4. RISK FACTORS 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS BEFORE INVESTING IN OUR SHARES. If you are in any doubt as to the information contained in this section, you should consult your stockbroker, bank manager, solicitors, aecountants or other professional adviser. RISKS RELATING TO OUR BUSINESS AND INDUSTRIES (i) Competitive Rivalry There is an estimate of 200 partlclpants in the telecommunications network services market in Malaysia. According to Protege Associates, Tier-] market participants with more than RM25.0 million in revenue include players such as OCK Group, Instacom Engineering Sdn Bhd and R&A Telecommunication Sdn Bhd and their respective subsidiary and associate companies. We face competition amongst the existing market players in Malaysia and potential network services providers beyond Malaysia. Our proven track record over the past 12 years, through our capability of delivering successfully implemented network services, has enabled us to bid for projeets with telecommunication operators directly and have been included as their approved service providers. We have also maintained good working relationships with our technology providers such as Huawei. Alcatel-Lucent, ZTE and Ericsson. Changes in the telecommunications market is rapid and having symbiosis partnerships whereby we utilise their technology whilst they focus on constant upgrading of these technology provides an advantage to allow each of us to excel in the areas which we are involved m. Nevertheless, there is also a potential risk of these technology providers entering the network services market directly. Whilst their focus is not in the implementation of such turnkey projects, they could be potential bidders in tender projects from telecommunications operators. However, technology providers would need to put in additional effort to secure the confidence of telecommunications operators in that they will be able to implement such technology besides being able to develop them. In addition, these technology providers in its new scope or role as network services providers would have to have the track record in delivering such services in a timely manner and quick response time towards any ratification work required. Whilst these have not been a forte for these technology providers, should they succeed, we may become service providers to these companies for the implementation of turnkey andlor deployment projects. We take considerable effort to ensure that our services meet the expectations of our clients. Incidences such as delays in deliverables, pilferages andlor vandalism during the performance of our services will be reported to the client as well as the relevant authorities immediately. Whilst that is so, there is no assurance that there may be potential negligence which may affect our reputation with our clients. We will take all necessary precautions including attaining necessary safety and equipment knowledge to ensure that such risks will be minimised to ensure that we remain competitive in the industry. Our track record in the industry and quality of work is pertinent to our continued growth into the future. Please refer to Section 6.5 ofthis Prospectus for further information on our competitive strengths. 4. RISK FACTORS (ConN) (ii) Timely Supply of Products and Services
Our revenue is mainly derived from our provision of telecommunications network services. Our ability to continuously procure successful tenders and contracts is attributable to our ability to fulfil client’s requirements based on specific quality, quantity and on a timely basis. Any failure or delays on our part may result in deferment or Joss of revenue to our clients and ourselves.
Occasionally, we may face downtime due to weather, sub-contracror’s manpower shortage and delay in delivery of supplies and equipments due to shipment or production delays which are not within our control. However, we keep supply of some of these pertinent equipment and supplies in order for us to continue delivering our services to our clients. We also ensure that we have adequate suppliers of materials and sub-contractors who will be able to provide us with the necessary supplies and perfonn tasks as required by us trom time to time. Further thereto, each of our projects is assigned with project managers or personnel to monitor and ensure that the above incidences are minimised. We also ensure that our progress is communicated on a timely basis to our clients to enable any ratification of timelines to minimise any disruptions at their end as our services affects telecommunication operators’ critical functions i.e. undisrupted connectivity. As at the LPD, we have not experienced any negative feedback due to our services nor have we been involved with any legal actions due to failure of delivering our services caused by such incidences. (iii) Dependency on Major Customers We derive a signiflcant portion of our income from our major customers, namely DiGi and Ericsson, who contributed more than 10% respectively to our Group’s total revenue in FYE 31 December 2011. For the FYE 31 December 20 II, DiGi and Ericsson contributed an aggregate of approximately 29.54%
of our total revenue. We operate on frame agreements with our customers and our customers are not committed to purchase a minimum amount from us at any specific interval during the frame agreement period (further details are as explained in Section 4.1 (iv) below). An adverse change in our relationship and/or a negative perspective of our services may result in a reduction or cessation of their purchases from us. If we are unable to obtain other frame agreement in substitution, our business, results of operations and fmancial condition may be adversely affected. Despite the uncertainty in the frame agreements, we have developed long tenn business relationships with our major customers with an average of eight (8) years of working relationship. These long tenn relationships have enabled us to develop a good understanding of our customers’ requirements and expectations, ensuring continuity of business with our existing customers. Further thereto, to mitigate this risk, we have taken the effort to expand our customer base, year upon year, to minimise our dependency on anyone of our major customers. Our customer base increased trom 33 customers in FYE 31 December 2008 to 97 in FYE 31 December 2011. Our customers comprise of technology providers as well as telecommunications operators. The number of telecommunications operators is being managed by the Malaysian Government (“Government”) whereby limited licenses are issued. Nevertheless, there are many international technology providers which may have the technology to suppon any of the Group’s future telecommunications needs such as 4G, WiMax, LIE, etc. The evolution of telecommunications will result in new vendors supplying to the existing telecommunications operators and future licensed operators. With our history and track record in managing telecommunications neLwork turnkey projects and provision of deployment services, we envisage that we would be in the forefront of [he tendering of such telecommunications network services to be provided in the future. 4. RISK FACTORS (Cont’d)
