Malaysia decreases and we are unable to successfully offset such decrease through higher domestic sales price, increased government subsidy, export sales in other markets, lower production costs, expansion of our business into other products or otherwise, our profit margins, business, financial condition and results of operations could be adversely affected. 5.2 RISKS RELATING TO OUR BUSINESS 5.2.1 Changes in the exchange rate between the USD and the RM could have a negative impact on our results of operations and financial condition Imported raw sugar, which accounted for 80.2% of our total cost of sales in 2010, is purchased in USD and certain hedging transactions related to these raw sugar purchases are also settled in USD. Moreover, our export sales, which accounted for 11.6% of our total revenues in 2010, are denominated in USD. The RM operates on a managed float basis, and a depreciation of the RM against the USD may materially and adversely affect our financial performance because it may increase our cost of production in RM terms. Conversely, an appreciation of the RM against the USD may have an adverse effect on our financial performance because it may reduce our export revenue in RM terms and raise the prices for our products against other currencies. Accordingly, changes in the USD to RM exchange rate could have an adverse impact on our results of operations and financial condition, including as a result of translation adjustments in converting USD amounts to RM for financial statement purposes. 5. RISK FACTORS (Cont’d) 5.2.2 We engage in hedging transactions that involve risks and can incur significant losses which would adversely affect our financial performance We are exposed to certain market risks arising from the conduct of our business activities, in particular, risks arising from fluctuations in raw sl.1gar prices and exchange rates. For the raw sugar we purchase outside of our long-term supply contracts, unless hedged as discussed below, the purchase price is determined only as of the date of delivery at the then-prevailing market price, not as of the date that the order is placed, which is typically months prior to the delivery date. In addition to being exposed to the risk of market price volatility of raw sugar, because all of our raw sugar purchases as well as related hedges discussed below are made in USD, we are also exposed to exchange rate risks. For a description of exchange rate risks, see Section 5.2.1 of this Prospectus. To minimise the risks associated with volatility in raw sugar prices, we engage in hedging transactions involving sugar futures contracts to fix the prices of some of our raw sugar imports. Additionally, because imported raw sl.1gar is purchased in USD, we may from time to time hedge against exchange rate fluctuations by entering into currency forward contracts. While these hedging transactions are meant to limit our risks related to raw sugar prices and foreign exchange rates, they also expose us to the risk of potentially incurring significant financial losses in situations where the counterparty to the hedging contract defaults on its contractual obligations or there is an unfavourable change in the expected differential between the underlying price in the hedging agreement and the actual market price of raw sugar or exchange rate. Under the FRSM, we are required to record fair value gains and losses related to our hedging transactions. We recorded fair value gains of RM25.1 million in 2009 and fair value losses of RM19.3 million and RM25.2 million in 2010 and the three months ended 31 March 2011, respectively on raw sugar futures contracts. In 2009, 2010 and the three months ended 31 March 2011, we recorded fair value losses on USD forward contracts of RM1.6 million, RM10.3 million and RM1.3 million, respectively. From 1 April 2011 through 20 May 2011, the market price of raw sugar has generally fallen below the level on 31 March 2011. Since we record our hedging transactions at fair value, to the extent that the market price of raw sugar falls below the fixed price under our futures contract or the exchange rates move unfavourably, our results of operation will be lower than they would have been if we had not engaged in such transactions. Consequently, our financial performance could be adversely affected during periods in which raw sugar prices or exchange rates are volatile. Alternatively, we may choose not to engage in hedging transactions in the future, in which case we would not be subject to risks associated with entering into such transactions but our financial performance could be adversely affected during periods in which raw sugar prices increase significantly or the RM depreciates significantly with respect to the USD. For a more detailed description of hedging transactions, see Section 8.2 of this Prospectus. 5.2.3 Damage to any of our production facilities that results in prolonged interruption of operations could materially and adversely affect our results We own and operate two sugar refineries, as well as a sugar cane milling facility. These production facilities are subject to potential hazards such as fire, explosions and other events that could result in material damage to the production facilities. Damage to any of our production facilities or prolonged interruptions in the operation of the facilities due to failure of critical pieces of machinery and equipment or repairs, disruption to logistics and flow of incoming raw sugar deliveries and outgoing finished products or other similar events could have a material adverse effect on our business, financial condition and results of operations. 