3. RISK FACTORS 3. RISK FACTORS There are a number of risk factors, both specific to tbe NVB Group and relating to tbe general business environment, whicb may impact on the operating performance and financial position of the Group and affect the achievability of the forecast. Notwithstanding the prospects of the Company as outlined in this Prospectus. investors should rely on their own evaluation and carefully consider the following factors (which may not be exhaustive) that may have a significant impact on the future performance of the Group, in addition to other information contained elsewhere herein, before applying for the Public Issue Shares. 3.1 Political, Economic and Regulatory Conditions Any adverse development in the political situations and economic uncertainties in Malaysia and/or other countries with which the NVB Group bas business links. directly or indirectly, could materially and adversely affect the financial and business prospects of the Group and the markets of its end products. These include risks of war, global economic downturn, expropriation, nationalisation, unfavourable change in government policy and regulations such as foreign exchange rates. methods of taxation and currency exchange controls. Whilst the Group continues to take preventive measures such as prudent financial management and efficient operating procedures, there is no assurance that adverse political, economic and regulatory conditions will not materially affect the Group.
3.2 No Prior Market for NVB Shares Prior to the Listing, there was no public market for the NVB Shares. There can be no assurance that an active market for the NVB Shares will develop upon its listing on the MESDAQ Market or, if deveLoped, that such market will be sustained. The Issue Price was determined through negotiation between NVB and Hwang-DBS based upoo several factors and may not be an indication of the market price of NVB Shares after tbe Listing. A variety of factors may cause the price of NVB Shares to fluctuate, including (without limitation) sale of substantial amounts of NVB Shares in the stock market in the imme<liate future, announcements of developments relating to the NVB Group’s business, fluctuations in the NVB Group’s operating results and sales levels, general industry conditions or the world economy, announcements of new products or product enhancements by the Group and/or its competitors. and developments in patent rigbts.
3.3 Business Risks The NVB Group is not insulated from general business risk as well as certain risks inherent in the industry in which it operates. For example, the Group may be affected by a general downturn in the global. regional and national economies. specifically, the Malaysian economy, enlJ’y of new players. constraints in labour supply, increase in labour costs, changes in law and tax legislation affecting the induSlJ’y, increase in costs of new machinery and/or additional engineering equipment, changes in business and credit conditions. fluctuations in foreign exchange rates and cbanges in system technology. THE REST OF THlS PAGE IS INTENTIONALLY LEFT BLANK 3. RISK FAcrORS (Cont’d) Tbe Group is also susceptible to specific business risks inherent in tbe HOD industry, which directly affects its business, given approximately 76% of tbe Group’s revenue, based on the proforma consolidated financial statemenls of NVB as at 30 Septemher 2004, was derived from tbe sale of HOD components. Tbe main challenge in the HOD market is the fast product life cycle that lasts about 9 months for a typical HOD model. Furthermore, technological advances in this area are spurred by the process of miniaturisation while attempting to maintain tbe data-storage and retrieval capacily of the HOD model. Sborter product life cycles make it difficull to recover the cost of product development before the existing model becomes obsolete. Meanwbile, as HOD technology hecomes more advanced, grealer sums of financial resources are needed 10 carry out product development. The cost pressures, slim margins, intense competition and increasing difficult business conditions have a huge impact on the players in the HOD industry. The NVB Group seeks to limit these business risks througb, inter alia, prudenl management policies, maintaining good business relationships with its customers and suppliers, expansion of its customer base in botb local and export markets, prudent contractual terms, close project supervision and plJlnning, and effective buman resource management. In order to effectively address and mitigate the specific business risk inherent in its core industry, the Group stays abreast of latest tecbnology advancements that influences the HOD industry, concentrates on product development witb emphasis on minialurisation and product innovation and diversifies to reduce dependency on the HOD industry. Nevertbeless, despite the mitigating efforts by the Group, no assurance can be given that any change in any of these business risks will nol have a material adverse effect on the Group’s business. 