As stated above, limited telecommunications operator licenses are issued by the Government. Currently, the Group’s customer base covers most major players in the industry to include amongst others Celcom, PI, DiGi and V-Mobile. By securing projects from other telecommunications operators (either by increasing it from existing customers who are not major customers or from new customers) will reduce the dependency on them. However, this effort has its limitations as the numbers of telecommunications operators are controlled by the said govemmental controls through license
issuance. Although we have been taking steps to diversitY our customer base, the loss of one or more of our major customers or cancellation of or reduction in orders from any of our major customers will have a material adverse impact on our business, financial condition or operating results. Although we seek to limit the dependence on our major customers through the efforts mentioned above, no assurance can be given that any loss of our major customers will not have a material adverse effect on our Group’s future performance. Please refer to Section 4.1 (iv) below for further information on the risk related to frame agreements. (iv) Frame Agreements The nonn in the telecommunications network service provider industry is to enter into fra.me agreements with telecommunications operators. These agreements provide the timeframe and the service levels required by our clients. It may include design, building, maintenance and operations of network infrastructure. However, there is no specified value in these agreements other than unit rates for services and materials. We receive purchase orders or bill of quantity for the required work, service and materials during the duration of the agreement in no specific intervals. Nevertheless, we would be ensured that with the frame agreements, we are the selected provider of such services rendered. Considering that any such implementation of network infrastructure by a telecommunications operator would involve substantially their entire network, we are able to quantitY the estimated value of such contracts internally. However, these revenue may not be billed as planned although in practice such a roll out of network service is typically for a certain number of infrastructure. Whilst that is said, any changes in the telecommunications industry such as technology i.e. from GSM to 3G or 3G to 4G, halfway through the implementation of our projects may result in our clients’ opting to begin upgrading their infrastructure to those latest technology. Hence, whilst the existing contract is subsisting, the absence of value and the nature that purchase orders or bill of quantity is required for any services or materials may render them obsolete. Whilst there is a risk of such events materialising, we provide our commitment in terms of quality and timeliness in our work. This will enable us to win the confidence of our clients to enable them to award us with their next projects. We have not experienced any contracts which have been discontinued midway or due to any change in technology being adopted since the beginning of our operations. (v) Dependency on Particular Segment of The Telecommunications Industry
Our revenue is mainly derived from the provision of telecommunications network services which contributed to 87.24% of our Group’s revenue in FYE 31 December 2011. We plan to increase the contributions from our other business segments such as becoming a telecommunications network infrastructure owner and provision of green energy and power solutions. Telecommunications operators are constantly investing to expand and upgrade their network quality, eoverage, capacity and capabilities to enable them to grow their subscriber base. One of their larger investments is in the ownership, maintenance and operations of network infrastructure such as base stations. Due to its high cost of ownership and duplications of base stations between these operators, they are beginning to favour infrastructure sharing and other means of reducing such infrastructure
investments. 4. RISK FACTORS (Cont’d) This allows us to capitalise on our experience in designing and building such infrastructure to invest in our own infrastructure to be leased to our clients and expand our network operations and maintenance services. We have obtained NFP license from MCMC on 29 November 2011 which will permit us to
build and own telecommunications towers. Please refer to Section 6.16 of this Prospectus for further information on our future plans. (vi) Flnctnation in Prices of Snpplies Major materials used by us in the provision of our services are related to steel and other metal related products such as electrical power generation systems, antennas, connectors and cables which accounts for approximately 39.02% of the total material that we purchased and sub-contractor services rendered in the FYE 31 December 2011. The price of steel is dependent on the demand and supply condition of steel in the global market. The increase or decrease in the price of raw materials are affected by many factors beyond our control, which amongst others, include the general state of the global economy, the level of industrial development worldwide, competition, industrial productivity levels, imposition of