5. RISK FACTORS (Cont’d) 5.2.4 Significant or prolonged disruptions to our storage and distribution facilities or to our transportation infrastructure could have an adverse effect on us We engage in a high volume business that is highly dependent on storage, distribution and transportation services to ensure smooth operation. We depend on the uninterrupted operation of our storage and distribution facilities and various means of transportation from those facilities to deliver our finished products to our customers. For example, MSM relies on uninterrupted operation of railways that connect its production facilities in Prai, Penang, to its warehouses located in Sungai Buloh, Selangor and Johor Bahru, Johor. Because of our limited storage capacity at the MSM Facility, MSM relies on regularly scheduled bulk transport of finished products to its two warehouses for packaging and fast distribution to customers located in the central and southern regions of Peninsular Malaysia in a cost-effective manner. As with other companies engaged in similar activities, our transportation infrastructure and logistics or operations at our storage and distribution facilities are subject to being partially or completely shut down, temporarily or permanently, as a result of any number of circumstances that are not within our control, such as catastrophic events, adverse weather conditions, environmental remediation and breakdown in equipment or machinery. Any significant or prolonged interruption at these facilities or an inability to transport products to or from these facilities for any reason would create a bottleneck in the flow of our business operations and impact our ability to serve our customers. If we experience any such disruptions or interruptions and are unable to quickly identify and resolve them, our reputation, business, financial position and results of operations could be adversely affected. 5.2.5 We may not be successful in reducing operating costs and increasing operating efficiencies As part of our business strategy, we continue to seek to reduce operating costs and increase operating efficiencies to improve our results of operation and financial performance. For example, we plan to increase operating efficiency and reduce costs by increasing the level of automation at our production facilities, especially at the KGFP Facility, to enable centralised monitoring and control of our production processes. We also hope to lower our energy costs by replacing the biofuel powered boilers at the KGFP Facility with gas powered boilers that would be cheaper to operate and maintain. We may not be able to achieve the cost savings or increased operational efficiencies that we expect to realise from these and other initiatives. Any failure to realise anticipated cost savings or increased operating efficiencies may adversely affect our competitiveness as well as our financial condition and results of operation. 5.2.6 Pursuit of new projects and initiatives to expand our business involves risks and we may not be able to successfully complete or fully realise the anticipated benefits As part of our growth strategy, we intend to expand our existing facilities and may seek to offer our products in new export markets to expand our business. For example, we are pursuing projects to enhance our economies of scale by expanding the production capacity at the KGFP Facility and the MSM Facility and increasing the storage capacity for raw sugar and refined sugar at the MSM Facility. 5. RISK FACTORS (Cont’d) Our ability to continue to expand our business through new projects and initiatives depends on many factors, including our ability to identify and implement promising projects and investments. In addition, we may be unable to obtain the required financing for these projects or initiatives on satisfactory terms, or at all. Any such project may require us to obtain environmental or other permits, designs or engineering, procurement and construction contracts. Due to these complexities, we may not be able to complete any such projects on a timely basis or at all, and may not realise the related benefits we anticipate. The integration of new projects or expansion of our existing facilities may result in unforeseen operating difficulties and may require significant financial and manqgerial resources. If these new projects and initiatives are not successfully completed or do not realise their anticipated benefits or if we fail to address one or more challenges associated with those activities, our business, financial condition and results of operation could be adversely affected. 5.2.7 Changes in the cost and availability of energy and essential utilities may result in increased operating expenses and reduced results of operations Our production processes require a high level of energy use and rely on a constant supply of essential utilities such as electrical power and water. Accordingly, increases in cost of energy or essential utilities may have an adverse effect on our profit margin and results of operations. For example, when the price of natural gas increased significantly from August 2008 to February 2009 due to a reduction in gas price subsidies by the Malaysian govemment, we experienced an increase in fuel costs of approximately RM10.7 million during this period. In addition, any significant or prolonged interruption in the supply of fuel, electrical power, water and other essential utilities could have an adverse impact on us. An increase in fuel prices would also affect our transportation and distribution costs. 