3. RISK FACTORS 3. RISK FACTORS
In evaluating an investment in the IPO Shares, prospective applicants should carefully consider all information contained in this Prospectus including but not limited to the general and specific risks of the following investment considerations: 3.1 Business Risks The Group is subject to certain general risks inherent to the fiber optic cable industry. These may include shortage in skilled workforce, increase in cost of workforce and operating cost, fluctuating cost of raw materials, enlry of new competitors, introduction of new technology and products, changes in general economic, business and credit conditions and changes in government policies. The Group has taken steps to mitigate the risks through continuous effort to maintain Its skilled workers and to enhance its range of products. The Group also embraces updated technology to continuously improve its products and services to meel customers’ demand and expectations. Further, the Group provides consultation services to customers as after sales services to retain its customers. 3.2 New Investment Activity Risks The Group may, if appropriate opportunities present themselves, invest in new ventures, acquire businesses or enter into synergistic Joint ventures thai the Group believes will be in the interest of its shareholders. As such, there are potential risks that Investments may have longer than expected gestation periods or may not be entirely successful. In this event, the Group may take tIme to recover or be unable to recover its initial investments. The Group plans 10 mitigate this risk, together with other possible venture risks in the fUlure by exercising due care in the evaluation of such ventures. Nevertheless, there can be no assurance lhat such ventures, if any, will yield positive returns to the Group. However. the Group will undertake a detailed evaluation and consider aU related risks prior to undertaking any acquisitions and joint ventures. 3.3 Borrowings Save as disclosed in Section 9.4 of this Prospectus, as at 30 September 2003. the Group does not have any other borrowings and indebtedness in the form of borrowings, including bank overdraft and liabilities under acceptances, hire purchase or commitments or guarantees. As at 30 September 2003 (being the !atesl practicable date prior to the printing of this Prospectus, the Group does not have any borrowings save for outstanding advances of AM18.6 million. The Group’s working capital requirements are met mainly from internally generated funds and if required, partially by borrowings in the form of overdraft or trade facilities. Given that the Group may incur borrowings in the form of overdraW trade facilities or other facilities and the payment of the facilities interest is dependent on interest rate, tuture fluctuations of the interest rale can have material effects on the Group’s interest and principal repayment However, this risk can be mitigated by having a fixed interest rate term as well as no interest payment for the current and next financial years, as in the case of the amount due to its Directors, which is presently the total borrowings of the Group. 3. RISK FACTORS (Cont’d)
3.4 New Products The Group is presently involved in the manufacturing of slotted core tiber optic cables and indoor cables. The local markets for the Group’s fiber optic cables, are characterised by technological changes, evolving industry standards, swift changes in customer requirements. The Group’s future depends substantially upon its ability to address the increasingly sophisticated needs of its customers by supporting existing and emerging hardware, software. database and networking platforms. In this respect, Malaysia has recently seen the launch of the 3G Spectrum which is to be rolled out by two major service providers within the next 10 to 15 years. The 3G Spectrum is expected to heighten the deployment of fiber optic cables including loose tube fiber optic cables. In view of this new demand, the Group is in the midst of planning to set up an additional production line for the production of loose tube fiber optic cables to cater for such new surge of demand. The timely development of the new production line is a complex and uncertain process. Although the Group believes that it will have the funding to implement its business plan, there can be no assurance that the Group will continue to have sufficient resources to successfully and accurately anticipate technological and market trends, or to successfully manage long development cycles. The Group may also experience design, marketing and other difficulties that could delay or prevent the development, introduction or marketing of its loose tube fiber optic cables. The Group is currently working with its joint venture partner, i.e. Ericsson to develop and set up the new production line for loose tube fiber optic cables. If the Group is not able to develop its loose tube fiber optic cables or to enhance its existing slotted core fiber optic cables on a timely and cost-effective basis, or if one or more of the Group’s competitors introduce products that better address customer needs or for any reason gain market share, the Group’s business, operating results and financial condition would be adversely affected. Given its experience and track record of the Group as well as the expertise and experience of its joint venture partner, Ericsson, in the production of loose tube fiber optic cables, the Group expects to be able to develop the additional production line on a timely and cost-effective basis.
3.5 Industry LifewCycle The fiber optic cable industry is cyclical in nature and highly dependent on the economic conditions of the country. As seen in year 1999, the economic slowdown did not spare the fiber optic cable industry as the Group experienced a decrease in sales. However, the Group was less susceptible to the cyclical effect as it had secured a long term contract for the supply of fiber optic cables for use by Telekom. This can be evidenced by the sustainable revenue and profits of the Group even during the economic downturn in 1999. Going forward, with the abovementioned secured sales and coupled with its effective marketing strategy as well as diversification into loose tube fiber optic cables, the Group is confident that it will continue to be resilient against the ever-changing economic conditions and market demands in Malaysia. Nonetheiess, no assurance could be given that any change to these factors would not have any material adverse impact on the Group’s business. 3. RISK FACTORS (Conl’d) 3.6 Dependence on Suppliers The major raw materials or components of the fiber optic cables are fibers. Currently, the Group sources its supply of fibers (raw material) tor the production of fiber optic cables mainly from two (2) suppliers. However. the Group is of the view that it is able to source its supply of fibers from other alternative suppliers. The Group maintains up to 3 months’ supply of fibers. However. due to the nature of fibers which is light and comprise 70·80% of the cost of the cables. they can be flown in and can be obtained at short notice. Much of the risk have also been passed to the suppliers, who maintain the fibers in their inventories, and supply the fibers to the Group on a three(3)-month rolling plan. Another important raw material or component for the production of fiber optic cables is the thixotropic gel. Currently, the Group is sourcing the supply of thixotropic gel, which is required for the process of stranding (i.e. to assemble loose and ribbon fiber into slotted core), from a single overseas supplier although there are alternative thixotropic gel suppliers available. The Group relies on this single supplier as It Is not possible to predict the chemical reaction that may arise from using an alternative gel. However, it is possible to find an alternative thixotropic gel supplier and to switch to another type of thixotropic gel if the need arises without much disruption to the manufacturing operations. In any event, both the fiber and thixotropic gel are purchased in bulk and kept in storage and can last for an average of 2 -3 months’ production.
3.7 Dependence on A Major Cuslorner The Group has a business alliance with its affiliated company, I.e. OSB, to supply fiber optic cables to Telekom. On one part, pursuant to the recognition of ass as an entrepreneur under the Telekom’s Entrepreneurs’ Development Programme (‘1MB Programme”), ass Is currently supplying fiber optic cables to Telekom under a supply agreement In July 1997 and its subsequent variation orderS/supplemental agreements (“TMB Contract”). Both the TMB Programme and TMB Contract are expiring in December 2004. On the other part, OCSB, aNSB and ass have entered into a supply agreement in August 1997 for the supply of fiber optic cables by lhe Group to OSS in relation to the TMB Contract. Based on the audited financial statements for the six (6) month period ended 30 September 2003, the supply of fiber optic cables for the TMS Contract accounted for approximately 98.26% of the Group’s total revenue. The Group is of the view that such high percentage is naturally expected, as it is a known fact that Telekom is the major player In the telecommunications industry in Malaysia. ass has received a letter of award dated 17 November 2003 from Telekom for a new contract 10 supply fiber optic cables for a period of three (3) years commencing from Ihe date of Ihe signing of the supply agreement. ass is expected to contribute an average of approximately 73% to Opcom’s revenue for the next five (5) years pursuant to the new contract. The Group inrends to reduce its reliance on the TMB Contract in the future and this is seen with Its plan to manufacture loose lube fiber optic cables for the domestic as well as the overseas market. 3. RISK FACTORS (Cont’d) 3.8 Foreign Currency Risk Currently, all the fiber optic cables manufactured by the Group are being sold locally whilst approximately 90% of its raw materials are being imported. The raw material cost for the production of fiber optic cables accounts for approximately 50% of oess’s cost of production. Transactions of these purchases are made in RM and USD. As such, the Group is exposed to foreign exchange risk in respect of the fluctuations in the RM or USD exchange rate against other foreign currencies. However, the Group undertakes hedging to mitigate such risks.
3.9 Dependence on Key Personnel The Group believes that its continued success will depend to a significant extent upon the abilities and continued efforts of its existing key management. The Group will strive to continue attracting and retaining skilled personnel to support its business operation and has made efforts to train its staff. As a result of this, the Group has enjoyed the support of its management staff with long-term service. The Group is headed by an experienced, dedicated and dynamic management team. They are trained and possess relevant knowledge and experience for the right business opportunities, which can provide synergy and growth to the Group. The success of the Group’s business was achieved through the deliberate and careful planning of the Directors with the support of the Group’s key management team.
3.10 Dependence on protection of intellectual property rights The Group owns the “OPCOM” trademarks. The “OPCOM” trademarks have been in use by the Group since the commencement of the Group’s business back in 1995. The Group has registered the following domain names which it uses in connection with its business, with the MYNIC :www.opcom.com.my www.opcomcables.com.my The “OPCOM” trademarks have gradually made its name amongst the local fiber optic cables manufacturers as well as the telecommunication industry since its inception almost a decade ago. Currently, the Group has granted a non-exclusive right to use the “OPCOM” trademarks to its affiliated companies I.e. OSB and Opcom Properties Sdn Bhd. Third parties may challenge or dispute the Group’s intellectual property rights in terms of, amongst others, title and third party intellectual property rights infringement and the Group could incur substantial costs in defending or prosecuting any claims relating to its intellectual property rights. Issues relating to intellectual property rights can be complicated and there can be no assurance that disputes will not arise or that any disputes in relation to the Group’s intellectual property will be resolved in the Group’s favour. Moreover, any such disputes could be time consuming, cause delays in introducing new or improved products and services or require that the Group discontinue using the challenged technology, and could have a material adverse effect on the Group’s reputation, business, operating results and financial condition. In this respect, the Group is of the view that such disputes will not likely happen as it has not been an issue since the use of “OPCOM” trademarks then. 3. RISK FACTORS (Cont’d) 3.11 Disruption in automation and systems The production of fiber optic cables are almost fully automated wherein the specifications/data of the batches of cables to be manufactured will be keyed-into the computer systems by trained production personnels. The manufacturing process would be almost fully automated save for certain stages of process, such as the feeding of raw materials and the packing of final products into the drums. Quality checks are imposed at certain stages in accordance with quality control management required under the ISO 9002 standard. However, it is noted that the production process may be interrupted by systems disruptions arising from the possibilities of disruptions of electricity supply or even machine breakdown. Such disruptions will cause wastage in the form of unfinished cables which would mostly be unmarketable. However, there may not be any wastage as longer lengths of unfinished cables can be converted into shorter lengths of cables which may be required by certain customers. In the event of service disruptions, the Group does not foresee any material loss arising therefrom which may have major impact on the Group’s financial performance. Moreover, the Group has not experienced any major system disruptions or any machine breakdown for the past few years, and will continue to ensure efficiency of the production process by taking the necessary preventive and maintenance measures.
3.12 Breakout of fire, energy crisis and other emergencies Every business faces the risks of losses arising from emergencies such as breakout of fire and energy criSIS (as mentioned In Section 3.11). The Group has taken note of such risks and has taken various steps to reduce such risks by having proper firefighting systems, dispersing the storing of the finished products in various warehouse/locations and carrying out periodical review on its security and maintenance by its Facility and Security Department’s personnel. The Group has also taken insurance coverage to mitigate the financial losses from such happenings where possible. In the event of a temporary energy crisis, the shortfall in production volume can be made up by increasing the scheduled production volume.
3.13 Insurance Coverage on Assets The Group is aware of the adverse consequences arising from inadequate insurance coverage that could potentially jeopardise its business operation. In ensuring such risks are maintained to the minimum, the Group reviews and ensures adequate coverage for its assets on a continuous basis. For the Group’s operations, all assets such as the manufacturing plant, inventories, office equipment and furniture and fittings are sufficiently insured under fire and other insurance policies. The Group has purchased insurance policies, among others, for fire breakout as well as fire consequential loss. Although the Group has taken the necessary measures to ensure that alt its assets are covered by insurance, there can be no assurance that the insurance coverage would be adequate to compensate for the replacement cost of the assets or any consequential loss arising therefrom. The Group has obtained confirmation from its insurance broker that the insurance policies’ coverage is adequate and sufficient. 3. RISK FACTORS (Cont’dJ 3.14 Competillve Risks The Group faces competition from both local and foreign fiber optic cables manufacturers. However, these competition are not expected to pose a serious threat as there are only a few existing fiber optic cable manufacrurers in Malaysia and the prices of imported fiber optic cables Bfe relatively more expensive due to high transportation costs. The competition of the latter may be stronger in view of the implementation of ASEAN Free Trade Area C’AFTA1 agreement. Under the AFTA agreement, tariffs on almost all products traded by ASEAN’s leading trading na1ions will be reduced by 2003. AFTA is implemented using the Common Effective Preferential Tariff rCEPT”). More than 1.000 products have been included in the CEPT. The compelitlve edge in the fiber optic cables manufacturing industry is characterised by elements such as tirst mover advantage, economies at scale, dominant market share and market knowledge. As for new entrants, the fiber optic cable industry poses high barrier of entries to potential new entrants. The barriers include significant start-up capital expenditure, the necessary technical know-how as well as knowledge of the market. The Group does nOl envisage any new entrants to the fiber optic cable manufacturing industry in the near future which may pose a stiff competition to its business. Further, the Group believes that h: has the edge over i1s competitors due to its economies of scale in production, its good relationships with its existing customers aoo its technological know-how acquired throvgh years of guidance from Opcom’s jointventure partner, Ericsson. The Group has taken pro-active measures to mitigate the competi1ive risks which include, inter alia. to constantly review its development and marketing strategies in response to ever-changing economic conditions and market demands, and to adopt different development concepts and marketing strategies that will correctly position its products to serve the needs of the existing and target markets. In addition. the Group has diversified its business into other related products such as cable accessories to ensure a stable stream of revenue. The Group shall continue to explore opportunities to diversify its business into new related products to maintain its competitive edge. Nevertheless, no assurance can be given that any change to these factors would not have any material adverse impact on the Group’s business.
3.15 Dependence on a Particular Market The Group currently focuses on the telecommunications industry in Malaysia. However, the Group intends to mitigate this dependence by introducing new products and exporting them to the overseas market. Please refer to Section 4.7 for details on the future plans at the Group. Nevertheless. no assurance can be given that the Group wilt be able to expand into the new markets successfully.
3.16 Economic, Political and Regulatory Risks Adverse developments in political, eoonomic. regulatory and environment conditions in Malaysia and other countries where the Group may operate can materially and adversely affect the financial prospects of the Group. Political and economic uncertainties include (but are not limited to) risks of war, riots, expropriation, nationalisation. renegotiation or nullification of existing contracts. methods 01 taxation, changes in import tariff policies and currency exchange controls.
3.17 Control by Promoters I some shareholders After the IPO, the Promoters (as set out in Section 5.1 of this Prospectus) will collectively control 72.9% of Opcom’s enlarged issued and paid up capital. As a result, these Promoters will be able to exercise influence over the outcome of certain matters requiring the vote of the Company’s shareholders unless they are required to abstain from voting by law, covenants and/or by the relevant authorities. 3_ RISK FACTORS (Cont’d)
3.18 Dependency on TNB’s Entrepreneur’s Development Programme (“EDP”) The Group is currently supplying its fiber optic cables to TNB which are underlined by TNB’s EDP. Under the EDP, Data’ Mukhriz Mahathir, the Chairman/Managing Director of Opcom as well as the Director of oess has been granted the “Entrepreneur” status with oess as the “Entrepreneur’s Company”. Among other conditions of the EDP are the equity holding in oess must be held by majority Bumiputera and that the Entrepreneur remains involved directly and actively -as an owner and in the management of the factory -of oess. In the event any of the conditions is not met, such status under the EDP may be revoked. Hence, the sales contract with TNB may no longer be realisable. The Group noted the possibilities that the EDP status may no longer remain status quo upon listing of Opcom on the MESDAQ Market as it might be difficult to justify that it remains in the EDP after listing. The Group also noted that there are cable manufacturers have been able to maintain a good business relationship with TNB despite the fact that they are not in EDP. The Group is confident that as it matures alongside with its eventual listing, it will be able to maintain a good business relationship with TNB, and the Promoters/Directors of Opcom intend to take the Company to the next level (i.e listing), with or without the EDP.
3.19 Dependence on Technology Provider Pursuant to the TCA and MAA, OCSB was dependent on the transfer of technology and the provision of technical assistance, services, management know-how from Ericsson in respect of the production for slotted core fiber optic cables. However, OCSB’s dependency on Ericsson as a technology provider is now minimal because OCSB has been manufacturing slotted core fiber optic cables for a reasonably long period (since January 1996). With the proposed production of loose tube fiber optic cables, OCSB expects to rely on Ericsson for its technology and technical services. Therefore, should the TCA and MAA 1all through, OCSB would have to search for alternative technology providers in respect of the production of loose tube fiber optic cables. Although OCSB’s dependency on Ericsson is not critical to its business (given that there are alternative technology providers), having to search for alternative technology may delay the commencement of the commercial production of loose tube fiber optic cables. However, OCSB has a good working relationship with Ericsson and expects to maintain this relationship in the future. 3,20 Material Litigation/Legal Uncertainties Like most supply agreements, the Group’s agreements with its customers contain provisions which expose the Group to potential product liability claims or liquidated damages claims. For instance the Supply Agreement dated 15 August 1997 between OCSB, ONSB and OSB for the supply of fiber optic cables to Telekom provides that in the event OCSB fail to supply fiber optic cables to Telekom within the stipulated time, OCSB shall pay liquidated damages. To date, the Group has not experienced any material product liability claims. Save as disclosed above and in Sections 12.6 and 4.2.15, as at 31 October 2003, the Group is not engaged either as plaintiff or defendant in any legal action, proceeding, arbitration or prosecution for any criminal offence, which has a material effect on the financial position of the Group. 3. RISK FACTORS (Cont’d)
3.21 Competing Technologies The increasing demand for high bandwidth in metro networks is relentless, and service providers’ pursuit of a range of applications, including metro network extension, enterprise LAN-fa-LAN connectivity, wireless backhaul and Local Multipoint Distribution System supplement has created an imbalance. This imbalance is often referred to as the “last mile bottleneck.” Service providers are faced with the need to turn up services quickly and cost-effectively at a time when capital expenditures are constrained. However, the last mile bottleneck is only part of a larger problem. Similar issues exist in other parts of the metro networks. “Connectivity bottleneck” better addresses the core dilemma. From a technology standpoint, there are several options to address this “connectivity bottleneck”. The first, most obvious choice, is fiber-optic cable. Without a doubt, fiber is the most reliable means of providing optical communications. However, certain installation considerations, delays and associated costs of laying fiber optic cables may make it less economically viable. Moreover, once fiber is deployed, it becomes a sunk cost and cannot be re-deployed if a customer relocates or switches to a competing service provider, making it extremely difficult to recover the investment in a reasonable timeframe. Another option is radio frequency (“RF’) technology. RF is a mature technology that offers longer range distances than Free Space Optics (“FSO”), but RF-based networks require considerable capital investments to acquire spectrum license. Yet, RF technologies may not scale reliably to optical capacities of 2.5 gigabits. When compared to FSO, RF may not make economic sense for service providers looking to extend optical networks. The third alternative is wire and copper-based technologies, (i.e. cable modem, Tier1s or DSL). Although copper infrastructure is available almost everywhere and the percentage of bUildings connected to copper is much higher than fiber, it may not be a viable alternative for solving the connectivity bottleneck. The biggest hurdle is bandwidth scalability. The fourth and often most viable-alternative is FSO -a tine-of-slght technology that uses lasers to provide optical bandwidth connections. The technology is an optimal solution, given its optical base, bandwidth scalability, speed of deployment (hours versus weeks or months), re-deployment and portability, and cost-effectiveness (on average, one-fifth the cost of installing fiber-optic cable). However, it cannot be deployed in non-line-of-sight applications and may not perform under certain adverse atmospheric conditions. Further, the range of transmission of FSO is much shorter than fiber optic cable. The alternative technologies to address “Connectivity Bottleneck” offer service providers compelling alternatives for optical connectivity and complement to fiber optics. The Group is of the view that fiber optic cables would be the preferred choice for most telecommunication applications in view of all the advantages that fiber optic cables can provide. 