import duties/levies and foreign currency fluctuations. Any increase In the price of raw materials will increase our cost of sales. Our Group has established long term relationships with our suppliers. Based on these relationships, we are able to source materials required for our projects at competitive prices. We also have a stable supplier base of approximately 150 suppliers as at FYE 31 December 20] I which provides us with necessary materials should there be a shortage being experienced by a particular supplier. Notwithstanding this, there can be no assurance that prices of our materials would not increase and that such increase will not have a material effect on our financial perfonnance. ]f at any time we are unable to absorb the bulk increase of the cost in material, we would discuss an appropriate variation in the frame agreements with our clients to negate such negative impact on our profit margins. Additionally, we also ensure that there is no sudden unanticipated price increases by keeping ourselves abreast of material pricing by being in contact with our suppliers periodically and to monitor factors stated above. We have not encountered any major cost ovemms in dealing with materials and were able to absorb most cost increases to the extent possible without major impact on our profits. However, there is no assurance that our operating results will not be affected by major fluctuations in prices in the future. Please refer to Section 6.11.1 of this Prospectus for further information on the types and value of purchases by and sub-contractor services rendered to our Group for the FYE 31 December 2011. (vii) Supply ofEquipmenI and Products An unintenupted and continuous supply of equipment and products to our business cycle is crucial to our Group’s success. Any disruption to the supply chain will adversely affect our business operations. For the FYE 31 December 2011, we have been dependent on Guangdong Westinpower Co. Ltd for the supply of products and materials for the running of our business. Guangdong Westinpower Co. Ltd contributed 38.82% of our total purchases for the FYE 3 1 December 2011. To mitigate the risk of dependence 011 any suppliers, our Group has sourced our supplies from approximately 150 suppliers as at 31 December 20 II. In addition, we have established good business relationships with our suppliers for whom we have been dealing with for approximately two (2) lo ten (10) years. Whilst there is no guarantee that our suppliers will continue to supply us with equipment and products at the required quantity, quality and at the expected prices, we do not foresee any adverse disruptions in our supply chain in the near future. As at to date, we have not encountered any major problems when dealing with our suppliers. Nonetheless, no assurance can be given that our Group’s business activities will not be affected in the event that there is a major disruption in our supply chain. 4. RISK FACTORS (Conl’d) (viii) Network Sharing The Government is encouraging shared facilities between telecommunications operators to reduce any effect on the environment due to the erection of multiple towers in one site for different telecommunications operators. The indirect long tenn benefit for the end-users is that shared facilities brings down costs and will in tum possibly benefit the end-users through reduced rates. With the Government promoting the consolidation of facilities, approvals for new sites will be reduced within urban areas. Further, telecommunications operators face the risk of not obtaining the required approvals from local authorities to install base stations or infrastructure which are suitable and required for their operations. Further thereto, with the Government’s call for infrastructure sharing, telecommunications operators have begun to collaborate to share network base stations to reduce costs whilst maintaining network coverage. As a result of such Government initiatives, DiGi and Celcom have implemented an integration project for infrastructure collaboration. Such initiatives require fresh infrastructure planning, development and maintenance works as well as dismantling works with regards to legacy infrastructure. The implementation of these works provides opportunities to our Group. Notwithstanding this is an advantage to us in terms of our plans to become telecommunications tower owners as well as the potential projects involving relocation of current existing structures to a location which would optimise connectivity between the sharing parties, it will eventually reduce the overall network deployment projects that will be implemented. Nevertheless, with the roll out of new telecommunications technologies and the increase in data usage amongst users as data and call rates are competitively reduced, telecommunications operators see a need to also increase their network coverage. For example, from a base station, 3G coverage is relatively narrower which requirc more nodes or connecting points than say GSM coverage. The increase in use of 3G services and data contents would require additional infrastrucmre for such advancement or increase in use. Hence, whilst there is consolidation of existing network infrastructure, new infrastructure will still be required due to heavier usage and newer telecommunications technology. (ix) Loss of Executive Directors, Key Management and Key Technical Personnel and Skilled Workforce We attribute our success to the leadership and contributions of our Executive Directors and key management team. Our continued success is therefore dependent to a large extent on our ability to retain these personnel, who are responsible for fonnulating and implementing strategies to enable growth in our business. The loss of any of our Executive Director, key management and key technical personnel and skilled workforce, without suitable replacements will have material adverse effect on our business operations and hence, our revenue and profits. We have taken the appropriate measures such as providing adequate compensation (which includes salaries, bonus, emoluments and other in-kind benefits), incentives, training and development programmes, as well as rewarding our employees for their contribution to our success. We also provide a healthy working environment, practise good workplace culture and uphold good work ethics to create a sense of belonging amongst our employees. However, there is no assurance that any loss of Executive Directors, key management team and key technical personnel and/or skilled workforce will not have an adverse effect on the performance of our Group. Further, our success depends to a certain ex lent on our ability LO continue to attract and retain qualified personnel. The competition for qualified employees within the industry is significant and loss of the services ofsuch personnel or to retain existing personnel could have an adverse impact on our business. As at the LPD, we have 294 engineers and 50 technicians and installers which are currently adequate for the current projects in hand. With the current pool of human resources in hand, we will also be able to reassign any personnel to particular projects which are short-handed or in the event there’s a need to complete them within a shorter timefTame as required by the telecommunications operators. Nevertheless, there can be no assurance that our Group’s operation would not be materially impacted should there be an inadequate supply of such qualified personnel. 4. RISK FACTORS (Conl’d) (x) Adequacy oflnsurance Coverage We believe our facilities, offices, equipment and inventories are adequately insured against any unforeseen events such as fire and burglary. We are aware of the consequences arising from inadequate
