Risk Factors

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 OUR FUTURE PERFORMANCE, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS BEFORE INVESTING IN OUR SHARES. If you are in any doubt as to the information contained in this section, you should consult your stockbroker, bank manager, solicitors, accountants or other professional adviser.
4.1 RISKS RELATING TO OUR BUSINESS AND INDUSTRY 4.1.1 Fluctuations in price of paper Paper is a major raw material used in our business operations. It constitutes the bulk of our direct operating costs. For the FYE 31 August 2013 and FPE 28 February 2014, paper materials contributed 43.9% and 42.8% to our total purchases of materials, services and products respectively. As paper is a commodity, it is subjected to fluctuations in world paper prices. Paper prices are affected by various factors, notably, prices of raw materials including virgin pulp and pulp from used/recycled paper as well as demand and supply conditions. In the event ofa sustained increase in the price of paper, there is a risk that we may be unable to pass the price increase to our customers or, if we do, we may not be price competitive. Under such scenarios, paper price increases may adversely affect our financial performance. The following provides some indication of prices of printing and writing paper commonly used by the print publishing industry: Between 2009 and 2013, the average price of uncoated woodfree paper (local production) increased at an AAGR of 0.6% whilst the average price of newsprint (imported) decreased at an average annual rate of9.3%. The following provides some indication on the supply conditions of the paper industry in Malaysia: Between 2009 and 2013, production quantity of uncoated woodfree paper increased at an AAGR of 4.5%; Between 2009 and 2013, the import quantity of uncoated printing and writing paper increased at an AAGR of 5.9%; and In 2010, there were 175 establishments involved in the manufacture of pulp, papers and paperboard in Malaysia. (Source: Independent Assessment of the Educational Publishing Industry Focusing on National School Curriculum in Malaysia prepared by Vital Factor) We also keep a certain level of inventory of paper for our Group’s needs for up to six (6) months, especially when paper prices are on the uptrend. In instances of a downtrend in paper prices, our Group would adopt a prudent approach by restraining from stocking up on our paper. In the event of a drop in the price of paper, we would be using relatively more expensive inventory paper compared to publishers that purchase paper on the spot market. If our competitors drop their publication prices as a result of lower paper costs, we may not be able to act promptly or, if we drop our publication prices, it may affect our profit margin. Similarly, in the event price of paper were to increase, we would be using relatively cheaper inventory paper compared to publishers that purchase paper on the spot market. Nevertheless, all publishers will be equally affected by fluctuations in the price of paper. As such, it is unlikely for anyone (1) publisher to have a sustained cost advantage over other publishers. 4. RISK FACTORS (Cont’d) Over the past four (4) FYE 31 August 2010 to 2013 as well as FPE 28 February 2014, we have not experienced any material impact on our profitability arising from fluctuations in paper prices. This is substantiated by our continued growth and positive PBT of RM8.2 million, RM12.9 ntillion, RM14.9 ntillion and RM17.7 million for FYE 31 August 2010, 2011, 2012 and 2013 respectively, as well as positive PBT of RMIO.9 million for FPE 28 February 2014. However, there is no assurance that our operating results may not be affected by fluctuations in paper prices in the future.
4.1.2 Dependency on suppliers We are dependent on Singa Trading (Malaysia) Sdn Bhd for the supply of paper as it contributed 22.4%, 10.8%, 40.0%, 29.5% and 22.6% of our total purchases of materials, services and products for FYE 31 August 2010,2011,2012 and 2013 as well as FPE 28 February 2014 respectively. Etamax Sdn Bhd, which also supplies paper to our Group, contributed 13.1% of our total purchases of materials, services and products for FPE 28 February 2014, while its contributions to our total purchases of materials, services and products for FYE 31 August 2010, 2011\ 2012 and 2013 were 5.8%, 7.3%, 2.5% and 4.1% respectively. In addition, Modern Alpine Sdn Bhd was also one of our major suppliers of paper as it contributed 10.1% and 12.7% of our total purchases of materials, services and products for FYE 31 August 20 I0 and 20II respectively. The contribution from Modem Alpine Sdn Bhd in FYE 31 August 2012 and 2013 had, however been reduced to 0.1% and 0.01% of our total purchases of materials, services and products respectively. We did not purchase any paper from Modem Alpine SdnBhd for FPE 28 February 2014. In mitigation, we have established a stable business relationship with Singa Trading (Malaysia) Sdn Bhd and Etamax Sdn Bhd for 29 years and 23 years respectively. As such, the stable relationship will provide us with the basis for continuing supply ofpaper. As paper is a commodity, it is widely available from other suppliers. Currently, we also source from several other suppliers of paper, such as Kertas Krafik Sdn Bhd and Intrapac Trading (M) Sdn Bhd. Thus, in the unlikely event that Singa Trading (Malaysia) Sdn Bhd and Etamax Sdn Bhd are unable to supply us with sufficient paper at cost competitive prices, we can promptly purchase from alternative suppliers. Although we do not foresee any difficulties in procurement of paper and have not previously experienced any material disruptions in the supply of paper, there is no assurance that we can continue to source sufficient quantity ofpaper at competitive prices.
