4. RISK FACTORS 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE PERFORMANCE OF OUR GROUP. YOU SHOULD CAREFULL Y CONSIDER THE RISKS AND INVESTMENT CONSIDERATIONS SET OUT BELOW ALONG WITH OTHER INFORMATION CONTAINED HEREIN IN THIS PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION. IF YOU ARE IN ANY DOUBT AS TO THE INFORMATION CONTAINED IN THIS SECTION, YOU SHOULD CONSULT YOUR STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR OTHER PROFES~ONALADWSER THE RISKS AND INVESTMENT CONSIDERATIONS SET OUT BELOW ARE NOT AN EXHAUSTIVE LIST OF THE CHALLENGES THAT WE CURRENTL Y FACE OR THAT MAY DEVELOP IN THE FUTURE. ADDITIONAL RISKS, WHETHER KNOWN OR UNKNOWN, MAY HAVE A MATERIAL ADVERSE EFFECT ON THE FINANCIAL PERFORMANCE OF OUR GROUP. 4.1 RISKS RELATING TO THE BUSINESS AND OPERATIONS OF OUR GROUP 4.1.1 Dependency on the demand for electricity supply We are dependent on the demand for electricity supply to fuel the demand for new substations and related products. Our customers are mainly utility and industrial companies or infrastructure contractors who subcontract part of their work to us. Increase in demand for electricity will subsequently increase the demand for new substations to cater for the increase in load. In Malaysia particularly, we are dependent on the economic and population growth to drive new infrastructure projects, and the absence of such projects will adversely affect our business operations. Many governments generally strive to improve the quality and sustainability of life for the population by providing better access to healthcare, public transport, water and electricity. In doing so, governments generally take a direct role in the planning and expansion of public utilities such as electricity to improve quality of life for its people. Investments in the electricity supply industry are greatly driven by government intervention in this context, as expansion efforts are ultimately funded by public funds. A reliable and secure electricity supply infrastructure is also key to economic investments. Industry demand for electricity will drive the demand for additional transmission and distribution capacity. Notwithstanding the above, any absence of further expansion or upgrades resulting from a decrease in demand for electricity supply in the future will have a direct impact on our business operations and the prospects of our Group. Nonetheless, in most countries, especially the developing countries, there will normally be an underlying electricity demand in tandem with the economic and population growth. Thus, it has become our Group’s focus to set foot in these countries to tap on these opportunities.
4.1.2 Foreign exchange risks We are exposed to foreign exchange risk. Since we began venturing into overseas markets in 2007, we have thus far conducted business in foreign countries such as Brunei, PNG, Sri Lanka, Ghana, Tanzania and Cambodia. For the FYE 31 December 2009, 2010 and 2011, approximately 44.8%, 51.4% and 76.5% respectively of our revenue were derived from overseas markets. Our overseas sales transactions are mainly conducted in the currencies of USD or EURO. In addition, we also source key components such as transformers, relays, cables and circuit breakers from overseas suppliers, which are mostly denominated in USD, EURO or Japanese Yen. For the FYE 31 December 2007 to 2011, approximately 43.8%, 27.8%. 65.4%. 35.1% and 73.3% of our total purchases were transacted in foreign denominated currencies. 4. RISK FACTORS (Cont’d) Starting from 2011, we do, from time to time, enter into currency forward hedging against any fluctuation in the foreign exchange and we also leverage on the natural hedge through the matching of our sales and purchases which are mostly denominated in EURO and USD. As our Group in general is simultaneously exposed to various types of currency, adverse movement in one currency would normally not impose adverse impact on the overall financial condition or operating results of our Group as the risk has been spread out. However, there is no assurance that such natural hedging would mitigate the risk that arises from foreign currency fluctuations which may have material adverse impact on our financial condition or operating results. Our Directors constantly monitors our Group’s foreign currency exposure and reviews our Group’s hedging needs. In the FYE 31 December 2009 and 2010, our Group incurred realised foreign exchange loss of RM1.41 million and RM1.31 million respectively, whilst our Group recorded realised foreign exchange gain of RMO.662 million in the FYE 31 December 2011. Save for the FYE 31 December 2009 and 2010, our Group has not experienced any material adverse effect on our financial condition or operating resuits arising from foreign currency fluctuations. Going forward, our exposure to foreign exchange risk is expected to increase in line with our future plans to expand our presence in overseas markets as disclosed in Section 5.8.1 of this Prospectus. 