Risk Factors

4. RISK FACT”-O”RS= . _
Tbere has been no prior public market for MSB Shares:. The Offer Price was: agreed upon by MSB and OSK as Adviser. Managing Underwriter and Placement Agent ba.~ upon several factors and may not be an indication of the market price of MSB Shares after the Public Offer and Listing. See Section 3.6 of this Prospectus on the basis for the determination of the Offer Price.
There can be no assurance that an active public market in MSB Shares will be developed or be sustained after tills Public Offer and Listing, or that the market priGe of MSB Shares will oot decline below the Offer Price>
A number of factors may cause the price of MSB Shares to fluctuate, including (without limitation) sales of substtlntiiil amQunts of MSB Shares in the public market in the immediate future: announcements of developments relating to MSB’s business: fluctuations in MSB’s operating results and sales levels; the conditions of the general industry, or lhe national or world­wide economy; changes in regulalion; announcements of new products or product euhancements by the MSB Group and/or irs competitors.
As an investor of MSB, it is to be DOted that MSB will be listed on the 1’v1ain Board of Bursa Malaysia, The performance of Bursa Malaysia is, to a certain exlent, dependent on external factors such as the performance of the regional and world bourses. and the inflow or outflow of foreign funds, Market sentiments are also largely driven by internal factors such as. the economic and political conditions of the country M well as the potential growth of Ihe various sevtors of the economy. These :factors will invariably contribute to the volatility of trading vplumes on Bursa Malaysia, thus adding risk to the market price ofMSB SIu1res.

MSB is subj(‘~t to certain business risks, such as labour and raw material shortages, iIK:rease in costs of labour, utilities and raw materials, ;;hanges in general eeOllOmlc. and business and credit conditiQtlS. Although the Group seeks to limit these risk… through. inter-alia, semi·automated operations, conservative management policies, ami maintaining long term business relationships with its suppliers and ~u.®mers. no assurance can be given that any change to these factors will not have IJUlten<Il adverse effects on the Group’s business,

The Group’s business acti vities are fooused mainly in Mamysia. Any adverse development in the economic, political and financial conditions in Malaysia c1)uld materially and adversely affect the financial and operational conditions and profitability of the MSB Group, These risks include the risks of an economic downturn, ehanges in mte-rest rates and unfavourable .changes in government policies such as changes in tnethtxl of laxation and the introduction of new regulations. Whilst the MSB Group will continue to tuke effective measures such as prudent financial management and efficient operating procedures, thel’e is no assurance that adverse political and economic factors will not materially affect the MSB Group.


eRe manufactured by MSCRC is mainly used in the manufacturing ofsteel pipes and tubes., steel furniture. home appliances, el/X~trical appliances. steel drums, automobile bodies, steel strappings and raw material for galvanised and coated steel sheets. As such, the demand for 1-1SCRC’s products is mainly dependent on, inteNilia. the ptO$peCts ofthe local mannfa,,”,iunng industry.
In an effort to reduce MSCRC’s dependence on the local manufacturing industry. MSCRC bas been expioring the possibility of expnmng its products to other overseas countrie.., if the prices offered are attractive. In the FYE 31 January 2004, MSCRC exported 7.053 mt of CRC to tne People’s Republic QfChina.
However. the exporting of eRe to overseas markets usually involves high freight and trnnspNtation .;:harges. in addition to the stiff competition from other fore.ign CRC manufacturers. As l.Iuch. it may not be profitable to export its products overseas unless the prices are favourable to MSCRC. There can be no assurance that the prices of eRe in overseas markets will be favourable to MSCRC,

To date, there are only two producers of eRe in Malaysia, namely MSCRC and Ornasteel. III 2002, Ornasteel and MSCRC produced an aggregate of 551.000 rol of eRe. which accounted for approximately 44.3% of the total local consumption of L244JlOO mt However. the Lion Group plans to e<>tablish a cold rolling mill. which is due to begin operations in 2004. The plan! wiU have a capacity of 1,5 million rot,
(Source: MISl!’ Report 20(3)
MSCRC is eApeCted to maintain its market. share at its current level as the Lion Group’s cold rolling: mill is expeeted to produce only approximately 400,000 mt of CRe per anmnn during its initial years ofoperations, To the best of their knowledge, management is oot aware of ,any other CRe plants currently being planned,
Notv.ithstanding the above. the CRe sector is stilI highly competitive as It faces competition in the global steel industry, With the initiation of the Common Effective Preferential Tariff scheme under the AFt’A. tariff on goods traded within the region, which meet a 40% ASEAN content requirement, wiU be reduced to 0% -5% by the 2003 (2006 for Vietnam and 2008 for Laos and Myanmar). This wouk! result in a liberalised market and intensify competition among steel producers in the region. Hence, manufacturers in certain selected industries can easily import cheaper CRC from the other ASEAN countries and other parts of the world.
In order to remain ahead of its competitors, the Group intends to continually improve the quality of Its products as well as to increase its focus on pricing its products competitively, Although the: MSB Group has taken efforts to maintain its-competitiveness. there is still no assurance that it will maintain its market share in the future.