3.4 Operational Risks NVSB, which carries on tbe core revenue-generating business of tbe NVB Group, has been profitable during the last financial year and generally, has a profitable track record, with tbe exception of FYE 2002. The loss was mainly altributable to tbe contraction in sales of HOD components as a result of the general slump in the world economy in 2OO1f2002 and was furtber compounded by excess inventories of HODs in the market in FYE 2002. The negative external factors aside, the NVB Group had also incurred substantial capital expenditure in FYE 2002 10 expand its production facilities. The timing for the expansion had been inopportune, in view of worldwide declining sales for HOD components. Nevertheless, the Group had weathered the losses and bad returned to profitability in the following year. However, there is no assurance tbatthe NVB Group will continue to be profitable in future years, or that it will achieve increasiog or consislent levels of profitabilily. The Group’s revenue and operation results could be adversely affected by many otber factors, which may include, inter·alia, debt collection problems, customer order deferrals, the availabilily of human resourres to meet market demand, the responsiveness of the Group in increasing its production capacity, the ability of the Group to develop and market new products. on a timely basis and otber risks common 10 going concerns. Sucb operational risks can he controlled and monilored by management. In order to minimise such operational risks, the Group continuously maintains good cosl management practices and a conducive working environment, fosters good customer relationships, concentrales on effective, result-oriented product development aod market penetration efforts, and conlinuously sourres for marketing leads and opportunities. Meanwhile, Ihe disruption of electricity supply is another operational risk to the Group in view of the Group’s highly automated production lines, which is dependent on constant electricily supply for its smoolh operations. In this respect, the Group will limit Ihe risk with the instaUation of a back-up generator for contingency purposes. Nevertheless, as Ihe operating premises of NVB are siluated within established industrial areas, the Group has never experieuced any serious disruption to the electricity supply that bad materially affected its operations. 3. RISK FACfORS (Cont’d)
3.5 Competition The global IIDD industry is an extremely competitive market with low margins. The cost pressures experienced by this industry extends backwards throughout the supply chain, including the precision engineering companies, which are mainly the component suppliers to the IIDD manufacturers. In 2004, there were two domestic companies involved in the supply of disk clamps and spacer rings to Western Digital, which is the sale IIDD assembler in Malaysia, The NVB Group is one 01 the two domestic companies supplying IIDD components to Western Digital. In terms of revenue, the NVB Group was the top supplier and commanded between 38% to 42% market share of the local demand for HDD disk clamps and spacer rings in 2004, Despite the relatively small local market size, the NVB Group still feels the competition to produce consistently high quality components at low cost. The imposing threat is mainly from Malaysia’s neighbouring countries, namely, Thailand and Singapore, which have established HDD industry hubs. Thailand has emerged as the largest exporter of HDD in South East Asia. Correspondingly, a number of supporting industries including the manufacture of component parts has also been establisbed in Thailand, which have the ability to compete with the NVB Group to supply to HDD assemblers. Furthermore, the Group faces the risk associated with the possibility of MNC manufacturers relocating their operatioos to other countries with lower cost base, such as Thailand. However, the Directors of NVB are of the view that such a risk is relatively low and would not have any material adverse impact on the operations of the Group. This is primarily due to the high precision nature of the HOD manufacturing business and the dependency of HDD assemblers on a limited number of key vendors for its supply of HDD components. The NVB Group is an approved vendor to several MNCs. The risks involved in the degree of flexihility that a MNC assembler has in switching its approved vendors are detailed in Section 3.8 of this Prospectus. The Directors of NVB Group are confident that the businesses of the Group will not be materially affocted by any external competition given its established businesses with over nine (9) years of experience and its reputation as one of the leading companies in the field of high precision engineering in Malaysia. To the best of the knowledge of the Group’s directors, there are few local manufacturers of HOD and other ultra-precision components and tools that possess the same technical expertise and capabilities as the Group. Such expertise provides the Group with a competitive edge over its local competitors. The Group has the proven ability to offer end-to-end high precision engineering, mass volume manufacturing services and timely delivery of components with consistently high quality, all of which are critical qualifying factors to service MNCs’ customers. Meanwhile, the NVB Group’s commitment to quality is attested with the certification of BS EN ISO 9001 :2000 for its quality management system. In respect of competition from new entrants, there are minimal COncerns since the barriers to entry for an aspiring entrant into the precision engineering industry are relatively high, in terms of both skilled manpower and financial resources. Apart from that, competition to become a HOD component vendor of an MNC is also based on a number of criteria, such as the ability to meet the design requirements and specifications, quality and services, reliability, price, production volume capabilities, turnaround time and costs. Hence, market penetration is a time-consuming and costly process for new entrants. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 3. RISK FACTORS (Oml’d)
3.6 Rapid Technological Changes Rapid advancement in data storage technology and the integration of information technology and internet technologies are constantly redefining market needs and the role of HDD manufacturers. With new digital information being created at e.ponential rates, emerging telecommunications, geoeral business and internet applications need new ways to store, manage, and access huge volumes of data. Advancement in data storage technology saw the capacity of HODs being boosted from a few gigabytes to 100 gigabytes aod more on a HOD unit. Meanwhile, scientific and technology breakthrough paves the way for further miniaturisation of the HODs from the typical 3.5-inch form factor to 2.5-ioch form factor or smaller form factors. Further, cost pressures on the HOD industry are increasing, as prices of HODs continue to drop in tandem with tbe process of miniaturisation. Such rapid technology changes may negate the competitive advantage of the Group while making it more difficult to recover the cost of product development before the model becomes obsolete, The NVB Group has taken such rapid technological changes in its stride and stays ahreast witb the latest technology developments, With technology discoveries and development, new HODs are finding their way into consumer electronics. 10 fact, consumer electronics with built-in HODs are projected to e.pand at a CAGR of 52.7% from 2004 to 2008. Leveraging on its core competencies and technological knowledge, tbe Group is broadening its product mi. flexibility to include the productioo of components based on miniaturised form-factor configurations for use in HODs in consumer electronics. The Group has also ventured into design and manufacture of a variety of high precision components, tools and dies for a wide range of industries, thus, furtber reducing its dependency on the HOD industry. Tbe Group’s R&D team constantly keeps abreast with new technologies and market trends, wherein the marketing team works closely with the R&D team to provide feedback trends and client requirements. The Group also focuses on its human resource development by investing in external and in-bouse training sessions to update and educate its employees.
3.7 Dependence on Key Personnel As in any other business, the NVB Group believes that its continued success will depend, to a significant extent, upon the abilities and continued efforts of its existing Directors and senior management aod technical team, aod tbe networking abilities of its marketing personnel. The loss of the services of any of these iodividuals may have a material adverse effect on the NVB Group’s continued ability to manage the operations effectively and competitively. As such, the NVB Group has made continuous efforts to strategically develop a dynamic management team and groom younger management personnel to ensure continuity of the quality and dynamism in the management team. The Directors of NVB also recognise the importance of the Group’s ability to attract and retain its key personnel and have in place a human resource strategy, which iocludes a competitive remuneration package aod human resource training aod development programme for all employees in all key functions of the Group’s operation. The NVB Group currently enjoys cordial relationships with its employees, and these employees do not belong to any trade union. Meanwhile, the moratorium on the shareholding of the promoters of NVB, together with their collective substantial interest in the NVB Group is an extenuating factor against the risk of the Directors and key management and key technical personnel exiling the NVB Group. 3. RISK FACfORS (COIlt’d) 3.8 Dependence on Key Customers Due to the past consolidation of the HDD and camera industries with few major manufacturers, the NVB Group sells its products to a limited number of customers. The major customers of the NVB Group accounted for approximately 93% of its revenue based on the audited financial statements for FYE 2004. Tbere is no contractual obligation on the part of any such customer to purchase any minimum volume of products or at all from the NVB Group in any given period. The NVB Group’s financial condition and operating results may be affected in the event it loses a major customer or if a major customer reduces its orders for the Group’s products. Hypothetically, the Directors of NVB forecast that the Group’s revenue shall be adversely affected by approximately 49% and PAT affected by approximately 35%, should NVB Jose Western Digital and Western Digital Corporation (Thailand) Co., Ltd., as its major customers in FYE 2005, assuming all other factors remain constant. Similarly, hypothetically, the Directors of NVB forecast that the Group’s revenue shall be adversely affected by approximately 22% and PAT affected by approximately 16%, should NVB lose MKE, as its major customer in FYE 2005, assuming all other factors remain constant. The Board of NVB, however, foresees that it will still continue to be profitable in the unlikely event tbat there is a loss of revenue from Western Digital, Western Digital Corporation (Thailand) Co., Ltd., MKE or anyone of its major customers. The production capacity made available from the lost of production orders frnm a major customer sball be filled by nther MNC customers. Recognising tbis risk, tbe Directors of the NVB are continuously trying to increase its customer base by courting new HDD manufacturers! other first tier vendors to MNCs, and expanding its scope of business to include the non-HDD market segment, such as manufacture of high precision micro components and fabrication of precision tools, moulds, dies, jigs and fixtures for use in CNC and precision engineering applications. In addition, the risk of losing a major HDD customer is reasonably mitigated because the Group is an approved vendor to several MNCs. In order to qualify as an approved vendor to MNCs, the Group is subject to various levels of rigorous audits limited not only to product quality conformance but also to manufacturing and process control requirements. Due to the laborious and time-consuming selection process of an approved vendor, its MNC customers are not inclined to switching vendors, unless there are product quality issues and inability of the vendor to deliver tbe required quantity of components with the exact specifications within a tight tolerance range, nn time.
3.9 Capital Investmenls The Group operates in a capital-intensive industry, given tbat CNC machinery, CAD/CAM and EDM equipment are costly. 10 line with the positive growth in the HDD industry for computer and consumer electronics applications, there is a surge in demand for HDD components. This trend is expected to continue over, at least, tbe next five (5) years. The Group has to inject additional machinery to increase its production capacity in order to meet its cllstomers’ orders. Meanwhile, new machinery and equipment are required as the trend of tbe HDD industry moves towards product miniaturisation with minimal compromise on the storage capabilities of the HDD, The NVB Group will be required to continuously invest in advance machinery and keep abreast with new CAD and CAM technologies in order to develop its product design capabilities and compete effectively. Without such investments, tbe Group’s operations may be rendered less efficient, resulting in the compromise in quality or losing the edge in technological competitiveness. This may adversely affect the operating and financial performance of the NVB Group. 3. RISK FACTORS (Cont’d) The NVB Group has invested significantly in capital expenditures on plant, machinery and equipment for the last three (3) financial years and for the three (3)·month financial period ended 31 December 2004 as follows: 3 months < –.—FYE 30 September——–··—-> ended 31 2002 2003 2004 December 2004 RM’ million RM’ million RM’ million RM’million Investment in additional plant, 8.5 3.9 13.5 5.4macllinery and equipment The Directors and senior management team of the NVB Group constantly update themselves with the technological changes and requirements through discussions with machinery and equipment vendors and its MNC customers to understand the manufacturing trends and requirements of their specific industries. This enables the Directors to plan the Group’s capital expenditures in line with the customers’ requirements, and the technical know-how and production capacity of the Group.
3.10 Investment Risks If appropriate opportunities present themselves, whether in Malaysia or elsewhere, the NVB Group may decide to enter into joint ventures, aUiances or partnerships with third parties, or to expand into other geographical markets. There can be no assurances that the NVB Group will be able to successfully identify, negotiate, finance or implement these ventures Or investments, to successfully integrate these ventures or investments 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 satisfactory to the NVB Group. However, any venture or investment of such nature will be carefully considered by the Directors of NVB and its subsidiaries with due care.
3.11 Control by Existing Shareholders NVB is controlled by the promoters, namely Thoo Chow Fah, Choo Wing Hong, Choo Wing Onn, Lee Tian Yoke, Choo Wing Yew. Choo Wing Leong and Choo Wing Kin, who, in aggregate, beneficially own approximately 74% of the Company’s issued and paid up capital after the Public Issue. Consequently, the aforesaid shareholders, if acting together, will possess voting control over NVB, giving them the ability, amongst others, to elect at least a majority of NVB’s Directors and to control the vote on significant corporate transactions. The introduction of corporate governance that requires the formation of the Audit Committee, which includes two (2) independent non-executive directors, may effectively help to promote transparency in all material transactions and the NVB Group’s accountability, thereby representing the interest of the minority and general public at large. The promoters would also be required to abstain from voting if there is any related-party transacrion, which may pose as a conflict to the interest of the Company. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 3. RISK FACfORS (Conl’tf)
3.12 Adequacy of Insurance Coverage The Group is aware of the adverse consequences arising from inadequate insurance coverage that could cripple its business operations. In order to ensure that such risks are minimised, the Group reviews and ensures adequate insurance coverage for its assets on a continuous basis. At present, the Directors believe that the Group is adequately insured against unforeseen events such as fIre and lightning, malicious damage, theft and burglary. Although the Group has taken the necessary steps to insure its assets adequately, there can be no assurance that the insurance coverage would be adequate for the replacement cost of the assets or any consequential loss arising from the damage or loss of the assets of the Group.
3.13 Foreign Exchange Fluctuation The Group’s revenue, mainly from the sale of HDO componeals, are generated in USo. The purchases of CNC machinery and equipment are mainly denominated in Yen and aluminium, a vital raw material in the manufacture of HOD components, in USO. In addition, the NVB Group has the intention to expand its business regionally, The exchange rate fluctuations may expose the NVB Group to the additional risk, in that, a weakening of the RM may increase the NVB Group’s operating costs or capital expenditure, and a weakening of the foreign currency will likewise diminish the value of the sales of the Company’s products generated in foreign currency. Currently, the USD is pegged to the RM at USOl.OO to RM3.80, thus, the NVB Group does not expect to be materially affected by fluctuations in USolRM exchange rate. Nevertheless, there can be no assurance that any future significant exchange rate fluctuations or changes in foreign exchange control regulations will not have a material and adverse impact on the revenues and financial performance of the Group.
3.14 Bnrrowing,s The NVB Group currently relies on credit facilities from banks and financiers to finance its operations and business activities. Fluctuations of the interest rates charged by the banks and financiers may have a material effect on the NVB Group’s profitability. These credit facilities may also be subject to terms and conditions which may limit the NVB Group’s operating and financial flexibility. Any act or omission by the NVB Group that breaches such terms and conditions may give rise to rights by the bankers or financiers to terminate the relevant credit facilities and/or enforce any security granted, in relation to those credit facilities, and which may also cause cross-defaults of other facilities. There can be no assurance that the aforesaid breaches will not have any adverse impact on the Group’s operational and financial results. The NVB Group is not presently in material breach of any such term or condition of any credit facility, and will at all times take all reasonable efforts to observe such terms and conditions. THE REST OF THIS PAGE IS INTENTIONALLY LEFf BLANK 3. RISK FACfORS (COIJI’tf)
3.15 Uncertainty oflbe Business DevelopmeDt Plan To achieve the Group’s growth strategies, there may be significant straio on the Group’s management, financial, customer support, operational and other resources. The success of the Group’s Business Development Plan will be dependent upon, amongst others, the Group’s ability to successfully develop and commercialise further applications of its technology, its ability to enler into strategic marketing arrangements on a timely basis and on favourable tenns, to successfully monitor its business growth, to hire and retain skilled management, as weU as to obtain adequate financing when needed. As a mitigating factor, the Group has been operating in this business since 1995. Nevertheless, lhere can be 00 assurance that the Group will be able to successfully implement its Business Development Plan or that unanticipated expenses or problems or technical difficulties will not occur which would result in material delays in its implementation or eveo deviation from its original plans. In addition, the actual results may deviate from the Business Development Plan due to rapid technological and market changes, as well as competitive pressures.
3.16 Delay in or Abortion of lbe Listing The occurrence of anyone (1) or more of the following events may cause a delay in or abortion of the Listing: (i) the Underwriter exercising its rights under the Underwriting Agreement and discharges itself from its obligations thereunder;
(ii) the identified investors failing to subscribe for the portion of Public Issue Shares allocated to them under the privale placement; and
(iii) the Company being unable to meet the public spread requirement, that is, at least 25% bUI not more than 49% of the tolal number of NVB Shares for which listing is sought must be held by a minimum of 200 “public” shareholders. Although the Directors of NVB will endeavour to ensure compliance by NVB of the various Listing Requirements, including, inter alia, rhe public spread requirements imposed by Bursa Securities for the successful Listing, no assurance can be given that the abovementioned events will not occur and cause a delay in or abortion of the Listing.
3.17 Forward Looking Statements All statements contained in this Prospectus that are not statements of historical fact constitute “forwardlooking statements”, which are statements based on assumptions that are subject to uncertainties and contingencies. Forward-looking terms such as “anticipates”, “believes”, “intends”, “plans”, “expects”, “forecasts”, “may'” “will” “would” and “could” or similar expressions as they relate to the NVB Group or its business are intended to identify sucb forward-looking statements. However, investors should note that these words are not the exclusive means of identifying forward-looking statements. All statements regarding tbe Group’s expected financial position, business strategy, plans and prospects are forward-looking statements. The NVB Group believes that the expectations reflected in such forward-looking statements are reasonable at this point in lime. There can be no assurance that such expectations will prove to be correct. Any deviation from the expectations may have adverse effects on tbe NVB Group’s financial and business performance.