5. RISK FACTORS 5. RISK FACTORS Before investing in our Shares, prospective investors should pay particular attention to the fact that our Company, and to a large extent our Group and operations, are governed by the legal, regulatory and business environment in Malaysia and other countries in which we operate, whether currently or in the future. Our business is subject to a number of factors, many of which are outside our control. Before making an investment decision, prospective investors should carefully consider, along with the other matters set forth in this Prospectus, the risks and investment considerations set out below. You should note that the following list is not an exhaustive list of all of the risks that we currently face or that may develop in the future. These and other risks, whether known or unknown, may potentially have a material adverse effect on us or our Shares. Risks relating to the industries in which we operate 5.1.1 Industry risks relating to our power business
(i) We are exposed to operational risks The financial performance of our power business depends on the successful operation of our power generating plants. Our ability to successfully generate power and deliver the required energy to Sabah Electricity is subject to, among others, the following risks: • operator error or failure of equipment or processes, particularly with older generating plants; • unexpected maintenance needs associated with operational issues;
• operational limitations that may be imposed by environmental or other regulatory authorities;
• labour disputes;
• terrorist attacks;
• interruptions in the supply of natural gas, diesel fuel or other material supplies;
• compliance with mandatory reliability standards;
• shortfalls in output levels and power generation efficiencies;
• information technology system failure;
• cyber intrusion; and
• catastrophic events such as fires, explosions, floods, droughts, tropical storms, pandemic health events such as influenzas, or other similar occurrences.
For example, one of the gas turbine generators of the RPII power plant failed in December 2012 due to damages to the compressor blades and stator vanes, which resulted in the RPII power plant running at half capacity of 95 MW for 79 days from 5 December 2012 to 21 February 2013. For the year ended 31 December 2013, this incident reduced the revenue of our power generation business by approximately RM15.0 million and PATAMI of our Group by approximately RM11.6 million. Refer to Section 7.7 of this Prospectus for further information. Although we have undertaken repair works to address the issues that caused the power plant’s failure, there can be no assurance that such issues will not recur. 5. RISK FACTORS (cant’d) In addition, any failure on our part to satisfy performance criteria specified in our PPAs would result in a decrease in the level of capacity payments made to us by Sabah Electricity. Furthermore, if we are unable to deliver power for prolonged periods such that we are in breach of the applicable PPA, Sabah Electricity may terminate the PPA after the lapse of the applicable cure periods. A decrease or elimination of revenues from our power generating plants or an increase in the cost of operating the facilities could have a material adverse effect on our financial position and results of operations. In addition, upon the expiration of the PPAs of the RPI and RPII power plants in 2029 and 2032, respectively, there is no assurance that new PPAs will be entered into on terms acceptable to us or at all. In such an event, there could be a material adverse impact on our business and results of operations. (ii) We may not be able to obtain adequate fuel supplies for our power generating plants We secure the natural gas supply for our power generating plants through long-term contracts with the PETRONAS Group. However, any disruption in the delivery of natural gas, including disruptions as a result of, among other things, transportation delays, weather, labour relations, environmental regulations and force majeure events, could limit our ability to operate our power generating plants. In addition, from 2020 through 2032, the quantity of natural gas to be delivered to us under the gas supply agreement relating to our RPII power plant may be limited by the availability of natural gas under certain circumstances, as described in Section 7.5.1 (iii) of this Prospectus. We have entered into an agreement with Shell Timur Sdn Bhd to supply diesel to our power generating plants as backup fuel as a safeguard against any disruption in the supply of natural gas to our facilities. We have storqge capacity for up to seven days’ supply of diesel, and we expect that, in the event of a disruption in the supply of natural gas, we would be able to operate our power plants on diesel fuel. However, a disruption in the supply of natural gas and a disruption in the supply of diesel at the same time could have a material adverse effect on our results of operations. (iii) We are obligated under our gas supply contracts to pay for a minimum quantity of natural gas, but Sabah Electricity is not obligated to despatch our power plants at a level that is sufficient to ensure that we will use natural gas equal to our minimum natural gas purchase obligation Our gas supply agreements have so-called “take-or-pay” obligations that specify the volumes of natural gas that PETRONAS is required to make available to us during each year of the contract and obligate us to purchase and take delivery of at least 75% of the specified volume in each year. Energy payments due to us under the PPAs are determined by the level at which Sabah Electricity despatches our power plants, which will depend on a number of factors that are outside our control, such as increased demand for electricity in Sabah and the quantity of generating capacity available to Sabah Electricity, inclUding any additions to that capacity from new plants. If Sabah Electricity does not despatch our power plants at a level that is sufficient to ensure that we use natural gas in an amount equal to our minimum quantity obligations under our natural gas supply agreements, our results of operations and financial condition could be materially and adversely affected. 5. RISK FACTORS (cant’d) (iv) Our power business is subject to extensive environmental regulation and permit requirements that may involve significant and increasing costs
Our power business is subject to extensive environmental regulations with respect to, among others, air quality, noise level, water quality and waste disposal, and compliance with these regulations involves significant costs and time. We are also required to obtain and comply with conditions established by licences, permits and other approvals to construct, operate or modify our facilities. Failure to comply with these requirements could subject us to civil or criminal liability, the imposition of liens or fines, actions by regulatory agencies seeking to curtail our power operations or termination of our PPAs. There also can be no assurance that regulatory authorities would not impose additional regulations on us that may affect the profitability of our power generating business. Any unanticipated changes in regulations governing the conduct of our power operations may also create additional bottlenecks and restrictions that may have a material adverse effect on our financial performance. We will incur additional effort and costs for monitoring and ensuring compliance with any new regulations that may be imposed on us.
(v) Our operations may cause harm to people and property
The nature of our operations may expose our employees to hazardous working conditions and, to a lesser extent, the general public or property held by third parties to various risks, such as explosions, fires and discharge of pollutants. Injuries to persons and losses or damages to properties held by third parties caused by these risks can subject us to liability that can be significant. These liabilities, which includes payment of damages or compensation arising from death or injury to persons and loss or damage to third party property and related defence costs and expenses, are very difficult to predict, may not be covered by our insurance policies and may make it difficult for us to secure insurance in the future at acceptable rates. The range of possible liabilities includes amounts that could have a material adverse effect on our liquidity, financial condition and results of operations.
(vi) We rely on Sabah Electricity as the sole offtaker for the power produced by our power plants
We rely on Sabah Electricity to purchase the power generated by our RPI and RPII power plants. There is no assurance that Sabah Electricity will be able to continue to meet its obligations under the PPAs in the future. Sabah Electricity’s failure to make payments under our PPAs could materially and adversely affect our business, financial condition, results of operations and cash flows.
5.1.2 Industry risks relating to our environment business (i) The rates that we charge our water supply customers are subject to regulations Our ability to maintain profitability in our water supply business is dependent upon our ability to recover our costs through the rates that we charge to our customers. These rates are subject to regulations implemented by SPAN, the Malaysian National Water Services Commission. The water tariff rates that have been in effect in the State of 3Johor since 1 August 2015 ranges from R1VI0.80 per m to RM7.00 per m3, depending on the type of customer and the consumption volume. For more information on these water tariff rates, refer to Section 10.2.3(ii)(a) of this Prospectus. 5. RISK FACTORS (cont’d) Every three years, we are required to file with SPAN a business plan that sets out, among others, our cost projections, including costs arising from projected changes in water usage and in lease rental payments due to PAAB, a government-owned water asset holding company regulated by SPAN that leases water infrastructure assets to us. Our business plan also sets forth the tariff rates that we propose to support our projected costs and earn a reasonable return. Depending on changes in the general economic conditions in which our Company operates, we may also request tariff increases from time to time. Once we have filed a business plan or otherwise requested a tariff increase, the ensuing administrative process may be lengthy, and there can be no assurance that our business plan will be approved by SPAN without alterations. We anticipate that if SPAN does not approve our proposed rate increases in full or at all, it would request PAAB to reduce the amount of lease payments required under our agreement with PAAB to a level that would permit us to earn a reasonable return. There can be no assurance, however, that this will necessarily be the case. In the event that our business plan, including proposed tariff adjustments, is approved, the rate increases that are implemented may be untimely or inadequate to recover expenses, including lease payments and expenses arising from changes in water usage. For more information on water tariff rates and lease payments to PAAB, refer to Sections 10.2.3(ii)(a) and (b) of this Prospectus. If our requested water tariff rate increases or an offsetting reduction either in the amount of the lease payments due to PAAB or in the amount of other expenses is not approved, or there is delay in such approval, there would be a material adverse effect on our financial condition and results of operations. (ii) We are required to comply with certain service obligations Under the service licence relating to our water supply business and the KPI targets that SPAN requires us to achieve, we are bound to comply with certain service obligations relating to, among others, achieving targets in water service coverage, water quality and availability, water pressure, security of supply, customer service and NRW reduction. There can be no assurance that we will be able to continuously meet these service targets or, in the event that we face difficulties in fulfilling the service targets, that the service targets would be amended to be more favourable to us. Non-compliance with the agreed service targets may result in SPAN imposing financial penalties or, in the event of a continuous breach of the terms which is attributable to us, our service licence may be terminated by the Minister of Energy, Green Technology and Water, Malaysia at the recommendation of SPAN. The financial penalties which may be imposed by SPAN come in the form of reduction in the profit margin of SA,IH in the next operating period. As set out in Section 7.16.1 of this Prospectus, SAJH enjoys a reasonable return as may be approved by the Government, subject to SAJH complying with the agreed KPI. For more information on factors which affect the profit margin of SAJH, refer to Sections 10.2.3(ii)(a) and (b) of this Prospectus. If our service licence is terminated or if SPAN takes other actions unfavourable to us as a result of such failures or for any other reason, there would be a material adverse effect on our financial condition and results of operations. (iii) Contamination of our raw water supply may disrupt our services and harm our reputation Our raw water supply may be subject to contamination, including contamination as a result of naturally-occurring compounds; pollution resulting from man-made sources, such as man-made organic chemicals; and deliberate acts, such as terrorist attacks. Floods, which occur from time to time in our catchment areas, often have a negative impact on the quality of our raw water supply. If any of our raw water supply sources become contaminated, we may have to interrupt the use of such raw water supply source and, to the extent feasible, make alternative arrangements to supply water to our customers. Failure to source raw water from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, will 5. RISK FACTORS (cont’d) result in a material adverse effect on our business, financial condition and results of operations. We are also potentially liable for costs or claims arising out of human exposure to hazardous substances in our water supplies or other environmental damages, which may not be covered at all by our insurance policies. While our water supply agreement with the State Government of Johor obligates the State Government of Johor to provide sufficient supply of water of adequate quality, if for any reason the State Government of Johor does not perform this obligation effectively or in a timely manner, any of the foregoing factors could have a material adverse effect on our business, financial condition, results of operations and reputation. We maintain security measures at our facilities and have heightened employee awareness of potential threats to our water systems. Despite our security measures, certain risks of contamination are largely outside our control.