The AFTA agreement was signed in 1992 between MaJaysia, Thailand, Singapore., Indonesia, Philippines and Brunei to promote economic co-operation and increased competitivenet,s by reducing inter,regional tariffs between member countries. AFfA has resulted in a gradual reduction of trade barriers in ASF.AN. Under AFrA. member countries have he:gun to lo’Wu import tariffs, export subsidies aod tax relief since the year :2000 and would totally abolish them by 2003. With the initintion of the Common Effective Preferential Tariff scheme under AFTA, tariff on goods traded within the regiun, which meets a 40% ASE,o\..:”ii content requirement, will be reduced to 0% ~ 5%” This would result in a liberalised market and Intensify competition among steel producers in the regioll”

Although competition among steel producers is expected to intensify under AFTA, the market liberalisation Qf the steel industry is expected to present opportunities to efficiently-run steel producers to increase their market shares both domeslically and regionalfy if they are able to emerge as low cost producers under the AFfA regime,
MSCRC has been operating under the AFfA regime when the provisions under the AFfA agreement came into effect on 1 January 2003. As at the date of the Prospectus. there bas been no material impact on MSCRC’s operations. However, there is no assurance that MSCRC’s sales, costs and profits will not be affected in the future.
To enhance its competitiveness under the AFfA regime, the MSB Group plans 10 continually improve the quality of its products as well as to increase its focus on pricing ils products competitively. In addition, the MSB Group periodically performs upgrading works on its machinery and undertakes training programmes for its wmkforce to keep them abreast with current prodoction technologies and teehnical know-how.
As in other businesses, the Group belleves that its continued succC-‘>S depends significantly on the abilities aud continued efforts of its existing Directors, senior management and long selVJce technical support staff, further details of which may be found in Sections 6.2 and 6.4 of this Prospectus”
The loss of any of the key members of the Group including Directors and senior management, could adversely affect the Group’s performance. However, with the rigorous on~the·job training extended to the middle management and operations staff as well as strong technical support from various suppliers, coupled with a competitive remuneration scheme, the-Group’s management has expanded and strengthened over the years. Thus,. the Gronp is confident that with the capabilities of its employees. it would not expect any difficulties in grooming the younger members of the management team to eventually take over from their seniors in the fU1ure.
Therefore, every effurt has been made by the MSB Group to ensure a smooth transitiOn in the
management team” Hence, the Group’s future suc.cess will also depend upon its ability to retain,
as well as to atlr~t new. skilled personnel,

The Directors: of MSB believe that the !let proceeds from the f>ublic Offer, together with casb flow generated from 1\188’8 operations and other existing S(lur;:es of funds, will be sufficient to meet the projected working capital and other cash requirements.
However, there is no assurance that future events may not cause the MSB Group to seek additional capital sooner. If additional capital is required, there. can be no assurance tbat it ‘Will be available, or if available., that it will be on terms satisfactory or favourable to the MSB Group. The issue of additional equity or other convertible securities by MSB may result ill the dilution of the interests of the then shareholders of MSB.
If appropriate opportunities present themselves, whether in MalaysIa or elsewhere, the MSD Group may decide to acquire businesses, products or technologies, or enter into joint ventures, alliances or partnerships with third parties, or to ex.paad imo other geographical markers.

There can be no assurance that tbe MSB Groap will be able to sucx:essfully identify, negotiate, finance Of implement these ventures or investments, to successfully integrn!e these ventures or invest.mentS with its current business and operations, or to benefit from the same, These ventures and investments may also require additional capital, which mayor may not be available on terms satisfactmy to the MSB Group. However, any venture or investment of such nature will be carefully considered by the Directors of MSB and its subsidiary with due care,
The MSB Group Inay also from time to time invest in new ventures and prodllCtS. These investme-nts may not be successful, or may have a delayed gestation period. In this event, MSB may not be able. or may be slow, to recover il.S investments: andlor achieve satisfactory retum.,>. However, any venture or investment of such nature will be carefully conside¥cd by the Diroctors of MSB-and its subsidiary with due care..