5.2.8 We are exposed to costs arising from compliance with environmental and health and safety regulations and may be exposed to liabilities in the event we fail to comply with these regulations We are subject to various MalaysiaI’} federal, state and local environmental laws and health and safety laws and regulations that impose limitations and requirements related to, among other things, the emission and discharge of hazardous materials into the ground, air or water from our facilities, safety and integrity of refineries, food quality, combustible dust risk mitigation, toxic substances, solid waste and emergency planning. These laws and regulations may require us to purchase and install pollution control equipment or to make operational changes to limit actual or potential impacts on the environment or the health of our employees. Currently, we do not anticipate any material claims or liabilities resulting from a failure to comply with these laws and regulations. However, any violations of these laws and regulations may result in substantial fines, criminal sanctions, revocations of operating permits or shutdowns of our facilities. Due to the possibility of changes to environmental and health and safety laws and regulations and other unanticipated developments, the amount and timing of future expenditures to comply with such laws and regulations may vary substantially from those currently anticipated. Our costs of complying with current and future environmental and health and safety laws and regulations, and our liabilities arising from future releases of, or exposure to, hazardous substances could adversely affect our business, financial condition and results of operations. 5. RISK FACTORS (Cont’d) 5.2.9 If we are not able to renew or maintain the permits and approvals required to operate our business, this may have a material adverse effect on our business We require certain permits and approvals to operate our business and facilities. In the future, we may be required to renew these permits and approvals or to obtain new permits and approvals. While we have not experienced any difficulty in renewing and maintaining these permits and approvals in the past, as and when required, we cannot assure you that in the future the relevant authorities will issue any required permits or approvals in the time-frame we anticipate or at all. Failure by us to renew, maintain or obtain the required permits and approvals may interrupt our operations or delay or prevent the implementation of any capacity expansion or other new projects and may have a material adverse effect on our business, financial condition and results of operations. For a more detailed description regarding our permits and licenses see Section 10 of this Prospectus. 5.2.10 Funding, especially on terms acceptable to us, may not be available to meet our future capital needs Our ability to obtain external financing and to make timely repayments of our debt obligations are subject to various uncertainties, including: our future results of operations, financial condition and cash flows; the condition of the Malaysian economy and the markets for our products; the cost of financing and the condition of financial markets; and the continuing willingness of banks to provide new loans. We cannot assure you that any required additional financing, either on a short-term or long-term basis, will be made available to us on satisfactory terms, if at all. If adequate funding is not available when needed, or is available only on unfavourable terms, meeting our capital needs or otherwise taking advantage of business opportunities or responding to competitive pressures may become challenging, which could have a material and adverse effect on our business, financial condition and results of operations. 5.2.11 Our insurance coverage may not be adequate to cover all losses and/or liabilities that may arise in connection with our operations We maintain insurance at levels that are customary in our industry to protect against various losses and liabilities. However, our insurance may not be adequate to cover all losses or liabilities that might be incurred in our operations. For example, our insurance may not cover losses due to workers being on strike resulting in work stoppages that could have a material and adverse effect on us. In addition, as is customary in the industry, we do not insure most of our assets against war, terrorism or sabotage. Moreover, we will be subject to the risk that in the future we may not be able to maintain or obtain insurance of the type and amount desired at reasonable rates. If we were to incur a significant liability for which we were not fully insured, it could have a materially adverse effect on our business, financial condition and results of operations. 5.2.12 We are controlled by FGVH, whose interests may not be aligned with those of the other shareholders of our Company Upon the successful completion of the IPO, FGVH will own, directly and indirectly, 54.0% of our Shares and thus will continue to be the controlling shareholder of our Company. FELDA, which is an entity established pursuant to the Land Development Act 1956, is the sole shareholder of FGVH. 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 Bursa Securities LR, FGVH will control the approval of all corporate matters requiring a shareholder resolution under the Act without the approval of other shareholders of our Company. This includes the approval of all final dividends and the appointment of directors. As the sole shareholder of FGVH, FELDA exercises similar control over FGVH, and thus FELDA also indirectly exercises control over our Company. There can be no assurance that FGVH or FELDA will not take actions in the future that would have an adverse effect on us. -475. RISK FACTORS (Cont’d) 5.2.13 Certain tax incentives or exemptions from the Malaysian government may no longer be available in the future The Malaysian government provides certain tax incentives for the promotion of investments in selected industries in Malaysia, including the Reinvestment Allowance (“RA”). The RA is available for manufacturing companies that incur capital expenditures on projects for purposes of expansion, modernisation or diversification. The rate of RA is 60% on the qualifying capital expenditures and this amount is in addition to capital allowances claims. The RA is used to reduce up to 70% of statutory income. In 2009, the total amount of RA claimed and utilised by MSM and KGFP was RM45.0 million. MSM and KGFP currently qualify for this incentive, but under current regulations, the incentive period for RA is fifteen consecutive years beginning from the first year of claim by a company, and the availability of the RA for both MSM and KGFP will expire at the end of 2011. If current regUlations are not amended to extend the incentive period for the RA incentive beyond the end of 2011, the loss of such tax incentive could have an adverse effect on our business, financial condition and results of operations.
5.2.14 We depend on certain key personnel and skilled employees Our success depends on the continued contributions of our key personnel and skilled employees. Although we intend to focus on succession planning issues to reduce our dependence on such personnel, the experience and knowledge gained by our key personnel, including our directors and senior management, may be difficult to replace. If we are unable to retain our existing key personnel, including our directors and senior management, or skilled employees, or attract, hire and integrate appropriate replacements and successors, our operations may be materially and adversely affected. 5.2.15 Failure to maintain good employee relations may adversely affect our operations and the success of our business Maintaining good employee relations is important for the smooth operation of our production facilities and our business as a whole. As of 31 March 2011, 39% of our employees were unionised, and MSM and KGFP are parties to collective bargaining agreements with their respective employees represented by in-house unions. We may not be able to favourably negotiate the terms and conditions of any new labour agreements, and strikes or disruptions to our operations may occur in the future due to this or other reasons. If we are unable to maintain good employee relations in the future or fail to negotiate collective bargaining agreements in the future on acceptable terms and on a timely basis, or if there are disputes relating to the interpretation or implementation of the collective bargaining agreements, our business, financial condition and results of operations may be adversely affected. For a more detailed description of our employees, see Section 7.17 of this Prospectus. 5.2.16 The Combined Financial Information, the historical audited financial information of our Subsidiaries and the Pro Forma Consolidated Balance Sheets included in this Prospectus may not accurately reflect our financial position, results of operations and cash flows The Combined Financial Information included in this Prospectus has been prepared based on the sugar business that was carved-out of the historical consolidated financial statements of PPS for the financial years ended 31 December 2008 and 31 December 2009, being the period prior to the acquisition of PPS’s sugar business by FGVH, and the historical consolidated financial statements of FGVH for the financial year ended 31 December 2010. 5. RISK FACTORS (Cont’d) The Combined Financial Information is presented for informational purposes only and do not incorporate the effects of the Pre-Listing Restructuring and related accounting treatment on the Company. Thus the Combined Financial Information is not necessarily indicative of the financial position, results of operationsand cash flows that would have occurred if the Subsidiaries had been operated together as a standalone group during the financial years or periods under review or had the Pre-Listing Restructuring been completed at or as of 1 January 2008. The individual historical financial information of each of the Subsidiaries included in this Prospectus was prepared and audited with respect to these independent standalone entities prior to the Pre-Listing Restructuring. Accordingly, they do not reflect the effects of the Pre-Listing Restructuring, including the formation of the Company. The Pro Forma Consolidated Balance Sheets have been prepared on the basis that the Pre-Listing Restructuring, IPO and Listing occurred on 31 December 2010. As the Pro Forma Consolidated Balance Sheets are prepared for illustrative purposes only, such information, by its nature, does not give a true picture of the effects of the Pre-Listing Restructuring, IPO and Listing on the financial position of the Company had the transactions or events occurred at the balance sheet date. Accordingly, the financial information presented in the Combined Financial Statements, the individual historical financial information of the Subsidiaries and the Pro Forma Consolidated Balance Sheets may not provide a true and accurate picture of the financial position or results of operations of our Company for the periods and dates presented. Further, such financial information does not purport to predict our future financial position or results of operations. 5.2.17 We may not be able to achieve the anticipated synergies, economies of scale or other benefits resulting from the Pre-Listing Restructuring and goodwill and intangible assets allocated to us pursuant to the Pre-Listing Restructuring may become impaired We recently undertook the Pre-Listing Restructuring in order to better align and consolidate the Felda Group’s sugar businesses under one group. Our success will depend, in part, on our ability to manage and operate the Subsidiaries and realise the anticipated synergies, economies of scale or other potential benefits from the Pre-Listing Restructuring. Prior to the Pre-Listing Restructuring, MSM and KGFP have operated as independent standalone businesses and not as a single group of companies. The Chuping Plantation was also previously operated by another entity before it became a part of KGFP through the Pre-Listing Restructuring. As such, there is no operating history of our Subsidiaries managed as one economic entity under the same group, and there can be no assurance that any of the intended benefits of the Pre-Listing Restructuring will be fully realised within the anticipated timeframe, if at all. There are a number of risks that may adversely affect us and our ability to maintain a competitive position in the sugar industry in Malaysia and in the export market, including: • unforeseen challenges that may require significant financial and managerial resources that could otherwise have been directed to other aspects of our business;
• higher than expected costs or difficulties associated with coordinating and integrating certain business functions, such as procurement of raw sugar, hedging activities and marketing and distribution efforts, and execution of strategic initiatives;
5. RISK FACTORS (Cont’d) • difficulties in integrating the management teams, strategies, cultures, technologies and operations of the Subsidiaries; and
• potential duplication in functions, operations or processes that may lead to inefficiencies that could take time to eliminate.
In addition, in 2010, in connection with the acquisition of PPB’s sugar business by FGVH, we recorded RM662.3 million of intangible assets comprising RM576.2 million in goodwill and RM86.0 million in acquired brand name, as well as an amortisation charge of RM3.2 million related to the brand name. See Note 2 to the Combined Financial Information included in this Prospectus for additional information on purchase price allocation in respect of the acquisition and Note 6.9 for additional information on our intangible assets. In accordance with FRSM, we will have to assess the carrying value of our intangible assets for impairment at least annually and whenever there is an indication of impairment. Additionally, any intangible asset identified with finite life, such as the acquired brand name, will be subject to amortisation over its estimated economic life. Intangible assets will be impaired when the carrying amount of the intangible assets exceeds their recoverable amount. Any reduction in, or impairment of, the value of the intangible assets and amortisation of finite life intangible assets will result in a charge against earnings, which could materially and adversely affect our financial condition and results of operations. Events that may give rise to the potential impairment of intangible assets include the cessation of our refined sugar business, suspension or cancellation of our licenses by the Malaysian government and obsolescence or physical damage to our operating assets. There can be no assurance that our efforts to take advantage of certain potential benefits through the Pre-Listing Restructuring will help enhance our financial performance or that our goodwill and intangible assets will not be impaired in the future. See Section 7.3.1 of this Prospectus for more information on potential benefits related to the Pre-Listing Restructuring. 5.2.18 We are exposed to the credit and other counterparty risk of our customers in the ordinary course of our business We have various credit terms With virtually all of our wholesale and industrial customers, and our customers have varying degrees of creditworthiness which exposes us to the risk of non-payment or other default under our contracts and other arrangements with them. In the event that a significant number of material customers default on their payment obligations to us, our business, financial condition and results of operations could be materially and adversely affected. 