(iv) Failure of our water treatment plants, network of water pipes or water reservoirs could result in losses and damages The success of our operations in the environment business is largely dependent on the quality and condition of our water treatment plants and our extensive network of distribution pipes, through which we treat and distribute water, and our reservoirs, where our water supply is stored. A failure of any major water treatment plant, pipe or reservoir could result in injuries and property damage for which we may be liable. The failure of a major water treatment plant, pipe or reservoir may also result in closing some of our facilities or parts of our network to conduct repairs. Failures and shutdowns could arise from factors such as natural disasters, including but not limited to earthquakes, floods, prolonged droughts and tropical storms; human errors in operating the water supply systems; raw water quality; industrial actions by employees in our environment business; and acts of terrorism. These types of failures and shutdowns may limit our ability to supply water in sufficient quality and quantities to our customers in accordance with standards prescribed by governmental regUlators, and may have a material adverse effect on our reputation and our business, financial condition and results of operations. Any business interruption or other losses might not be covered by insurance policies, and such losses may make it difficult for us to secure insurance in the future at reasonable rates.
(v) We are exposed to the risk of disruption in the supply of important goods or services from third parties We are dependent on a continuous supply of important goods and services from suppliers in the operations of our environment business. Any disruption or prolonged delays in obtaining important supplies or services, such as purchased water, maintenance services, treatment chemicals or electricity, could adversely affect our environment business and our ability to operate in compliance with all regulatory requirements, which could have a significant effect on our results of operations. In certain areas of our operations, we rely on third parties to provide services (such as the day-to-day operations and maintenance of our water and wastewater treatment plants and certain customer bill printing, mail activities and telecommunications services). There can be no assurance that these third parties would be able to perform such services at all times, and a disruption in these services could materially and adversely affect our results of operations and financial condition. Some causes for a delay or disruption in the supply of important goods and services include: • the State Government of Johor, which is contractually obligated to provide raw water to us, or our suppliers of treated water, may not provide us with water in sufficient quantities or may provide us with water that does not meet applicable quality standards or is contaminated; 53 5. RISK FACTORS (cant’d) • our other suppliers may not provide materials that meet our specifications in sufficient quantities; • our suppliers may face production delays due to natural disasters or due to strikes, lock-outs or other similar industrial actions; • our suppliers may not meet contractual service quality standards; and • one or more suppliers could make strategic changes in the lines of products and services they offer. As a result of any of these factors, we may be required to find alternative suppliers for the materials and services on which we rely. Accordingly, we may experience delays in obtaining materials and services of adequate quality on a timely basis and in sufficient quantities from such alternative suppliers at a reasonable price, which could interrupt services to our customers and have a material adverse effect on our business, financial condition and results of operations. (vi) We are reliant on PAAB to deliver new water infrastructure assets SAJH relies on PAAB to carry out the capital works related to the new water infrastructure assets in Johor according to the business plan approved by SPAN. PAAB has committed to deliver to SAJH any new water infrastructure assets based on the defined scope, design, specification and timing as proposed under the approved business plan. There is no assurance that PAAB will deliver to SAJH the prescribed new water infrastructure assets at the right scope, design, specification or on time. If for any reason PAAB is unable to perform its obligation effectively or in a timely manner, any of the foregoing factors could have a material adverse effect on our business, financial condition, results of operation and reputation. (vii) We are subject to extensive environmental regulation that may involve significant and increasing costs The water industry is subject to various laws and regulations, inclUding environmental laws and regulations, and health and safety laws administered by local, national and overseas governmental authorities. These laws and regulations address, among others, air and water discharges, the storage of hazardous chemicals, the storage, treatment, discharge and disposal of waste, occupational safety and health of employees and other aspects of the operations of our environment business. Failure to comply with any relevant laws and regulations, as well as injuries or other harm caused by such failure, may result in financial penalties or administrative or legal proceedings against us, including the termination or suspension of the operation of our water and wastewater treatment or water supply facilities. Further, we have incurred, and expect to continue to incur, operating costs to comply with government regulations, and we have made, and expect to continue to make, capital expenditures on an ongoing basis to comply with environmental, health and safety laws and regulations. In addition, future environmental legislation may materially impact our operations and increase our capital expenditures and operating and maintenance costs. There can be no assurance that we will be able to remain in compliance with applicable environmental, health and safety laws and regulations or that we will not become involved in future litigation or other proceedings (or be held responsible in any future litigation or other proceedings) relating to environmental health or safety matters or other regulatory matters, the costs of which could be material. From time to time there are incidents of non-compliance with environmental laws and regulations, particularly in the operations of our subsidiaries in China. These have 5. RISK FACTORS (cant’d) historically been resolved with no material adverse effect on our operations, financial condition or cash flows. For more information on our compliance with environmental laws and regulations, refer to Section 7.9.2 of this Prospectus. There can also be no assurance that the adoption of new environmental, health and safety laws and regulations, new interpretations of existing laws and regulations or other similar developments will not result in our facilities being subject to termination, suspension or the imposition of fines and penalties. Our failure to comply with any or all applicable government regulations, or a change in any or all such regulations, may disrupt our operations and could have a material adverse effect on our business, financial condition, results of operations and cash flows. (viii) We may not be successful in maintaining existing concessions or securing new concessions Our future plans in relation to the environment business contemplate the maintenance of our current concessions and continued acquisition of new concessions and projects. Our ability to expand our business and increase operating profits may be limited as a result of various external events. For example, concessions for new projects under consideration may be awarded to competing bidders, potentially on the basis of political or other non-commercial