Upon completion of the Public Offer, the Directors, executive officers and substantial shareholders Q{ MSB will. in the aggregate, beneficially own approximately 52.8% of the issued and paid-up share capital of MSB, As a result, these shareholders, if acting together, will possess voting control over MSB, giving them the ability, amongst others. to elect at least a majority of MSB’s Directors and to control the vote on significant corporate transactions.
Nonetheless. MSB has appointed three (3) independent directors as a step towards good corporate governance to ensure that Mly future transactions involving related parties, if any, are entered into on arms-length terms.

Certain Directors and substantial shareholders of the MSB Group have interests in companies carryi.ng out similar business activities as the MSB Group, Please refer to Section 9.3 of this Prospe;::ms for details of disclosure on any potential conflict of interests and factors that would avert any potential conflict of interests.
The MSB Group may continue to enter into tmsines-s or other lrMlsactions with related parties in the future. However, the MSB Gtoup has internal <:ontrol systems to ensure lIlat the recurrent related party transactions. are undertaken on an arm’s length basis and on normal commercial terms consistent with too Group’s usual business practices and policies. which are 00 more favourable 10 the interestoo parties than those extended to tmrd parnes! public and are oot to the detriment of the minority sharehol.dcrs.. These include trnnsacting at the prevailing market rates/prices for the service or product. on the service or product provider’s usual commercial terms, and otherwise in accordance with applic:.Wle industry norm,
The MSB Group’s agreements with customers typically contain provisions designed to limit the Group’s exposure to potential product or other liability claims. MSB has not, to date, experienced any material product or other liability daiIns. Ho”,~ver, it is possible that the limitation and/or exclusion uf liability provisions. in the Group’s agreements with Cli..-.tomers may not be efftttive as a result of existing or future laws. or unfavourable judicial decisions.


MSCRC currently operates Ii single production line of various independent processes for its products. Consequently, any hreakdown of critical machinery along the production line as a result of a disruption in energy supply, fire outbreaks or other emergencies may adversely affect MSCRC’s production capabilities. Since the last twelve (12) months. MSCRC has oot experienced any breakdown that has severely disrupted its operation..;;,
None4heless. to minimize the risk of any such future breakdown, MSCRC employs a strict preventive maintenance and service procedure for its production line. The production line-is checked regularly by MSCRC’s trained personnel. while its critical facilitie$ are serviced once every five (5) years by expel!S from tile relevant equipment suppliers.
Additionally, the Group has built a back-up generator that will provide electricity for the operation of the baroh annealing furnaces in the piant, the sales and delivery departments as well as too other office operations. The MSB Droop has also established fl health. safety and security measure for each level of operation that is strictly adhered 10 by its employees, An appropriate emergency response and back-up plan has also been put in place by management to cater for any accidents and/or emergency situations.
Up to 20,002,000 of the Offer Shares are to be. under….tiUen by the Managing Underwriter and the Underwriter mentioned in Section 1 of this Prllipectus. The underwTiting commi&&ion IS payable by the Company at a ratc of 1.5% of \he offer prIce of RML40 per Share for the Offer Shares made available for the Malaysian Publi<; and any Offer Shares reserved for the Directors, eligible employees and business associates of the MSB Group and the MlG Group rhat are not subscribed and therefore I.lnderwriuen by the Managing Underwriter and Underwriter. However, the agreement of the Managing Underwriter and Underwriter to underwrite up to 20,002.000 of the Offer Shares shoul\l not be taken as an indication of the merits or assurance of the value of the Offer Shares.

