3. RISK FACTORS 3. RISK FACTORS Prospective applicants should carefully consider the following risk factors (which are not exhaustive) in addition to the other information contained elsewhere in this Prospectus before applying for the IPO Shares:RISKS RELATING TO THE BUSINESS (a) Risks associated with market expansion outside of Malaysia As part of our growth strategy, we are in the process of penetrating into new markets ou(side of Malaysia. In addition to Singapore and Hong Kong, our beverage products have been exported to other overseas countries including the USA, Canada, Tai’Nan, Indonesia, Brunei, Thailand, Philippines, China, United Kingdom and Auslralia. We have also commenced operations of OLDTOWN WHITE COFFEE cafe outlets in Singapore and in Indonesia in 2008 and in the first quarter of 2011, respectively. While we believe that market diversification would enhance our growth potentials and reduce our dependence on the local market, it would subject us to the various food and beverage regulations in foreign jurisdictions. We will also increase our dependence on the third party distributors to distribute and market our product in these foreign markets. While exporting our products increases revenue and profits, we may be required to expand our existing resources such as our management information systems, personnel and eXisting infrastructure, in order to be fUlly equipped to manage the market expansion. For our overseas expansion plans to work according to plan and expectations, the expansion plans are subject to the company being able to attract suitable joint venture partners or franchisees. We would be highly dependent on the joint venture partner or franchisee’s familiarity with the local market outlook, preferences and goodwill to secure good locations (which have characteristics such as heavy human traffic flow, reasonable rental costs, safe and conducive environment for dining and close proximity to patrons) for further expansion of our business. We may also face financial challenges in managing the costs involved in selling up new outlets as opposed to the funds required for working capital. (b) Changes in consumer preference and perception
Our business is highly dependent on the goodwill and market receptiveness associated with brands such as OLDTOWN, OLDTOWN WHITE COFFEE and NAN YANG. Consumer preference and market perception are expected to continually change and there is no guarantee that the market recepUveness to the brands will persist, hence we would be challenged 10 continuously adapt to such changes.
(c) Negative publicity
Any negative publicity concerning food quality, publication of government or industry findings concerning food and beverage served by us or others in the industry would have adverse effects on the business, just as positive research findings may have a positive boost towards our performance. Like any other operator in the food and beverage industry, bad publicity may adversely affect our image, reducing customer confidence in our products and result in reduced palronage to our outlets. This affects financial performance as the drop in revenue will need to be addressed by defensive measures which may result in a compounded increase in expenses incurred to re-build customer confidence or to challenge lawsuits. The management of Oldtown Group is of the opinion that in the current age of information (echnology, any claims which result in negative publicity can easily be made without the claimant first ascertaining the accuracy or validity of such facts. There has been unfavourable publicity in the past with regards to the OLDTOWN WHITE COFFEE cafe oullet’s branding and the management views such publicity very seriously and has, amongst others, conducted internal investigations on such negative publicity claims. As at to date, the management has found no evidence to support such claims and there have not been any adverse effects on the operations and financial perfonnance of Oldtown Group. 3. RISK FACTORS
(d) Food contamination Food contamination is an inherent risk to all food and beverages companies. There is, alv.oays the possibility of food contamination given the numerous manufacturing process involved in the production of our products. As such we may be exposed to craims relating to possible contamination of our products, thereby resulting in costly litigation. Should we be involved in any litigation due to the contamination of our products, our Group’s operation and profitability maybe adversely affected. Furthermore, this may result in premise inspection by the local authorities and / or National Institute of Occupational Safety and Health (“NIOSH”), which may result in monetary fine and/ or directive to temporary close down operations for a cleaning exercise. This would also have a negative impact on our Group’s operation and profitability. To the best knowledge of our Board, our Group has not had any food contamination issue which materially affected the operations of our central food processing centres or cafe outlets and has never been ordered by any government agencies to crose our central food processing cenlres and/or cafe outlets. (e) Affected by the changes in conditions in places in which our cafe outlets are located There is no assurance that the buildings in which our cafe oullets are located will continue to be in operation and will not crose down or be demolished. If the above happens, we would need to write off the fixed assets of that particular cafe outlet. There is a risk that we may not be able to find suitable alternative locations for our cafe outlets and this may lead to a loss of income. The compensation received may not be sufficient to cover our losses and this in turn may have an adverse effect on earnings. We may also be affected by any changes in tenant mix and poor maintenance of the malls in which our cafe outlets are located, which may lead to reduced patronage, thereby affecting our business. To the best knowledge of our Board of Directors, our Group is not aware of any changes in conditions in places which our cafe outrets are located. (f) Dependent on the availability, costs and quality of raw materials for products There are also risks that our suppliers may not be able to fulfil our needs and expectations in terms of cost and product quality. The cessation of suppliers or the business relationship with these suppliers may result in our Group having to incur time and higher costs in sourcing from new suppliers. This may lead to a disruption to business activities. However, our Group is not dependent on any supplier as the main raw materials, such as creamer, as these raw materials are widely available. The costs of some of the raw materials, such as coffee beans, used by our business are dictated by global commodity prices. Changes in climatic conditions and governmental regulations may result in reduced supply leading to an increase in costs of raw materials. If our suppliers, owing to any reason whatsoever, are not able lo constantly provide adequate quantity of raw materials and/or meet our quality requirements. there may be interruption to our operations which in turn may materially affect the profitability of our Group. However as at LPD, suppliers of our Group have continuously proven to be a reliable source in terms of both quality and quantity. As such, our Group has not experienced any interruption of supply of raw materials. 3. RiSK FACTORS (g) Successful imitation of our products and concept by competitors Our Group’s profitability may also be affected if our competitors are successful in imitating our product’s recipes and restaurant concepts and are able to provide such products and services at competitive prices. While there are competitors with similar products and concepts in the market, our Group does not appear to have been affected by these competitors as we have been able to maintain our sales expectations. (h) Infringement of trade marks
Our Group has invested in branding campaigns to promote our trade mark items and have also filed for trade mark applications to protect against any infringement of trade marks. Despite that, there is no certainty that the trade marks will not be infringed. Such infringement may lead to the loss of sales and reduced customer confidence. Our Group would also have to incur legal costs to initiate legal proceedings against those who infringe on our trade marks. Our Group has taken action against cerfain parties who have infringed upon our trade mark. However the infringement by other parties has not led 10 any loss in sales and/or reduced customer confidence.
(i) Outbreak of any contagious or virulent disease
The spread or oulbreak of any contagious or virulent disease in the countries in which we operate could have a material adverse impact on our Group’s operations. In the evenl that any of our employees in our Group, employees of our suppliers and/or customers is infected with such diseases, we may be required to temporarily shut down the affected OLDTOWN WHITE COFFEE cafe outlets to prevent the spread of disease. This will have a negative impact on our profitability. Our Group has not encountered any case whereby any of our Group’s employees, employees of our suppliers and/or customers has been infected with a disease requiring temporary shutdown of any of OLDTOWN WHITE COFFEE cafe outlets. 0) Disruption at central food processing centres and cafe outlets Our central food processing centres which are located at Ipoh and Subang Jaya may face disruption such as fire hazards or power failures which may result in the damage of our supplies and/or products and we may be unable to process / supply the food ingredients necessary for the continuous operation of our restaurants and/or franchises. While we maintain insurance policy covering certain losses, such as loss due to fire and loss due to theft, which we consider adequate, we are not insured against business interruption. Accordingly we cannot assure that our insurance coverage would be sufficient to cover all our potential losses. To the best knowledge of our Board of Directors, there has not been any disruption at our central food processing centres and cafe outlets. (k) Default or loss of franchisees and licensees Our financial performance is to a certain extent, affected by the performance of our franchisees and licensees. While our franchisees and licensees have been compliant in their financial obligations to dale, the franchisees and licensees may default on future payments of royalty and advertising and promotional fees, to our Group due to any reasons whatsoever and is not in a position to compensate us for any direct or indirect losses which we may have suffered as a resull of such defaUlts. We cannot give any assurance that our existing franchisees and licensees will continue to be successful in their operations. The loss of our franchisees and licensees will result in a decrease in our revenues in that market or geographical area and this may present an opportunity to our competitors to increase their market share in that market or geographical area. Our Group has not experienced any failure or loss pertaining to payments due to us from our franchisees and licensees. 3. RISK FACTORS
(I) Litigations by franchisees, licensees and third parties There is risk of litigation which may be brought against us by third parties for the wrongdoings of our franchisees or licensees or as a result of disagreements belWeen our Group and the franchisee or licensees which cannot be resolved amicably through negotiations. We may incur litigation expenses to defend our Group, which may have an adverse impact on our business and financial performance. To the best knowledge of our Board of Directors, there is no material litigation brought by any of the franchisees or licensees against our Group. (m) Increase in rental or failure to renew existing tenancies in respect of our cafe outlets and central food processing centres
Most of our cafe outlets are rented from third parties with tenancy terms of up to three (3) years. We generally commence negotiations of a new tenancy term three (3) months before the expiry of the existing tenancy. During the negotiation process, the landlords have the rights to review and change the terms and conditions of the rental agreements. We face the possibility of an increase in rental fees payable to the landlords. Additionally, the landlords may also refuse to extend the tenancy of the said properties and as such we would have”to close down the cafe outlets located on (he rented properties. This will have an adverse impact on our Group’s operations and profitability. All rental increases have already been forecasted and in most cases our tenancy agreements provide for the increase of such rentals which have been mutually agreed upon.