factors, or competition for such concessions may decrease the returns available from them. In addition, political or economic developments in the countries in which we currently have or in the future obtain concessions, including but not limited to changes in laws, rules or regulations or government policy, such as unexpected changes in regulatory requirements (including with respect to taxation and tariffs), could result in changes to concession terms, increase the cost of conducting the environment business or change the potential return available to us from a project. We also bear the risk that our concession counterparties will be unable or unwilling to fulfill their obligations under the applicable agreement or arrangement, including those relating to determination and payment of tariffs. Any or all of these events could have a material adverse effect on our business, financial condition, results of operations and prospects. (ix) We provide professional engineering and other services, including engineering-procurement-construction, design build, project delivery and commissioning, in connection with water-and wastewater-related projects that involve significant risks We provide professional engineering and other services; including engineeringprocurement-construction, design-build, project delivery and commissioning; in connection with water-and wastewater-related projects that involve significant risks. In connection with these types of projects, we may commit to a specific completion date or performance standards, which may expose us to significant additional costs, including agreed upon financial damqges and reputational damage if we miss the completion date or fail to achieve the performance standards. Project performance can be affected by a number of factors beyond our control, including delays due to governmental inaction, public opposition, inability to obtain financing, inclement weather, unavailability of materials, changes in project scope, accidents, environmental hazards, labour shortages or disruptions, unexpected soil condition, natural calamities, social and political unrest and other factors. If we assume risks related to these events or other risks beyond our control, our exposure to these risks may not be insurable or may only be insurable on unacceptable terms. If these events occur, the total project costs could exceed our estimates and we could experience reduced profits or incur a loss on a project, which may reduce or eliminate overall profitability and have an adverse effect on our financial position and cash flows. 55 5. RISK FACTORS (cont’d) (x) Our engineering, procurement, construction and commissioning (“EPCC”) contracts are typically fixed-price contracts, and our compensation may be insufficient to cover unanticipated or substantial changes in costs over the life of the project Our EPCC contracts are typically fixed price contracts. We attempt to estimate all essential costs at the time of entering into the EPCC contract for a particular project, and these are reflected in the overall price that we charge our customers for the project. These cost estimates mayor may not be covered by the contracts between us and the subcontractors, suppliers, and any other parties that may become necessary to complete the project. Thus, if the cost of materials were to rise dramatically as a result of sudden increased demand, or if financing costs were to increase, our operating results could be adversely affected. In addition, we require qualified, licensed subcontractors to install many of our systems. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. In several instances in the past, we have obtained change orders that reimburse us for additional unexpected costs. Should miscalculations in planning a project or delays in execution occur, there can be no assurance that we would be successful in obtaining reimbursement, that we would achieve our expected margins or that we would not record a loss in the relevant fiscal period.
5.2 Risks relating to our Company 5.2.1 We are exposed to risks in relation to our growth and expansion strategies In line with our long-term initiative of pursuing growth and achieving sustainability, our management may engage in the active recruitment and retention of skilled talents, prudent cost control, exploration of merger and acquisition opportunities as well as the expansion of our businesses both in terms of capacity and geography. Among others, such strategic moves are intended to result in the realisation of savings, creation of efficiencies, offering of new products or services, generation of cash or income and/or reduction of risk. Such initiatives expose us to various uncertainties and risks which mayor may not have been foreseen by our management. There can be no assurance that our management will be able to achieve the desired result in a specified period through such strategies. Factors affecting the outcome of management’s strategies may range from general economic conditions, successful integration across functions, possession of the necessary technology and intellectual properties or the presence of skilled personnel. 5.2.2 The operation of our business is dependent upon certain permits, licences, approvals and land use rights We require certain permits, licenses, approvals and land use rights to operate our business and facilities. We may be required to renew these permits, licences, approvals and land use rights or to obtain new permits, licenses, approvals and land use rights. While we have not experienced any difficulty in renewing and maintaining these permits, licences, approvals and land use rights as and when required, there can be no assurance that the relevant authorities will continue to issue the required permits, licences, approvals or land use rights in the time-frame and with the duration we anticipate or at all. Under some of our licenses, a significant change in our shareholders may trigger approval requirements from relevant authorities, and there can be no assurance that these approvals will be obtained. Failure by us to renew, maintain or obtain the required permits, licences, certificates, qualifications, approvals 5. RISK FACTORS (cont’d) and land use rights may interrupt our operations or delay or prevent the implementation of projects. Any disruption in relation to required permits, licences, certificates, qualifications, approvals or land use rights may have a material adverse effect on our business, financial condition and results of operations. For further information regarding our land use rights and permits and licences, refer to Annexures A and B, respectively, of this Prospectus. 5.2.3 We are exposed to technological and information systems risks We operate in capital intensive industries, where competitive advantages in technological and information systems are vital to our competitiveness. We rely on information technology and systems in connection with the operation of our business, especially with respect to the monitoring and operation of our facilities including but not limited to the management of assets, maintenance and construction projects, supply of materials, compliance requirements, human resource functions, data backup, customer service, and billing and accounting. A loss of these systems or any disruptions associated with these systems could adversely affect our operations and have a material adverse effect on our business, financial condition and results of operations. Our information technology systems may be vulnerable to damage or interruption from: • power loss, computer system failures, and internet, telecommunications or data network failures; • operator negligence or improper operation by, or supervision of, employees; • physical and electronic loss of data;
• computer viruses;
• intentional security breaches, misappropriation of data and similar events; and
• tropical storms, fires, floods, earthquakes and other natural disasters.