The raw material currently used in the MSB Group’s production is sourced from several main suppliers, namely Megasteel from Malaysia and other HRC pmducers from Japan. While the Group has established good long-term relationship with its suppHers, there is no assurance that their relationship wiiI continue in the post~Listil:’lg period, However, the Company has already identified 4 list of alternative suppliers from which to rource the raw material should the current suppliers fail to hoOOt1f their obligations, Notwithstanding the foregoing, the Directors of the COillpilOY are oonfidern that the long-term relationship that they have nurtured with its suppljers, ranging from 4 to 8 years, wU1 ensure that the Group easily obrains an adequate supply of HRC at competitive prices in the future.
The MSB Group has not entered into any long term contracts to supply to its major customers as it is the norm in the steel industry to negotiate contracts on a ql.l8£terly basis. However, the Group has a track record of gelling recurrent orders as evidenced by the long-rerm relationship with its cllStomers, The Group’s long standing customer relationships also serves as an endorsement of the qlUl1ity of its CRe.
(‘~in statements in tuis Prospectu.-o; are based on hist<::wical data which may not be refl.x:rive of the future results, wllile others are forward-looking in narure which are subject to unccltainties and contingencies. All fprwaro-looking statements are based on estimates and assumptions made by the Directors of M,.’;B, and although believed to be reasonable, arc subject to known and unknown risks, uncertainties and other factors which may carne the actual results, performance or achievements to differ materially from the future results. Altbough MSB believes that the expectations reflected in such forward-looking statements are reasonable at this tin1e, t!len~ can he 00 lliismaoce that such expectations will prove to have been correct.
The inclusion of the forward-looking statemenl\; 10 the Prospectus should not be regarded that the plans and objectives of the MSB Group will be achieved.
The MSB Group may from time to time obtain credit facilities from banks and financiers: to finance its operations and business activities. Interest may be charged on these credit facilities by the banks and financiers. Fluctuations-in interest rates may have a material impact on the MSB Group’s profitability. These credit facilities may aiso be snbject to lern1s and conditions which Iliay limit l.he MSB Group’s operating and financial flexibiiity. Any act or omission by the MSB Group thnt breaches such terms and conditions may give rise to rights by the banks Or financiers to terminate the relevant credit facilities arn:Jior enforce any security granted. in relation to those credit facilities. and which may aiso tall&C eross-defaults of other facilities, There can be no assurance that the atoresaid breaches will not have any adverse impact on the MSB Group’s operational and financial results.
As at 30 April 2004, the proforma MSB Group’s total borrowings amounted to approximately RJ..1655 million comprising of trust receipts and bankers acceptance. The MSB Group will be utilising part of the proceeds from the Public Offer for reducing bank borrOwings and working capital purposes, The MSB Group is not presently in breach of any such term Or condition of any credit facility, and wi:Jl at all times take all reasonable efforts to observe such terms and conditions.

The MSB Group currently imports approximately 60% of its raw materials from Japan, while. for the FYE 31 January 2004, tess than 5% of its production was exported overseas on an irregular basis. These tran..’I1ictions are mainly denominated in foreign crurencies mainly in usn. The risk of foreign exchange fluctuations has been reduced since the imposition of a fixed excbange rate for the RM against the USD in September 1998. However, in the event Ihat the fixed exchange rate is lifted or re-pegged to a new rate, the Group mayor may not have a greater exposnre to foreign currency fluctuations, The Group wiJI, as a mitigating factor, attempt to llhC various hedging tcchnlque£ to mitigate this risk. However. there can be no assurance that any future significant flu..iuations in exchange rates and financial crisis win not materiaIiy or adversely affect the MSB Group’s operations.

Changes or .additions in the regulatory conditions in Malaysia and the other countries where the MSB Group is currently obtaining its raw materials could materially and adversely affect the financial prospects of the MSB Group. Any withdrawal or reduction of import duty exemption in Malaysia on ARC will increase MSCRC’s raw material cost, This higher cost will be passed on to MSCRC’s customers as this is the norm in the loc-a! steel industry”
However. no assurance cnn be given that there will be no changes or additions made to rules and regulations in tbe future to which the Group’s operations are governed by and that such changes or additions. if made, will not have an adverse effect on the Group’s operations. For further details concerning the government legislation and policies affecting the MSB GrQUP, piensc refer to Section 8.5 of this Prospectus,


The MSB Group is aware of the adverse coJisequences arising frOIh inadequate insurallCC coverage that <:ould .adversely affect its business operations.!n ensuring such riSK:H are reduced to the minimum, the MSB Group reviews and ensures adequate coverage for its assets on a continuous basis. For the MSB Group’s operations, aU assets such as office equIpment, furniture, fittings, machinery and premises are sufficiently insured for fil’t! and other risks. However. there can be no assurance that the insu.rance coverage would be adequate for the replacelM:nt cost of the assets or any cCHl-‘,eqllen.tialloss ilrislng therefrom.
The Group believes its existing operations are in compliance with the relevant environmental legislatIon governing activities within Malaysia. Nevertheless, there is il possibility that the Government may change its regulations with regards to environmental mattets in future which would require the Group to modIfy its facilities or incur expenses that could have &1 adverse effect on the Group’s operating results. In the event the relevam environmental regulations in Malaysia are changed, 00 assurance can be given that the measures taken by the Group to comply with such new regulations will not have a material effect on Its operating results. To date, the Groop has installed a waste water treatment plant at its plant and is actively implementing treatment, recycling and disposal procedures in line with standards prescribed by the relevant authorities at it~ plant.



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