(n) Quality of food products and services
It is essential that the quality of food served must be consistent throughout all our outrets. Any inconsistency in the quality of our food products may result in customer dissatisfaction and hence a decrease in their patronage to our cafe outlets. High staff turnover, shortage of staff and lack of supervision, although consistenUy addressed by internal training and development programs, may not be sufficient to ensure consistency and quality of the food products served and the services at our cafe outlets which may have an adverse impact on our Group’s financial performance” Our Group’s products and services are tailored as a -quick serveconcept thereby reducing the skill requirement of the employees, hence we have not been affected by shortage of manpower nor have our Group been affected by inconsistent food quality as all our food are cooked and/or prepared by the central food processing centres located in lpoh and Subang Jaya. (0) Dependence on key management As in any other businesses, the Group believes thai its continued success will depend to a significant extent upon the abilities, skills, experience, competency and continuous efforts of its existing Directors and management team. The Group will strive to continue attracting and retaining qualffied and experienced personnel who are essential towards providing the required skills and services to successfully support the operations of the Group. In addition, every effort is being made to groom the younger members of the management team to gradually take over from the senior members to ensure a smooth transition in lhe management team should changes occur. The loss of the services of any of our Executive Directors and key management personnel without suitable and timely replacement, or the inability of our Group to attract and retain other qualified personnel, could adversely affect our operations and hence, our revenue and profitability. Details of our key management personnel and our management succession plans are set out in Sections 5.6 and 5.12 of this Prospectus, respectively. 3. RiSK FACTORS (p) Pilferage by employees We operate cafe outlets where a large proportion of our transactions is based on cash payments. There is a risk of pilferage of cash by employees, which may materially affect our financial performance. However. we have put in place various operational procedures and controls 10 minimise pilferages by employees. Some of lhem are as follows: (i) Customer’s orders are entered into a Point·of·Sale (POS) system, which are transmitted to the cafe kitchen for preparation of food and beverages. The customer pays the amount stated on (he official receipt, which is generated from the POS system. This ensures that all customers’ payments are captured by the POS system;
(ii) All cash collected for the day are deposited daily into a bank and/or once a certain threshold has been reached, by each of the cafe outlet manager;
(iii) Daily bank-in slips are faxed to Oldtown Group’s head office on a daily basis. These are then verified against the sales summary report generated by Ihe POS system for each cafe outlet at Oldtown Group’s head office; and (iv) All daily cash sales are reconciled to Ihe amount slaled in the sales summary report. The POS is linked to our Group’s head office via Wide Area Network and is programmed to transmit sales data from the cafe outlet to head office on a daily basis. Notwilhstanding the above, there is no assurance lhal cash pilferages may not affect our future financial performance. (q) Rules. regulations and controls To avoid any disruption in ils business operations, the Group has been using its best endeavours to ensure strict compliance with the relevani laws and regulations and conditions that are enforced and/or imposed and that the relevant licenses and permils are obtained and renewed on a timely basis. There is, however, no assurance that the introduction of new laws or olher future regulatory development will not have a material adverse effect on the business operations of the Group. Generally, any inability to comply with all regulations and/or conditions or changes in applicable regulations and requirements may have a negative impact on its businesses. There is also no assurance that the existing licences and permits issued will not be subject to the imposilion of further conditions or restrictions by the relevant authorities from time to lime or upon renewal, which may materially affect the business operations of the Group. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 3. RiSK FACTORS RiSK RELATING TO THE INDUSTRY (a) Subject to labour and immigration laws and policies that govern the employment of foreign employees
Our business operations are labour intensive. As at LPD, we had, in aggregate, 2,342 employees, out of which 174 employees are based in Singapore and 65 are based in Indonesia. Please refer to Section 5.12 of this Prospectus for further details on our employees. Our business is lherefore subject 10 the labour and immigration laws that govern the employment of our foreign employees. In the event of any restrictions on the number of foreign workers being brought into our country, overseas operation or any increases in foreign worker levy, our business and financial performance may be adversely affected. Our Group has not been affected by any changes in labour and immigration laws and policies that govern the employment of foreign employees.