4.1.3 Dependency and inability to retain key management personnel We believe that our success has been, and will continue to be, significantly dependent on the efforts, abilities and capabilities of our key management and technical team especially our Executive Chairman, Lim Ah Hock; and Executive Director / CEO, Paul Lim who are both the major shareholders of our Company. In addition, we rely on Paul Lim who has been instrumental in the development, growth and success of our Group and under his leadership, our Group has grown to become a major integrated electric power technology company in Malaysia. Further, our key management and technical team are well equipped with the necessary skills and experience in power system engineering technology and manufacturing of related products. As such, loss of our key management and technical team without suitable and timely replacement may have an adverse impact on our ability to effectively carry out our business activities. We strive to minimise this risk by ensuring that we have the ability to attract and retain our existing Directors and key management through the implementation of human resource strategies and developing a human resource plan that inciudes suitable compensation packages, career development and human resource training and development for our key management. In addition, our Group is continuously improVing our internal documentation recording systems, process procedures, and technical database registration to establish base competency of our Company to reduce dependency on individuals. Furthermore, our Group would also undertake a SGP to reward and retain such key management. Upon completion of the Listing, our Executive Chairman, Lim Ah Hock; and Executive Director / CEO, Paul Lim will hold approximately 42.73% and 27.52% equity interest in PESTECH respectively. This will ensure that Lim Ah Hock and Paul Lim will continue to have vested interest in the success of our Group. Although we seek to limit our dependence on our Directors or key management, there can be no assurance that the above measures will be successful in retaining our Directors or key management or in ensuring a smooth transition or management succession plan should such key persons no longer be able to serve our Group. 4.1.4 Operational risks and insurance coverage As we are involved in the electricity supply industry, our business activities are susceptible to operational risks. Risks in day-to-day operations include risk of accidents, disruption in supply of key components, disruption in supply of utilities, as well as fire, flood, and/or 4. RISK FACTORS (Cont’d) other natural disasters that may cause disruption or delay in implementing our Projects and also damage to our Products and manufacturing and administrative facilities thereby possibly disrupting our business operations. In addition, as our Projects involve use of heavy equipment and machineries, we may encounter accidents or dangerous incidents at the project sites. We seek to limit the above risks through, inter-alia, the following risk measures:(i) We have taken up property insurance covering our factory premises, fixed assets and inventories. As at the LPD, our Group’s insurance coverage for our assets is RM14.420 million which covers the total NCA of our factory premises, fixed assets and raw materials inventories as at 31 December 2011;
(ii) We have taken/Will take up insurance for each Project for up to the value of the Project;
(iii) Our premises are equipped with basic regulatory fire-fighting equipment such as fire hose reel system and fire extinguisher stored at strategic locations which can be easily accessible in the event of fire. Employees are trained on the use of these equipment, proper fire-fighting techniques and procedures and evacuation drills; (iv) We ensure that our manufacturing facilities and warehouse comply with all safety requirements stipulated in various licences issued by the relevant authorities. In-house training and briefing on safety requirements and proper use of equipment are also conducted to ensure that our employees are adequately trained to minimise the risks of industrial accidents; and
(v) We have taken up a professional indemnity insurance of RM1 0.0 million to cover professional risks in our Projects.