4.1.3 Dependency on customers For the past four (4) FYE 31 August 2010, 2011, 2012 and 2013 as well as FPE 28 February 2014, we have been dependent on our major customer, namely Popular Book Co. (Malaysia) Sdn Bhd by virtue of its revenue contribution of9.3%, 9.4%,10.3%,10.3% and 8.1% of our total Group revenue respectively. In mitigation, we have been dealing with Popular Book Co. (Malaysia) Sdn Bhd for approximately 28 years. This demonstrates a stable and long-term business relationship with this customer. Furthermore, our risk of dependency on this customer is minimised by our diverse base of approximately 1,380 and 620 active customers for FYE 31 August 2013 and FPE 28 February 2014 respectively. Our customer diversity is further substantiated where our top 10 customers accounted for only 32.6% and 28.7% of our total revenue for FYE 31 August 2013 and FPE 28 February 2014 respectively. Nevertheless, there is no assurance that our dependency on this major customer will not have a sigrtificant impact on our future business performance. 4. RISK FACTORS (Cont’dj 4.1.4 Inability to fully mitigate the loss in potential financial contribution resulting from the non-renewal of licence from YGMB for past year examination papers Our licence from YGMB to reprint, distribute, market and sell past year examination papers of UPSR, PMR, STAM and SPM has not been renewed upon its expiry on 14 September 2013. In this regard, we have ceased reprinting, distributing, marketing and selling the past year examination papers with etTect from 15 September 2013. For the past four (4) FYE 31 August 2010, 2011, 2012 and 2013, this series of publication constituted 7.7%, 17.7%, 23.6% and 17.7% of our total revenue respectively. For FPE 28 February 2014, there was no revenue contribution from this series ofpublication. The non-renewal of this licensing agreement may financially affect our operational results in the future. However, our Group has taken steps to reduce the impact of the non-renewal of this agreement such as increasing our range of publications via the acquisition of the publication rights and production files for a list oftitles for National School Curriculum based educational materials from Pearson Malaysia as detailed in Section 5.1 of this Prospectus, launching our new range of publications and growing our online publishing segment. Nevertheless, there can be no assurance that we will be able to fully mitigate the financial impact from the non-renewal of the licence to reprint, distribute, market and sell past year examination papers of UPSR, PMR, STAMand SPM.
4.1.5 Revocation of exclusive distributorship of LEGO Education products We have been dealing with LEGO System A1S, which has its headquarters in Denmark, as the exclusive distributor of LEGO Education products in Malaysia and Brunei, which includes early learning products, machines and mechanisms, and robotics since 2005. Our existing agreement with LEGO System A1S is valid until 31 December 2014. For the FYE 31 August 2013 and FPE 28 February 2014, sales from LEGO Education products contributed the majority of our applied learning products which accounted for 5.4% and 4.5% of our total revenue respectively. As such, our dependency on the distribution of LEGO Education products is relatively low and a revocation of the exclusive distributorship of LEGO Education products may not have a material financial impact on our operational results. Apart from LEGO Education products, we are also appointed as a distributor of other applied learning products by Pitsco and National Instruments, both ofwhich have their headquarters in the United States. The contribution from Pitsco products for FYE 31 August 2013 were approximately RMO.3 million or 7.1 % of the total contribution of applied learning products of RM4.2 rnillion while the remaining contribution of applied learning products ofapproximately RM3.9 million or 92.9% were from LEGO Education products. Meanwhile, the contribution from Pitsco products for FPE 28 February 2014 were approximately RM45,000 or 2.3% of the total contribution of applied learning products of RM2.0 million while the remaining contribution of applied learning products of approximately RM1.9 million or 97.7% were from LEGO Education products. In addition, we can also source similar products from other manufacturers or suppliers. This would lower our dependency on the exclusive distributorship of LEGO Education products. Nevertheless, there can be no assurance that a revocation or non-renewal of our exclusive distributorship for LEGO Education products will not have a material adverse impact on our business in the future. 4. RISK FACTORS (Conl’d)
4.1.6 Dependency on successful textbook tender from the Ministry of Education We currently have agreements with the Ministry of Education to publish a range of textbooks for primary and secondary levels of education. Generally, these agreements would have an initial contract period of three (3) years. Subsequent extension/renewal period of one (I) to three (3) years will be given at the discretion of the Ministry of Education, until there is a revision to the said curriculum. These textbooks under the agreements are geographically exclusive in nature (i.e. the mandatory usage of the publisher’s textbook(s) for a certain subject and level in a particular territory or area within Malaysia). As at LPD, our agreements with the Ministry of Education for the publishing of textbooks have expiry dates ranging from July 2014 to December 2016. Publishing of textbooks is dependent on our ability in winning textbook tenders from the Ministry of Education. For the past four (4) FYE 31 August 2010, 2011, 2012 and 2013 as well as FPE 28 February 2014, our revenue generated from sales of textbooks contributed 4.5%, 11.6%, 