3.22 Trade Facilities The Group has trade facilities with financial institutions which may contain certain covenants, representations, warranties, undertakings and/or conditions which may limit the Group’s operating and financial flexibility. The aforesaid covenants, representations, warranties, undertakings and/or conditions are common to such trade facilities. A breach of such covenants, representations, warranties, undertakings and/or conditions may allow the financial institution to terminate the relevant trade facilities and/or enforce any security granted in relation to that trade facilities. The Board of Directors is aware of such covenants, representations, warranties, undertakings and/or conditions and will endeavour to take the necessary precautions to prevent any such breach. 3_ RISK FACTORS (Cant’d)
3.23 Disclosure Regarding Forward~Looking Statements Certain statements in this Prospectus are based on historical data, which may not be reflective of the future results, and any forward-looking statements in nature are subject to uncertainties and contingencies. All forward-looking statements are based on forecasts and assumptions made by the Group, and although believed to be reasonable, are subject to unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to differ materially from the future results, performance of achievements express or implied in such forwardlooking statements. Such factors include, inter-alia, general economic and business conditions, competition and the impact of new laws and regulations affecting the Group. In the light of these and other uncertainties, the inclusion of any forwardlooking statements in this Prospectus should not be regarded that the plans and objectives of the Group will be achieved. 3.24 Related Party Transactions! Conflict of Interest As disclosed in Section 7 of this Prospectus, there are certain related-party transactions involving the Directors and/or substantial shareholders and/or persons connected with the Directors and/or substantial shareholders of Opcom. The Directors and substantial shareholders of Opcom have given an undertaking that all business transactions between the Group and the Directors and substantial shareholders and their related persons, shall be based on arms length basis and on commercial terms that shall not be disadvantageous to the Group. As disclosed in Section 7.4 of this Prospectus, some of the Promoters, Directors and/or substantial shareholders of Opcom have interests in a company carrying on similar businesses as the Group. To mitigate any potential conflict of interest, the interested Promoter, Director and/or substantial shareholder of Opcom has given a written non-competition undertaking, details of which are set out in Section 7.4 of this Prospectus.
3.25 No Prior Market for Opcom’s Shares Prior to this Public Issue, there has been no public market for Opcom’s shares. There can be no assurance that an active market for Opcom’s shares will develop and continue to develop upon or subsequent to its listing on the MESDAQ Market or, if developed, that such a market will be sustained. The Issue Price of RMO.BO for the Public Issue and Offer Shares has been determined after taking into consideration a number of factors, including but not limited to, the Company’s financial and operating history and condition, its prospects and the prospects of the industry in which the Company operates, the management of the Company, the market prices for shares of companies engaged in business similar to that of the Company and the prevailing market conditions at the time the application for listing of Opcom was submitted to the SC. There can be no assurance that the Issue Price will correspond to the price at which Opcom’s shares will trade on the MESDAQ Market upon or subsequent to its listing.
3.26 Failure/Delay In The Listing The success of the listing exercise is also exposed to the risk that it may fail or be delayed should any of the following event occurs: (i) The eligible directors, employees as well as business associates of the Group fail to subscribe the IPO Shares allocated to them;
(ii) The underwriters of the IPO fail to honour their obligations under the underwriting agreements;
(iii) The placees under the private placement fail to subscribe the IPO Shares allocated to them; and (iv) Opcom is unable to meet 1he public spread requirements i.e. at least 25% of the issued and paid-up capital of Opcom must be held by a minimum of 200 public shareholders holding no less than 100 ordinary shares in Opcom each.