5. RISK FACTORS (Cont’d) 5.2.19 Lease agreement with PAK for plots of land in Prai, Penang, on which the MSM Facility is located may not be finalised within the anticipated timeframe MSM is currently in the process of formalising a lease agreement with PAK in respect of four plots of land in Prai, Penang (the “Prai Land”), on which the MSM Facility is located. The Prai Land is the site of certain factory bUildings, warehouses, railway lines and other structures that are part of the MSM Facility currently used by MSM in its business operations. For a more detailed description of the relevant plots of land, see Section 11.2 of this Prospectus. MSM has received a letter of undertaking from PAK dated 8 April 2011, which sets out the decision on 1 April 2011 by the Malaysian government, as the controlling entity of PAK, to approve a long-term lease with respect to the Prai Land. For’ more information on the letter of undertaking, see Section 7.21.1 (v) of this Prospectus. Under the letter of undertaking, PAK has agreed to grant a lease to MSM for the Prai Land, and MSM and PAK are to formalise such an agreement within a period of six month from 1 April 2011. PAK and MSM have agreed to the key terms of the lease agreement, and the lease agreement is expected to be finalised and executed within the anticipated timeframe. However, if for any reason the lease agreement is not entered into within the required timeframe on the terms we currently anticipate, there can be no assurance that a valid and binding lease agreement will be entered into at all, or if eventually entered into, that it will be on the terms contained in the letter of undertaking. Consequently, our operations at the MSM Facility, our business, financial condition and results of operations would be materially and adversely affected.
5.3 RISKS RELATING TO OUR SHARES 5.3.1 There has been no prior market for our Shares There has been no prior market for our Shares and there can be no assurance as to the liquidity of any market that may develop for our Shares, the ability of holders to sell our Shares or the prices at which holders would be able to sell our Shares. None of us, the Promoters, the Selling Shareholder and the Placement Manager have an obligation to make a market in our Shares. Application has been made to Bursa Securities for the listing of and quotation for our entire share capital (including the IPO Shares) on the Main Market of Bursa Securities and it is expected that there will be an approximate 12 Market Day gap between closing of the Retail Offering and trading of our Shares. We cannot assure you that there will be no event or occurrence that will have an adverse impact on the securities markets, our industry or us during this period that would adversely affect the market price of our Shares when they begin trading.
5.3.2 The Share price may be volatile The market price of our Shares could be affected by numerous factors, including: (i) general market, political and economic conditions;
(ii) trading liquidity of our Shares;
(iii) changes in earnings estimates and recommendations by financial analysts; (iv) changes in market valuations of listed shares in general or shares of companies comparable to ours;
(v) changes in government policy, legislation or regulation; and
(vi) general operational and business risks.
5. RISK FACTORS (Cont’d) In addition, many of the risks described elsewhere in this Prospectus could materially and adversely affect the market price of our Shares. Accordingly, there can be no assurance that our Shares will not trade at prices lower than the Institutional Price or the Retail Price. Over the past few years, the Malaysian, regional and global equity markets have experienced significant price and volume volatility that have affected the share prices of many companies. Share prices of many companies have experienced wide fluctuations that have often been unrelated to the operating· performance of those companies. There can be no assurance that the price and trading of our Shares will not be subject to fluctuation.
5.3.3 There may be a delay or failure in trading of our Shares The occurrence of certain events, including the following, may cause a delay in or termination of the Listing: (i) we are unable to meet the minimum public spread requirements as determined by Bursa Securities, that is, having at least 25% of our issued and paid-up Shares in the hands of at least 1,000 public shareholders holding at least 100 Shares each at the point of Listing; or
(ii) we are not able to obtain the approval of Bursa Securities for the Listing for whatever reason.
In such an event, investors will not receive any IPO Shares, and we and the Selling Shareholder will be jointly and severally liable to return in full, all monies paid in respect of any application for the IPO Shares. If such monies are not paid within 14 days after we and the Selling Shareholder become liable to repay it, then, pursuant to sub-section 243(2) of the CMSA, we and the Selling Shareholder will become jointly and severally liable to repay the monies with interest at the rate of 10% per annum or such other rate as may be prescribed by the SC upon expiration of that period until full refund is made.