5.6%, 9.5% and 1.3% to our total revenue respectively. As such, our dependency on textbook tenders from the Ministry of Education is relatively low. Nevertheless, in the event that we fail to sustain the number of successful textbook tenders in the future, our business performance may be somewhat affected. Our strengths and competitive advantages include our strong brand name, established track record in the educational publishing industry since our business commencement in 1985, proven track record with the Ministry of Education as we have won numerous tenders and successfully met our tender obligations, long term business relationship with the Ministry of Education since we won our fIrst textbook tender in 1987, and our fInancial strengths to promptly undertake large volume printing and distribution of textbooks to national schools in Malaysia. These strengths and competitive advantages help position us in winning future tenders to publish textbooks from the Ministry ofEducation. Nevertheless, there can be no assurance that in the future we will continue to win suffIcient number of textbook tenders and that our failure to win textbook tenders will not have a material adverse impact on our fInancial performance.
4.1.7 Absence of long term contracts with customers With the exception of the Ministry ofEducation, we do not have any long term contracts with our customers as the majority of our sales are based on purchase orders. This is a common practice in the industry. As such, the uncertainty in sales may impact on our business performance. We have a large customer base and established business relationships with our customers. For FYE 31 August 2013 and FPE 28 February 2014, we have approximately 1,380 and 620 active customers, respectively. Our top ten (10) customers for FPE 28 February 2014 have been dealing with us for at least 13 years. Although we have not previously experienced any material impact due to the absence of long term contracts, there can be no assurance that our customers will continue to purchase suffIcient quantity ofour products.

4. RISK FACTORS (Cont’d) 4.1.8 Stock returns and obsolescence We typically publish new edition ofeducational materials every year. Some ofthe educational materials that we sell may be returned to us for either a full refund or offset against future sales. Such returns are commonly resold to other customers or placed back into our inventory with all other stocks for future resale. Returns that are not resold over a period of time, as with all other stocks which cannot be sold after a period of time, will be deemed obsolete and subsequently written off and disposed as scrap. As a result, we may face the risk of holding obsolete stocks which may financially affect our operational results if the volume of obsolete stocks is large and are written offor sold at a discount. To manage and control our sales returns, we have in place an inventory management system to monitor the sales and distribution of our stocks to our customers across Malaysia. Following this, we could analyse the historical and current trends in demand for our titles, which provides us with purchasing data to enable us to anticipate demand for our titles and therefore, enable us to plan our supply, lessening the risk to overproduce and control cost over-run as well as minimising any subsequent sales returns. This is demonstrated by the fact that for the FYE 31 August 2010,2011,2012 and 2013 as well as FPE 28 February 2014, the value from credit notes issued for stock returns amounted to RM9.7 million, RMI1.6 million, RMIO.9 million, RMIO.8 million and RM7.5 million respectively as compared to gross revenue approximately RM56.7 million, RM71.5 million, RM75.7 million, RM90.7 million and RM58.2 million for FYE 31 August 2010, 2011,2012 and 2013 as well as FPE 28 February 2014 respectively. In this regard, for the FYE 31 August 2010,2011,2012 and 2013 as well as FPE 28 February 2014, actual sales returns as a percentage of the relevant financial year’s!period’s gross sales have been declining from 17.1% to 16.2%, 14.4%, 11.9% and 12.9% respectively. Over the past four (4) FYE 31 August 2010 to 2013 as well as FPE 28 February 2014, we have not experienced any material impact on our profitability arising from stock returns or obsolescence. This is substantiated by our continued growth and positive PBT of RM8.2 million, RM12.9 million, RM14.9 million and RM17.7 million for FYE 31 August 2010, 2011, 2012 and 2013 respectively, as well as positive PBT of RM1O.9 million for FPE 28 February 2014. In addition, our focus is on National School Curriculum educational materials, which would normally stay relevant for a number of years. Even if there is a change in the curriculum, we usually have sufficient notice to adjust our production accordingly. Furthermore, our educational materials such as workbooks, revision guides, assessment books and model test papers are not perishables and their storage life in our warehouse is approximately three (3) years before they are written down to zero and eventually disposed of as scrap. Our Group adopts a three (3) years policy to write down these educational materials as, based on our past experience, there is still demand for these materials even when a new edition is available in the market. Our workbooks, revision guides, assessment books and model test papers can be used independently or collectively as revision and practice materials. The older edition of these educational materials, which are in line with the National School Curriculum, are still relevant for use in schools and by students, as different editions of these educational materials generally contain different sets ofquestions and exercises. Our Group adopts product bundling and discount pricing strategies to promote older editions of these educational materials. Textbooks, on the other hand, are considered obsolete when there is a change in the National School Curriculum. 