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 ALL THE OTHER RELEVANT INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, BEFORE MAKING AN APPLICATION FOR OUR IPO SHARES. 4.1 RISKS RELATING TO OUR GROUP The risks in our Group inclUde, without limitation, the foilowing:­4.1.1 Dependency on the quarry industry Our Group is primarily dependent on the quarry industry. Most of our revenue were generated from the quarry industry, hence our financial health is c10seiy iinked to the quarry industry. Our operations and financial performance wiil be adversely affected if there is a decline in the production volume of various quarry based materials, which could, amongst others, caused by the slowdown in the construction and buiiding demand in Maiaysia and/or adverse changes in the reguiatory environment governing the quarry industry. Notwithstanding the aforementioned possibiiities, our Group beiieves that the demand for various quarry based materiais remain positive, given the importance of the construction industry in our country. According to the IMR Report, the growth in the quarry industry is likely to be underpinned by the Malaysian Government’s initiatives such as the Tenth Malaysian Plan (“lOMP”) and the Economic Transformation Programme (“ETP”) which features a number of major property deveiopment and infrastructure projects that wouid give rise to the construction industry in Malaysia. These positive trends have a flow-over effect on the quarry machinery and equipment market as more quarrying activities wouid be needed to meet the higher demand of quarry materials, the supporting products and services of the quarry machinery and equipment market would also be in higher demand. The above positive developments wiil increase various quarrying activities and quarrying operations by quarry operators and mining operators in order to meet the increasing demand for quarry based materials for use in major property deveiopment and infrastructure projects. ThUS, the increase in quarrying activities and quarrying operations by our customers would in turn increase the demand of our quarry-based products to be distributed and suppiied to them. The increase in quarrying activities would iead to longer quarry operation hours and increasing wear and tear of the various quarry industrial products, quarry machinery and quarry equipment, as weil as its related spare parts, and quarry griils used in a quarrying process. The need to frequently repiace these products on a timeiy manner wouid thus contribute to higher demand for our products to be distributed and suppiied to our customers. Whilst the above present positive outlook for our business operations, there can be no assurance that any changes in the quarry industry wiil not have a materiai adverse effect on our operations and financiai performance. In addition, concerns of the Government on the environmental impact arising from quarry industry such as noise, air and sound poilution may lead to changes of the Government’s rules and regulations to protect our country’s natural resources. As our Group’s financiai performance is cioseiy linked to the quarry industry, there wiil be no assurance that any future changes of the Government’s rules and reguiations towards the quarry industry wiil not have material impact to our Group’s financial performance. 4. RISK FACTORS (Cont’d) 4.1.2 Dependency on experienced management and key personnel We attribute our success to the leadership and contributions of our key management team, which comprises Lau Mong Ling, Wong Sin Chin, Yeen Yoon Hin, Lim Lee Pooi and Leong Mun Wah as well as our other key management personnel. We believe that our continued and future success is therefore dependent to a significant extent on our ability to retain our key management personnel, who is responsible for formulating and implementing our business strategies, business development and daily management and operations. The loss of these key management personnel without any suitable and timely replacement, and our inability to attract or retain qualified and right personnel would have an unfavourable and material impact on our Group’s operations. We strive to minimise this risk by ensuring that we have the ability to retain our existing Directors, key management personnel as well as technical personnel. Our Group recognises the importance of attracting and retaining the key personnel and have put in place human resource strategies and developing a human resource plan that include suitable compensation packages, career development, training and development for the key personnel. Our Group have also implemented a number of incentive schemes, which includes performance bonuses, annual performance increment, sales commissions and the opportunity to participate in our IPO, which would serve to attract, motivate and retain key management. In addition, our IPO exercise will also serve as a vehicle for our Group to attract new talents and at the same time, reward our key management staff. We have also put in place various measures to ensure a smooth management succession plan. Kindly refer to Section 8.12 for the details of our management succession plan. However, there can be no assurance that the above measures will always be successful in retaining our Directors and key management personnel or in ensuring a smooth transition or management succession plan should such key persons are no longer able to serve our Group. 4.1.3 Non-exclusivity of distributorship agreements by our Principals Our Group has not entered into any written distributorship agreements between our principals, namely Junjin CSM, Nakayama, Alpha Plus and Ryoko Sangyo Corporation (the trading arm of Mitsubishi), (collectively, the “Principals”). Although the distributorship letters that we have received by our Principals (excluding Alpha Plus, which has not given us the distribution letter) are not a legally binding document for both parties to the distributorship rights, our Principals have acknowledged our Group as their supplier and distributor of their products in the stated regions, as per the distributorship rights letters given. In general, the terms of the distributorship are as per the normal distribution process made through the purchase orders, delivery orders and invoices, of which the terms are in accordance with normal industry practices, whereby our Group is given a specific numbers of days from the date of invoice (depending on our Principals) to make payment for the products ordered from these Principals. The above arrangements between both parties were made and created over the long period business relationship and neither party sees the need to enter into a distribution agreement to further strengthen this business bond between the parties. For our purchases of quarry industrial products, quarry machinery and quarry equipment as well as its related spare parts business segment, we face a risk of termination or withdrawal of our non-exclusive distributorship rights from our Principals. In the event that our non­exclusive distributorship rights is being withdrawn from our Principals for any reasons, there may be a negative impact on our Group’s quarry industrial products, quarry machinery and quarry equipment as well as its related spare parts business segment. Nevertheless, our Group has cultivated a strong and good working relationship with our Principals and the 4. RISK FACTORS ( Cont’d) brand manufactures we worked with, and has established a strong distribution network and customer base over the years. 5uch achievements are important for these brand manufacturers and Principals to further expand its market coverage and penetration into the quarrying and mining industry not only in Malaysia, but also In the 50uth East Asia region. As such, our Group do not expect to encounter significant problems in obtaining quarry Industrial products, quarry machinery, quarry equipment and reconditioned quarry machinery as well as its related spare parts from these brand manufacturers and our Principals. Our continuing strong relationship with these brand manufacturers and Principals would also enable our Group to source quality quarry industrial products, quarry machinery, and quarry equipment at competitive terms. Nonetheless there can be no assurance that this risk will not have any adverse impact to our operations and financial performance. 4.1.4 Foreign currency exchange fluctuation A significant proportion of our purchases are transacted in foreign currencies such as the U5D, whilst our revenue are mainly denominated in RM. Most of our quarry industrial products, quarry machinery, quarry equipment and its related spare parts are imported and transacted in U5D, hence our Group’s gross profit and gross profit margin are directly affected by the foreign exchange fluctuation. The following is our Group’s breakdown of purchases made during the FYE 2010, FYE 2011, FYE 2012 and FYE 2013:­FYE 2010  FYE 2011  FYE 2012  FYE 2013  RM’OOO 0/0 17,952 85 3,066 15 21,018 100  RM’OOO 0/0 20,449 80 5,089 20 25,538 100  RM’OOO 0/0 28,255 86 4,730 14 32,985 100  RM’OOO 0/0 30,355 85 5,430 15 35785 100  Purchases transacted in foreign currencies Purchases transacted in RM Total Durchases
There is a financial risk to our business if there is any adverse fluctuation in anyone or more currencies transacted by our Group. In such a situation, there is a possibility that we could incur foreign exchange losses and/or our product pricing may increase which could make us less competitive. Our Group had in the past incurred foreign exchange gain/loss due to foreign purchases transacted. The following is our Group’s foreign exchange gain/loss for the financial years under review:-Realised loss/(gain) on foreign exchange:­-5CH Corporation Group -5CHWM -5CHME Total realised 10551 (aain)  FYE 2010  FYE 2011  FYE 2012  FYE 2013  RM’OOO  RM’OOO  RM’OOO  RM’OOO  3.1 0.8 (2.2)  0.1 3.1 (004)  (2.8) (2.0) (0.3)  (400.0) (4.0) (2.0)  1.7  2.8  (5.11  (406)
For most of our larger purchases such as quarry industrial products, quarry machinery, quarry equipment and reconditioned quarry machinery, we utilise the letter of credit facility for our purchases made from our foreign suppliers, which provides us with a degree of protection. The usage of letter of credit facility helps our Group to mitigate against the risk of fluctuations in foreign exchange rate for our foreign purchases, by locking in/fixing upfront the current exchange rate as at the date of the purchases made, which will then mitigate any changes in the total cost of purchase arising from the movement in foreign exchange rate. 4. RISK FACTORS ( Cont’d) Our Group was also granted a credit term of 150 days to 180 days from our foreign quarry machinery and quarry equipment suppliers, i.e. Junjin CSM and Seishin Corporation, in FYE 2013. Our Group has previously utilised financing facilities to fully repay our foreign suppliers prior to the delivery of quarry machinery and quarry equipment. With these credit term granted from our suppliers, it gives us the flexibility to be able to time our repayment to our foreign suppliers within the credit period granted to us when the foreign exchange rates are favourable, as compared to the foreign exchange rate recorded in our books at the time of purchase made. As such, our Group managed to record a foreign exchange gain of RMOA06 million during FYE 2013. In addition, as the RM is currently a managed float since the de-pegging of the RM, this may prevent any extreme fluctuations of the RM vis-a-vis USD, and hence the effects of any foreign currency risks are less significant and mitigated to a certain extent. Our management will continue to monitor our foreign exchange exposure by keeping abreast with current political, economic and regulatory conditions of the countries that we work with, both our customers as well as suppliers. We will take the necessary steps to closely monitor foreign currency risk in terms of our exposure size and fluctuations. Our management may consider using certain hedging mechanism in the future to minimise our exchange rate exposure whenever deemed appropriate. Nevertheless, there is no assurance that any adverse fluctuations in foreign exchange rates would not have a material impact on our Group’s financial performance. 4.1.5 We are subject to the credit risks of our customers Our financial performance and position are dependent, to a certain extent, on the creditworthiness of our customers. If circumstances arise that affect our customer’s ability or willingness to pay us, we may experience payment delays or in more severe cases, we may not be able to collect payment from our customers. Accordingly, we would have to make provisions for doubtful debts, or incur debt write-offs, which may have an adverse impact on our profitability. We generally grant our customers credit terms within the range between 90 days to 180 days. We have in the past faced certain credit risk whereby our customers did not make payment within the credit period given to them. There is no assurance that we will be able to collect such debts on time, or at all. If our customers experience cash flow difficulties or a decline in their business performance, they may default in their payments to us. As a result, we may experience payment delays or in more severe cases, non-recovery of debts from our customers. We would then have to make provisions for doubtful debts, or incur debt write­offs, which may have a material adverse impact on our financial results. In mitigating our exposure to credit risk, we will assess the credit standing of the existing and prospective customers prior to accepting their orders. In addition, we regularly review our trade receivable ageing and monitor subsequent collection of debts. Our Group maintains proper follow up procedures which include sending out reminder letters, calls and field visits to recover the long outstanding debts. Although we strive to reduce this risk through our credit evaluation process, there can be no assurance that our customer’s credit risk will not have an adverse impact on our Group’s future financial performance. 4.1.6 We are dependent on obtaining adequate financing to fund our operations We are reqUired to stock up our inventories, before we are able to sell them to the end users in the quarry industry and collect the revenue from our customers. We need to ensure that our inventory level is sufficient in order for us to distribute and supply our products to our 4. RISK FACTORS (Cont’d) customers on timely basis and help our customers’ mitigate the risk of delay and ensure smooth quarrying process. We face the risk that we are unable to collect the revenue on a timely basis. In order to fund our purchases from our suppliers, we require adequate funding either from internal resources or borrowings to fund the initial purchases. If we are unable to secure adequate financing, our cash flow, operations, growth and expansion plans will be adversely affected. Normally, we are granted trade credit facilities of between 150 days to 180 days to finance our purchases from our suppliers. Although we strive to mitigate this risk through careful cash flow management and stringent credit control, there can be no assurance that this risk would not have an adverse impact on our operations and financial performance. 4.1.7 We are exposed to product liability claims and warranty claims by our customers The quarry industrial products, quarry machinery, quarry equipment and reconditioned quarry machinery, and the supply of its related spare parts as well as quarry grills that we distribute and supply to the quarry industry must conform to and perform according to our customer’s specifications. Our Group has not experienced any product liabilities claim for damages suffered from manufacturing/design defects for the products we distribute and supplied in the past. In terms of product warranty, our Group generally proVides manufacturer product warranty to its customers, which ranges from one (1) to twelve (12) months, depending on the type and condition of the products supplied. Our Group will have the recourse to claim any liabilities made by our customers from the manufacturer and brand owners of the quarry industrial products, quarry machinery and quarry equipment, should there be a defect in its structural design. It is a common practice for manufacturers and brand owners to recall these quarry industrial products, quarry machinery and quarry equipment, should there be a defect in its original design, without any liability to be incurred by our Group. As such, our Group’s risk in relation to the product liabilities claims, defects, accidents and malfunctions is mitigated. Hence, there is minimal impact to our Group arising from any of these warranty claims. In relation to the reconditioned quarry machinery, Junjin CSM sells the used hydraulic crawler drilling machinery to our Group, and it is then reconditioned by our servicing team. Our servicing team has received on-going technical training by Junjin CSM to provide technical support and maintenance services for the range of such quarry machinery and quarry equipment to our customers in the quarry industry. These reconditioned quarry machinery will then be sold and marketed to smaller quarry operators that are mainly located in East Malaysia. Our Group will not claim any product liabilities from Junjin CSM for any defects due to the original quarry machinery design defects during the warranty period. However, the warranty period provided by our Group is only for one (1) month for this reconditioned quarry machinery, which covers the major parts of the reconditioned quarry machinery which include but not limited to the engine, transmission, drive train and hydraulics. Our management does not expect this product liabilities risk to be material. In addition, our Group also distributes brand new Junjin CSM’s range of quarry machinery and quarry equipment, and as such will be aware of any potential original quarry machinery and quarry equipment defects, thus further mitigating this risk. With regards to our reconditioned quarry machinery, we are required to rectify defects in our workmanships at no additional cost to our customers if it is still within the warranty period of 4. RISK FACTORS (Cont’d) one (1) month given for the reconditioned quarry machinery. If we are required to rectify defects during the warranty period, which result in substantial costs being borne by us, the profitability of our products will be reduced. Our Group have not received any warranty claims nor encountered any product liability claims for our reconditioned quarry machinery in the past. As our Group is not the manufacturer of the reconditioned quarry machinery or the parts used in the reconditioning of these reconditioned quarry machinery, our Group will not be subjected to any product liability claims from our customers. In view of this, our Group has not made any provision for product liability claims in relation to the reconditioned quarry machinery for the financial years under review. We have provided for warranty against manufacturing defects for the quarry grills that we manufacture and supply to our customers, and we have not experienced any unresolved quarry grill claims from our customers. However, we have rectified manufacturing defects in the manufacturing of quarry grills in FYE 2010. The number of claims made for our quarry grills and the cost to rectify are as follows:­FYE 2010  FYE 2011  FYE 2012  FYE 2013  Number of warranty c1aims*  20  – – – Total cost to rectify (RM)  9,225  – – –
Note:­* The warranty claims made by customers were due to manufacturing defect detected in the quarry grills that we manufactured. Subsequently, our Group has rectified the manufacturing defect and we have undertook continuous product development and enhancement initiatives to improve our quarry grill manufacturing processes and hence, they were no further defect claims for the quarry grills. We may also be subject to product liability claims from our customers or by third parties, for the losses or damages suffered as a result of manufacturing defects. These third parties are our customers who purchase our products such as resellers, distributors and hardware dealers. End users refer to the customers who purchased our products through/from these resellers, distributors and hardware dealers. These end users may assert product liability claims on both of manufacturing and/or design defects, by making a warranty claim to these resellers, distributors and hardware dealers, which would then proceed to make a direct product liability claims to our Group. In such an event, our Group have the recourse to claim for further product liabilities from the manufacturer and brand owners of the quarry industrial products, quarry machinery and quarry equipment, should there be a defect in its structural design. However, our Group has not experienced any product liabilities claim for damages suffered from manufacturing/design defects for the products we distribute and supplied in the past from these third parties and end users. We have not purchased insurance coverage for product liability and thus not covered or compensated by insurance in respect of losses, claims and liability arising from or in connection with product liability. Should these events occur, our financial performance and position could be adversely affected. We firmly believe that with the experience and expertise of our Group and by working closely with our manufacturers, suppliers and distributors to ensure that prescribed prescription of our range of products are met, hence any defects in these products supplied is minimised. However, there is no assurance that any repair or replacement works to be carried out during the specified defects liability period will not have a material and adverse impact on our Group’s financial performance. Our Group also recognises the importance of product liability protection towards our Group’s financial performance and condition. Thus, as part of our Group’s on-going risk management practice and business expansion plans, our Group is currently studying the Viability and SUitability of an insurance coverage policy to mitigate any potential product liability we may be held liable in the future. 35 4. RISK FACTORS (Cont’d) To mitigate the risk of defects occurring, our Group seeks to ensure that all manufacturers, suppliers and distributors which we deal with are trustworthy and reliable and have a good track record of its quality. To date, our Group has not been subject to any material defect liability claims or incurred a significant adverse impact on our financial performance as a result of having to carry out rectification works. 4.1.8 Reliance on imports Most of our products are imported from Japan, Korea, China, USA and Australia. Our reliance on imports may pose a risk to our business in the event of, among others, shortage of supply, delays in shipment, imposition of duties and/or taxes, and increase in transportation costs. However, we wish to highlight that we have not faced any risk of imposition of duties and/or taxes and increase in transportation costs for our purchases in the past. A significant proportion of quarry machinery, quarry equipment and reconditioned quarry machinery for the use of the quarry industry in Malaysia are imported. As such, general problems associated with imports would most likely affect our Group’s competitors as our competitors also place reliance on imports. Our Group shall continually seek to diversify our source of purchases for our quarry industrial products and raw materials for the manufacturing of our quarry grills by seeking local partners in order to limit our dependence on the foreign market for our foreign purchases. Hence, by diversifying our source of purchases to include local suppliers, we should be able to m'[nimise our risks in the event that anyone of our existing foreign suppliers is affected by unforeseen circumstances. Our Group strives to minimise the effects of risk of disruption of supply of our products by holding adequate level of inventories of our quarry-based products to act as a buffer against any unfavourable disruption in supply, so as to minimise disruptions and to ensure timely delivery to our customers’ to mitigate the risk of delay and ensure smooth quarrying operations of our customers. Nonetheless there can be no assurance that this risk will not have any adverse impact to our operations and financial performance. 4.1.9 Shipping disruptions Our Group relies on marine transportation as a significant portion of our Group’s bUlky products are imported from overseas. In addition, the delivery of quarry machinery, quarry equipment and the reconditioned quarry machinery to East Malaysia also relies on marine transportation. Therefore, our Group is exposed to shipping disruptions that may arise as a result of weather conditions, political turmoil, pirate attacks, social unrest, port strikes, oil spills, delayed or lost shipments, which may have an adverse impact to our Group’s business. However, our Group has not faced any shipping disruptions in the past that has affected our overall operations. To mitigate the risk of shipping disruptions, the majority of our imported products are mainly done on the Cost, Insurance and Freight (“CIF”) basis, where our suppliers are responsible for paying the costs associated with the transport of the goods to the named port at destination. These costs include marine insurance in our name which limits our damages associated with shipping disruptions. Nonetheless, there can be no assurance that any shipping disruptions will not have any adverse material impact to our business operations in the future. 4.1.10 Dependency on our major suppliers, partners and Principals Our Group relies on our suppliers, partners and Principals, in which we work closely with to support our business activities and Principals, which are our suppliers who provide us 4. RISK FACTORS ( Cont’d) distribution rights to distribute and supply their quarry machinery and quarry equipment. Any severance of these relationships will have a negative impact on our Group’s ability to supply our products to our customers. Our suppliers supply our Group with the quarry industrial products and the spare parts for our quarry machinery, quarry equipment and reconditioned quarry machinery business segments, as well as the raw materials for the manufacturing of quarry grills. Most of our products are imported from Japan, Korea, China, USA and Australia. Our Group usually make purchases from our approved list of suppliers and prefers to maintain long-term business relationships with our suppliers based upon their trustworthiness and reliability in the supply of quality quarry industrial products, quarry machinery, quarry equipment and reconditioned quarry machinery as well as its related spare parts and raw materials for the manufacturing of quarry grill. The suppliers of the spare parts for the quarry machinery, quarry equipment and reconditioned quarry machinery are both local and overseas authorised suppliers that are approved by our Principals. Our business partners are engineering companies which we have established close relationship in the past to support its engineering projects and quarrying operations. Our business partners shall refer and recommend us to potential customers to purchase quarry based products such as our quarry industrial products, quarry machinery and quarry equipment and quarry grills as it can be supplied to the various stages of quarrying process. However, we wish to highlight that there is no arrangement made between our Group and our business partners for benefits in return to them for such referrals made, commission fees, recommendation fees, profit sharing arrangement, joint ventures and other form of benefits arrangement. However, we intend to continue working closely with our business partners in the near future to undertake and bid for potential engineering projects. Our Principals are quarry machinery and quarry equipment brand manufacturers, which includes Junjin CSM, Nakayama, Alpha Plus and Ryoko Sangyo Corporation, all of which act as our Principals for our range of quarry industrial products, quarry machinery and quarry equipment as well as its related spare parts. Our Group has been relatively dependent on our major suppliers namely, Seishin Corporation and Junjin CSM, which accounted for 19.97% and 38.90% respectively of our Group’s total purchases during FYE 2013. Our Group’s performance and relationship with our suppliers have been strong and positive, whereby we have received an appreciation award from Junjin CSM for our outstanding contribution to the sales volume of Junjin CSM branded quarry machinery in Malaysia. This appreciation award, which was awarded in FYE 2010 for our Group’s contribution to Junjin CSM’s growth in its overall sales volume (24 units of Junjin CSM’s hydraulic crawler drill, with a value of RM17.12 million sold between FYE 2007 to FYE 2010) in the Malaysian quarry machinery and equipment market. However, we are not aware of any awards that have been awarded by Junjin CSM to any other parties/suppliers in the past relating to the sales of the Junjin CSM’s quarry machinery and quarry equipment for the Malaysian region. Although our Group has been given the rights to distribute Nakayama and Junjin CSM brand quarry machinery and quarry equipment, we recognise the importance of not only relying on a sole supplier and will continually seek to diversify our supplier base. While our Group has endeavoured to diversify our supplier base in order to reduce the risk of an interruption in supplies, there can be no assurance that such endeavours will be successful and that any disruption in supply will not have a material adverse impact on the operations of our Group. We have been dealing with our major suppliers, partners and Principals for at least three (3) years. However, our Group seeks to mitigate this risk by continuously maintaining good relationships we have to ensure minimal disruptions on our supply chain and operations. 4. RISK FACTORS (Cont’d) 4.1.11 Debt covenants Pursuant to the credit faciiity agreements entered into by our Group with various banks or financiers, we are bound by certain positive and negative covenants which may limit our operating and financial f1exibiiity. The aforesaid covenants are of a nature which is commoniy contained in credit facility agreements in Malaysia. Any act by our Group falling within the ambit or scope of such covenants will require the consent of the relevant banks/financiers. Breach of such covenants may give rise to a right by the banks or financiers to terminate the relevant credit facility and/or enforce any security granted in relation to that credit faciiity. Our Board is aware of such covenants and will take all necessary precautions to prevent any such breach. As at the LPD, neither we nor any of our subsidiaries are in breach of any terms and conditions or covenants associated with credit arrangements or bank loans, which can materially affect our business operations or financial position. 4.1.12 Operational risks and insurance coverage We are susceptible to various operational risks such as accidents, outbreaks of fire or floods, energy crises or other natural caiamities, which may cause significant losses or damage to our goods, production facilities, warehouse and office thus disrupting and affecting our business operations. As we are aware of the adverse consequences arising from inadequate insurance coverage for the accidents and outbreaks that could disrupt our business operations, we have taken up insurances which covers fire & lightning, burglary, money losses, life & personal accidents covering our properties, furniture & fixtures, assets, employees, equipment, stocks and inventories. However, there is no assurance that this coverage is sufficient to cover all potentiai losses, and indemnify us against all possible liabiiities arising from our operations. We seek to limit the above risks through the implementation of the follOWing pians and risk­management practices:­(I) Our facilities are equipped with the basic regulatory fire-fighting equipment such as fire extinguishers. Empioyees are trained on the use of these equipment, the proper fire­fighting techniques and procedures, and evacuation drills; and
(ii) We ensure that our faciiities, warehouses and workshops meet all safety requirements stipulated in various licenses issued by the relevant authorities. We also conduct various in-house training and briefing on safety requirements, and the proper use of our quarry machinery. By complying with the safety requirements issued by the relevant authorities, and making sure our employees are adequateiy trained, we minimise the risks of industrial accidents in our faciiities.

Despite the above, there is no assurance that our insurance coverage is sufficient to offset the potential financial losses arising from pUblic liabiiity, fire, theft, and personal coverage of our insurance policies. We may be liable to the amounts claimed. If such events were to occur, our business and financial performance may be materially and adversely affected. There are aiso other risks such as natural disasters, riots, general strikes, acts of terrorism and any other risks that cannot be reasonably insured against, which may adversely affect our operations. However, we wish to highlight that our operations have not been affected by any of such events thus far. 4. RISK FACTORS (Cont’d) 4.1.13 Foreign operations risks With our Group’s operations consisting of operations in Singapore (via Italiaworld), we are subjected to foreign operations risks. These risks may include amongst others, country risk, regulatory risks and political risks which are entirely out of our Group’s control and there Is no assurance that these risks will not have any material adverse effects on our Group’s operations and profitability. In addition, as mentioned in Section 6.1S of this Prospectus, our Group is looking at expanding our operations to other countries in this region, which includes Indonesia, Thailand, Vietnam, Myanmar and cambodia, where we seek to expand our distribution and supply business. Unfavourable developments in political, economic, government control and regulatory framework of these overseas markets may affect our Group’s plans for expansion. Whilst our Group practices prudent financial risk management and efficient operating procedures, there is no assurance that adverse political and economic development, which is beyond our control, will not materially affect our Group. Our Group is also subjected to more specific risks in this context and may include among others, credit risk and market risk. Our Group will mitigate these risks by ensuring that our customer base consists of well-established and reputable companies as well as undertaking thorough due diligence prior to the commencement of any overseas ventures or entering into any overseas contracts. 4.1.14 Property not issued with Certificate of Fitness As disclosed in Section S.7.2 of this Prospectus, one of the properties rented by our Group located at Lot 7782-S, Batu 12V, Serdang Lama, 43300 Seri Kembangan, Selangor Darul Ehsan has not been issued with a certificate of Fitness by the local authorities. The said property is currently being used as our storage facility since August 2011 for our quarry machinery, quarry equipment and reconditioned quarry machinery business segment. As at 31 August 2013, we have a total of twenty-three (23) units of quarry machinery and quarry equipment (6 units of Nakayama SR series Vertical Shaft, 6 units of Junjin CSM’s hydraulic crawler drill, 4 units of Dyteco Jaw Crusher, 2 units of other quarry equipment and S units of hydraulic crawler drilling machinery) that were stored in this storage facility, with a total book value of RM7.87 million as at 31 August 2013. We wish to highlight that SCHSB currently has a tenancy agreement with the landlord of the said property, being Low Han Leong Brothers Sdn Bhd, which has expired on 31 July 2013. Our Company has since renewed the tenancy agreement with Low Han Leong Brothers Sdn Bhd for the period from 1 August 2013 to 31 July 201S. Our management has decided that it is a more cost-effective measure to remain at this property at this juncture, until the completion of our new operation facility, as we will have to incur additional costs in the form of a penalty charges for early termination of the tenancy agreement and further relocation cost incurred to relocate to a new operation site. The local council for this property, Majlis Perbandaran Subang Jaya has confirmed and recognised that there was no application for the Certificate of Fitness submitted by the developer of the said property. We have purchased fire insurance coverage for our quarry machinery, quarry equipment and reconditioned quarry machinery stored at this facility. However, if we are unable to claim for insurance damages, we shall incur losses for all of these quarry machinery, quarry equipment and reconditioned quarry machinery stored at this facility, and the amount of these losses shall be its total book value. We wish to highlight that our management is of the view that any relocation prior to the completion of our new operation facility, if necessary, will not affect our Group’s overall 4. RISK FACTORS ( Cont’d) operations materially, and we do not foresee any difficulty in relocating to an alternative site should the need arises as interim measure prior to the completion of our new operation facility. In the event the existing site shall no longer be available, our management has identified two (2) backup sites for relocating our storage facility to the following locations:­
(a) Lot 35, Jalan 0 If, Kawasan Perusahaan Cheras Jaya, 43200 Cheras, 5elangor Darul Ehsan, which is currently vacant and has been earmarked for our Group’s new operation facility. This vacant [and can be easily converted into a storage facility by erecting fencing perimeters around the site for security purposes; or
(b) A warehouse and storage facility located at Port Klang.

In mitigating this risk, 5CH5B has also provided an undertaking to relocate our storage facility to our new operation facility located at H.5.(M) 13156, PT 23677, Mukim Ceras, Tempat Cheras Jaya, Daerah Hulu Langat, Negeri 5elangor bearing the postal address of Lot 35, Jalan o 1/1, Kawasan Perusahaan Cheras Jaya, 43200 Cheras, Selangor Darul Ehsan, upon completion of construction of the said operation facility, which is expected to be within thirty six (36) months from the date of our Listing. In any event, as the said property is used only as a storage facility, thus we do not foresee any particular difficulty in relocating to an alternative site should the need arises as an interim measure prior to the completion of our new operation facility. Although there has been no action taken by the authorities on this matter, there can be no assurance that we may be allowed to continue operating from this property in the future.

4.2 RISKS RELATING TO OUR INDUSTRY 4.2.1 Competition Our Group constantly seeks to take proactive measures to mitigate competition risk, inclUding constantly reviewing our marketing strategies in response to the ever-changing market conditions and the adoption of niche marketing concepts and strategies on our sales and after-sales period services, such as packaging certain spare parts for quarry machinery, quarry equipment and reconditioned quarry machinery at lower selling price to encourage our regular customers to purchase additional units of quarry machinery and quarry equipment, as well as provid ing first interval service with complimentary spare parts for our quarry machinery and quarry equipment. These strategies have been effective in positioning our Group to meet the needs of our target markets. This enables our Group to provide our customers with value added after-sales service, which includes on site repair and maintenance services for customers who bought our quarry machinery, quarry equipment and reconditioned quarry machinery with a maximum of 24 hours response time (same day response for sites within Klang Valley. Sites outside Klang Valley will take 24 hours). We also provide continuous site visits to the quarry operation site of our customers. We constantly strive to offer quality and reasonably-priced products to meet our customer’s needs and preferences. We have more than 25 years of experience in the quarry industry, where it puts us in a better position to advise our customers on each product’s features based on our customers’ needs and preferences. In addition, the wide selection of products we carry enables our customers to have reqUired replacement parts that are to be replaced within the specified usage hours. In addition, our Group’s proven track record and our team of experienced and skilled personnel are also a major mitigating factor to this risk as it enables our Group to remain 4. RISK FACTORS ( Cont’d) competitive in the future. Our Group mitigates this risk through constant monitoring of our competitors’ movements on services provided and stocking, as well as their pricing strategies. Our Group believes that our competitive advantages and strengths will give us the edge needed to maintain or improve our market position and market share. However, there can be no assurance that we will be able to compete effectively with the existing and new competitors in the future, in light of the changing and competitive market environment. There can also be no assurance that our Group will be able to maintain or increase our market share in the future in light of competition from existing competitors and/or potential new entrants to the industry. 4.2.2 Changes in quarry machinery and quarry equipment technology The quarry machinery and equipment market which we operate in deals with quarry machinery and quarry equipment that are highly technology based and advancement in these technologies are expected to enhance quarrying operations and productions. Hence, changes in technology can slowly render old quarry machinery, quarry equipment, spare parts and expertise obsolete. As a distributor and supplier of quarry machinery, quarry equipment and reconditioned quarry machinery, our Group’s exposure to the risk of changes in the quarry machinery and quarry equipment technology are fairly low. Our Group can easily upgrade our product portfolio to fit the demand of time. As a result, we can trade any quarry machinery, quarry equipment and quarry industrial products that are available in the market with ease. In addition, as evident in our Group’s offering of reconditioned quarry machinery that are of older models, there exists a market for older model quarry machinery as smaller operations do not require the use of the latest quarry machinery and quarry equipment technology. However, there can be no assurance that any changes to the factors mentioned above will not have any material adverse impact on our Group’s financial performance and position.

4.3 RISKS RELATING TO THE INVESTMENT IN OUR SHARES 4.3.1 No prior market for our Shares Prior to our Listing, there has been no public trading for our Shares on any stock market. Accordingly, there can be no assurance that an active market for our Shares will develop and continue to develop upon our Listing or, if developed, that such a market will be sustained. Our IPO Price was determined after taking into consideration a number of factors including but not limited to our Group’s historical earnings, prospects and future plans, our financial and operating history and conditions, and the market value of our assets. There can be no assurance that our IPO Price will correspond to the price at which our Shares will be traded on the ACE Market of Bursa Securities upon or subsequent to our Listing or that an active market for our Shares will develop and continue upon or subsequent to our Listing. The price at which our Shares will trade on the ACE Market of Bursa Securities after our IPO may be influenced by a number of factors including, amongst others, the depth and liqUidity of the market for our Shares, investors’ individual perceptions of our Group, market and economic conditions. There is no assurance that the market price may not decline below our IPO Price. Hence, there can be no assurance of the ability of the shareholders or the prices at which they would be able to sell their shares. 4. RISK FACTORS (Cont’d) 4.3.2 Failure/delay in or termination/abortion of our Listing Our Listing is exposed to the risk that it may be aborted or delayed on the occurrence of any one or more of the following events:­(a) The selected investors fail to subscribe for the portion of our IPO Shares;
(b) Our Underwriter exercising its rights pursuant to the Underwriting Agreement discharging itself from their Obligations therein; and
(c) We are unable to meet the public shareholding spread requirement as determined by Bursa Securities, which is at least 25% of our enlarged issued and paid-up share capital of our Shares for which listing is sought must be held by a minimum number of 200 public shareholders holding not less than 100 Shares each upon the completion of our IPO and at the point of our Listing.

In this respect, we will exercise our best endeavour to comply with the various regulatory requirements, including, inter-alia, the public shareholding spreads requirement in paragraph (c) above for our successful Listing. However, there can be no assurance that the abovementioned factors/events will not cause a delay in or non-implementation of our Listing. Upon the occurrence of any of these events, investors will not receive any Shares and we will return in full without interest, all monies paid in respect of any application for our Shares within fourteen (14) days, failing which the provisions of sub-sections 243(2) and 243(6) of the CMSA will apply accordingly and we will be iiable to repay the monies with interest at the rate of 10.0% 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 our Listing is aborted and/or terminated, and our Shares have been allotted to the shareholders, a return of monies to all holders of our Shares could only be achieved by way of cancellation of share capital as provided under the Act and its related rules. Such cancellation requires the sanction 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 Malaysia) and the confirmation of the High Court of Malaysia. There can be no assurance that such monies can be recovered within a short period of time or at all in such circumstances. 4.3.3 Dividend payment Our Company, an investment holding company, derives its income mainly from dividends received from our subsidiaries. Hence, our ability to pay future dividend and our ability to sustain our dividend policy in the future are largely dependent on the performance of our subsidiaries. In determining the size of any dividend recommendation, we will also take into consideration a number of factors, including but not limited to our financial performance, cash flow requirements, debt servicing and financing commitments, availability of distributable reserves and tax-exempt profits/tax credits, future expansion plans, loan covenants and compliance with regulatory requirements. 4.3.4 Trading price and volume of our Shares The trading prices and volume of our Shares could be subject to fluctuations in response to various factors, some of which are not within our control and may be unrelated or disproportionate to our operating results. These factors may include variations in the results of our operations, changes in analysts’ recommendations or projections, changes in general market conditions and broad market fluctuations. 4. RISK FACTORS (Cant'(/) In addition, the performance of Bursa Securities is very much dependent on external factors such as the performance of the regional and world bourses and the inflow or outflow of foreign funds. Sentiments are also largely driven by internal factors such as economic and political conditions of the country as well as the growth potential of the various sectors of the economy. These factors invariably contribute to the volatility of trading volumes witnessed on Bursa Securities, thus adding risks to the market price of our listed shares. Nevertheless, the profitability of our Group is not dependent on the performance of Bursa Securities as the business activities of our Group have no direct correlation with the performance of securities listed on Bursa Securities.
4.4 OTHER RISKS 4.4.1 Political and economic risks The performance of our Group is correlated to the overall eoonomic and political conditions both domestically and internationally, as it is largely dependent on the performance of the quarry industry. Like all other business entities, adverse developments in political, eoonomic and regulatory oonditions in Malaysia could unfavourably affect our financial position and business prospects. These risks include, among others, risks of war, changes in eoonomic oonditions, changes in interest rates and unfavourable changes in Government policies such as introduction of new regulations, import duties and tariffs. Our Group has taken efforts to diversify our range of services and markets, improve on our marketing and distribution strategies as well as pre-empting certain regulations to mitigate any possible adverse impact on our Group from any adverse development in political, economic and regulatory authorities. Whilst we strive to continue to take effective measures such as prudent financial management and efficient operating procedures, there is no assurance that adverse political, economic and regulatory factors will not materially affect our operations, financial performance and future prospects. 4.4.2 Control by our Promoters/substantial shareholders Upon our Listing, our Promoters, as set out in Section 8.1 and Section 8.2 of this Prospectus will collectively control 69.17% of our Group’s enlarged issued and paid-up share capital. Thus, our Promoters will be able to exercise some influence over the business direction and matters governing our Group requiring the vote of our Company’s shareholders unless we are required to abstain from voting by law and/or by the relevant gUidelines or regulations. The interests of our Promoters may differ from or have conflict with the interests of other shareholders of our Company. Nevertheless, as a step towards good corporate governance, we have appointed one (1) Independent Non-Executive Chairman, three (3) Independent Non-Executive Directors and an Audit Committee have been set up to ensure that all future transactions involving related parties, if any, are entered into on arms-length basis, or normal commercial terms that are not more favourable to the related parties than those generally available to third parties and are not to the detriment of our minority shareholders. 4. RISK FACTORS ( Cont’d) 4.4.3 Forward-looking/prospective statements Certain statements in this Prospectus are based on historical data of our Group which may not be reflective of future results and others are forward-looking in nature that are based on assumptions and subject to uncertainties and contingencies which mayor may not be achievable. Whether such statements would ultimately prove to be accurate depends upon a variety of factors that may affect our businesses and operations, and such forward-looking statements also involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, plans, performances and achievements, expressed or implied, by such prospective statements. Although we believe that the expectations reflected in such future statements are reasonable at this time, there can be no assurance that such prospective statements or expectations will prove to be correct in the future. Any deviation from the expectations may have a material adverse effect on our business and financial performance. The above is not an exhaustive list of challenges we are currently facing or that may develop in the future. Additional risks whether known or unknown, may in the future have a material adverse effect on us and/or our IPO Shares. [The rest of this page is intentionally left blank]

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