5.3.4 We may not be able to pay dividends We propose to pay dividends out of cash generated by our operations after setting aside necessary funding for capital expenditures and working capital needs. Dividend payments are not guaranteed, and our Board of Directors may decide, in its sole absolute discretion, at any time and for any reason, not to pay dividends or to pay smaller dividends than we currently propose. If we do not pay dividends, or pay dividends at levels lower than that anticipated by investors, the market price of our Shares may be negatively affected and the value of the investment in our Shares may be reduced. Further, our payment of dividends may adversely affect our ability to fund unexpected capital expenditures as well as our ability to make interest and principal repayments on any borrowings we may have outstanding at the time. As a result, we may be required to borrow additional money or raise capital by issuing equity securities, which may not be possible on favourable terms or at all. Further, in the event we incur new borrowings subsequent to the Listing, we may be subject to covenants restricting our ability to pay dividends. 5. RISK FACTORS (Cont’d) 5.3.5 We plan to use the net proceeds from the Public Issue primarily for capital expenditure, expansion of our business and working capital, and you may not necessarily agree with how we use them The net proceeds to be received by us from the Public Issue are expected to be RM422.5 million. We may spend the net proceeds from the Public Issue in ways you may not agree with or that may not yield a favourable return to our shareholders. Even though at the time of the investment decision we believed in good faith that the investment would be beneficial to our Company and maximise returns to our shareholders, the benefits of the investment, for whatever reason, may not be realised as expected. We plan to use the net proceeds from the Public Issue primarily for capital expenditure, expansion of our business and working capital. We will have discretion as to the actual application of our net proceeds, detailed further in “Section 4.12 -Use of Proceeds”, and you are providing your funds to us, upon whose jUdgment you must depend for the specific uses we will make of the net proceeds from the Public Issue. 5.3.6 We are a holding company and, as a result, are dependent on dividends from our Subsidiaries to meet our obligations and to provide funds for payment of dividends on our Shares We are a holding company and conduct sUbstantially all of our operations through our Subsidiaries. Accordingly, dividends and other distributions received from our Subsidiaries are our principal source of income. Consequently, the amount of these dividends and distributions are an important factor in our ability to pay dividends on our Shares (to the extent declared by our Board of Directors). The ability of our Subsidiaries to pay dividends or make other distributions to us is sUbject to the availability of distributable reserves and to these companies’ having sufficient funds that are not needed to fund their operations, other obligations or business plans. In addition, changes in FRSM may affect the ability of our Subsidiaries (and consequently our ability) to declare and pay dividends. As we are a shareholder of our Subsidiaries, our claims as a shareholder will generally rank junior to all claims of our Subsidiaries’ creditors and claimants. In the event of a liquidation of a Subsidiary, there may not be sufficient assets for us to recoup our investment in that Subsidiary. 5.3.7 The sale or the possible sale of a substantial number of our Shares in the public market following the IPO could adversely affect the price of our Shares Following the sale of up to 234,564,700 IPO Shares, up to 26% of our Shares will be publicly held by investors participating in the IPO, while 379,609,448 Shares, or 54% of our Shares, will be held, directly and indirectly through FGVS, by FGVH and 140,595,952 Shares, or 20% of our Shares, will be held by KPF. Following the Listing, the Shares sold in the IPO (other than the Offer Shares sold to KPF) will be tradable on the Main Market without restriction. The Shares may also be sold outside the United States subject to the restrictions of Regulation S. We, the Selling Shareholder, FGVS and KPF have entered into the lock-up arrangements as described in Section 4.7.3 of this Prospectus, and FELDA and FGVS, as Promoters, and FGVH, as a Promoter and the Selling Shareholder, are subject to a moratorium in accordance with the SC’s requirements and the lock-up arrangements described in Section 14.2 and Section
4.7.3 of this Prospectus. 5. RISK FACTORS (Cont’d) However, notwithstanding our existing level of cash and cash equivalents, we may issue additional Shares after the end of the lock-up period in connection with financing activities or otherwise, and it is possible that FGVH, FGVS or KPF may dispose of some or all of their Shares after the lock-up period and moratorium period pursuant to their own investment objectives. If FGVH, FGVS or KPF sell or are perceived as intending to sell a substantial amount of Shares, the market price for our Shares could be adversely affected. 5.3.8 Because the Retail Price is higher than our net tangible asset value per Share, purchasers of our Shares in the IPO will experience immediate and substantial dilution. Purchasers of our Shares may experience further dilution if we issue additional Shares in the future The Retail Price is higher than the net tangible asset value per Share. Therefore, purchasers of our Shares in the IPO will experience an immediate dilution in net tangible asset value of RM2.28 per Share at the Retail Price of RM3.38, and our eXisting shareholders will experience an increase in the net tangible asset value per Share. In order to meet our funding requirements, we may consider offering and issuing additional Shares or equity-linked securities in the future. Purchasers of our 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.