4. RISK FACTORS (Cont’d) All other books such as supplementary educational materials, general titles, readers, applied learning products and electronic dictionaries are not subject to any write-down policy as these products continue to be relevant and useful over long periods of time, notwithstanding changes in the National School Curriculum. For example, the content of our Group’s general title “Spirit of the Keris”, a selection of short stories, would continue to entertain readers at any point in time. Supplementary materials such as our Group’s educational comic that teaches about the human body would continue to be relevant and useful over long periods of time. Similarly, our Group’s applied learning products are mainly used to educate children about robotics. They will continue to be relevant and useful for a long period of time because the basic principles, mechanics and electronics of robotics do not normally change. Hence, these products will be written down in full only when there is no longer market demand for the product. As mentioned in Section 6.2.3 of this Prospectus, we have ceased the production of our electronic dictionaries and as at LPD, we have remaining stocks of electronic dictionaries carried at the cost ofRM151,250 in our inventory. Our inventory of printed access code cards are access passes to our Group’s online resources and the contents of these online resources are continuously being updated to comply with the National School Curriculum and to meet customers’ needs. As such, the printed access code cards are not subject to any obsolescence at present. However, despite our efforts, there can be no assurance that the operational and financial position of our Group will not be affected by stock returns or obsolescence andlor slow­moving stocks.
4.1.9 Seasonality Our business operations are exposed to seasonality patterns. For the last four (4) financial years between FYE 31 August 2010 and 2013, our second fmancial quarter (December to February) consistently experienced the highest quarterly sales, which contributed an average of 49.9% of total sales for each financial year. Conversely, we had consistently been recording lowest quarterly sales for our fourth financial quarter (June to August), which contributed an average of 6.2% of total sales for each financial year. Our first financial quarter (September to November) and third financial quarter (March to May) contributed an average of 25.0% and 18.9% respectively of tlle total sales for each of the last four (4) financial years between FYE 31 August 2010 and 2013. These seasonality patterns are primarily caused by the timing of the start of the academic year for national schools. As a result, our seasonal sales pattern may adversely impact on our quarterly profits and cash flow. However, these seasonality patterns have been consistent for the past four (4) financial years under review and such seasonality patterns are taken into consideration by our Group in our cash flow planning. For FYE 31 August 2014, we expect some changes in our seasonality patterns due to the abolishment of PMR to be replaced by Form 3 Assessment (PT3 -Pentaksiran Tingkatan 3) as per the circular by the Ministry of Education on 31 March 2014. In this regard, in June 2014, our Group has launched new series of model test papers based on the PT3 fo=t for lower secondary levels of education. In addition, our Group is also in the midst of publishing new series of assessment books and revision guides based on the PT3 fo=1. As such, we expect to record sales from PT3 educational materials in our fourth financial quarter (June to August) of20l4. Moving forward, we also expect to record sales ofpost-secondary educational materials in our fourth financial quarter (June to August), which coincides with the intake of post-secondary students in May for national schools. 4. RISK FACTORS (Cont’d)
4.1.10 Dependency on Executive Directors and key management personnel As in any other businesses, our Group believes that its continued success will depend, to a significant extent, upon the abilities, skills, experience, competency and continuous efforts of our existing Executive Directors and management team. Over the years, we have built a strong management and operations team that has vast experience in the educational publishing industry and knowledge ofour business as well as understanding of end-consumers’ needs and requirements. As such, the loss of any of our Executive Directors and key management personnel, without a suitable and timely replacement, may have a material adverse impact on our business and our continuing ability to compete effectively. The profiles of our Board of Directors and key management personnel are set out in Sections 8.2.1 and 8.4.1 of this Prospectus respectively. We recognise the importance of attracting and retaining our key management personnel and have put in place competitive compensation packages for their contribution towards our continuing success. In addition, we provide a healthy working environment, practise conducive workplace culture, uphold good work ethics to create a sense of belonging and foster good working relationships amongst our employees. We also have in place a management succession plan and provide training and career development opportunities for our employees. Whilst we depend on our Executive Directors and key management personnel, we are not overly dependent on anyone of them. Nonetheless, there can be no assurance that the above measures will be successful in attracting and retaining our key management personnel or ensuring a smooth transition should changes occur.
4.1.11 Infringement of intellectual property rights We have developed and used various intellectual properties in connection with our business. We are susceptible to claims by third parties to have infringed their intellectual property rights. Similarly, we are also susceptible to infringement of our intellectual property rights by third parties. In defending our legal rights and entitlements, we may be exposed to suits and counter suits by third parties. Such disputes as to the ownership of intellectual property rights and the resolution of such disputes, by litigation or otherwise, may be time consuming and costly. Any of the above could have an adverse impact on our business, operations and financial conditions. Therefore, our Group requires our authors to undertake to indemnify us for losses and damages arising out of the contents of their works which has infringed the rights of third parties. We also own the copyrights to all published versions of our titles, which are protected under the Copyright Act 1987. This is further explained in Section 6.15 of this Prospectus. In the event of third party infringing our intellectual property rights, we will undertake necessary legal actions to seek damages as well as to protect our rights. Our Group has also put in place a policy of using only licensed softwares in our business. As at LPD, neither have we filed nor have we been served with any legal process in relation to any infringement of intellectual property rights. There can be no assurance that there will be no future infringement of intellectual property rights, which may have a material adverse impact on our business and operations. 4. RISK FACTORS (Cont’d)
4.1.12 Growing trend towards online publishing Under the Household Use of the Internet Survey 20 II conducted by the Malaysian Communications and Multimedia Commission (MCMC), it was estimated that 63.5% of households used the internet for educational purposes as compared to 46.0% in 2009. With the aim of improving the quality of learning across Malaysia, the Malaysian Government has commenced the implementation of IBestariNet, which provides high speed internet access and virtual learning environment for 10,000 schools nationwide. The increased usage of online learning materials may threaten and reduce the usage of print educational materials, hence posing a risk to the industry. In line with the growing trend of learning via online medium, educational publishers that are involved in print publication should consider diversifYing into or strengthening their online publishing as a complementary business activity. There are synergies between print and online publishing as the same content and material can be used for both medium of publishing. In addition, digital publications including online publications can be more engaging and interactive, which could be useful for publishers to create brand loyalty among consumers. (Source: Independent Assessment of the Educational Publishing Industry Focusing on National School Curriculum in Malaysia prepared by Vital Factor) For the FYE 31 August 2013 and FPE 28 February 2014, print publishing of educational materials accounted for 82.6% and 92.9% of our total revenue respectively. As such, a growing trend towards online publishing may affect our business. To keep up with the developments towards on-line learning, our Group has embarked on online publishing since 20 II. Our online educational resources include cloud-based teaching and learning content, tools and platforms. Our online publishing revenue has increased by 866.7% from approximately RMO.6 million in FYE 31 August 2011 to approximately RM5.8 million in FYE 31 August 2013. For FPE 28 February 2014, we have recorded online publishing revenue of approximately RM83,000 (after netting off sales returns of approximately RMO.6 million mainly due to sales returns for our iPBS online educational products). In line with our emphasis on growing the online publishing, we will continue to develop and introduce new online educational resources in the future. This is expected to grow in the coming years, while our print publishing operations will continue to meet the existing demands in the market. In recognition of our online educational resources, we had, on 2 April 2013, successfully secured an MOU with YGMB to offer and support an online tutorial programme with self­assessment for 20,000 candidates of UPSR and SPM for 2013 in selected schools in Perak Darnl Ridzuan. This was undertaken under i-TRIM (Interaktif Tuisyen Rakyat IMalaysia), a government education initiative. This involved the supply and implementation of our online educational resources, namely i-Learn. Under the said MOU, our Group had billed YGMB on aquarterlybasisbasedona fixed schedule. The MOUwasvaliduntilend of2013. Nevertheless, despite our online efforts, there can be no assurance that the growing trends towards online publishing will not materially impact on our business.
4.1.13 Credit risk We generally grant our customers credit periods of between 60 days and 90 days. We are exposed to credit risks arising from trade receivables which may arise from events and circumstances beyond our control or events which are difficult to anticipate or detect, such as an economic downturn or deterioration. In the event of significant delay or default in payment by our customers or where our customers face significant fmancial difficulties, we will have to make allowance for impairment losses on trade receivables or write off trade receivables as bad debts, which may adversely affect our financial performance.
4. RISK FACTORS (Cont’d) For the past four (4) FYE 31 August 2010 to 2013 and FPE 28 February 2014, our Group has not written off any bad debts directly to the statement of profit or loss. However, our Group has recognised allowance for impairment losses on trade receivables of RM80,000, RM92,OOO, RM9,000, RM130,000 and RM198,000 in the statement of profit or loss for FYE 31 August 2010 to 2013 and FPE 28 February 2014 respectively. As at 31 August 2010,2011, 2012,2013 and as at 28 February 2014, the balance of the allowance for impairment losses on trade receivables in the statement of financial position amounted to approximately RMO.6 million, RMO.7 million, RMO.l million, RMO.2 million and RMO.4 million respectively. Notwithstanding the above, there is no assurance that we will not encounter significant allowance for impairment losses on trade receivables or bad debts in the future that may materially affect our financial performance. 4.1.14 Changes in National Curriculum and educational policies We are principally a publisher of educational materials focusing on primary and secondary school education based on the Malaysian National School Curriculum. In the event of a change in curriculum or educational policies such as medium of instruction, publishing business like ours may not be able to react quickly to such changes. However, changes to the Malaysian National School Curriculum are announced ahead oftime, and this would usually allow sufficient time for our Group to realign our business activities. An example of such changes is the reversion of Mathematics and Science to be taught in Bahasa Malaysia instead ofEnglish and the introduction ofKSSM to replace KBSM in 2017. A change in curriculum is generally positive for publishers, as it would encourage end-users to buy new educational materials when the older publications are made obsolete by the new curriculum. An example is the new KSSR curriculum incorporating school based assessment and national examination namely UPSR. This curriculum change may stimulate demand for additional purchases of educational materials, such as revision materials, during the academic year. Publishers with a ready pool of experienced writers and editors with the appropriate subject matter and language skills would be in a better position to quickly adapt to changes in curriculum to minimise any adverse impact, and at the same time benefit from first-mover advantage or fast­to-market. (Source: Independent Assessment of the Educational Publishing Industry Focusing on National School Curriculum in Malaysia prepared by Vital Factor). Our Group has an experienced management and editorial team with the capabilities to develop National School Curriculum based and supplementary educational materials in a timely manner to meet any new National School Curriculum requirements and educational policies. Our Group has published various National School Curriculum based educational materials, including textbooks, in Bahasa Malaysia and English for primary and secondary levels of education as well as some in Chinese for national-type schools (Chinese). With these capabilities, we are able to react quickly to changes in national curriculum and educational policies. Please refer to Section 6.l(c) of this Prospectus for further details of our Group’s. competitive advantages and key strengths. However, there can be no assurance that changes in curriculum and educational policies may not have material adverse impact on our business in the future. 4. RISK FACTORS (Cont’d)

4.1.15 Abolishment of national examinations In Malaysia, the majority of educational materials are examination oriented, targeted at students preparing to undertake national examinations such as Primary School Achievement Test (UPSR -Ujian Pencapaian Sekolah Rendah), Lower Secondary Assessment (PMR ­Penilaian Menengah Rendah) and the Malaysian Certificate of Education (SPM -Sijil Pelajaran Malaysia). As ofJanuary 2014, the PMR examination has been abolished with 2013 being the last year of centralised examinations for Form 3 students. As such, publishers may face lower demand for educational materials for PMR Based on the circular by the Ministry of Education on 31 March 2014, PMR will be replaced by Form 3 Assessment (PT3 -Pentaksiran Tingkatan 3) whereby the results of the PT3 will be used as a basis for admission of students into certain types of schools and streaming of students for upper secondary levels ofeducation. (Source: Independent Assessment of the Educational Publishing Industry Focusing on National School Curriculum in Malaysia prepared by Vital Factor) In the same announcement by the Ministry of Education, the Document of Performance Standard (DSP -Dokumen Standard Prestasi), which are guidelines used by teachers to assess and report on students’ achievements, has been simplified into a Student Learning Progress Guide (PPPM -Panduan Perkembangan Pembelajaran Murid). This guideline will form part of the School-Based Assessment (PBS) that will be effective for students in Year I, 2 and 3 under primary levels of education and Form I, 2 and 3 under lower secondary levels of edueation for the academic year of2014. In April 2014, our Group has published a new series of PBS educational materials based on pppM. Also, in June 2014, our Group has launched new series of model test papers based on the PT3 format for lower secondary levels of education. In addition, our Group is also in the midst of publishing new series of assessment books and revision guides based on the PT3 format. Our educational materials which were originally published under our PMR series remain relevant as general revision materials for teachers and students alike. Nonetheless, there can be no assurance that the abolishment of national examinations will not have a material adverse impact on our business performance.
4.1.16 Dependency on experienced and skilled editors We believe that human capital is one of our key success factors. Our editorial personnel are critical in maintaining the quality of our publications as well as our brand and market reputation. We must continue to attract and retain experienced and skilled editorial personnel who have a strong command ofthe subject areas and relevant experience in editing. The lack of experienced and skilled editors may lead to a deterioration of quality of our publications and may impact on our brand names as well as market reputation, thus adversely affecting our business and financial performance. We provide competitive remuneration packages to attract and retain experienced and skilled editors. In addition, we strive to maintain the quality of our staff by providing continuous training and development opportunities. Please refer to Section 8.9.2 ofthis Prospectus for our Group’s training and development. Despite our efforts, there can be no assurance that we will continuously be able to maintain a sufficient pool of editors and it will not have a material impact on our business. 4. RISK FACTORS (Cont’d)
4.1.17 Political, economic and regnlatory nncertainties Any adverse development in the political, economic and regulatory environment in Malaysia could materially and adversely affect the financial and operational conditions as well as the overall profitability ofour Group. We will be affected by any changes in the political leadership and/or regulatory and government policies. Such political and/or regulatory changes or uncertainties include (but are not limited to) introduction of new laws and regulations which impose and/or increase restrictions on the publishing industry, political or social development, risk of war, expropriation, nationalisation and renegotiation or nullification ofexisting contracts. Any widespread and/or prolonged economic slowdown would affect consumer and business confidence, and subsequently their tendency to spend. The uncertainty over the global economies, particularly resulting from the euro zone debt problem, may also impact on the local economy. This may cause consumers to be more cautious in their spending patterns, thus leading to a slowdown in consumer spending. However, the demand for educational materials like textbooks is generally more resilient to an economic slowdown as these form part of the requirements of the national school curriculum. In addition, consumers are generally less sensitive to changes in economic conditions when considering expenditure for educational purposes. This is substantiated by the fact that while the Malaysian economy experienced a 1.5% decline in real gross domestic product in 2009, real household final consumption on education increased by 11.5% in the same year. (Source: Independent Assessment of the Educational Publishing Industry Focusing on National School Curriculum in Malaysia prepared by Vital Factor) We do not possess any printing press machines or publish periodicals, the two (2) matters requiring approvals from the Ministry of Home Affairs under the Printing Presses and Publications Act 1984. We outsource the printing of all our materials. Therefore, we do not need any licence for printing press or permit for periodicals save for the licence to participate in e-perolehan from the Ministry of Finance as disclosed in Section 6.14.1 ofthis Prospectus. Whilst we have not experienced any severe restrictions on the conduct ofour bu.~iness, we will continue to take precautionary measures such as efficient operation procedures and take steps to comply with any new laws and regulations imposed. There is no assurance that any adverse development or change in the political, economic and regulatory environment would not have any adverse impact on our business and fmancial performance.
4.1.18 Inadequate insurance coverage We maintain general insurance policies where practicable, covering both our assets and employees in line with general business practices in the publishing indUStry, with policy specifications and insured limits which we believe are reasonable. However, in the event that the amount of such claims exceed the coverage of general insurance policies which we have taken up, we may be liable for shortfalls in the amounts claimed. In such events, our business and financial position will be adversely affected. Our Directors have confirmed that there has not been any claim which has exceeded the coverage of our general insurance policies in the past. 4. RISK FACTORS (Cont’d) In ensuring such risks are kept to a minimum level, we review and ensure adequate coverage for our assets on a continuous basis. We ensure the continuity of our insurance by renewing the insurance policies annually. The total amount insured is RM15.6 million on our motor vehicles, property, plant and equipment representing approximately 89.6% of the NBV of our property, plant and equipment (including motor vehicles, office equipment and buildings but excluding the NBV for land amounting to RMIO.2 million) as at 28 February 2014. Our Group has also insured up to RMIO.O million of our inventories representing approximately 70.9% of our Group’s inventories (excluding papers amounting to RM1.8 million held in the premises of our paper suppliers and printers) as at 28 February 2014. Although we have taken necessary steps to adequately insure our assets, there can be no assurance that our insurance coverage would be adequate to compensate the replacement costs of the assets or any consequential losses arising thereof.
4.1.19 Foreign exchange transaction risk Some of our sales as well as our purchases of applied learning products are transacted in foreign currencies. As such, we are exposed to foreign exchange transaction risk. An unfavourable foreign exchange movement against the RM may have an impact on our profitability. For FYE 31 August 2013 and FPE 28 February 2014, 5.5% and 9.3% of our purchases of materials, services and products were transacted in USD respectively. In addition, 0.5% of our revenue for FYE 31 August 2013 was transacted in USD and Brunei Dollar. There was no revenue transacted in USD for FPE 28 February 2014, whilst we have recorded minimal negative revenue in Brunei Dollar in the financial period under review as a result of sales return from the Brunei market. Due to the transactions in foreign currencies being not material, fluctuations in foreign exchange rates will not have a material impact on our purchases as well as revenue. For FYE 31 August 2013 and FPE 28 February 2014, we did not experience any material losses arising from foreign exchange transactions. Please refer to Section 12.2.10 of this Prospectus for further information on the impact of foreign exchange fluctuations on our financial performance. Nevertheless, there can be no assurance that any foreign currency fluctuations in the future will not adversely affect our financial performance.
4.1.20 Unauthorised use of our brand names We place great emphasis on the reputation of our brand names, namely ‘Sasbadi’, ‘Sasbadi Online’, ‘Maya Press’, ‘Orbit Buku’, ‘Sasbadi Learning’ and ‘MBP Publications’, as negative connotations could have an adverse impact on the sales of our products. In order to prevent the unauthorised use ofour brand names, we have applied to register the said brand names and related logos with MyIPO. The registrations of our trademarks are in various stages of the approval and registration process. Please refer to Section 6.15 of this Prospectus for our Group’s intellectual property rights. Nonetheless, even when the brand names have been registered, there can be no assurance that there will not be unauthorised third party copying, using or exploiting our brand names and logos. 4. RISK FACTORS (Cont’d)
4.1.21 Competition We face competition from eXlstmg competitors as well as potential new entrants m the educational publishing industry. The barriers to entry into the educational publishing industry are relatively low based on capital requirements as most functions within the process of transfonning a manuscript into the end-product may be outsourced to third parties. The entry cost for online publishing is even lower as there are no prmtmg costs involved compared to print publishing. In addition, distribution costs for online publishing are minimal as it is made available through the internet. As such, competition within the educational publishing industry may increase. However, while set-up costs may be low, operating costs are considerably higher. This is due to the need to pay professional staff as well as to extend credit terms to resellers and retailers. In addition, there is a long lead time between obtaining manuscripts and transfonning them into final products suitable for sales to consumers. All these factors would pose barriers to entry for new entrants. Furthermore, a more established publisher with a strong brand name, a wide distribution network whilst enjoying economies of scale, would be in a stronger position to compete in the market. (Source: Independent Assessment of the Educational Publishing Industry Focusing on National School Curriculum in Malaysia prepared by Vital Factor) We leverage on our competitive strengths such as our established track record, brand awareness, extensive distribution network, large customer base, diversity in product range, in­house content development, availability of large range of publications, economies of scale as well as our experienced management and editorial personnel as set out in Section 6.1 (c) of this Prospectus. While we continuously strive to maintain and adopt appropriate strategies to remain competitive, there can be no assurance that a change in the competitive environment would not have a material adverse impact on our business and financial performance.
4.1.22 Utilisation of external writers in creating publications Our Group utilises contents developed in-house as well as external writers for our publications. It is common for us to acquire manuscripts from experienced lecturers, teachers and examiners as well as commissioning external writers for our National School Curriculum based and supplementary educational materials. For the FYE 31 August 2010,2011,2012 and 2013 as well as FPE 28 February 2014, 44.5%, 35.7%, 30.9%, 22.3% and 29.1% respectively of the new titles published by our Group were developed based on manuscripts of external writers. As such, we may face competition in engaging and retaining external writers from being sourced by our competitors. Nevertheless, our Group has an experienced in-house editorial team that is capable of developing contents for publication. This enables us to develop and write our own publications without relying solely on external writers and tlIird party manuscripts. As at LPD, our Group has 64 personnel in our editorial team including managerial personnel. Of these, approximately 53.1% of our editorial team members have between 7 and 26 years of experience as writers for publications. For the FYE 31 August 2010,2011,2012 and 2013 as well as FPE 28 February 2014, the remaining 55.5%, 64.3%, 69.1%, 77.7% and 70.9% respectively, were for new titles developed based on in-house created contents and in combination with third parties. 4. RISK FACTORS (Cont’d) Furthermore, the external writers shall also not write or edit a competitive work for any other publishers and shall not publish such work himself for so long as their work is still in current publication by our Group. Our Group also has an advantage in sourcing for quality external writers due to, amongst others, our established brand name and the ability to market our products through a wide distribution network. Although we have not experienced difficulties in creating publications due to shortage of contents or manuscripts, there is no assurance that we can continue to create and source sufficient contents and manuscripts for our publications. Notwithstanding the ahove measures, steps and efforts undertaken hy our Group to mitigate the ahovementioned risks relating to our husiness and industry, there can he no assurance and guarantee that we can successfully manage all the risks including our ahility to compete successfully in the future and our ahility to ohtain sufficient supply of materials from our regular suppliers. Further, there is no assurance that our customers will continue to place orders with US in the future and at the same levels as they had previously, or our ahility to attract and to retain our key management personnel with similar level of experience and capahilities. Failure to do so could have a material and adverse impact on our husiness, financial condition and the results of our operations. THERESTOF THISPAGEHASBEENINTENTIONALLYLEFTBLANK

 

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