Notwithstanding the above measures, there is no assurance that our insurance coverage is sufficient to cover potential losses in the event of fire, theft or accidents and in such event, we may be liable to cover the insufficiencies, which may adversely affect our business activities, projects implementation and financial performance. However, our business operations have not been affected by any such events thus far including other risks such as natural disaster, general strikes, riots and any other risks which cannot reasonably be insured against. 4.1.5 Dependency on third party suppliers to source equipment, components and parts for use in our Projects and Products We are dependent on third party manufacturers such as Siemens Malaysia, ABB Malaysia Toshiba Asia Pacific Pte Ltd (“Toshiba”), Tenaga SWitchgear Sdn Bhd and Tira Thai Co. Ltd to supply components such as relays, current transformers and voltage transformers for use in our Products, as well as equipment such as switchgear and transformers for our Projects. For the FYE 31 December 2007 to 2011, our purchases from the aforementioned third party manufacturers amounted to approximately RM10.506 million, RM6.774 million, RM8.251 million, RM15.401 million and RM13.888 million representing 31.0%, 17.9%, 12.8%,19.7% and 15.0% respectively of our total purchases in the respective years. In addition, we also engage third party fabricators to fabricate metal parts for use in our Products. Although there are many such third party manufacturers and fabricators in the industry, our operations may possibly be affected if we are unable to guarantee the supply and performance of the components and equipment. As at the LPD, our Group has not experienced any difficulties in purchasing equipment, components and parts from third party suppliers for use in our Projects or Products. 4. RISK FACTORS (Cont’d)
4.1.6 Third party technical utilisation risk In the course of developing a substation, we would need to use third party equipment or products which we do not have control over their technical input and development. If such equipment or products are faulty, we would need to request for technical assistance from the original manufacturer to help mitigate the problems. Although, normally the manufacturer would have a team of experts ready to assist in these circumstances, we would not be able to ascertain that such assistance can be always delivered in a timely and efficient manner. We take comfort that these third party equipment or products suppliers, such as ASS Malaysia, Siemens Malaysia and Toshiba are of established brandnames with long standing track record on the reliability of their equipment or products. Nonetheless, in the event of a technical fault due to third party technical utilisation which we are unable to resolve with the assistance of the supplier, additional costs may be incurred and project completion delay may happen which could adversely affect the particular project in hand.
4.1.7 Project risks As stated in Section 4.1.8 of this Prospectus, our Group’s revenue is heavily derived .from Projects which are entered into on a contractual basis, subject to performance of certain terms and conditions. If our Projects were delayed as a result of factors that we are contractually responsible for, especially on those that are within our control, we are liable to pay liquidated and ascertained damages on termination or delay. As such, any delays may affect our ability to complete our Projects and achieve our business plans accordingly. The difficulties faced in executing projects may also result in incurring higher cost. These types of developments may, in turn, have an adverse effect on our business, financial condition and results of operations. Notwithstanding the above, for those situations which are out of our control, such as adverse weather conditions, such delays would usually be compensated by our customer via an extension of time to complete the project. In addition, under the terms of most of the contracts with our customers, our customers may request changes to the contract specifications that result from changes in field design or other unanticipated events affecting the project. Our contracts generally provide that such additional direct costs resulting from these types of changes in specifications are borne by our customer. Apart from the above, our Projects could be subject to cancellation, deferral or rescheduling which could affect our Group’s anticipated profitability. Furthermore, any termination of material projects will have an adverse impact on our future revenue, taking into consideration the typical size of Projects. However, cancellation or termination of Projects would not have any material impact on our revenue pertaining to the portion of work that has already been rendered. Payments for work rendered prior to such cancellation or termination would still be paid by our customers. As at the LPD, our Group has not paid or been liable to pay any liquidated and ascertained damages on termination, delay or rescheduling during the financial years under review. In addition, our performance in a particular year may depend substantially on a single project. For example, in FYE 31 December 2010 and 2011, revenue contribution from the Project in Cambodia amounted to 27.4% and 57.7% of our total revenue respectively. Whilst we do not expect this trend to recur, there is no assurance that such dependency will not happen in the future. In the event of such recurrence, it may have an adverse impact on our performance due to any unforeseen cancellation, deferral or rescheduling of Projects. 