5.4 OTHER RISKS 5.4.1 Unfavourable financial and economic developments in Malaysia or overseas may have an adverse effect on us We are incorporated in Malaysia, all of our assets are located or registered in Malaysia, and Malaysia is the principal market for our products. As a result, we are subject to political, social, economic, legal and regulatory risks specific to Malaysia. . Beginning in July 1997 and lasting until 1999, Malaysia experienced a significant financial and economic downturn that resulted in, among other things, a significant devaluation of the RM and an increase in the number and size of companies filing for corporate reorganisation and protection from their creditors. More recently, Malaysia’s economy has been affected by the global economic crisis that began in late 2007, as evidenced by the 1.7% decline in Malaysia’s GDP in 2009 and the decline in the growth rate of Malaysia’s GDP to 4.6% in 2008, compared to 6.3% in 2007. The Malaysian economy recovered in 2010, with its GDP growing at 7.2%. We cannot assure you that the Malaysian economy will continue to grow or that GDP in Malaysia will not decrease. Also, general economic conditions in Asia may have an effect on our business, financial condition and results of operations, as well as our future prospects. The recent global financial crisis, the recent earthquake and tsunami in Japan, the recent European sovereign debt crisis, recent developments in North Africa and the Middle East, higher oil and other commodities prices, inflation or the threat thereof, rising interest rates, the general weakness of the global economy and the occurrence of avian flu and swine flu in Asia and other parts of the world have increased the uncertainty of global economic prospects and may continue to adversely affect the Malaysian economy. Any future deterioration of the Malaysian and global economy could adversely affect our business, financial condition and results of operations.
5. RISK FACTORS (Cont’d) Terrorist attacks and other acts of violence or war may negatively affect the Malaysian market in which our Shares will trade and may also adversely affect financial markets globally. These acts may also result in a loss of business confidence, decrease the demand for our products and ultimately adversely affect our business. In addition, any such activities in Malaysia or its neighbouring countries in Southeast Asia might result in concern about the stability in the region, which could adversely affect the price of our Shares. 5.4.2 Forward-looking statements in this Prospectus may not be accurate This Prospectus contains forward-looking statements. All statements, other than statements of historical facts, included in this Prospectus, including, without limitation, those regarding our financial position, business strategies, plans and prospects of our management for future operations are forward-looking statements. Such forward-looking statements are made based on assumptions that we believe to be reasonable as at the date hereof. Forward-looking statements can be identified by the use of forward-looking terminology such as words “may”, “will”, “would”, “could”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “aim”, “plan”, “forecast” or similar expressions and include all statements that are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of our Group, or industry results, to be materially different from any results or performance expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding our present and future business strategies and the environment in which we will operate in the future. Such factors include, among others, general economic and business conditions, competition, the impact of new laws and regulations affecting our industry and initiatives of the Malaysian government. In light of these uncertainties, the inclusion of such forward-looking statements in this Prospectus should not be regarded as a representation or warranty by us or our advisers that such plans and objectives will be achieved. (The rest of this page has been intentionally left blank)