(b) Subject to requirement of the relevant food regulations
We are subject to the laws and regulations governing the food and beverage industry, including but nat limited to those relating to taxes, food safety, handling and storage, hygiene standards, sale of food and beverage requirements, namely the Food Act 1983, Food Regulations 1985 and Trade Descriptions Order 1975 (Use of Expression “Haral~ in Malaysia). We are required to obtain and maintain for our operations, certain licences, permits and approvals from the relevant authorities. There is no assurance that there will not be any changes in these legislations and that we would be able to continue complying with any of the changes which may be introduced by the relevant authorities. In the event that we are unable to comply with the existing regulations, such as obtaining, maintaining or reviewing the relevant licences required in operating our businesses, we may be disallowed to continue our business operalfons. In addition, any changes in or introduction of new regulations that require our compliance may increase our cost of operations. All these will have an effect on our business and financial perfonnance. (c) Public liability The Food Services Industry interacts directly with the public as the end-consumers of its products and services. As SUCh, there is always a risk of public liability from the food and beverages served, as well as dining within the premises. Any incidents caused on the premises would subject the operator to legal redress, which may impact financially on the business, as well as contributing to the bad publicity of the restaurant, cafe or other food service outlets. However some incidents are unavoidable, and as such, operators of food services would normally take public liability insurance to help mitigate such risk. In addition, operators who exercise due care, cons’lderation and safety would be able to mitigate to a large extent the risk of public liability. Such care and consideration would include proper handling and storage of foods, ergonomics of the work place and public seating area, and other customer consideration procedures. Our Group has purchased insurance coverage for public liability and hence, we are covered by insurance in respect of losses, claims and liability arising from or in connection with public liability from the food and beverages served, as well as dining within the premises. As SUCh, these evenls, should they occur, will’ not adversely affect our business and financial performance. 3. RISK FACTORS (d) Competitive industry We operate in an industry which is highly competitive where the barriers of entry are low. Our competitors include large and diverse groups of restaurant chain operators, individual restaurants and cafe outlets. We compete by being able to offer good quality food, competitive pricing, good customer services and accessible locations with good facilities. However, there are risks that our competitors may be able to replicate our products and offer them at competitive prices. In the event that we are unable to compete effectively in our industry, our business and financial performance will be materially and adversely affected. Our Group has been eXlremely competitive in the past and we have not faced any financial repercussions with regards to competition within the industry in the past. (e) Subject to changes in economic, political, social, legal conditions and discretionary consumer spending Our business is subject to prevailing economic and social conditions. Any adverse changes in the above conditions in Malaysia as well as in the other countries where we obtain our supplies, market our products and operate our cafes could materially affect our operational and financial prospects. Among the negative changes which may impact consumer spending include unemployment levels, high interest rates, consumer debt levels, availability of credit, increased tax rates etc. Any such negative changes will affect consumer spending and hence, have an effect on our business and our financial performance. As our Group is also operating in foreign countries such as Singapore and Indonesia, our Group is also subject to compliance with any government laws, decree, regulation or other requirements including any regulation which may affect the repatriation of capital and remittance of profit to or by the Group’s overseas operations back to Malaysia. Our Directors are not aware of any government laws. decree, regulation or other requirements which may affect the repatriation 01 capital and remittance of profit to or by the Group’s overseas operations back to Malaysia. However, although this is highly unlikely to happen, we may not be able to comply with the regulations and/or monetary policies of both, locally and overseas, which may be newly introduced from time to time by the relevant authorities. In the event that we are unable to comply with those regulations, we may run into difficulties and constraints in our business operations both locally and/or overseas. In addition, any changes in or introduction of new regulations that require our compliance may increase our cost of operations. All these will have an effect on our business and financial performance. RISK RELATING TO INVESTMENT IN OUR SHARES (a) No prior trading market for our Shares and a market for our Shares may not develop Prior to this invilation, there has been no public market for our Shares. Although we have made an application to list our Shares on the Main Market of Bursa Securities, there is no assurance as to the liquidity of any market that may develop for our Shares, or even if a market develops, will be sustained. There is no assurance of the ability of the holders or the prices at which the holders would be able to sell their Shares. The market prices of our Shares are subject to the vagaries of market forces and many other factors, such as prevailing economic, political and financial conditions in Malaysia, our operating results and the markets for similar securities. Hence, there is no assurance that the market price may not decline below the issue price. 3. RISK FACTORS
(b) Capital market risk The perfonnance of the local bourse is very much dependent on external factors such as the performance of regional and world bourses and the flows of foreign funds. Sentiments are also largely driven by internal factors including political and economic conditions of the country as well as growth potential of the various sectors of the economy. These factors invariably contribute to the volatility of trading volumes witnessed on Bursa Securities, thus adding risk to the market price, which may already fluctuate significantly and rapidly as a result, inter alia, of the following factors:• differences between our actual financial and operating results and those expected by investors and analysts;
• announcements by us or our competitors of significant contracts, acquisitions, strategic alliances, joint ventures or capital commitments;
• fluctuations in stock market prices and volume;
• changes in our operating results;
• changes in securities analysts’ estimates of our financial performance and recommendations;
• changes in market valuation of similar companies; • our involvement in litigation, arbitration or other forms of dispute resolution;
• additions or departures of key personnel; and
• changes in general economic and stock market conditions
(c) We may require additional funding for our future growth Although we have identified our future plans as set out in Ihe Section 4.23 of this Prospectus as avenues to pursue growth in our business, the proceeds from the IPO may not be sufficient to fully cover the estimated costs of implementing these future plans. We may also find opportunities to grow through acquisitions that cannot be predicted at this juncture. Under such circumstances, secondary issue(s) of securities after the IPO may be necessary to raise the required capital to develop these growth opportunities. If we then fail to utilise the new equity to generate a commensurate increase in earnings, our EPS will be diluted, and this could lead to a decline in our share price. Any additional debt financing may, apart from increasing interest expense and gearing, contain restrictive covenants with respect to dividends, future fund-raising exercises and other financial and operational matters in any such events, our growth or financial perfonnance will be adversely affected. (d) We may not be able to pay dividends to shareholders Our ability to pay dividends or make other distributions to our shareholders may be subject to, amongst others: • restrictions contained in loan agreements which limit dividend payments without the prior written consent of our lenders; or
• our Group having profits and excess funds which are not needed to fund our operations, obligations or business plans; or
• receipt of funds from our subsidiaries.
Our shareholders’ claims will generally rank junior to all other creditors and claimants against our Group. In the event of liquidation, there may not be sufficient assets for us to payout dividends. 3. RISK FACTORS
(e) Forward looking statements
Certain information in this Prospectus is based on the historical experience of the Group and may no! be refleclive of future results. Whilst the interpretation of this information may be fOf’lNard-looking, the contingencies and inherent uncertainties underlying these information should be carefully considered by investors and should not be regarded as a representation by the Group and its advisers that the objectives and the future plans of the Group will be achieved. Any differences in lhe expectation of the Group from its actual performance may result in the Group’s financial and business performances and plans to be either, materially or immaterially, different from those anticipated.
(f) There may be a delay in our listing or our listing may be aborted
The occurrence of anyone or more of lhe following evenls, which may not be exhauslive, may cause a delay in our listing or our listing to be aborted:~ • the Bumipulera investors approved by MITI fail to acquire the portion of Shares allocated to them;
• the identffied investors under the Public Issue and Offer for Sale fail to subscribe for the portion of our Shares allocated to them although they have furnished their irrevocable undertaking letters to subscribe for such Shares;
• the Underwriters exercising their rights pursuant to the Underwriting Agreemenl to discharge themselves from their obligations thereunder; or
• we are unable to meet the public spread requirement as determined by Bursa Securities, inclUding at least 25% of our tolal issued and paid-up share capital being in the hands of a minimum of 1,000 public shareholders holding not less than 100 Shares each at the point of Listing
Although our Directors will endeavour to ensure compliance by our Company of the Listing Requirements, including inter-alia, the public spread requirements imposed by the SC and Bursa Securities for the successful listing, no assurance can be given that lhe abovementioned factors will not cause delay or abortion of the Listing. (g) Ownership and control by our existing shareholders After Ihe IPO, our Promoters as set out in Section 5.1 of this Prospectus will collectively directly control more lhan 50% of our Group’s enlarged issued and paid up share capital. Therefore, our promoters will be able to exercise some influence over the direction and matters governing our Group requiring the vote of our Group’s shareholders unless Ihey are required to abstain from voting by law, covenants, and/or by relevant authorities. Nevertheless, our Group has appointed independent directors 10 ensure that any future transactions involving relaled parties are entered into on an arms-length terms which are not detrimental to our Group, so as to facilitate good corporate governance whilst promoting greater corporate transparency.