4. RISK FACTORS (Cont’d) 4.1.8 Our performance is project-driven For the past five (5) FYE 31 December 2007 to 2011, Projects has been the key contributor to our total revenue. As stated in Section 11.4.1 of this Prospectus, our Group’s Projects (before consolidation adjustment) has contributed approximately 49.8%, 75.5%, 87.4%, 84.2% and 98.3% of our total revenue for the FYE 31 December 2007 to 2011. Over the years, domestically, we have been awarded with Projects substantially from TNB. As for foreign markets, we have executedlare executing Projects in Brunei, PNG, Sri Lanka, Cambodia and Ghana for both utilities and industrial companies. These Projects are usually obtained via an open tender basis. Our perfomnance is project-driven. Our ability to replenish contracts in the future is dependent on, inter-alia, government policies and general economic conditions, the need to build infrastructure for the electrical supply industry in certain countries or industries; and changes in general business and credit conditions both locally and abroad. As such, our financial results can be adversely affected in the event that we fail to secure enough order book for our Projects. Due to risks inherent in undertaking Projects, we take the necessary steps to establish a good relationship with our customers and ensure customer retention and referral by:(a) offering value added solutions or services to customers through, amongst others, our ability to accommodate customer’s design change requests, our comprehensive inhouse test equipment for commissioning of substation and ability to provide aftersales customer services by our in-house team instead of going through the principals;
(b) providing appropriate solutions to customers at hand and ensuring that customers
are satisfied with our project quality and services; and , (c) completing our projects without delay. 4.1.9 Changes in economic, political and regulatory conditions in countries we operate in We are susceptible to changes in economic, political and regulatory conditions in Malaysia, as well as other countries in which we operate. We have, to date, established our presence in Brunei, Sri Lanka and Cambodia, and we have also conducted business in Ghana, PNG and Tanzania. Thus, adverse situations in countries which we are currently operating in and any other countries which we could operate in the future, may potentially cause significant interruptions to our business activities, affecting our financial performance and profitability. These situations inclUde, but are not limited to, current global and local economic climates, inflation, credit conditions, political leadership, Government regulations and policies, risks of war, methods of taxation, natlonalisation, expropriation and renegotiation or nullification of existing contracts. Currently, we are in the midst of executing a Project in Cambodia. Cambodia has, by and large, been facing more political stability compared to the days of the Khmer Rouge rule. However, there have been instances of unrest at the Cambodia-Thailand border since 2008 pertaining to the border dispute with Thailand. This situation has eased since the Pheu Thai Party won the parliamentary election in Thailand in July 2011, and announced efforts to resolve the dispute with Cambodia. Nevertheless, the border dispute could have a direct impact on the political and economic conditions of Cambodia as a whole, and consequently, our business operations may be adversely impacted which may affect our financial performance and profitability. As at the LPD, our Group has not experienced any adverse occurrences arising from changes in economic, political and regulatory conditions in the countries we operated I are operating in. 4. RISK FACTORS (Cont’d) 4.1.10 Reliance on a single customer Based on the past three (3) FYE 31 December 2009, 2010 and 2011, TNB had contributed 35.8%, 36.0% and 16.0% to our revenue respectively. In view that the local market is expected to remain as a significant contributor to our Group’s revenues, we will continue to bid for local contracts and consequently, TNB, being the largest electricity utility company in Malaysia, will continue to be a significant contributor to our revenue. Based on the information set out in the Independent Market Research Report by Frost & Sullivan Malaysia Sdn Bhd, the performance of the system design, engineering and infrastructure segment of the power transmission and distribution industry is dependent on investments made by utility companies. In Malaysia, generation, transmission and distribution plans are developed by the Government and announced in the Malaysia Economic Plan. Investments are disbursed to various Government agencies and utility companies, which translates to actual expenditure on projects executed within this industry. Being the largest and sole electricity utility company in Peninsular Malaysia and Sabah (via Sabah Electricity Sdn Bhd), annual system design, engineering and infrastructure expenditure to be incurred by TNB could be directly linked to Government spending and the economic and political conditions in Malaysia or the world. Accordingly, any adverse economic or political conditions which result in lower Government public spending or the loss of TNB as our customer, may affect the future growth and profitability of our Group. Nonetheless, we have developed a good relationship with TNB through the long term working relationship (since 2001), timely delivery and reliability of our products and services. In addition, we have started to venture out from Malaysia since 2007 to expand our presence internationally and to be less reliant on local market. Based on the revenue contributions by the local and overseas markets for the past three (3) FYE 31 December 2009 to 2011, the sales from overseas markets have significantly increased whilst the sales contribution from local market was decreasing relatively over the financial years. As set out in Section 5.8.1 of this Prospectus, we aim to expand our presence to other developing countries where there is a demand for the development, improvement and build up of electncity transmission and distribution assets and expect that overseas contribution will continue to represent a major portion of our revenue in the near future. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 4. RISK FACTORS (Cont’d) 4.2 RISKS RELATING TO INVESTING IN OUR SHARES 4.2.1 No prior market for our Shares Prior to the IPO, there has been no public market for our Shares, Hence, there is no assurance that upon listing, an active market for our Shares will develop, or, if developed, that such a market can be sustained. The IPO Price was determined after taking into consideration various factors and we believe that a variety of factors could cause our Share price to fluctuate and such fluctuations may adversely affect the market price of our Shares. There can be no assurance that the IPO Price will correspond to the price at which our Shares will trade on the Main Market of Bursa Securities upon our Listing and the market price of our Shares will not decline below the IPO Price, 4.2.2 Share price volatility and volume of our Shares The performance of Bursa Securities 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, Sentiment is also largely driven by internal factors such as economic and political conditions of the country as well as the 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 risks to the market price of our listed Shares. Nevertheless, the profitability of our Group is not dependent on the performance of Bursa Securities as the business activities of our Group have no direct correlation with the performance of securities listed on Bursa Securities, In addition, the market price of our Shares may be highly volatile and could fluctuate significantly and rapidly in response to, amongst others, the following factors, some of which are beyond our control:(i) Variations in our results and operations;
(ii) Success or failure in our management team in implementing business and growth strategies;
(iii) Changes in securities analysts’ recommendations, perceptions or estimates of our financial performance; (iv) Changes in conditions affecting the industry, the general economic conditions or stock market sentiments or other events or factors;
(v) Additions or departures of key personnel;
(vi) Fluctuations in stock market prices and volumes; or
(vii) Involvement in litigation. 4.2.3 Ownership and control by our existing shareholders As disclosed in Section 7.1.1 of this Prospectus, our Promoters will collectively hold in aggregate approximately 71,2% of our enlarged issued and paid-up share capital upon listing, As a result, they will be able to, in the foreseeable future, effectively control the business direction and management of our Group as well as having voting control over our Group and as SUCh, will likely influence the outcome of certain matters requiring the vote of our shareholders, unless they are required to abstain from voting either by law and/or by the relevant gUidelines or regulations, 4. RISK FACTORS (Conl’d) Nevertheless, our Group has appointed two (2) independent directors and set up an Audit Committee to ensure that any future transactions involving related parties are entered into on an arms-length basis and/or on normal commercial terms that are not more favourable to the related parties than those generally available to third parties and are not detrimental to our minority shareholders, and to facilitate good corporate governance whilst promoting greater corporate transparency. 4.2.4 Failure or delay in our Listing The occurrence of anyone or more of the following events, which is not exhaustive, may cause a delay in or cancellation of our Listing:(i) The MITI-approved investors fail to acquire the Shares allocated to them under the Offer for Sale;
(ii) Our Soie Underwriter exercIsing their rights pursuant to the Underwriting Agreement to discharge themselves from its obligations thereunder; and/or
(iii) We are unable to meet the public shareholding spread requirement of the Listing Requirements, i.e. at least 25% of our issued and paid-up share capital for which listing is sought must be held by a minimum number of 1,000 public shareholders holding not less than 100 Shares each at the point of our Listing. In such event, investors will not receive any of our IPO Shares and we together with the Offerors wiil return in full, without interest, all monies paid in respect of any application for our IPO Shares in compliance with sub-section 243(2) of the CMSA. 4.2.5 Forward looking statements This Prospectus contains certain forward-looking statements that are based on historical data, which may not be reflective of the future performance of our Group and others are forward-looking in nature which is subject to uncertainties and contingencies. Forwardlooking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially from future results. Such forward-looking statements are based on numerous assumptions regarding our present and future business strategies, the environment in which our present and future business strategies have been developed and the environment in which we will operate in the future. Although our Group believes that the expectations reflected in such forward-looking statements are reasonable at this point in time, we can give no assurance that such expectations will be justifiable. Whether or not such statements prove to be accurate would be dependent upon a variety of factors that may have an effect on the business and operations of our Group. In light of these uncertainties, the inclusion of such forward-looking statements in this Prospectus should not be regarded as a representation or warranty by us, the Offerors or our Principal Adviser, that our plans and objectives wiil be achieved.