3. RISK FACTORS 3. RISK FACTORS IN EVALUATING AN INVESTIVIENT IN THE IPO SHARES, YOU SHOULD CAREFULLY CONSIDER ALL INFORMATION CONTAINED IN THIS PROSPECTUS INCLUDING BUT NOT L1IV1ITED TO THE FOLLOWING GENERAL AND SPECIFIC RISKS. 3.1 RISKS RELATING TO OUR BUSINESS AND OPERATIONS 3.1.1 Our Group is subjected to risks inherent to the automotive industry and automotive upholstery industry Our Group is principally engaged in the styling, manufacturing, distribution and installation of car seat covers and the supply of leather cut pieces to the automotive leather upholstery industry. Our Group is also involved in the styling, manufacturing, distribution and installation of car door trim covers and covers for other car accessories, the provision of sewing services for fabric car seat covers, the wrapping and stitching services for car accessories and the supply of raw materials. As such, we are subject to certain risks inherent to the automotive industry and automotive upholstery industry. The risks in these industries include, inter alia, constraints in skilled labour supply, entry of new players, increases in the price of raw materials and other production costs, availability of raw materials, unfavourable changes in government and international policies such as tax legislations, changes in economic, business and credit conditions, and collectability of debts. Our Group has constantly minimised these risks through, inter-alia, increasing the efficiency of operations, diversifying the pool of suppliers, expanding our geographical presence and customer base in both Malaysia and overseas markets as well as carrying out continuous review and improvement of our operations and production processes. However, there can be no assurance that any abrupt change to these factors will not have a material adverse effect on our Group’s business operations. 3.1.2 Our pursuit of new ventures, namely the retail industry via EEmpire and the aviation upholstery and parts refurbishment industry via PAviation, involve risks and we may not be able to realise the anticipated benefits We plan to expand into the retail industry via EEmpire and the aviation upholstery and parts refurbishment industry via PAviation, which would expose us to the risks inherent to these new ventures. The direct penetration into the REM retail market segment might not generate the results expected as our Group is relatively new to this market segment and most of our Group’s current business is predominantly in the OEM and POI market segments. In addition, we are exposed to the risk associated with the retail segment such as changes in taste and preferences of consumers, damages and thefts, and lack of recognition and track record in the retail industry, amongst others. The diversification into the aviation industry exposes us to various risks which include, inter alia, the lack of recognition and track record in the aviation industry being a new player, constraints in obtaining skilled and aviation approved labour supply, limited market size as compared to the automotive industry, as well as, high regulatory compliance requirements in the aviation industry. Our Group is leveraging on the exposures of our Promoters in the automotive aftermarket business segment as set out in Section 4.20.2 of this Prospectus to expand into the retail industry via EEmpire. Further, our experience in the leather upholstery and automotive industry would facilitate us to adapt to the aviation upholstery and parts refurbishment industry, as both these industries have similarities in terms of having stringent requirements, albeit one from the end customers while the other more from the regulatory perspective. If these new ventures do not realise their anticipated benefits or if we fail to address the challenges associated with the said new ventures, our business, financial condition and results of operation could be adversely affected. 3. RISK FACTORS (Cont’d) 3.1.3 Fluctuation in foreign exchange rates could have an impact on our Group’s financial performance As set out in Section 4.10 of this Prospectus, the main component of our Group’s purchase of raw materials is leather which is imported and denominated in USD. However, only a portion of our Group’s revenue is derived from exports as set out in Section 4.5.3 of this Prospectus and is denominated mainly in USD, EUR, SGD and AUD. As such, any fluctuation of foreign currencies, particularly with reference to USD against the RM, will result in our Group incurring foreign currency exchange gains or losses. Based on the analysis on our Group’s PBT for the past four (4) FYE 2012 to FYE 2015 and FPE 2015 on the assumptions that all other things remain unchanged except for the 5% and 10% appreciation or depreciation of RM against the USD, the impact on our Group’s results in terms of foreign currency exchange gains or losses incurred would range from approximately 6.61 % to 19.21 % on our Group’s PBT as set out below:Group FYE I2012 Change RM’OOO % FYE I2013 RM’OOO Change % FYE I2014 Change RM’OOO % FYE I I FPE II2015 IChange 2015 Change RM’OOO’ % RM’OOO % Combined PST 7,9641 12,6241 18,793 23, 770 1 I 1 I 9,5251 Increase by 5% Increase by 10% Decrease by 5% Decrease by 10% 7,2121 1 6,460 8,716, 9,468 ! (9.44) (18.88) 9.44 18.88 11,7891 1 ‘ 10,953 13,459 14,295 1 (6.61 ) (13.24) 6.61 13.24 16,988 15,183 20,598 22,403 (9.60) (19.21 ) 9.60 19.21 21,7621 19,755 1 25,7781 27,785! (8.45)1 8,7721 (16.89)1 8, 020 1 8.45, 10,278, 16.891 11,0301 (7.91) (15.80) 7.91 15.80
We maintain foreign currency accounts to off-set some of our sales against the purchases in foreign currencies to provide a certain degree of natural hedge. As and when the need arises, our management will make the necessary arrangements to hedge against exchange rate fluctuation, taking into account the exposure period and the relevant transaction costs. Further, depending on the circumstances, certain of our customers allow us to revise or renegotiate the selling prices of our leather car seat covers which have enabled us to recover, to a certain extent, the foreign currency differences arising from the foreign currency fluctuation. Notwithstanding the above, there is no assurance that any adverse fluctuation in foreign exchange rates would not have an impact on our Group’s financial performance.
3.1.4 We rely on skilled labour and are dependent on foreign workers Cost of production labour represented approximately 13.88%, 11.93%, 12.34%, 11.90% and 9.48% of our Group’s total cost of sales for the FYE 2012, FYE 2013, FYE 2014, FYE 2015 and FPE 2015 respectively as tabulated in Section 22.214.171.124.2 of this Prospectus. Of these, foreign workers represented approximately 60.06%, 65.57%, 67.71%, 70.65%, 68.82% and 66.32% of our Group employees for the FYE 2012, FYE 2013, FYE 2014, FYE 2015, FPE 2015 and the LPD respectively as detailed in Section 5.9 of this Prospectus. As at the LPD, our Group has a total of approximately 268 employees in the Production Department, of which 250 are foreign workers as set out below according to their respective nationalities:Countries No. of Employees Malaysia 18 Bangladesh 24 Nepal 219 Vietnam 5 Myanmar 1 Thailand 1 Total 268
3. RISK FACTORS (Cant’d) The production of leather upholstery for car seats and accessories rely heavily on skilled labour, in areas such as cutting, sewing and quality control inspection. As leather is the largest component in our Group’s cost structure, skilled labour forms an important element in ensuring maximum yield in the leather usage and minimising wastage in the manufacturing process. Inadequate supply of labour may disrupt the production processes. All the employees including the foreign workers recruited are not skilled and need to undergo a systematic in-house training program to equip them with the skillset before they are involved in the production processes. Any shortage of foreign workers will disrupt our operations resulting in the delay or interruption of our supply to our customers, which in turn will affect our profitability. Our Group has not experienced any disruptions arising from disputes among our workers nor were there any disputes between the workers and our Group. In order to minimise the risk of labour shortages, our Group has been continuously recruiting new employees who are required to undergo in-house training conducted by the heads of the respective departments. Our new employees in the Production Department are required to undergo a competency test and we also provide on-the-job training to new employees to ensure that they are equipped with the necessary experience and skills. On 19 March 2016, the Government announced a restructuring in the foreign levy rates from RM1,250 to RM1,850 per annum for the employment of foreign workers in the manufacturing, construction and service sectors. Currently, the levy charges of RM1,250 per annum for the employment of our foreign workers are recoverable via monthly deductions from the foreign workers’ salaries. With the increase in the levy charges, our Group has decided to absorb the incremental portion of RM600 per annum and the expected financial impact to our Group is RM200,000 per annum (as at the LPD, our Group has a total of 323 foreign workers as disclosed in Section 5.9 of this Prospectus). This is not expected to have a material adverse impact on the profitability of our Group. Our Group is continuously exploring other alternatives to automate our production processes, where possible, such as cutting, sewing and stitching, and the embroidering processes to reduce our dependency on labour. At the same time, we will also explore ways to improve the efficiency and productivity of our foreign workers, which could offset any potential increase in the associated cost of employing foreign workers. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 3. RISK FACTORS (Cont’d) 3.1.5 We may not be able to attract and retain Directors, key management team and skilled personnel Our Group is led by our Group lVIanaging Director, Oatuk Teoh Hwa Cheng, with an experienced and capable management team with good track records. Oatuk Teoh Hwa Cheng has extensive experience and in-depth knowledge in the leather related industry. With his wealth of experience and expertise, our Group’s management is able to identify and seize market opportunities to help our Group stay ahead of the competition. We are of the view that the continued success and ability of our Group to compete and expand in the automotive leather upholstery industry will depend significantly upon the abilities and continued dedication of our Directors, key management as well as skilled personnel of our Group. However, we strive to maintain and further establish our Group’s success by ensuring that we have the ability to retain our existing Directors, key management as well as skilled personnel as we recognise the importance of attracting and retaining the key management team and skilled personnel to support our business operations in the long term. 3.1.6 We are dependent on our major customers from the OEM (OE Fit) market segment who are Tier 1 car seat manufacturers in Malaysia Our Group derives major revenue from the production of leather car seat covers for the OEM (OE Fit) market segment for Tier 1 car seat manufacturers in Malaysia, such as Toyota Boshoku UMW Sdn Bhd, Fuji Seats (Malaysia) Sdn Bhd, Tan Chong & Sons Motor Company Sdn Bhd, Lear Automotive Malaysia Sdn Bhd (formerly known as TSLear Automotive (M) Sdn Bhd), Auto Part Manufacturers Co Sdn Bhd and Mitsubishi Motors (M) Sdn Bhd, who are our major customers as detailed in Section 4.12 of this Prospectus, who in turn, supply their products directly to automotive assemblers such as Toyota, Perodua, Nissan, Proton, Hyundai and Mitsubishi. Nevertheless, our Group also derives revenue from POI (Smart Fit) and REM market segments, such as the supply of the leather car seat covers to Tan Chong & Sons Motor Company Sdn Bhd who has gradually shifted from being our OEM (OE Fit) market segment customer to the POI (Smart Fit) segment customer from FYE 2013 onwards. We have also exported our products to Netherlands, Australia and USA which individually contributed at least 5% of our Group’s total revenue (in anyone of the financial years/ period) during the past four (4) FYE 2012 to FYE 2015 and FPE 2015 via our distribution partners. In Australia, besides working with our distribution partners, we have an online ordering system, where the customers can place their orders via our website. In addition to Netherlands, Australia and USA, the other overseas markets which our Group have exported our products to for the past four (4) FYE 2012 to FYE 2015 and FPE 2015 are as set out in Section 4.5.3 of this Prospectus whilst the details on our mode of distribution to the said export markets are disclosed in Section 126.96.36.199 (c) of this Prospectus. Therefore, the availability of a diversified customer base has positioned our Group to rely less on a single customer. For the past four (4) FYE 2012 to FYE 2015 and FPE 2015, none of our customers continuously contributed more than 10% of our Group’s total revenue as set out in Section 4.12 of this Prospectus. In view of the above, our Group has been continuously expanding our customer base to include more marques as well as to expand our market presence in Malaysia and overseas. 3. RISK FACTORS (Cont’d) 3.1.7 Inadequate insurance coverage could have an adverse impact on our business operations Our Group’s assets, such as the manufacturing plant, storage area, office and hostel building, plant and equipment, as well as inventory are insured against any unforeseen circumstances which includes, inter alia, fire, flood, loss, damage, robbery and theft. We are aware of the adverse consequences arising from inadequate insurance coverage that could have an adverse impact on our business operations. In order to minimise such risks, our Group regularly reviews and ensures adequate insurance coverage are obtained for our Group’s assets, including but not limited to product liability insurance. Nevertheless, there can be no assurance that the insurance coverage would be adequate for the replacement costs of the assets or any consequential loss arising therefrom. 3.1.8 We are exposed to the risk of product liability claims that is inherent in our business and products The nature of our Group’s business exposes us to the risk of product liability claims that is inherent in the manufacturing and marketing of our products. As a designer and manufacturer, we may be subject to product liability claims due to product defects. A substantial claim or a substantial number of claims relating to our products could have a material and adverse impact on our business, operating results and financial position. If our products prove to be defective and result in losses to our customers, we may be liable to product liability claims under the Malaysian law or any other jurisdictions’ law in which our products are supplied and sold. As a result, we may have to incur significant legal costs and divert our administrative resources regardless of the outcome of the claims. In addition, any such claim could damage our relationships with our customers and business reputation. We may also be forced to defend lawsuits and if unsuccessful, to pay a substantial amount of damages. Although we have not experienced any product liability claim since the commencement of our business, there is no assurance that the aforementioned will not occur in the future. Nonetheless, the management is of the view that our products have passed the stringent production and quality control processes, and are adequately covered and insured by the product liability insurance. 3.1.9 Our trademarks and patents for the development and usage of our Smart Fit product may be subjected to infringement, counterfeiting, unauthorised third party use or exploitation We believe that one of the critical factors that differentiate us from our competitors is our trademarks and our patents relating to the development of our Smart Fit product. In order to defend our patents and trademarks used in our products, we have ensured that such patents and trademarks are filed for registration and/or duly registered under the relevant intellectual property offices around the world. Save for PLeather’s application for the patent of interchangeable vehicle interior lining that has been registered in Malaysia (as disclosed in Section 4.14.2(a)(i) of this Prospectus), PLeather’s other application for the same patent in Taiwan, Indonesia, USA, Thailand and Japan (as disclosed in Section 4.14.2(a)(ii) of this Prospectus) are still pending registration (“PLeather’s Patents”). 3. RISK FACTORS (Cont’d) Apart from PLeather’s Patents, all other patents for vehicle seat covers and trademarks used in our products are not filed for registration and/or duly registered originally by our Group but was filed for registration and/or duly registered in the name of either MRZ or Seatcoverpro whereby our Group Managing Director, Datuk Teoh Hwa Cheng and Executive Director, Datin Sam Yin Thing are the substantial shareholders. Nonetheless, MRZ and Seatcoverpro have entered into Deeds of Assignment respectively with PLeather to assign and transfer all rights, title and interest in respect of all these patents and trademarks used in our products to our Group. Further details of the Deeds of Assignment are disclosed in Section 13.5(b), (c) and (d) of this Prospectus. Although Datuk Teoh Hwa Cheng and Datin Sam Yin Thing are the Directors and substantial shareholders of MRZ and Seatcoverpro, the Board of Pecca (save for Datuk Teoh Hwa Cheng and Datin Sam Yin Thing) confirms that the aforementioned Deeds of Assignment executed between our Group and MRZ and Seatcoverpro were not detrimental to the minority shareholders of our Company. Claw back events might arise if winding up proceedings had commenced on MRZ and/or Seatcoverpro pursuant to the Act, affecting the transactions contemplated under the Deeds of Assignment. Nevertheless, based on the documents and information made available to our solicitors for the IPO, Messrs Jeff Leong Poon & Wong (“JLPW”) as well as the statutory declarations made by Datuk Teoh Hwa Cheng and Datin Sam Yin Thing, JLPW is of the view that there is adequate basis to contest any claw back events that might arise. However, there is no guarantee that we will be able to defend our patents and trademarks against infringement, counterfeiting, unauthorised third party use or exploitation, any of which would reflect negatively on the image of our brand names and patents. Should we fail to protect and retain our intellectual property rights, this may have an adverse impact on our business, operational results and financial position. In addition, in relation to the trademarks and patents for which the completion of the registration is still in process, there is a possibility that these registrations may not be successful. In such case, the Pecca Group may still manufacture or sell the products which are dependent on the use of such intellectual properties, unless there is an identical or similar patent successfully filed by a third party. The respective intellectual property authorities may accept the application for the registration of identical or similar intellectual properties filed by a third party. If any legal proceeding against the Pecca Group for infringement of intellectual property rights of third parties is successful, the Pecca Group may be prohibited from manufacturing or selling products which are dependent on the use of such intellectual properties. This may have an adverse effect on our reputation, brand equity, business operational results and financial position. 3.2 RISKS RELATING TO THE INDUSTRY IN WHICH OUR GROUP OPERATES 3.2.1 Adverse developments in the political, economic and regulatory conditions in Malaysia and other countries may affect our Group’s financial position and business prospects Adverse developments in the political, economic and regUlatory conditions in Malaysia and other countries where our Group operates, sources our supplies or markets our products, could materially and unfavourably affect the financial position and business prospects of our Group. Political, economic and regulatory uncertainties that may develop include, but are not limited to the changes in political leadership, risks of war, expropriation, nationalisation, renegotiation or nullification of existing contracts, methods of taxation and unfavourable changes in government policies such as introduction of new regulations, import duties and tariffs, and currency exchange controls. Although our Group seeks to limit such risks through prudent financial management and efficient operating procedures, there can be no assurance that any change to these factors will not materially affect our Group’s business and financial performance. 3. RISK FACTORS (Cont’d) 3.2.2 Fluctuation in automotive leather prices would impact the selling prices of our products Automotive leather is a major cost component in the manufacturing of automotive leather upholstery and constitutes approximately 61.41 % and 65.02% of the total cost of sales for the FYE 2015 and FPE 2015 respectively (as disclosed in Section 188.8.131.52.2 of this Prospectus) or 75.25% and 76.54% of the total cost of raw materials consumed (as disclosed in Section 4.10 of this Prospectus) for the FYE 2015 and FPE 2015 respectively. Generally, leather prices fluctuate with the supply and demand condition in the global market. According to the Heavy Native Steers category of the IMF Primary Commodity Prices, leather hides prices have increased by approximately 17.8% to USD 0.86 per pound from January 2012 to December 2012. In 2013, it increased further to USD 1.05 per pound and up to its all-time high of USD1.15 per pound in September 2014. However, the prices have since moderated to USDO.94 per pound in June 2015 and USDO.70 per pound in February 2016. According to Frost & Sullivan, the decline in leather hide prices mirrors similar trends in global commodity prices and weaker growth in emerging markets on demand, especially for leather-based products. The tanneries that manufacture automotive leather procure the semi-processed or wetblue leather whereby only a portion of the leather hide is being used. In this regard, the variation in the price of automotive leather largely corresponds with the difference in quality of the finished leather itself and less by the fluctuation of leather hide prices. Fluctuation in automotive leather prices would to a certain extent impact our selling prices to our OEM (OE Fit)/ PDI (Smart Fit) customer segments whereby the supply of our products is in accordance with the specifications of the vehicle models depending on the model life cycle of the vehicles. For any new OEM/ PDI project secured, the project development time of approximately six (6) to nine (9) months from the award date to mass production would also expose us to the fluctuation in automotive leather prices. However, for customers that have nominated the source of leather supplier(s) to us, we will not be affected by the fluctuation in the leather hide prices as we have a back to back arrangement for the reimbursement of price differences from our customers. Furthermore, leather hide is a widely traded commodity and any increase or fluctuation in the price of leather hide will affect all the players in the automotive leather upholstery industry and will result in consequential general increase in the pricing of the products. Nevertheless, there can be no assurance that our business would not be adversely affected if there is an adverse long-term price movement of leather hides. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK 3. RISK FACTORS (Cont’d) 3.2.3 Our Group faces intense competition in the automotive industry We believe that with our established business relationships with our customers, good business track record, prompt delivery, consistent quality and price competitiveness of our products, our Group is ready to face the challenges and the intense competition in the automotive industry both in the domestic market and in the overseas markets where we export our Group’s products. Our Group faces competition locally from OK Leather Corporation Berhad, OEM Autoseats Malaysia Sdn Bhd and Gosford Leather Sdn Bhd, which also supply to local OEM automotive assemblers, such as Honda Malaysia Sdn Bhd, Inokom Corporation Sdn Bhd, Volvo Car Manufacturing Malaysia Sdn Bhd, Tan Chong Motor Holdings Berhad and Perusahaan Otomobil Nasional Berhad as disclosed in paragraph 3.12 of the Independent Market Research Report in Section 10 of this Prospectus. Although there will be lower entry barriers as the industry becomes more competitive with the progressive market liberalisation in terms of removal or reduction of tariffs (duties and surcharges) and non-tariff obstacles (licensing rules, quotas and other requirements), the continued success of most of the automotive upholstery leather players is dependent on the established close working relationships with the original brand manufacturers. The original brand manufacturers set stringent requirements such as approvals for product testing, close monitoring of rejection rates, monthly grading of suppliers’ on-time delivery performance, VAVE and cost-down capabilities of suppliers. Further, it is the original brand manufacturers that determine the final specifications of the products resulting in a very limited number of existing local automotive leather manufacturers who would be able meet their stringent requirements and standards in order to qualify for the role as their suppliers. In addition, economies of scale of our Group also pose significant barriers to entry to potential new players in the industry. Further, our Stylelab with in-house design and styling capabilities, competitiveness in the quality of our product and pricing, up-to-date manufacturing facilities and capabilities will ensure our continued edge to compete in the local market whilst our commitment to our timely delivery and competitive pricing inclUding our ability to meet the stringent requirements set by the local original brand manufacturers have also provided us with the advantage to be competitive in the production of our products for the export markets. Although our Group intends to grow and compete effectively, there is no assurance that our Group will be able to maintain or surpass our existing market share in the future. According to Frost & Sullivan, we are the largest automotive leather upholstery supplier for the OEM and POI passenger vehicle segments in Malaysia in 2015. We command a market share of about 36.3% in 2011, 38.4% in 2012, 57.8% in 2013, 65.2% in 2014 and 67.7% in 2015 based on the number of installed-leather-upholstery passenger vehicle units for OEM and POI market segments for each respective year, with the exclusion of REM market segment. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK
3. RISK FACTORS (Cont’d) 3.2.4 There are no long term contractual agreements between our Group and our customers There are no long term contractual agreements between our Group and our customers. This is the norm in the industry in which our Group operates where the supply of leather upholstery for car seat covers is dependent on the life-cycle of individual car models and/or variants. According to Frost & Sullivan, the OEMs typically introduce new car models via facelift every three (3) to four (4) years or full model change every seven (7) years. Frost & Sullivan anticipates this trend to bode well for the automotive leather upholstery industry as car accessories are now an integral part of the OEM’s customer fulfilment strategy for both new and facelift car models in order to attract new buyers. Within each model, there are typically several variants whereby the interior styling, including the upholstery of the vehicle, are different and would be changed or updated at least twice during the life cycle of the model. Despite the absence of long term contracts with our customers, our Group has an established and proven track record in consistently providing high quality products and services, which has earned our Group the confidence and recognition of our local and overseas customers. This is evident as approximately 57.93% and 43.78% of our Group’s total revenue for the FYE 2015 and FPE 2015 respectively was derived from our major customers that have established business relationships with us for at least six (6) years whereas approximately 80.89% and 78.11 %of our Group’s total revenue for the FYE 2015 and FPE 2015 respectively was derived from our major customers that have established business relationships with us for at least four (4) years as disclosed in Section 4.12 of this Prospectus. As at the LPD, we are the supplier of leather car seat covers for all the car models for Perodua, Mitsubishi and Nissan. We are also the supplier for most of the models that have localised leather program for Hyundai and Toyota which further testified to our proven track record on our product quality and services. This in turn has enabled our Group to enjoy long and stable relationships with various groups of customers, ranging from car assemblers to distributors and end users. In addition, for car assemblers to change suppliers in the middle of the life cycle of a specific model, new development and testing would be required to be conducted. This new development and testing process on average would require approximately six (6) to nine (9) months while for the existing supplier to redevelop the existing design would require approximately two (2) to three (3) months. Furthermore, our Group seeks to limit this risk by broadening our clientele base, which includes, inter-alia, venturing into new markets abroad. Nevertheless, there can be no assurance that the absence of long term contractual agreements with customers will not have any adverse effect on our Group’s business.
3.2.5 We are dependent on our suppliers for the supply of the raw materials and components The raw materials used by the manufacturers for the production of automotive leather upholstery consist mainly of leather hides, PVC, plastic parts and foam. The manufacturers in this industry rely on imports of leather hides. Although leather hides are sourced outside of Malaysia, the automotive leather upholstery industry is not dependent on any individual country for the supply of leather hides as leather hides are widely traded commodity in the world. The other raw materials such as PVC, plastic parts and foam are available from a range of manufacturers and suppliers locally and overseas. Hence, the players in this industry are not relying on any particular manufacturer for the supply of raw materials and components. 3. RISK FACTORS (Cont’d) The main raw material consumed by our Group is leather hides. To ensure the uniformity and consistency in colour and embossed print of our products, we opt to source the supply of leather hides from limited number of suppliers. For the past three (3) FYE 2012 to FYE 2014, our Group was dependent on Conceria Pasubio Spa (Italy) for the supply of leather hides. Conceria Pasubio Spa (Italy) accounted for approximately 65.07%, 63.66%, 58.59%,24.52% and 3.90% of our Group’s total purchases for the past four (4) FYE 2012 to FYE 2015 and FPE 2015 respectively. Our Group has adopted a mUltiple sourcing policy to reduce the dependency on single leather hides supplier resulting in Zendaleather SA (Uruguay) being our major supplier for leather hides for FYE 2015 and FPE 2015 and accounted for approximately 33.04% and 28.73% of our Group’s total purchases respectively. We are also required by our customer, Toyota Boshoku UMW Sdn Bhd, to source the leather hides directly from its nominated supplier for selected models of car manufactured by Toyota, namely Camry and Hilux which has resulted in Toyota Tsusho (Malaysia) Sdn Bhd being our major supplier for the FYE 2015 and FPE 2015 accounting for approximately 19.98% and 41.26% of our Group’s total purchases respectively. In addition, our Group has increased the purchase of leather hides from Industria Conciaria Europa SPA (Italy) from approximately 3.94% in FYE 2015 to approximately 11.46% in FPE 2015 of our Group’s total purchase. The increase in the purchase of leather hides from Zendaleather SA (Uruguay), Toyota Tsusho (Malaysia) Sdn Bhd and Industria Conciaria Europa SPA (Italy) has resulted in the consequential reduction in the supply of leather hides from Conceria Pasubio Spa (Italy) for FYE 2015 and FPE 2015 as indicated above. In addition, our Group also sources leather hides from a small pool of tanneries from Thailand. In order to mitigate the reliance on any single supplier, we have established vendor development programmes (as disclosed in Section 4.11 of this Prospectus) and a list of approved suppliers. Our established relationships with our suppliers had grown to mutually benefit both our Group and the suppliers whereby our Group represents a major customer to the suppliers. This assures our Group of our ability to source for a constant supply of raw materials at reasonable prices, which in turn minimise and avoid any disruption to our operations. In practice, we normally keep sufficient level of stocks of leather hide, PVC and other main materials. This is due to the lead time of approximately 2.5 months between the order and delivery of leather hides from our supplier. For other materials, the lead time averages from 2 weeks to a month as most of them are sourced locally. Our Group has not experienced any interruption to the supply of these key raw materials in the past. Nevertheless, there can be no assurance that any change to factors such as diseases, natural disaster, environment and political issues will not have any material adverse effect on the supply of raw material to our Group. 3.2.6 Our Group’s leather products are subject to product substitution The demand for leather upholstery instead of the standard material of textile or fabric for automotive upholstery is likely to grow in tandem with growing consumer affluence and the increase in the production of vehicles. Simultaneously, improvements in textile technology have also led to invention of synthetic leather that exhibit similar aesthetic properties to leather. Synthetic leather thus can be considered as a close substitute, yet it does not command similar prestige and quality as leather. Nevertheless, we believe that automotive assemblers and end users would still prefer to use leather instead of synthetic leather as leather is a premium material for the automotive upholstery and has been the preferred choice since the invention of automobiles given its durability and tactile characteristics. The availability of synthetic leather provides the platform for industry players to use complementary materials to achieve greater cost advantage that meets the OEM configuration. 3. RISK FACTORS (Cont’d) 3.2.7 Our Group’s performance is dependent on the automotive industry and automotive leather upholstery industry The performance of our Group relies heavily on the automotive industry and automotive leather upholstery industry. There is no assurance that our revenue will grow or be maintained at a profitable level should there be a decline in the performance of the automotive industry and automotive leather upholstery industry generally. Nevertheless, as our products and services cater for three (3) distinctive segments within the automotive industry, i.e. OEM, PDI and REM, this provide the assurance to our Group that the production and operations of our Group are diversified and we are not dependent on any single segment of the automotive leather upholstery industry thus providing us with the necessary infrastructure for our Group to adjust our marketing strategy accordingly to face any potential challenges in the automotive leather upholstery industry. Further, our Group via PAviation is venturing into the manufacturing, repair, refurbishment, distribution and installation of aircraft leather seat covers and other leather related products, for the commercial aircrafts and private jets which are in the aviation industry. These will diversify the revenue stream of our Group thereby reducing our dependency on a single industry, i.e. the automotive industry.
3.3 RISKS RELATING TO THE INVESTMENT IN OUR SHARES 3.3.1 There has been no prior market for our Shares and an active market for our Shares may not develop Prior to this invitation, there has been no public market for our Shares. There can be no assurance that an active market for our Shares will develop and continue to develop upon or subsequent to our Listing or, if developed, that such a market can be or will be sustained. The IPO Price has been determined after taking into consideration a number of factors, inclUding but not limited to our Group’s financial and operating history and conditions, our prospects and the prospects of the industry in which our Group operates, the management of our Group, the market price for shares of companies engaged in similar businesses and the prevailing market conditions. There can be no assurance that the IPO Price will correspond to the market price at which our Shares will be traded on the Main Market of Bursa Securities upon or subsequent to our Listing or that an active market for our Shares will develop or continue to develop upon or subsequent to our Listing. 3.3.2 Our Listing may fail, be delayed or aborted Our Listing may fail or be delayed should any of the following events occur:(a) the Bumiputera investors approved by the MITI under the Private Placement fail to subscribe for the Offer Shares allocated to them;
(b) our Joint Underwriters exercise their rights pursuant to the Underwriting Agreement to discharge themselves from their obligations thereunder;
(c) the selected investors under the Private Placement fail to subscribe for the IPO Shares allocated to them;