The foregoing risks may result in the loss or compromise of customer, financial or operational data, disruption of billing, collections or normal field service activities, disruption of electronic monitoring and control of operational systems and delays in financial reporting and other normal management functions. Adverse effects on us may include remediation costs related to lost, stolen or compromised data, costly repairs of data processing systems, increased cyber security protection costs, adverse effects on our compliance with regulatory and environmental laws and regulations, litigation and reputational damage.
5.2.4 Our operations are primarily conducted in Malaysia, which exposes us to risks associated with Malaysia and the performance of the Malaysian economy We are incorporated in Malaysia, and historically, we have derived, and continue to derive, the majority of our revenues and operating profits from Malaysia. Our profit before tax from Malaysia accounted for 96%, 99% and 95% of our total profi(before tax for the years ended 31 December 2012,2013 and 2014, respectively, and 95.6% and 95.5% of our total profit before tax for the six months ended 30 June 2014 and 2015, respectively. Accordingly, our business is highly dependent on the state of the Malaysian economy. Demand for water and electricity is directly related to the performance of the Malaysian economy (including overall growth and income levels) and the overall levels of business activity in Malaysia. Between July 1997 and 1999, Malaysia experienced a significant financial and economic downturn that resulted in, among others, a significant depreciation of the RM and an increase in the number 5. RISK FACTORS (cont’d) and size of companies filing for corporate reorganisation and protection from their creditors. The European sovereign debt crisis, ongoing conflicts and political and economic developments in the Middle East, Ukraine and China, and general weakening of the global economy have increased the uncertainty of global economic prospects and may continue to adversely affect the Malaysian economy. For example, the Malaysian economy was affected by the global economic crisis that began in late 2007, as evidenced by the 1.5% decline in Malaysia’s GOP in 2009 and the decline in the growth rate of Malaysia’s GOP to 4.8% in 2008, compared to 6.3% in 2007. Malaysia’s GOP grew at 7.4% in 2010, 5.2% in 2011,5.6% in 2012, 4.7% in 2013, 6.0% in 2014 and 5.3% in the first six months of 2015 (Source: Department of Statistics Malaysia, Official Portal website at http://www.statistics.gov.my). We cannot assure you that the Malaysian economy will continue to grow or that Malaysia’s GOP will not decrease. Factors that may adversely affect the Malaysian economy include: • decreases in business, industrial, manufacturing or financial activities in Malaysia;
• scarcity of credit or other financing, resulting in lower demand for products and services provided by companies in Malaysia;
• exchange rate fluctuations;
• volatility of prices of commodities, such as crude oil, natural gas and palm oil;
• a prolonged period of inflation or increase in interest rates;
• changes in the Government’s taxation policies;
• a re-emergence of Severe Acute Respiratory Syndrome, avian influenza (commonly known as bird flu), swine flu or the emergence of another similar disease in Malaysia;
• natural disasters, including landslides, tropical storms, fires, droljghts, floods or similar events;
• political instability, terrorism or military conflict in Malaysia, other countries in the South East Asia region or globally; and
• other regUlatory, political or economic developments in or affecting Malaysia. The factors above and other factors beyond our control may reduce the demand for water and electricity in Malaysia and could have a material adverse effect on our business, growth prospects, financial condition, results of operations and cash flows.
5.2.5 Funding, especially on terms acceptable to us, may not be available to meet our future capital needs Our ability to implement our growth strategy, to make necessary operational capital expenditures and for refinancing maturing debt depends in significant part on our ability to obtain external financing. The availability of external financing is subject to a number of factors, including, our future results of operations, financial condition and cash flows, the condition of the Malaysian economy as well as the economies of other countries where we have operations, the markets for our products, the cost of financing and the condition of financial markets. There can be no assurance that any required additional financing, on either a short-term or a long-term basis, will be made available to us on satisfactory terms, if at all. If adequate funding is not available when needed, or is available only on unfavourable terms, it may become challenging for us to meet our capital needs, take advantage of business opportunities or respond 5. RISK FACTORS (cont’d) to competitive pressures, which could have a material and adverse effect on our business, financial condition and results of operations.
5.2.6 We depend on certain key personnel and skilled employees Our success depends on the continued contributions of our key personnel and skilled employees. The pool of qualified talents in the industries in which we operate is limited, and competition for qualified personnel is intense. Although we intend to focus on succession planning issues to reduce our dependence on such personnel, the experience and knowledge gained by our key personnel, including our directors, senior management and engineers, may be difficult to replace. There can be no assurance that the loss of any key management personnel can be avoided. Moreover, a significant increase in the wages paid by competing employers could result in a reduction of our skilled labour force, increases in the wage rates that we must pay, or both. If we are unable to retain our existing key personnel, including our Directors and senior management, or skilled employees, or attract, hire appropriate replacements and successors, our operations may be materially and adversely affected. 5.2.7 Failure to maintain good employee relations may adversely affect our operations and the success of our business Maintaining good employee relations is important for the smooth operation of our production facilities and our business as a whole. As at the LPD, approximately 45.6% of our employees were unionised, all of whom are employees of SA.IH, and in our environment business we are a party to a collective bargaining agreement with the labour union of SAJH (namely Kesatuan Pekerja-Pekerja SAJH Sdn Bhd (Bukan Eksekutif)) representing its employees. We may not be able to negotiate the terms .. and conditions of any new labour agreements to our favour, and strikes or disruptions to our operations may occur in the future due to this or other reasons. If we are unable to maintain good employee relations in the future or fail to negotiate collective bargaining agreements in the future on acceptable terms and on a timely basis, or if there are disputes relating to the interpretation or implementation of the collective bargaining agreements, our business, financial condition and results of operations may be adversely affected. For more information on our employees, refer to Section 7.11 of this Prospectus.
5.2.8 We are exposed to the credit risks of our customers We are exposed to the credit risk of our customers, and default on material payments owed to us by our customers could significantly reduce our operating cash flows and liquidity, as well as have a material adverse effect on their financial condition and results of operations. Some of our customers could also experience cash flow difficulties or become subject to liquidation which could, in turn, lead to long delays in collection of payments or write-off of accounts receivable. There is no assurance that our exposure to the risk of delayed payments from our customers or defaults in payment by our customers will not increase, or that we will not experience losses or cash flow constraints as a result. If any of these events were to occur, our financial condition, results of operations and liquidity could be materially and adversely affected. For more information on our credit risks, refer to Section 10.2.7(iii) of this Prospectus. 5.2.9 Our Promoters, whose interests may not be aligned with those of our other shareholders, will be able to exercise significant influence over our Company Upon the successful completion of the Offering, we expect our Promoters to hold
31.6% of our enlarged issued and paid-Up share capital and thus, will be able to exercise significant influence over our Company. Our Promoters, other than in
5. RISK FACTORS (cont’d) respect of certain votes regarding matters in which they are interested and must abstain from voting under the Listing Requirements, will be able to exercise influence over the election of our Directors and the approval of any corporate proposals or transactions requiring the approval of our shareholders. While we will be required to comply with the Listing Requirements with regards to the mitigation of conflicts of interest, there can be no assurance that the interests of our Promoters will be aligned with the interests of the other shareholders of our Company. 5.2.10 Exchange rate fluctuations could negatively affect our financial condition and results of operations Part of our income and expenses, particularly those relating to our water concessions in China and Thailand, are denominated in foreign currencies, while our reporting currency is in RI\II. Fluctuations in the exchange rate between the RM and foreign currencies may not have a material impact on our foreign currency denominated cash flow, but they may have an adverse impact on our reported income and expenses, as they are required to be stated in RM, as well as on financial and other covenants contained in our indebtedness that are based upon such reported financial figures.
5.2.11 Our ability to generate sufficient cash flow to fulfil our debt obligations is not assured Based on our pro forma consolidated statements of financial position as at 30 June 2015, the total borrowings of our Group as adjusted for the Pre-Offering Reorganisation (including the Transfer of Sukuk), the Offering and the Proposed Remaining RWT (Cayman) Acquisition is RM1,456.8 million. There is no assurance that our Group will be able to generate sufficient cash flow in the future to fulfil our debt obligations. Further, our Group’s indebtedness may, among others, limit our ability to obtain additional financing and require our Group to dedicate a substantial portion of our cash flow to service our current and future debt obligations, which will reduce funds available for other purposes.
5.2.12 There may be conflicts of interest between our Group and our related parties Some of our Directors and/or substantial shareholders have engaged and/or may in the future engage in other businesses or corporations which carryon a similar trade as that of our Group or which are our customers or suppliers, from which potential conflicts of interest may arise. Details are set out in Sections 9.1.4 and 9.3.5 of this Prospectus. There can be no assurance that direct or indirect competition or conflicts of interest will not arise in the future between us and our related parties in any areas of business which may have a material and adverse effect on our business, financial condition and results of operations.
5.2.13 Existing or future claims against our Company, our subsidiaries, our Directors or our key management may have an unfavourable impact on us From time to time, our Company, our subsidiaries, our Directors or our key management may be subject to litigation, investigations, claims and other legal proceedings. Refer to Section 9.6 of this Prospectus for a description of legal proceedings brought against one of our Directors in relation to a Libyan housing project and reprimands by the SC. An adverse decision in any legal proceedings could have a negative impact on our Company’s reputation or relations with our customers or other third parties. In addition, the time required to defend against any legal proceedings could divert our management’s attention from our day-to-day operations. We cannot predict with certainty the outcome of any legal proceedings in which we become involved, and it is difficult for us to estimate the possible costs to us stemming from any such matters. An unfavourable outcome in any such legal 5. RISK FACTORS (cant’d) proceedings could have a material adverse effect on our business, financial position, results of operations and cash flows. 5.2.14 As we continue to expand internationally, we are increasingly susceptible to legal, regulatory, political, economic and competitive conditions outside of Malaysia, as well as operational risks different from those that we face in Malaysia We operate internationally, particularly in China and Thailand, and expect to continue expanding our business activities outside of Malaysia. We are required to comply with foreign laws and regulations in the countries in which we operate including, but not limited to, trade laws, investment sanction laws, environmental laws, tax laws, industry laws and capital control regulations. We conduct country risk assessments and in-country risk management to ensure that we understand the legal and regulatory operating environment and the political, economic and competitive conditions of a particular country, both when commencing work in that country and on an ongoing basis. We cannot ensure, however, that local legal, regulatory, political, economic or competitive developments in the countries in which we operate will not have a material adverse effect on our business, financial condition or results of operations. We have expanded our business through investments and projects outside of Malaysia, and we may continue to make similar investments or undertake similar projects in the future. These investments subject us to different risks than those we face in growing our operations in Malaysia, including foreign legal and regulatory risks associated with cross-border transactions and operational risks related to managing transactions outside of Malaysia, such as those arising from dealing with entrenched domestic competitors in overseas markets and our relative lack of familiarity with the rules and regulations in other jurisdictions. These risks may complicate our efforts to complete these transactions. Addressing these risks may require us to devote substantial management resources, which could distract our management from overseeing our ongoing operations. Any failure by us to address these issues could delay or prevent us from completing any future overseas expansions or could make such transactions substantially more expensive to complete than we had anticipated, any of which could have a material adverse effect on our business, financial condition or results of operations. 5.2.15 We may not be able to effectively manage our future assets and joint ventures. We expect to expand our business through investments and joint ventures. Investments or joint ventures may require us to make significant cash commitments and incur substantial debt. We may not be able to effectively manage or execute our strategies with respect to our future assets and joint ventures. Our control over these assets and joint ventures will generally be subject to .the terms of applicable agreements and arrangements. In addition, our partners in these assets and joint ventures may: • have economic or business interests or goals that are inconsistent with ours;
• take actions contrary to our instructions or requests or contrary to our policies or objectives; or
• be unable or unwilling to fulfil their obligations under the applicable agreement or arrangement or to provide anticipated levels of support.
5. RISK FACTORS (cont’d) A disagreement, depending on its severity, with any of our partners could affect our ability to develop or operate the respective asset or joint venture, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
5.3 Risks relating to our Shares 5.3.1 There may be a limited market for our Shares There has been no active market for our Shares, and there can be no assurance as to the liquidity of any market that may develop for our Shares, the ability of holders to sell our Shares or the prices at which holders would be able to sell our Shares. None of us, our Promoters, the Selling Shareholder and the Joint Bookrunners have an obligation to make a market in our Shares. We have received the approval of Bursa Securities for the Admission and the listing of and quotation for our entire enlarged issued and paid-up share capital including the Offering Shares, on the Main Market of Bursa Securities, and it is expected that there will be an approximate 10 Market Day gap between closing of the Retail Offering and trading of our Shares. We cannot assure you that there will be no event or occurrence that will have an adverse impact on the securities markets, the industries in which we operate or us during this period that would adversely affect the market price of our Shares when they begin trading. Our Shares could trade at prices that may be lower than the Institutional Price or the Final Retail Price depending on many factors, including prevailing economic, political and financial conditions in Malaysia, our operating results and the markets for similar securities. In addition, the market for securities in emerging markets has been subject to disruptions that have caused intense volatility in the prices of securities similar to our Shares. There can be no assurance that the market for our Shares, if any, will not be subject to similar disruptions. Any disruption in such markets may have a material and adverse effect on the holders of our Shares.
5.3.2 Our Share price and trading volume may be volatile The market price of our Shares could be affected by numerous factors, including: • general market, political and economic conditions;
• trading liquidity of our Shares;
• changes in earnings estimates and recommendations by financial analysts;
• changes in market valuations of listed shares in general or shares of companies comparable to ours;
• changes in government policy, legislation or regulation; and
• general operational and business risks.
In addition, many of the risks described elsewhere in this Prospectus could materially and adversely affect the market price of our Shares. Furthermore, if the trading volume of our Shares is low, price fluctuations may be exacerbated. Accordingly, there can be no assurance that our Shares will not trade at prices lower than the Institutional Price or the Final Retail Price. Over the past few years, the Malaysian, regional and global equity markets have experienced significant price and volume volatility that have affected the share prices of many companies. Share prices of many companies have experienced wide fluctuations that have often been unrelated to the operating performance of those 5. RISK FACTORS (cont’d) companies. There can be no assurance that the price and trading of our Shares will not be subject to fluctuation.
5.3.3 There may be a delay or failure in trading of our Shares The occurrence of certain events may cause a delay in or termination of our Offering. These events include our inability to meet the minimum public spread requirement as determined by Bursa Securities, that is, having at least 25% of our issued and paidup Shares in the hands of at least 1,000 public shareholders holding at least 100 Shares each at the point of Offering. In such an event, investors will not receive any Offering Shares, and we and the Selling Shareholder will be jointly and severally liable to return in full, without interest, monies paid in respect of all applications for the Offering Shares. If such monies are not returned within 14 days after we and the Selling Shareholder become liable to repay it, then, pursuant to Section 243(2) of the CMSA, in addition to the liability of our Company and the Selling Shareholder, the officers of our Company and the Selling Shareholder will become jointly and severally liable to return such monies with interest at the rate of 10% per annum or such other rate as may be prescribed by the SC upon expiration of that period until full refund is made. In the event that our Offering is aborted and our Shares have been allotted to the investors, a return of monies to investors could only be achieved by way of cancellation of share capital as provided under the Act. Such cancellation requires the approval of our shareholders by special resolution in a general meeting, consent of our creditors (unless dispensation with such consent has been granted by the High Court of Malaya) and the confirmation of High Court of Malaya. There can be no assurance that such monies can be recovered within a short period of time or at all in such circumstances.
5.3.4 We may not be able to pay dividends We propose to pay dividends out of cash generated by our operations after setting aside necessary funding for our capital expenditure and working capital needs as well as after taking into account any restrictive covenants that we are obligated to observe. Refer to Section 10.7 of the Prospectus for a description of our Group’s existing credit facilities that may restrict future dividend declarations and payments. Dividend payments are not guaranteed, and our Board may decide, in its sole absolute discretion, at any time and for any reason, not to pay dividends or to pay smaller dividends than we currently propose. If we do not pay dividends, or pay dividends at levels lower than that anticipated by investors, the market price of our Shares may be negatively affected and the value of your investment in our Shares may be reduced. Further, our payment of dividends may adversely affect our ability to fund unexpected capital expenditures as well as our ability to make future interest and principal repayments on any borrowings we may have outstanding at the time. As a result, we may be required to borrow additional money or raise capital by issuing equity securities, which may not be possible or on favourable terms or at all. Further, in the event we incur new borrowings subsequent to the Offering, we may be subject to covenants restricting our ability to pay dividends. 5.3.5 We are a holding company and, as a result, are dependent on dividends from our subsidiaries and joint ventures to meet our obligations and to provide funds for payment of dividends on our Shares We are a holding company and conduct substantially all of our operations through our subsidiaries and joint ventures. Accordingly, dividends and other distributions 5. RISK FACTORS (cont’d) received from our subsidiaries and joint ventures are our principal source of income. Consequently, the amount of these dividends and distributions are an important factor in our ability to pay dividends on our Shares (to the extent declared by our Board). The ability of our subsidiaries and joint ventures to pay dividends or make other distributions to us is subject to the availability of distributable reserves and to these companies’ having sufficient funds that are not needed to fund their operations, other obligations or business plans or to maintain compliance with their debt covenants. For more information on these debt covenants, refer to Section 10.7 of this Prospectus. As we are a shareholder of our subsidiaries, our claims as a shareholder will generally rank junior to all claims of our subsidiaries’ creditors and claimants. In the event of a liquidation of a subsidiary, there may not be sufficient assets for us to recoup our investment in that subsidiary. 5.3.6 We plan to use the proceeds from the Public Issue primarily for repayment of borrowings, settlement of the Proposed Remaining RWT (Cayman) Acquisition, investment in RWT (Cayman) and for working capital, and these may not yield a favourable return The net proceeds to be received by us from the Public Issue are expected to be RM637.5 million. We may utilise the net proceeds from the Public Issue in ways that may not yield a favourable return to our shareholders. Even though at the time of the investment decision our Board believed in good faith that the investment would be beneficial to our Company and maximise returns to our shareholders, the benefits of the investment, for whatever reason, may not be realised as expected. We plan to use the net proceeds from the Public Issue primarily for repayment of borrowings, settlement of the Proposed Remaining RWT (Cayman) Acquisition, investment in RWT (Cayman) and for working capital, as described in Section 3.6 of this Prospectus. We will have discretion as to the actual application of our net proceeds, detailed further in Section 4.10 of this Prospectus, and you are providing your funds to us, upon whose jUdgment you must depend for the specific uses we will make of the net proceeds from the Public Issue. 5.3.7 The sale or the possible sale of a substantial number of our Shares in the public market following our Offering could adversely affect the price of our Shares Following the Offering, we expect 31.6% of our enlarged issued and paid-up share capital will be held by our Promoters and 54.2% of our enlarged issued and paid-up share capital will be held by public shareholders, assuming Over-allotment Option is not exercised. Following the Offering, our Shares will be tradable on the Main Market of Bursa Securities without restriction. Our Shares may also be sold outside the United States subject to the restrictions of Regulation S. We, the Promoters, the Selling Shareholder and one of the Cornerstone Investors (being, Permodalan Darul Ta’zim Sdn Bhd), have entered into lock-up arrangements as described in Section 4.6.3 of this Prospectus; in addition to these lock-ups, our Promoters and certain of our eXisting shareholders are subject to a moratorium as described in Section 12.2 of this Prospectus. However, notwithstanding our existing level of cash and cash equivalents, we may issue additional Shares after the end of the lock-up period in connection with financing activities or otherwise, and it is possible that our Promoters or any party may dispose of some or all of their Shares after the lock-up and moratorium periods pursuant to their own investment objectives. If our Promoters or any party sell or are perceived as intending to sell a substantial amount of Shares, the market price for our Shares could be adversely affected. 64 5. RISK FACTORS (cont’d) 5.3.8 Since the Retail Price and the Institutional Price are higher than our net asset value per Share, purchasers of our Shares in the Offering will experience immediate and substantial dilution and may experience further dilution if we issue additional Shares in the future Purchasers of our Shares in the Offering will pay more for their Shares on a per Share basis than our pro forma net asset value per Share as at 30 June 2015. As a result, such purchasers will experience immediate and substantial dilution of approximately RMO.85 per Share, representing the difference between the assumed Retail Price and Institutional Price of RM1.70 per Share and our pro forma net asset value per Share of RMG.85 as at 30 June 2015 (after giving effect to the Pre-Offering Reorganisation, the assumed Public Issue of 375 million Shares at the assumed Retail Price and Institutional Price of RM1.70 per Share and the Proposed Remaining RWT (Cayman) Acquisition), while our existing shareholders will experience an increase in the net asset value per Share. In order to meet our funding requirements, we may consider offering and issuing additional Shares or equity-linked securities in the future. Purchasers of our Shares in the Offering may experience further dilution in the net asset value per Share if we issue additional Shares or equity-linked securities in the future.
5.3.9 Forward-looking statements in this Prospectus may not be accurate This Prospectus contains forward-looking statements. All statements, other than statements of historical facts, included in this Prospectus, including, without limitation, those regarding our financial position, business strategies, plans and prospects of our management for future operations are forward-looking statements. Such forwardlooking statements are made based on assumptions that we believe to be reasonable as at the date hereof. Forward-looking statements can be identified by the use of forward-looking terminology such as words “may”, “will”, “would”, “could”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “aim”, “plan”, “forecast” or similar expressions and include all statements that are not historical facts. Such forwardlooking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of our Group, or industry results, to be materially different from any results or performance expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding our present and future business strategies and the environment in which we will operate in the future. Such factors include, among others, general economic and business conditions, competition, the impact of new laws and regulations affecting our industry and initiatives of the Government. 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 or our advisers that such plans and objectives will be achieved.