insurance coverage that could have an adverse material impact on our business. To mitigate such risk, our Group conducts regular reviews on our insurance coverage including assessing the adequacy of our insurance coverage. Further thereto, we are also aware of the risk involved in the implementation of our services which involves operating at heights, open fields and adverse weather conditions which could result in injury and any untowardly incidences to our personnel. We have adequate personnel insurance coverage and our personnel are trained to assess the safety measures to be undertaken to avoid any incidences due to human errors. We are also adequately insured with liability insurance against any damages and losses during the tenure of our frame agreements with our clients. Although we believe that all necessary precautions have been taken, there can be no assurance that our operations would not be affected as a result of the risk of having inadequate insurance coverage. (xi) Political, Economic and Regulatory Risk The supply and demand for telecommunications infrastructure needs are very much dependent on the ongoing economic climate. Any slowdown in the global or local economy may have an adverse impact on the supply and demand for growth in these infrastructure. These include risks of war, global economic downtum, expropriation, nationalisation, unfavourable changes in Government policy and regulations such as telecommunications laws and controls. There can be no assurance that any change to these factors will not have a material adverse effect on our business. Whilst our business operations is currently not subject to any laws and regulations of the jurisdiction where we operate save in respect of major licences disclosed in Section 6.12, there is no assurance that future changes to the said laws, regulations, rulings, directions, policies and guidelines will not affect the operation and performance of our Group. RISKS RELATING TO INVESTMENT IN OUR SHARES (i) Delay or Abortion of our Listing Our Listing may be potentially delayed or aborted in the event of the following: (a) our Underwriter and Joint Underwriter exercising its rights pursuant to the Underwriting Agreement to discharge itself from its obligations; or
(b) we are unable to meet the public spread requirement of at least 25% of our enlarged issued and paid-up share capital to be held by a minimum of200 public shareholders holding not less than 100 Shares cach, at the time of Listing.
We expect to meet the public shareholding requirement at the point of Listing by allocating thc Public Issue Shares to the requircd number of public shareholders during the balloting/private placement processes. However, upon the occurrence of events stipulated in (a) and/or (b) above, monies paid in respect of any application accepted will be returned to you without interest within fourteen (14) days after we become liable to repay it. Further thereto, should the monies nol be returned within fourteen (14) days after we are liable for it, our Directors shall be jointly and severally liable to repay such monies with interest at the rate of ten (10) per centum per annum (or such other rate as may be prescribed by the SC) from the expiration of that period as set out at Section 243(2) of the CMSA. 4. RISK FACTORS (Cont’d) (ii) No Prior Market for Our Shares and Possible Volatility of Our Share price There is no prior market for our Shares. Accordingly, there can be no assurance that an active market for our Shares will develop upon our Listing or if developed, that such market will be sustained. In addition, our Shares could trade at prices that may be lower than the Issue Price depending on many factors, some of which are not within our control and may be unrelated or disproportionate to our operating results. These include, amongst others, prevailing economic and fmaneia! conditions in Malaysia, the depth and liquidityofthe market for ourShares and investors’ individualperceptions ofourGroup. (iii) Control by Promoters Upon Listing, our Promoters will collectively hold approximately 71.04% of our enlarged issued and paid-up share capital. Depending On how they choose to vote and because of their shareholdings, our Promoters will generally be expected to have significant influence on the outcome of certain matters requiring the vote of our shareholders, unless they are required to abstain from voting by law and/or as required by the relevant authorities. Nevertheless, as a step towards good corporate governance, we have appointed three (3) Independent Non-Executive Directors and set up an Audit Committee to ensure that, inter-alia, any future transactions involving related parties are entered into on an arm’s length basis, on normal commercial terms which are not more favourable to the related parties than those generally available to the public and are not detrimental to our minority shareholders. (iv) Dividend Payments OUf Company, being an investment holding company derives income mainly from dividends received from our subsidiary companies. Hence, our ability to pay future dividends and our ability to sustain our dividend policy in the future are largely dependent on the performance of our subsidiary companies. In determining the size of any dividend recommendation, we will also take into consideration a number of factors, including but not limited to OUf financial performance, cash flow requirements, debt servicing and financing commitments, future expansion plans, loan covenants and compliance with regulatory requirements. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK