3. THE RISK FACTORS 3. THE RISK FACTORS
In evaluating an investment in the Offer 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:i} No Prior Market for PMCB Shares Prior to this Offer, there has been no public market for PMCB’s Shares. There can be no assurance that an active market for PMCB’s Shares will develop upon its listing on the Second Board of the KLSE or, if developed, that such a market will be sustained. The Offer price of RM1.40 for the Offer Shares has been determined after taking into consideration a number of factors, including but not limited to, the Group’s financial and operating history and conditions, its prospects and the prospects of the industry in which the Group operates, the management of the Group, the market prices for shares of companies engaged in business similar to that of the Group and the prevailing market conditions. There can be no assurance that the Offer price will correspond to the price at which PMCB’s Shares will trade on the Second Board of the KLSE upon or subsequent to its listing or that an active market for PMCB’s Shares will develop and continue to develop upon or subsequent to its listing. ii} Foreign Currency Risk PMCB Group exports its products to various countries such as China, USA, Philippines, Ireland, Thailand, Singapore, India and Italy. The exports are mostly denominated in USD. PMCB Group also imports raw materials from overseas which are mainly denominated in USD and SGD. As such, the Group is exposed to exchange rate risk. Given that both exports and imports are denominated in USD, this provides a natural hedge against exchange rate risk. However, the effects of the natural hedge will depend on the ratio of USD exports against imports. Currently the risk of exchange fluctuation is low as the Ringgit is pegged against the USD. Nevertheless, there is no certainty that the currency peg will remain and no assurance that any future foreign exchange fluctuations arising from the lifting of the currency controls or the adjustment of the Ringgit to USD peg will not adversely affect the financial results of the PMCB Group. iii} Political and Economic Factors Adverse development in political, economic and regulatory conditions in Malaysia as well as other countries where the Group may operate, source its supplies or market its products could materially and adversely affect the financial and operational conditions as well as the overall profitability of the Group. For the financial year ended 31 December 2002, PMCB Group sourced approximately 42.80% of its raw materials from overseas while apprOXimately 44.40% of its products are sold to Free Tradellndustrial Zones, LMW and other local customers. Direct export accounted for approximately 55.60% of total sales. Political and economic uncertainties include (but not limited to) changes in general economic, business and credit conditions, government legislations and policies affecting manufacturers, inflation, interest rates, fluctuations in foreign exchange rates, political or social development, risks of war, expropriation, nationalisation, renegotiation or nullification of existing contacts, methods of taxation and currency exchange controls. Iv) Control by Substantial Shareholders Upon completion of the Offer, Chuah Choon Bin and Tan Boon Teik will collectively own approximately 50.94% of the Company’s issued and paid-up share capital. As a result, they would be able to exercise some extent of influence on the outcome of certain mailers requiring the vote of the Company’s shareholders, unless they are required to abstain from voting by law, covenants and I or the relevant authorities. 27 3, THE RISK FACTORS (Cont’d) v) Dependence on Key Management The success of PMCB Group could be attributed to the leadership and stewardship of its experienced Directors and the key management team. However, the Group’s continued success will depend substantially upon the vision and continued efforts of the Directors and key management and the availability of skilled workers. As part of the long-term plan to nurture its key management, PMCB Group intends to groom younger members of the management staff and other employees to participate in the management of PMCB. The Group has a policy in place such that it is not dependent on one person to perform an important job function to prevent dependency on any particular person. Emphasis is placed on team work and all important projects will have backUp personnel. The Directors of PMCB recognise the importance of attracting and retaining skilled personnel to support its business operation by providing attractive remuneration package and conducive working environment. However, there can be no assurance that the Group will always be successful in retaining key management. vi) Competitive Conditions The semiconductor and automation industries in Malaysia are highly competitive, subject to rapid technological changes and new product development. While no assurance can be given that PMCB Group is able to maintain its competitive edge over its competitors and also its ability to maintain its customer base, it is pertinent to note that the Group has been able to chart continued growth in its business since incorporation of its first subsidiary in 1995, as evidenced from its profit track record, despite the recent economic downturn. This is the result of the Group’s continued effort in providing high quality products and services to its existing customers as well as attracting new ones. Many of PMCB Group’s customers are MNCs in Malaysia and in overseas where the selection of equipment for their manufacturing process are based on stringent criterias such as high quality standard equipment, good after sales service support, competitive pricing and also dependability of the products. Having its Own software development team is another competitive edge against its competitors. Software development requires advanced technology know-how and also the expertise of the computer system engineers. PMCB Group’s software for machine control is 100% developed in-house. All these competitive advantages to the Group serve as barriers for new prospective entrants in the business. vii) Risk Relating to Technological Obsolescence The PMCB Group is SUbjected to the inherent risk due to the rapid technological development. The Group’s products are characterised by rapid technological developments. evolving industry standards, swift changes in customer requirements, new product introductions and enhancements. The Group seeks to minimise these risks by actively and continuously pursuing technology innovation and advancement, industry best practices and strategic business alliances to address the increasing sophisticated needs of its customers. The Group also provides continuous staff development to align their skills and knowledge with the requirements of the latest technology in the automation and semiconductor industries. Continuous efforts are constantly made to increase the efficiencies of the R&D team for the development of new products and to strategically develop a continuing effective and dynamic management team to ensure the continued improvement of the Group’s performance in the future. Although the Group has put in its efforts to mitigate the risk, there is no assurance that the Group will be successful in developing and marketing new products or making enhancements to its existing products. 28
3. THE RISK FACTORS (Cont’d) viii) Business Risks PMCB Group, like other businesses operating in an open economy, is subject to market forces. There would be potential for products being obsolete, process technologies being cost ineffective, its market share being eroded or the industry experiencing downturn. In order to mitigate such risks, the Group had implemented various strategies such as increasing its product range, expansion of market base and R&D to strengthen and expand its business activities, However, no assurance can be given that any change in the market forces will not have a material adverse effect on the Group. The PMCB Group is involved in new product development whereby a substantial amount of prelaunch testing is conducted before a new product is officially marketed. However, the performance of its products will only be truly assessed when the machinery are being used on the field. The products may encounter various unforeseeable problems, resulting in the disruption of customers’ operations. Unless immediately rectified, this will result in negative exposure, which will affect the Group’s reputation and business opportunities. In an industry where product brand and perfonmance are crucial, the market share of PMCB Group may stand to be adversely affected should such negative publicity arise. To minimise exposure to such risk, the Group believes in strengthening its R&D by recruiting and training more skilled personnel and to invest in R&D activities. Emphasis is also placed on continuous quality checking to ensure the products meet customers’ reqUirement and are of high quality to avoid any unwanted negative publicity. Excellent after sales services will be given priority to help users who encounter problems with the new products, As PMCB Group’s products are made according to specifications required by customers and are not available off the shelf, after sales service is crucial to ensure smooth running of customers’ operations. Excellent sales service is also a way to maintain and build good reputation and relationship with the customers. ix) Dependence on the Electronics Industry The Group sells its products and services to customers from various sub-sectors of the electronics industry. As such, the Group’s performance will, to a large extent, depend on the outlook and cyclical nature of the electronics industry. Any slow down in consumer demand locally and overseas will present a risk to the demand for the Group’s products designed for use in the electronics industry. As such, there can be no assurance that any adverse development in the electronics industry will not affect the Group’s business, operating results and financial conditions. In addition, the demand for the Group’s products and services can be characterised by changing technology and continUing process development. Thus, the future success of the Group will depend on its ability to maintain and enhance its technological capabilities, develop and market manufacturing services to meet the ever changing customers’ needs and successfully anticipate technological changes. Although the Group is continuously exploring other areas of technological improvement, there is no assurance that its efforts will be successful or that the emergence of new technologies and customers’ requirements will not render its technology or process obsolete or uncompetitive. 29
3. THE RISK FACTORS (Cont’d) x) Intellectual Property All the products produced by PMCB Group depend heavily on the use of its own intelligent technology know-how. The Group’s success will also depend on its ability to use industry standard third party proprietary technology, and to protect its own technological know-how. However, the existing patent, copyright, trademark and trade secret laws afford only limited protection. Accordingly, there can be no assurance that the Group will be able to protect its proprietary rights against unauthorised third party copying, use or exploitation, any of which could have a material adverse effect on the Group’s business, operating results and financial conditions. The Directors believe that the risk is relalively low due to the nature of the Group’s products, as the equipment produced by the Group involves numerous aspects, which are complex and time consuming to develop and integrale. To further mitigate the risk, the Group has submitted applications to register several of its trademarks and affirmed the relevant statutory declarations in respect of the copyrights of certain software products. All the employees are also required to sign a non-disclosure agreement (“NDA”) to protect the Company’s interest. xi) Absence of Long Term Contractual Agreement with Customers and/or Suppliers There is no long term contractual agreement between PMCB Group and its customers and/or suppliers. The Group seeks to limit this risk by employing various strategies to broaden its clientele base, which includes, inter alia, venturing into new markets through setting up of new marketing/sales office abroad. Despite the absence of long-term contracts with its customers, the Group has an established and proven track record in terms of providing quality products and services, which has earned the Group the confidence and recognition of the various MNCs and overseas customers. PMCB Group also ensures that its relationships with existing customers is continuously nurtured by providing product enhancement, product upgrading and related after sales services. The major raw materials utilised by the Group such as aluminium, stainless steel, delrin (an antistatic plastic material) and perspex (transparent plastic cover) can be easily sourced and thus it is not necessary for the Group to enter into long term contracts with its suppliers. xii) Security and Systems Disruptions The software products developed by PMCB consists of : Manufacturing process monitoring and control software system; Vision inspection system; and RFIO for control and monitoring. These software products are stored in a secured server room with daily back-up on tape which is kept at a remote location. Adequate and prompt system recovery plan is in place to handle any contingency situations that may arise. Therefore, the impact of security and system disruptions is substantially mitigated and will not have any major impact to PMCB’s business. 30 3. THE RISK FACTORS (Cont’d) xiii) Risk of Severe Acute Respiratory Syndrome (“SARS”) Major health crisis of global proportions caused by SARS are expected to unfavourably affect the growth of both global and Malaysian economies. Reduction in business travelling to affected countries will to a certain extent affect business growth. However, PMCB’s presence in China through its representative office based in Shanghai will provide competitive edge over our competitors who do not have a physical presence in China. PMCB believes that any temporary deferment of orders from China will be shortlived and in view of PMCB wide customer base globally, the risk associated with SARS on PMCB’s operation in China will be mitigated through marketing efforts directed to non SARS affected countries. PMCB believes that any adverse impact on the automation industry should be minimal as indications are showing that the SARS epidemic is under control in China and is diminishing in other parts of the world.
xiv) Dependence on Particular Markets and Geographical Locations The Group currently focuses on semiconductor and manufacturing industries in Malaysia, with clients in various states in Malaysia and other countries stretching across Asia, Europe and USA. However, the Group will not be overly dependent on any particular market and geographical location as the Group has progressively expanded its customer base throughout Peninsular Malaysia and the overseas market.
xv) Dependency On Certain Customers The major customers of the Group for the financial years ended 31 December 2000, 2001 and 2002 are as follows:Customers <—————————Financial Year Ended ————————–> 31 December 2000 31 December 2001 31 December 2002 A well known MNC (China)’ A well known MNC (Malaysia)’ A well known MNC (Ireland)’ Unisem (M) Berhad 22.63% 26.49% -23.83% 1.30% 66.28% 0.51% 16.44% 14.53% 14.81% 12.39% 11.30% Total 72.95% 84.53% 53.03%
PMCB was unable to obtain the written consents of the said customers for the disclosure of their names In this Prospectus. The above major customers of PMCB Group accounted for approximately 72.95%, 84.53% and 53.03% of the PMCB Group’s total turnover for the financial years ended 31 December 2000, 2001 and 2002 respectively. Although the PMCB Group has established business relationships with these customers for several years and believes that it has built up good rapport, there can be no assurance that these companies would continue to be the Group’s major customers, or that the failure to maintain this business relationships or reduction in orders from the major customers would not affect the Group’s operating results. PMCB Group will continue to enhance its value added services propositions, improve its service levels and maintain its competitiveness including broadening its products range and to develop a more diversified portfolio of customers and markets in the future, both locally and overseas, to lessen its dependency on the major customers and industry. Some of the strategies taken include intensifying its overseas expansion by setting up a sales representative office in Shanghai, China in January 2002. These strategies has shown their results as indicated in the reduction in the percentage of turnover contributed by certain major customers in the financial years ended 31 December 2001 and 2002.
3. THE RISK FACTORS (Cont’d) xvi) Achievability of Forecast This Prospectus contains the profit forecast of PMCB Group that are based on certain assumptions made by the Directors of PMCB, but which nevertheless are subject to uncertainties and contingencies. Because of the subjective judgments and inherent uncertainties of the profit forecast, and due to events and circumstances which do not occur as expected, there can be no assurance that the profit forecast contained herein will be realised and actual results may be materially different from those shown. Investors will be deemed to have read and understood the descriptions of the assumptions and uncertainties underlying the profit forecast that are contained herein. xvii) Adequacy of Insurance Coverage of the Group’s Assets The Group is aware of the adverse consequences arising from inadequate insurance coverage that could cripple 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. Although the Group has taken necessary measures to ensure that its raw materials, finished products and all its other assets are adequately covered by insurance, there can be no assurance that the insurance coverage would be adequate for the replacement cost of the other assets of PMCB Group, including but not limited to the raw materials, finished products or any consequential cost arising therefrom. xviii) Capital Market Risk As an investor of PMCB, it is to be noted that PMCB will be listed on the Second Board of the KLSE. The performance of our local bourse is very much dependent on external factors such as the performance of the regional and world bourses and the inflow or outflow of foreign funds. Sentiments are also largely driven by internal factors such as the economic and political conditions of the country as well as the growth potential of the various sectors of the economy. These factors will invariably contribute to the volatility of trading volumes witnessed an KLSE, thus adding risk to the market price of the Shares of PMCB to be listed on the KLSE. Nevertheless, it shall be noted that the profitability of PMCB is not dependent on the performance of the KLSE. xix) Failure in Listing Exercise The listing exercise is also exposed to the risk that it may fail or be delayed should the following events occur:(a) The Bumiputera investors and institutions approved by MITI fail to subscribe to the portion of Offer Shares allocated to them;
(b) The eligible Directors, employees and business associates of PMCB Group fail to subscribe to the portion of Offer Shares allocated to them;
(c) The Company or the Underwriters fail to honour their obligation under the underwriting agreement;
(d) The Underwriters, in honouring their obligations become a shareholder holding 5% or more of the Shares in the Company: and
(e) The Company is unable to meet the public spread requirements i.e. at least 25% of the total number of shares for which listing is sought must be in the hands of a minimum of 1,000 public shareholders holding not less than 100 Shares each.
3. THE RISK FACTORS (Cont’d) xx) Forward Looking Statements Certain statements in this Prospectus are based on historical data. which may not be reflective of the tuture results, and others are tOlWard looking in nature, which are subject to uncertainties and contingencies. All torward looking statements are based on estimates and assumptions made by the Board at Directors of the Company, and although believed to be reasonable, are subject to known and unknown risks, uncertainties and other factors which may cause the actual reSUlts, performance or achievements to differ materially from the tuture results, performance or achievements expressed or implied in such forward looking statements. Such tactors include, inter-alia, general economic and business conditions, competrtion, the impact of new laws and reguiations affecting the PMCB Group and the industry and changes in interest rates. In the light of lhese uncertainties, the inclusion of fOlWard looking statements in this Prospectus should not be regarded as a representation or warranty by the PMCB or its advisers that lhe plans and objectives ot the Group will be achieved. xxi) Risk of Implementation of Asean Free Trade Area (“AFTA”) I Common Effective Preferential Tariff (“CEPT”) PMCB believes that the equipment automation industry is not subject to any risk associated wah the impiementation of AFTAICEPT as presently, there is no tariff imposed on intra Association of South-East Asian Nations (“ASEAl\I”) trade tor equipment used in the semiconductor industry. Furthermore, raw materials and components sourced from ASEAN countries are not subject to high import duty and in most cases, the importing companies enjoy import tax-exempt privileges when bringing raw materials and components into Malaysia tram overseas including ASEAN countries. However, there is no assurance that the implementation ot AFTAICEPT will not have any material impact on the Group’s operation. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK