5. RISK FACTORS 5. RISK FACTORS Before investing in our Shares, you should pay particular attention to the fact that we, and, to a large extent, our business and operations, are governed by, or dependent on, the legal, regulatory and business environment in Malaysia, whether presently or in the future, many of which are outside our control. Prior to making an investment decision, you should carefully consider, along with the other matters in this Prospectus, the risks and investment considerations as set out below. You should note that the following list is not an exhaustive list of all the risks that we face or risks that may develop in the future. These and other risks, whether known or unknown, may have a material adverse effect on us or our Shares. Risks relating to our business 5.1.1 Our growth prospects may be limited if we encounter difficulties executing our future plans and strategies Our future plans and strategies depend on, among others: (i) our ability to maintain and grow the operations and financial performance of our existing stores;
(ii) our ability to identify suitable sites for new stores and successfully negotiate tenancy agreements for these sites on terms acceptable to us;
(iii) our ability to attract, train and retain talented personnel in sufficient numbers for our expanded operations; (iv) our ability to adapt and grow our operational and management systems, including our IT systems, to support an expanded network; and
(v) our ability to effectively control and manage our costs in our expanded network, in particular, purchase costs, and expenses related to rent, logistics, human resources and marketing.
If we fail to achieve any of the above, we may not be able to achieve our future plans and strategies objectives. Our ability to manage our future growth will also depend on our ability to continue to successfully implement and improve our operational, financial and management systems in the evolving competitive markets. Failure to effectively execute our future plans and strategies may result in limited growth and reduced profitability which could have a material adverse effect on our business, prospects, financial condition and results of operations.
5.1.2 Our success depends substantially on the value of our brand We regard the ‘7-Eleven” brand name and related logos, trademarks and other intellectual property, which we license from 7-Eleven USA as having significant value and as being an important factor in our marketing and success. Our success depends largely on our ability to maintain and enhance the value of our brand and our customers’ connection to our brand. Isolated incidents may severely damage brand value, particularly if the incidents draw considerable negative publicity. Such incidents may relate to the way we manage our relationship with our franchisees, our growth strategies or the ordinary course of our or our franchisees’, business. Other incidents may also arise from events that are, or may be, beyond our control and may damage our brand, such as actions taken (or not taken) by 7-Eleven USA or other “7-Eleven” franchisees outside of Malaysia, or by one or more of our franchisees or their employees. Consumer’s demand for our products and our brands’ value could diminish significantly if any such incidents or other matters erode consumer confidence in our products, which could have a material adverse effect on our business, prospects, financial condition and results of operations. 5. RISK FACTORS (Cont’d) If we are no longer able to license the “7-Eleven” name and related logos, trademarks and other intellectual property from 7-Eleven USA, we would lose our right to use the “7-Eleven” brand, which could reduce customer demand for our products and services and have a material adverse effect on our business, prospects, financial condition and results of operations. Please refer to Section 5.1.3 of this Prospectus for further information. Moreover, there is no assurance that third parties or competitors will not infringe the brand name licensed to us. To establish and protect this intellectual property, we rely on a combination of our contract with 7-Eleven USA and 7-Eleven USA’s registered trademarks and licenses. The measures we take to protect our intellectual property rights may prove inadequate to prevent misappropriation of our intellectual property. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others, which could incur substantial costs, and there is no guarantee that we would prevail in any such litigation. Litigation of this type may result in substantial costs and diversion of resources and may result in counterclaims or other claims against us, and could have a material adverse effect on our business, prospects, financial condition and results of operations. 5.1.3 We face risks in relation to our license agreement with 7-Eleven USA Our business of operating convenience stores under the “7-Eleven” brand in Malaysia is sUbject to the terms and conditions of the ALA. Pursuant to the ALA, 7-Eleven USA grants us the right to establish and operate “7-Eleven” convenience stores and to grant sub-franchises to franchisees who will establish and operate ”7-Eleven” convenience stores solely in Malaysia and Brunei Darussalam. The ALA is valid until 30 November 2033 and is renewable at our option for additional terms of 10 years each SUbject to, among others, material compliance with the terms of the ALA and, except in limited circumstances, the signing of 7-Eleven USA’s then-current form of renewal area license agreement, which shall supersede the ALA in all respects. For certain particularly egregious breaches of the ALA, including, without limitation, breach of the covenants regarding protection of trade secrets and business information, maintenance of false books or records, certain fraudulent and criminal acts, material impairment of the goodwill associated with the “7-Eleven” brand, commencement of voluntary bankruptcy or other insolvency proceedings, breach of the covenant not to compete, repeated defaults of the ALA (even if cured), and any attempted transfer by us or our equity holders of our rights and obligations under the ALA, all or a substantial portion of our assets or direct or indirect ownership in us or our controlling principals without 7-Eleven USA’s prior written consent (unless such transfer does not result in a change of control). 7-Eleven USA has the right to terminate the ALA without any applicable cure period. Moreover, 7-Eleven USA, in some of the instances above, has the right to terminate the ALA for breaches by our controlling principals, whom are our direct and indirect controlling shareholders and over whom we have no control. There can be no assurance that we will be able to renew the ALA and there can be no assurance that the ALA will not be revoked or terminated prior to its expiry (during the original term or any renewal period), which would prohibit us from carrying out our business operations using the “7-Eleven” brand. If we were unable to operate under the “7-Eleven” brand, our business, prospects, financial condition and results of operations would be adversely affected. In addition, under the ALA we are required to seek the consent of 7-Eleven USA to carry out various corporate activities, including the use of the “7-Eleven” name. We cannot guarantee that this consent will be granted, which may restrict our business activities and adversely affect our business, prospects, financial condition and results of operations. 44 5. RISK FACTORS (Cont’d) Moreover, upon non-renewal or termination of the ALA, we may be required to pay a non-renewal fee of up to six times the average royalty that we have paid to 7-Eleven USA over the three financial years prior to non-renewal, and 7-Eleven USA may have the right to purchase sUbstantially all or all of our assets. Similarly, upon any prospective sale of a substantial portion of our assets or change of control in our Company, such as a potential takeover of our Company, whether in a hostile or a friendly bid, or a disposal by one of our controlling principals in their direct or indirect shareholding in us (unless such disposal does not result in a change of control), 7Eleven USA may have a right of first refusal to acquire our assets or such shareholding interests, which may deter a potential sale of assets or takeover of our Company even if it were favourable to our shareholders. In addition, the validity and enforceability of the ALA is governed by the laws of the State of Texas, US, which may differ from the laws of Malaysia. Please refer to Section 7.26 of this Prospectus for further information on the salient terms of the ALA. 7-Eleven USA entered into a restructuring and IPO consent agreement with our Company, 7-Eleven Malaysia, BRetail, PMSB, IUB, Vista Meranti, HQZ and TSVT on 11 September 2013, as varied by the first amendment to the said restructuring and IPO consent agreement on 23 December 2013, in relation to, among others, the consent granted by 7-Eleven USA to our Company to undertake the Pre-I PO Reorganisation, our IPO and Listing as well as waiving its right of first refusal to acquire our IPO Shares and consenting to our granting of an area sub-licence to our wholly-owned indirect subsidiary, CSSSB, to operate ”7-Eleven” convenience stores in Sabah (“Second Restructure and IPO Consent Agreement”). Conditions under the Second Restructure and IPO Consent Agreement include the following: (i) so long as our Shares are registered and traded on any pUblic stock exchange, TSVT must either:
(a) maintain, directly or indirectly, at least 35% plus one Share shareholding in our Company and to appoint or elect the majority of the Board of 7-Eleven Malaysia and to otherwise retain full, complete and independent control over a majority of the Board of 7Eleven Malaysia (“7-Eleven Malaysia Board Control”); or
(b) maintain, directly or indirectly, more than 50% shareholding in our Company (in order to ensure that TSVT meets the requirement of the 7-Eleven Malaysia Board Control);
(ii) we must utilise the proceeds from our Public Issue to retire the Note in full and to repay our indebtedness to 7-Eleven Malaysia and 7-Eleven Malaysia must utilise the proceeds that it receives in the manner as set out in Section
4.10 of this Prospectus; and (iii) BRetail must utilise part of the proceeds received from the Offer for Sale towards part repayment of certain indebtedness of our controlling principal. 5. RISK FACTORS (Cont’d) Furthermore, under the Second Restructure and IPO Consent Agreement, 7-Eleven USA waives its right of first refusal in the ALA to any Shares placed in the public float as a result of our IPO, though not with respect to any Shares owned, directly or indirectly, by any of our controlling principals (whether or not they were a controlling principal at the time of our IPO) unless sUbsequent to such sale, TSVT continues to have, directly or indirectly, more than 35% shareholding in our Company. Any breach by our Company, 7-Eleven Malaysia or our controlling principals of the terms of the Second Restructure and IPO Consent Agreement gives 7-Eleven USA the right, after applicable cure periods, to terminate the ALA and if it does terminate the ALA, then 7Eleven USA may increase royalty rates under the ALA to the then-current royalty rate for new “7-Eleven” area licensees and/or require us to execute 7-Eleven USA’s thencurrent form of area license agreement, which agreement shall supersede the ALA in all respects, and the terms of which may materially differ from the terms of the ALA. We do not control our controlling shareholders, and therefore cannot guarantee that they will not breach the terms of the Second Restructure and IPO Consent Agreement, which could materially and adversely affect our business, prospects, financial condition and results of operations. 5.1.4 A deterioration in our relationship with 7-Eleven USA could have an adverse effect on our operational efficiency and results of operations We have a strong working relationship with 7-Eleven USA, through which we receive training, merchandising, design and other operational support from them, giving us the benefit of their global knowledge on the operation of convenience stores, logistics, merchandising and the “7-Eleven” brand. 7-Eleven USA is not contractually obligated to provide us with a continuing level of support, and if operational support from 7Eleven USA were to cease for any reason, we would lose access to a range of assistance and the benefit of the knowledge and expertise that 7-Eleven USA provides us, which may have a material adverse affect on our ability to run our operations efficiently, and to meet the needs of our customers. 5.1.5 Our future plans and strategies may expose us to business and operational risks As part of our future plans and strategies, we plan to expand our network of stores, refurbish many of our stores and build a new CDC. Our future plans and strategies may result in us facing various business and operational risks, which may include insufficient cash flow, insufficient funding capability and an inability to hire suitable workforce. Additionally, new “7-Eleven” stores may not be immediately profitable, or profitable at all, as it typically takes up to three years for our stores to reach maturity. As a result, our establishment of new stores may lower our profit margins until the stores reach maturity, and there is no guarantee that they will do so. Moreover, by simultaneously undertaking these future plans and strategies, we may put additional strain on our operational and financial resources, as well as on our management, potentially reducing the focus that they can give to overseeing our day-to-day business. We cannot be certain that we will successfully develop and implement our future plans and strategies or that we will successfully address the risks to which our plans will expose us. In the event that we do not successfully address these risks, our business, prospects, financial condition and results of operations could be materially and adversely affected. 5. RISK FACTORS (Cont’d) 5.1.6 Our business has low margins and is particularly susceptible to increases in operating costs and expenses As a convenience store operator, we typically experience low margins as we have a low mark-up on products. The following table sets forth our profit before tax margin and profit after tax margin for the periods indicated: Year ended 31 December 2010 2011 2012 2013 Profit before tax margin (%)(1) 3.1 2.8 3.6 4.4 Profit after tax margin (°fcfil 2.1 2.1 2.6 3.1 Notes: (1) Computed based on profit before tax over revenue.
(2) Computed based on profit after tax over revenue.
Due to our low margins, our results of operations are particularly susceptible to increase in our operating costs and expenses, such as increase in labour costs, rental fees, real estate purchase costs, administrative overheads and merchandise costs. If we are not able to pass on the increased costs to our customers, this may adversely affect our business, prospects, financial condition and results of operations. 5.1.7 We depend on our ability to secure attractive locations at commercially acceptable prices As at the LPD, we operate 1,562 of our stores on tenanted properties and we own the remaining 21 properties. The performance of our stores depends largely on our ability to secure attractive locations, which are typically those with high foot traffic. Such locations are in high demand in Malaysia generally, and in urban centres such as Kuala Lumpur and Selangor in particular. A continued increase in property prices in Malaysia will increase the costs that we incur in securing locations for our stores and may increase our costs associated with locations that we already operate. Moreover, as demand for retail locations in Malaysia increases, we cannot assure you that we will succeed in securing attractive locations (for those stores that we tenant, we typically have tenancies that carry three-year terms and are renewable at our option for up to four additional three-year terms, subject to rental price increases depending on prevailing market conditions and agreed maximum increases). There is no guarantee that we will be able to secure long-term tenancies for our new stores, nor that we will be able to negotiate tenancies and renewal terms that are commercially acceptable to us. If we are unable to renew a tenancy at the end of its term, we may be forced to relocate to a different, potentially less attractive, location, or the rent we pay may increase SUbstantially. Any increase in property prices in Malaysia generally or prices of retail locations, and any difficulty in securing new locations or renewing tenancies on our existing locations on commercially acceptable terms, could have a material adverse effect on our business, financial condition or results of operations. 5. RISK FACTORS (Cont’d) 5.1.8 Any disruption in the supply of products from our key suppliers or increase in the prices of products from these suppliers may have a material adverse effect on our business, results of operations and financial condition A few key suppliers provide us a substantial portion of the products that we sell at our stores. Our three largest suppliers account for more than 40% of our total purchases by value and hence our product strategy depends on our ability to maintain good relationships with these and our other key suppliers. If there is any delay or interruption in our suppliers’ ability to provide us with necessary products, or if our supplier ceases to operate, we may be required to seek alternative supply sources. Similarly, should we terminate a contract with any of these key suppliers, we may face difficulties sourcing a similar quality and quantity of products from other suppliers at costs acceptable to us. Any delay or interruption in receiving products could impair our ability to supply products to our stores. Furthermore, we typically place orders through individual purchase orders, rather than dedicated supply contracts, and may be subject to price fluctuations or supply shortages based on changes in our suppliers’ businesses, cost structures or other factors. Our profit margins and/or price competitiveness may be affected if our key suppliers increase the prices of their products. Any disruption in the supply of products from these suppliers or increase in the prices of products from these suppliers for any reason may have a material adverse effect on our business, results of operations and financial condition. In addition, certain of our key suppliers for cigarettes, soft drinks and pastries contribute significantly to our other income through display incentives. If these suppliers cease to offer us such display incentives, it may reduce the amount of other income we receive, and thus have a material adverse effect on our results of operations.
5.1.9 We rely on a single CDC that manages supplies for a substantial portion of the products we sell Our distribution network is substantially concentrated around a single CDC, in Shah Alam, Selangor, through which approximately 53% of our products by volume are distributed to our stores in Peninsular Malaysia and we intend to construct a new CDC which we expect to distribute up to approximately 75% of our products by volume in Peninsular Malaysia. Any significant disruption in the operation of the facility due to natural disasters or events such as fire, accidents, prolonged power outages, system failures or other unforeseen causes, could devalue or damage a significant portion of our inventory, which could adversely affect our product distribution and sales until such time as we can secure an alternative facility. In such event, we cannot guarantee that our suppliers could deliver straight to our stores all of the products that currently flow through our CDC or that they could do so in a timely manner and at their current cost, which may threaten our ability to restock our stores. Direct delivery to our stores may also not allow us to take advantage of certain supplier rebates for shipping to a centralised location. If we encounter difficulties with our CDC or other problems or disasters arise, we cannot ensure that critical systems and operations will be restored in a timely manner or at all, which could result in an inability for us to restock our stores in a timely manner. Any disruptions or disasters at our CDC could have a material adverse effect on our business, prospects, financial condition and results of operations. 5. RISK FACTORS (Cont’d) 5.1.10 Shortages or unavailability of products demanded by customers due to disruptions to our supply chain may materially and adversely affect our business and competitiveness We seek to maintain an optimal level of inventory of our products at our stores to control inventory carrying costs and more efficiently deploy working capital. Any failure to do so could materially and adversely affect our business and profitability, as well as damage our reputation. Natural disasters such as earthquakes, extreme climatic or weather conditions such as floods or droughts, or natural conditions such as crop disease, pests or soil erosion, may adversely affect the supply of fresh products and local transportation. Should our supply of products be disrupted, we may not be able to procure an alternate source of supply of products in time to meet the demands of our customers, or we may not be able to procure products of equal quality and quantity on equally competitive terms, if at all. Such disruption to supply may materially and adversely affect our business, profitability and competitiveness. In addition, disruptions to the delivery of products to our CDC and stores may occur for reasons such as poor handling, transportation bottlenecks or labour strikes. Further, we rely on third-party logistics providers whom we do not directly control to deliver our products from our CDC to our stores. Any such disruptions could lead to delayed or lost deliveries or damaged products and disrupt the supply of these products to us, materially and adversely affecting our business, profitability and competitiveness. We cannot assure you that we will not incur losses nor that there will not be material write-offs due to disruptions to our supply chain, which may result in increased costs or reduced sales and may materially and adversely affect our competitiveness, financial condition and results of operations.
5.1.11 Our business depends on our ability to determine the appropriate mix of products to suit customers’ preferences Our success depends in part on our ability to determine the appropriate mix of products that both meet our standards for quality and appeal to our customers’ preferences. Failure to source and market such products, or to accurately forecast changing customer preferences, could lead to a decrease in the number of customer transactions at our stores and a decrease in the amount customers spend when they visit these stores. If our management is unable to identify and adapt to such changes in customers’ preferences quickly, customers’ demand for our products may decline, which could have a material adverse effect on our business, prospects, financial condition and results of operations. 5. RISK FACTORS (Cont’d)
5.1.12 The sale of consumer products exposes us to the risk of adverse publicity Our sales include perishable food products and food services. Preparation, packaging, transportation, storage and sale of perishable food products and non-food products entail the inherent risk of product contamination, deterioration or defect, which could potentially lead to product recalls, liability claims and adverse publicity. Food and non-food products may contain contaminants that could, in certain cases, cause illness, injury or death. Any delivery or sale of contaminated, deteriorated or defective products may be grounds for product liability claims or product recalls. The risks of negative press, product liability claims or product recall obligations are particularly relevant in the context of our sales of freshly prepared food products, a business we intend to grow. We could incur adverse publicity through any such claims, or associations with such claims, which could have an adverse effect on our business, prospects, financial condition and results of operations. 5.1.13 The termination of our partnership with MOL may have an impact on our commission revenue and profitability We earn commission revenue from our in-store services, on which we effectively earn 100% gross margin as there are negligible cost of sales associated with reloads, which form the majority of our in-store services. Increased commission revenue has been largely responsible for driving the increase in our gross profit margins since the start of 2010 and is also expected to continue to be an important part of our growth strategy going forward. We derive a substantial portion of our commission revenue through our strategic partnership with MOL, a payment service provider that facilitates electronic distribution of prepaid mobile phone and online gaming reloads through web-based and terminal-based infrastructure provided by MOL who owns, manages and maintains it. MOL is part of the Berjaya Family and is also a related party of our Group. Our strategic partnership with MOL, which is further detailed in Section 7.2.2(iii) of this Prospectus, allows us to earn commissions from the sale of mobile phone reloads from our telecommunications partners, which MOL facilitates via the MOL terminals, and commissions for the sale of online gaming reloads directly from MOL. For the years ended 31 December 2010, 2011, 2012 and 2013, our commission revenue earned through our strategic partnership with MOL was RM36.5 million, RM42.5 million, RM49.6 million and RM56.6 million respectively, of which 44.6%, 42.3%, 38.8% and 35.8% of the total commission revenue respectively are commission revenue which we earned directly from MOL relating to MOL gaming reloads and mobile phone reloads of one telephone network operator in Malaysia. We have, since 3 September 2013, enhanced our strategic relationship with MOL to further expand our areas of collaboration which is expected to increase our commission revenue, details of which are set out in Section 7.2.2(iii) of this Prospectus. However, there is no guarantee that our enhanced strategic partnership with MOL to increase our commission revenue will be successful, nor can we guarantee that our strategic partnership with MOL will not be terminated. In the event that our strategic partnership with MOL is terminated, we may experience disruptions and/or increased costs while we transition to a new payment service provider, which may have an impact on our commission revenue, and our gross profit and gross profit margin. 5. RISK FACTORS (Cont’d) 5.1.14 Our business relies on the satisfactory performance of our IT systems and any malfunction for an extended period or loss of data could materially and adversely affect our ability to operate We use advanced IT systems for customer checkout processes, ordering of supplies, and the timely exchange of business information between our headquarters, regional offices and individual stores. These systems are critical to our day-to-day business operations as we use them to manage procurement, sales and inventory, to collect and analyse information to understand the needs of our customers and respond quickly to changing customer preferences and to oversee our cash management and internal controls processes. We cannot assure you that our IT systems will always operate without interruption or malfunction in the future and that we will not lose data. Moreover, we outsource the development and maintenance of our IT system to a third party, and although we have historically had a good relationship with our IT developer, we cannot assure that this will always be the case. Any disruption in our IT systems may hinder our ability to manage ordering and procurement, ensure adequate inventory levels, oversee our cash management and expose us to other operational inefficiencies and risks that could materially and adversely affect our business, prospects, financial condition and results of operations.
5.1.15 We are exposed to certain risks in connection with the substantial use of cash in our business operations Due to the nature of the retail business, we process a large volume of cash transactions in the course of our business operations. Nearly all of our customer purchases are settled in cash, exposing us to the risk of cash change shortages, as well as security issues such as theft. Please refer to Section 5.1.16 of this Prospectus for further information. Although we have a cash management policy (please refer to Section 7.18 of this Prospectus for further information), there is no guarantee that our cash management policy is sufficient to protect us from such risks which, if substantial in the aggregate, could have an adverse effect on our business, financial condition and results of operations.
5.1.16 Our stores face security risks As our stores operate on a 24-hour basis, we are regularly affected by pilferage, shoplifting, theft and robbery. Whilst we have taken insurance coverage for theft and robbery to protect against these risks, our insurance policies may be insufficient to cover actual losses. We also incur significant additional costs in securing our stores (for example, by installing closed circuit televisions and time delayed safes in all of our stores). Furthermore, incidences involving a breach of the security of our stores, such as armed robberies, could adversely affect our brand perception, and may discourage customers from visiting our stores.
5.1.17 Our success depends significantly on our senior management and other key personnel and our ability to attract and retain talented personnel We have been, and will continue to be, dependent on the expertise and experience of our senior management and other key employees for the success of our business. The loss of our senior management or other key employees could impair our ability to operate and impede the execution of our strategies. We may not be able to replace such persons within a reasonable period of time with individuals that possess equivalent expertise and experience, which may disrupt our business and impair our financial condition and results of operations. In addition, our continued success will also depend on our ability to attract and retain talented and qualified personnel at all levels to perform administrative, accounting and customer service functions and to manage our day-to-day operations and future expansion. 51 5. RISK FACTORS (Cont’d) 5.1.18 Our ability to fulfil our debt obligations is not assured Based on our pro forma consolidated statement of financial position as at 31 December 2013 assuming the Pre-IPO Reorganisation, our Listing and IPO were completed on 31 December 2013, our total contracted financial liabilities, including future finance costs, was approximately RM548.6 million, of which RM541.4 million were current liabilities. If we are unable to make payments in connection with our debt and other fixed payment obligations as they become due, we may need to renegotiate the terms and conditions of such obligations or to obtain additional equity or debt financing. We cannot assure you that our renegotiation efforts would be successful or timely or that we would be able to refinance our obligations on acceptable terms or at all. If financial institutions or our trade and other creditors decline to lend additional funds to us or to refinance or extend our existing liabilities when they mature on acceptable terms, whether as a result of our perceived credit risk or otherwise, and we fail to raise financing through other means, our business, prospects, financial condition and results of operations may be materially and adversely affected. Please refer to Section 10.2.6(ii) of this Prospectus for further information. Moreover, a substantial portion of our financial liabilities are trade and other payables, particularly those due to our suppliers. If we are unable to make timely payment on any of our payables, we may damage, perhaps irreparably, our relationships with our suppliers and may not be able to find suitable alternative suppliers, which could have a material adverse effect on our ability to restock our stores and on our business, prospects, financial condition and results of operations. 5.1.19 Refurbishments of our existing stores may affect our business, financial condition and results of operations We refurbish our stores from time to time in order to improve the appearance of our stores and enhance our customers’ shopping experience. We also have an ongoing refurbishment programme and intend to undertake refurbishments of 600 stores from 2014 to 2016 of which approximately 60% will be major refurbishments and 40% will be minor refurbishments. Any refurbishment to the retail space of our existing stores may disrupt their business and cause loss of turnover during such refurbishment period. In addition, it may require significant time to recreate the optimal product mix and generate the same level of customer traffic at the said store after the refurbishment process. If we are unable to complete such refurbishment in a timely manner or if we fail to enhance our customer traffic following such refurbishment, our business, financial condition and results of operations may be materially and adversely affected. 5.1.20 We may require additional financing or capital, which may not be available on terms acceptable to us or at all We may need to obtain external debt and equity financing, through public or private financing, to finance the opening of new stores in accordance with our expansion plans. Our ability to finance our capital expenditure plans is subject to a number of risks, contingencies and other factors, some of which are beyond our control. Furthermore, any adverse developments in the Asian and international equity capital or credit markets or any decline in consumer disposable income in Malaysia may be a significant barrier to raising financing and may significantly increase the overall cost of our funds. Our debt facilities generally prohibit us from incurring further indebtedness without the consent of our lenders. There is no guarantee that we would be able to secure consent to incur any further indebtedness. If adequate funding is not available to us on terms acceptable, or at all, this will materially and adversely affect our ability to fund the development and expansion of our business. Our inability to obtain sufficient funding for operations or development plans could have a material adverse effect on our business, prospects, financial condition and results of operations. 52 5. RISK FACTORS (Cont’d)
5.1.21 Our insurance coverage may not adequately protect us against all material hazards Our significant insurance policies consist of coverage for risks relating to fire, electronic equipment, glass, money, fidelity, burglary and public liability. There can be no assurance that any insurance proceeds we receive would be sufficient to cover expenses relating to insured losses or liabilities. We are also subject to risks of increased premiums or deductibles, reduced coverage, and additional or expanded exclusions in connection with our existing insurance policies. If we suffer any uninsured losses, damages or liabilities in the course of our operations, we may not have sufficient funds to cover any such losses, damages or liabilities. To the extent that we suffer losses or damages as a result of a risk for which we do not maintain insurance or which is not covered by our insurance policies or where the cost of the losses or damages exceeds our insurance coverage, we will have to bear such costs, which could have a material adverse effect on our business, prospects, financial condition and results of operations.
5.1.22 We may be involved in legal and other disputes arising out of our operations from time to time and may face significant liabilities as a result We may be subject to various litigation and other disputes from time to time. Legal proceedings and disputes in which we may be involved are subject to many uncertainties, and their outcomes are difficult to predict. Our customers, employees or others may bring claims against us for faulty or defective products that we sell. These litigation actions and claims may be costly and time consuming, and could result in liabilities and reputational harm. We cannot accurately determine the full extent of any claims and liabilities (financial or otherwise) of our on-going litigation and claims. In particular, our business exposes us to an inherent risk of product liability claims and adverse publicity. If we were found responsible for damage caused by faulty or defective products sold in our stores, our reputation may be materially adversely affected. This could lead to the erosion of customers’ confidence in our brand and stores and a subsequent reduction in sales. In addition, we may need to incur significant legal, settlement and other costs in defending actions against us. Due to the inherent uncertainty of the litigation and dispute resolution process, there is no assurance that the resolution of any particular legal proceeding or dispute will be in our favour, and any result that is not in our favour may have a material adverse effect on our business, prospects, financial condition and results of operations. On 5 March 2012, 7-Eleven Malaysia commenced a suit against Shell Malaysia in relation to a dispute concerning whether there was a valid and binding agreement between the parties for a new master tenancy agreement for 34 “7-Eleven” convenience stores at various Shell petrol stations in Malaysia. While we believe that we have a good chance of prevailing in the case, we had since 6 March 2012, begin providing for potential damages for double-rental, being twice our normal contracted rental rates, for 35 stores (34 sites pius another site which is not part of the new master tenancy agreement) of RM260,464 per month. Based on our audited consolidated financial statements for the years ended 31 December 2012 and 31 December 2013, cumulative provisions for double-rental stood at RM2.6 million and RM5.7 million respectively. We have not made any provisions for potential mesne profits or other potential damages that we may be required to pay. There is no guarantee that we will prevail in this case, and, if we do not, there is no guarantee that our actual losses will not exceed, perhaps substantially, the amounts that we provided in our financial statements. In addition to financial damages, if we do not prevail in the suit it is possible that we may be forced to close or relocate those stores, and there is no guarantee that we would be able to find suitable alternative locations for all or any of the stores. 53 5. RISK FACTORS (Cont’d) Even if we do prevail in this suit, we might incur substantial legal costs in defending the action. Any finding against us in the claim could have a material adverse effect our business, prospects, financial condition and results of operations. Please refer to Section 15.5 of this Prospectus for further information on 7-Eleven Malaysia’s litigation with Shell Malaysia.
5.1.23 We are controlled by our substantial shareholders whose interests may not always align with our interests Immediately after the completion of our IPO, our substantial shareholders will own 57.0% of our enlarged issued and paid-up share capital, assuming the Over-allotment Option is not exercised (51.0% assuming full exercise of the Over-allotment Option). As a result, our sUbstantial shareholders will be able to exercise significant influence over the composition of our Board and the vote of our Shares. The interests of our substantial shareholders may differ from our interest or the interests of our other shareholders. Our substantial shareholders could have significant influence in determining the outcome of any corporate transaction or other matters submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, the election of directors and other significant corporate actions to the extent that they are not required to abstain from voting (and procuring persons connected to them to abstain from voting) in respect of such transactions and corporate actions. Our substantial shareholders also have the power to prevent or cause a change in control. In addition, our sUbstantial shareholders also hold interest in companies other than us, and we have entered into various transactions with companies, directly or indirectly, controlled by or connected to our sUbstantial shareholders. Please refer to Section 13 of this Prospectus for further information on these transactions. In addition, we expect in the future to enter into other transactions with our related parties. 5.1.24 If we fail to obtain or renew the regulatory licenses, approvals and permits we need in order to operate our stores, our existing operations may be materially and adversely affected Our stores require a number of licences to operate and sell their products, including licences to sell specific products and certain controlled goods, trading licenses and advertising/signage licenses. Moreover, we must regularly renew a significant number of our licences. We may not obtain all the requisite licenses, approvals and permits that we are reqUired to obtain from the various authorities, or renew existing licences, approvals and permits as they lapse, in a timely manner to operate and continue with our business, or at all. As a reSUlt, the authorities may prohibit us from selling those particular products, require us to cease operations at a store until the local business licences are obtained, charge us compounds or penalties for non-compliances, or, in some instances, seize those products that we stock without the appropriate license. As at the LPD, 22 of our stores do not have the requisite trading licences and 49 of our stores do not have the requisite advertising licences, and as such we may be sUbject to the relevant compounds, as set out in Sections 7.27.2(i) and (ii) of this Prospectus, if convicted. Any failure by us to obtain or renew the licenses that we require may have a material adverse effect on our business, contractual arrangements, prospects, financial condition and results of operations. Please refer to Section 7.27 of this Prospectus for further information on the licences that we require to operate our business. 5. RISK FACTORS (Cont’d) 5.1.25 Our substantial shareholder’s debt facilities may expose us to risks relating to corporate actions taken by our substantial shareholder and/or its other subsidiaries PMSB, which is our substantial shareholder and a company indirectly owned by TSVT, had on 11 January 2013 and 18 January 2013 issued the MTN in tranches primarily to refinance PMSB’s loan facility which was obtained for the Delisting of BRetail (as defined in Section 6.1.1 of this Prospectus). The proceeds from the issuance of the MTN were also utilised for, among others, the expansion of 7-Eleven Malaysia’s stores. The facility agreements relating to the MTN (“Facility Agreements”) contain restrictive covenants that expose us to risks arising from corporate actions taken by our substantial shareholder and its other subsidiaries. Under the terms of the Facility Agreements, PMSB and its other subsidiaries are generally prohibited from, among others, incurring further indebtedness without the prior written consent of the guarantors to the MTN (“Guarantors”), save for only certain kind of indebtedness. The Facility Agreements also contain covenants that limit, among others, PMSB and its other subsidiaries from paying more than 50.0% of their profit after tax as dividends and disposing all or a substantial portion of their assets. Accordingly, any incurrence of indebtedness, save for the abovementioned certain kind of indebtedness without the prior written consent of the Guarantors or other breach of the terms of the Facility Agreements, by PMSB or one of PMSB’s other subsidiaries could give rise to a default of PMSB’s obligations under the Facility Agreements. The restrictive covenants contained in the Facility Agreements had previously applied to us. However, PMSB had on 16 December 2013, obtained the approval from one of the Guarantors to exclude us from being sUbject to these covenants, effective on the Listing date. Similarly, PMSB had on 21 January 2014, agreed to the terms imposed by the other Guarantor to exclude us, effective on the Listing date, from being subject to the restrictive covenants under the Facility Agreements, sUbject to, among others, PMSB’s or BRetail’s undertaking that it will pledge our Shares as security for one of the Facility Agreements after the expiry of the moratorium period. In addition, because PMSB has pledged all the BRetaii Shares and BRetaii ICPS (collectively “BRetaii Securities”) held with the Guarantors, the Guarantors can enforce their charge over the pledged BRetaii Securities in the event of a default of certain of PMSB’s obligations under the Facility Agreements. Notwithstanding, PMSB had on 16 December 2013 and 24 January 2014, obtained undertakings from the Guarantors not to deal with any of the pledged BRetaii Securities for a period of six months from the date of Listing, which coincides with the moratorium period. However, there can be no assurance that the Guarantors will not deal with any of the pledged BRetail Securities after the expiry of the moratorium period. Similarly, because of PMSB’s or BRetail’s undertaking to pledge our Shares as security for one of the Facility Agreements upon the lifting of the moratorium, there can be no assurance that the Guarantors under the said Facility Agreement will not enforce the charges over the pledged Shares after the expiry of the moratorium period. 5. RISK FACTORS (Cont’d) Our financing agreements also generally require that our substantial shareholders maintain at least 51 % direct or indirect shareholding in us. On the other hand, the Second Restructure and IPO Consent Agreement requires TSVT to maintain at least 35% plus one Share, direct or indirect shareholding, in us so long as our Shares are registered and traded on any pUblic stock exchange and provided TSVT has the 7Eleven Malaysia Board Control or otherwise more than 50% direct or indirect shareholding so as to ensure that TSVT meets the requirement to have the 7-Eleven Malaysia Board Control. However, upon any foreclosure of PMSB’s shareholding in BRetaii or any foreclosure of PMSB’s or BRetail’s shareholding in us, TVST may no longer majntain such level of ownership, which could constitute a change of control event in our financing agreements and a default under the Second Restructure and IPO Consent Agreement and ALA. Upon the occurrence of a change of control event, 7-Eleven USA has the right to, among others, raise the royalty rate we pay under the ALA or terminate the ALA, and upon such termination, it can exercise, among others, its right to acquire the assets of 7-Eleven Malaysia and CSSSB at fair market value. In addition, under our financing agreements, the lending banks may be permitted to declare all amounts outstanding immediately due and payable upon the occurrence of a change of control event. Some of our financing agreements also contain cross-default provisions, such that if any of our other borrowings be declared due and payable prior to their stated maturity, it would also trigger an event of default in these agreements. We have no control over the actions of PMSB or its other subsidiaries, and we cannot assure you that PMSB and its other subsidiaries will always comply with the terms of the Facility Agreements. Any breach by PMSB or its other subsidiaries of the terms of the Facility Agreements may have a material adverse effect on our business, prospects, financial condition and results of operations. 5.1.26 Any breach of or use of properties in breach of the category of land use and/or express condition in the issue documents of title (“lOT”) of our owned or tenanted properties, or any failure to obtain the CF or CCC for such properties, may adversely affect our business, financial condition and results of operations Most of our stores located at shop lots, shopping malls, commercial buildings and complexes are tenanted and as a result, we are not in a position to ascertain whether the property owners and/or the landlords have complied with all land laws, rules and regulations in respect of such properties, in the event the property owners and/or landlords do not co-operate in providing us or are unable to provide us, with sufficient information pertaining to the properties. In Peninsular Malaysia, any occupation or granting of permission to occupy any building or part thereof without a CF/CCC, will render the registered proprietor/occupier liable to a fine and/or imprisonment of persons such as our Directors, secretary or similar officers in the company of our Group for a term not exceeding 10 years. In addition, any usage of land that we occupy or tenant that is inconsistent with the category of land use and/or express condition as set out in the lOT or any use of a building or part thereof for a purpose other than that for which it was originally constructed, could subject the affected land to forfeiture by the Land Administrator, pursuant to the National Land Code, 1965 and expose us to various fines not exceeding RM500,000 for each affected property (and in the case of continuing offences, further fines not individually exceeding RM5,000 for each day during which the offence continues after the first conviction of the offence) and/or imprisonment of persons such as our Directors, secretary or similar officers in the company of our Group for a term not exceeding two years. If the land on which we occupy or tenant is forfeited and we are forced to shut down the relevant store, we will suffer a loss in revenue and may suffer other losses or damages in respect of the relevant store. 56 5. RISK FACTORS (Cont’d) In East Malaysia, any usage of land which is inconsistent with the condition set out in the lOT or occupation of any building or any part thereof without a valid CF/CCC will render the registered proprietor/occupier liable to a fine and/or imprisonment and a further fine for any continuing offence. While we endeavour to fUlly comply with and abide by the aforesaid restrictions where we are the owner of the relevant land and we can negotiate with our landlords to apply to the relevant authorities to convert the land use of the tenanted properties that we occupy and/or procure the necessary CF/CCC in respect of such properties, we may not always be successful in doing so. Even if we are able to make the necessary application and procure the conversion of land use or the necessary CF/CCC, or procure the registered proprietor to do so, such procedures will take time and there can be no assurance that we will not be subject to any penalties or fines in the meantime as an occupier of such land or the lands will not be subject to forfeiture in the meantime. If such applications are unsuccessful, or in the event that we are certain that we would not receive any response from the landlord, or that we are unable to arrive at a mutual agreement with the landlord to convert the land use and/or procure the CF/CCC, we may be required to shut down the relevant store and relocate it to another location. There can be no assurance that we would be able to secure a suitable property for the relocation whether or not within the same vicinity or in a timely manner, or at all, and we may lose the opportunity to operate and remain competitive in the area concerned. In addition, the approval from the SC for our IPO which was obtained on 7 February 2014 is subject to, among others, the rectification of the non-compliances relating to CF/CCC within 12 months from the date of the SC’s approval letter. Failure to comply with the said condition may subject, amongst others, our Company, our directors, officers and the Promoters to anyone or more of the actions as set out in Section 354 of the CMSA including penalties, reprimands and moratoriums or prohibitions on any trading of or any dealing in our Shares if the SC is satisfied that it is appropriate in all the circumstances to take action. Further, under the Listing Requirements, Bursa Securities may suspend the trading of our Shares upon notice by the SC and/or delist our Company pursuant to a directive, requirement or condition imposed by the SC, if it is the SC’s opinion that the Company has breached or failed to comply with the said condition. As at the LPO, the usage of one of our owned properties and 44 of our tenanted properties are inconsistent with the category of land use and/or express conditions as set out in the lOT, while three of our owned properties and 10 of our tenanted properties have not been issued with the requisite CF/CCC. In addition, in respect of 413 and 137 of our tenanted properties, there is an absence of records of CF/CCC or information relating to land use, respectively, attributable to, among other things, lack of information or records. Please refer to Section 7.15 of this Prospectus for further information on the non-compliances of the material properties owned by us and our tenanted stores. 5. RISK FACTORS (Cont’d)
5.2 Risks relating to the industry in which we operate 5.2.1 Our performance depends on the performance of the Malaysian economy and consumer spending patterns Our performance depends on consumer demand for our products, some of which are discretionary products, and, consequently, is sensitive to various factors that may affect consumer spending, including general economic conditions, consumer confidence in future economic and political conditions, disposable consumer income, consumer demographics and consumer perceptions of personal well-being. According to the IMR Report, Malaysia’s real GDP grew at a CAGR of 5.7% between 2009 and 2013. In addition, household consumption expenditure in Malaysia increased by 19.0% in 2010, 16.2% in 2011 and 8.9% in 2012. The growth in the Malaysian economy, household consumption and retail sector was an important factor in our past performance growth. There is no guarantee that Malaysian economic conditions will continue to be as favourable as they have been in the recent past. If a general economic downturn does occur, then as a convenience store, we may not be able to compete directly on price with some other retailers, such as grocery stores, hypermarkets or supermarkets, which experience economies of scale due to their larger product base and store size. In an economic downturn, as consumer discretionary spending decreases, it is possible that consumers will increasingly purchase products from our indirect, lower-cost competitors. Moreover, consumer preferences and expectations, while ever changing, may change particularly quickly during periods of economic turmoil and we may fail to promptly identify our customers’ needs. Consequently, we may not be able to introduce such new products that are in demand, which may lead to a loss of sales opportunities to competitors in the market. Any adverse development in the Malaysian economy generally, or that impacts consumer discretionary spending, in particular, could have a material adverse effect on our business, prospects, financial condition and results of operations. 5.2.2 The retail sector in Malaysia is highly competitive The products that we and our franchisees sell compete directly against products sold at other retail choices, such as convenience stores, supermarkets and hypermarkets, petro marts and others. The entry of foreign retail players into the market has intensified all areas of competition including price, quality, variety and convenience. We compete with other convenience store operators primarily on the basis of convenience, presentation, price, as well as customer loyalty, product mix and high quality customer services. Our direct convenience store competitors include retailers such as “KK Super Mart” and “Circle K”. In addition, we compete with other larger format supermarket and hypermarket operators including ‘Tesco”, “AEON Big” and “Giant”, as well as petrol stations such as “Shell”, “Petronas” and “Petron” that also operate convenience stores at their petrol stations such as “Select”, “Mesra” and “Treats”. Many of these competitors bear recognised brand names and have significant customer loyalty. Key competitive factors include the number and location of stores, quality and speed of service, attractiveness of facilities, effectiveness of advertising, marketing and operational programmes, price, demographic patterns and trends, customers’ preferences and spending patterns, and perceptions of new product development. As a convenience store operator, we may not be able to compete directly on price with some of our competitors, such as grocery stores, hypermarkets and supermarkets, who may face lower costs than we do due to their wider product range, shorter operating hours and the economies of scale inherent in operating larger stores. 5. RISK FACTORS (Cont’d) We also face the inherent risk of entry of new players to the convenience chain industry in Malaysia, especially established foreign convenience store chains, some of which are direct competitors of ”7-Eleven” worldwide. Established foreign convenience store chains like “ampm”, “Lawson” and “FamilyMart” are direct competitors of ”7-Eleven” worldwide. Although many foreign convenience store chains do not have a presence in Malaysia, their existence in other East and Southeast Asian countries including Japan, Taiwan, Hong Kong, Singapore and Thailand are evidence of their interests in the East and Southeast Asian region. We are the largest convenience store operator in Malaysia in terms of number of stores, with a market share of 82% of the standalone convenience store segment, as of March 2014, according to the IMR Report. There can be no guarantee that we will be able to increase or maintain our market share or competitive position. If we are unable to maintain our competitive position, we could experience lower demand for our products, downward pressure on pricing and a loss of market share, each of which could have a material adverse effect on our business, prospects, financial condition and results of operations. 5.2.3 Political, economic, social, regulatory and other developments in Malaysia may adversely affect us Our business, prospects, financial position and results of operations may be adversely affected by political, economic, social, regulatory and other developments in Malaysia and, to a lesser extent, Southeast Asia and the rest of Asia. These developments, which may be uncertain, include, but are not limited to, the risks of war, terrorism, riots, expropriation, nationalisation, renegotiations or nullification of existing contracts, deterioration of international bilateral relationships, changes in laws and regulations (including increases in the minimum wage and changes in tobacco policies or taxes), changes in interest rates, inflation, economic recession, foreign exchange control regulations and methods of taxation (including customs, excise, duties and tariffs). Some types of losses, such as from terrorism and acts of war, may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, our business, prospects, financial condition and results of operations may be materially and adversely affected. Stress experienced by global markets began in the second half of 2007 and continued during 2008 to 2013, and this pressure may continue in the future. Concerns over inflation, geopolitical disputes, the availability and cost of credit, the credit crisis in Europe, the economic slowdown of China, the volatile political climate in North Africa and the Middle East and unstable markets in some countries have led to a general decline in lending activity between financial institutions and in commercial lending markets while increasing volatility of the global economy in the near term. This global turmoil has had a negative impact on the economy in Malaysia. Any further slowdown in economic growth or challenges in the financial markets may adversely impact our business, prospects, financial condition and results of operations. New policies and regulations implemented by the Malaysian Government, including legislations and regulations enacted by the MDTCC, state governments and municipal councils, particularly those relating to a minimum wage increase, may have an impact, adverse or otherwise, on our business, prospects, financial condition and results of operations. For example, as a result of a December 2012 increase in the Malaysian statutory minimum wage from RM750 per month to RM900 per month in Peninsular Malaysia and from RM700 per month to RM800 per month in East Malaysia, our store staff costs increased by RM24.1 million, or 17.4%, from RM137.9 million in 2012 to RM162.0 million in 2013, Any future minimum wage increases may also adversely impact our business, prospects, financial condition and results of operations. 59 5. RISK FACTORS (Cont’d) Moreover, the Malaysian Government’s stated intention is to reform subsidies across a number of products and services, including electricity. Pursuant to an announcement by the Malaysian Government on 2 December 2013, the average electricity tariff in Peninsular Malaysia increased on 1 January 2014. The tariff increase for commercial usage ranges from 10.6% to 18.4%, depending on the voltage, timing and amount of electricity used. For our usage, the tariff increase was approximately 17%. As this tariff increase was effective 1 January 2014, the effects of the tariff increase are not reflected in the audited consolidated financial information included in this Prospectus. Assuming our consumption of electricity remains the same, our total electricity cost should increase accordingly (in addition to increases due to other factors, such as the opening of new stores). We attempt to mitigate the effects of cost increases either through increased efficiency to offset the increases or, when that is not possible, by passing costs onto customers and/or suppliers. However, there is no guarantee that we will be able to successfully pass through electricity or other cost increases, either as a result of the 1 January 2014 increase or future increases, to our customers. In the event that we increase prices in order to combat cost increases, it is possible that our customers will not be willing to pay these increased prices, and we may therefore lose customers. For the years ended 31 December 2010, 2011, 2012 and 2013 electricity costs accounted for 3.9%, 3.9%,
4.1 % and 4.1 % of our total operating costs (including cost of sales), respectively. 5.3 Risks relating to our Shares 5.3.1 There has been no prior market for our Shares and it is uncertain whether a sustainable market will ever develop There has been no prior market for our Shares and it is uncertain whether a sustainable and active market for our Shares will ever develop. There can be no assurance as to the liquidity of any market that may develop for our Shares, the ability of holders to sell their Shares or the prices at which holders would be able to sell their Shares. None of us, our Promoters, the Selling Shareholder and the Placement Managers have an obligation to make a market in our Shares. It is expected that there will be an approximate nine Market Days gap between closing of the Retail Offering and trading of our Shares. We cannot assure you that there will be no event or occurrence that will have an adverse impact on the securities markets, the industries in which we operate or us during this period that would adversely affect the market price of our Shares when they begin trading. Our Shares could trade at prices that may be lower than the Institutional Price or Final Retail Price depending on many factors, including prevailing economic and financial condition in Malaysia, our operating results and the markets for similar securities. In addition, markets for securities in emerging markets have been sUbjected to disruptions that have caused intense volatility in the prices of securities similar to our Shares. There can be no assurance that the market for our Shares, if any, will not be subject to similar disruptions. Any disruption in such markets may have a material and adverse effect on the price of our Shares.
5.3.2 Our Share price and trading volume may be volatile The market price of our Shares may fluctuate as a result of, among other things, general market, political and economic conditions, trading liquidity of our Shares, the difference between our actual financial operating results and those expected by investors and analysts, changes in earnings estimates and recommendations by financial analysts, changes in market valuations of listed shares in general or shares of companies comparable to ours, changes in government policy, legislation or regulation, and general operational and business risks. In addition, many of the risks described in Section 5 of this Prospectus could materially and adversely affect the market price of our Shares. Furthermore, if the trading volume of our Shares is low, price fluctuation may be exacerbated. Accordingly, there can be no assurance that our Shares will not trade at prices lower than the original issue price of our Shares.