Risk Factors

IV. RISK FACTORS IV. RISK FACTORS Applicants for the Issue/Offer Shares should carefully consider the following factors, which may not be exhaustive and which may have an impact on the future performance of the Group, in addition to the other infonnation contained elsewhere in this Prospectusbefore applying for the Issue/Offer Shares: t (1) No prior market for SKRB Shares Prior to this Public Issue and Offer for Sale~ there has been no public market for SKRB Shares. There can be no assurance that an active market for SKRB Shares will develop upon SKRB’s listing on the Second Board of MSEB Of) if developed~ that such market will be sustained. The issue/offer price of RMO.90 per Issue/Offer Share has been determined after taking into consideration a nwnber of factors including~ but not limited to, the Group’s operating and fmancial history and conditions, its prospects and the prospects of the industry in whic.h the Group operates, the management of the Group and the prevailing market conditions prior to the issue ofthis Prospectus. The price at which the SKRB Shares will trade on the Second Board ofMSEB after the Public Issue and the Offer for Sale may be influenced by a number of factors, including the depth and liquidity of the market for the SKRB Shares and investors~ perception of the SKRB Group. There can be no assurance that the Issue Price/Offer Price will correspond to the price at which the SKRB Shares will trade on the Second Board of MSEB upon or subsequent to its listing or that an active market for the SKRB Shares will develop and c.ontinue upon or subsequent to its listing. (ii) Contr-ol by substantia! shareholders Follovving the Public Issue and Offer for Sale, the substantial shareholders of SKRB~ namely AHSB, MBSB and WHSB collectively hold approximately 720/0 of the Company~s enlarged issued and paid-up share capital. The aforesaid shareholders, if they act together~ may be able to influence the outcome of certain matters requiring the vote of the Company~s shareholders unless they are required to abstain from voting by law and/or by the relevant authorities. (iii) Business risks The SKRB Group is subject to certain risks inherent in the furniture industry which include~ amongst others, but is not limited to, raw material shortages and labour supply constraints, increases in the costs of raw materials such as rubberwood, changes in general economic, business and credit conditions, entry of new players~ foreign exchange rate fluctuations, changes in industry policy and tax legislation affecting the furniture industry in Malaysia and increases in production costs. Although the Group seeks to limit these risks throug~ inter alia, automating certain aspects of its manufacturing operations, investing in R&D, maintaining close relationships with customers and suppliers, diversifying its pool of suppliers and customers and expansion of both existing and new markets~ there can be no assurance that any change to these factors will not have a material adverse effect on the Group’s business. (iv) Operational risks The SKRB Group IS subject to certain risks inherent in the furniture manufacruring industry which include~ amongst others, fIre hazards and disruption to electricity supply. As a significant proportion of the Group’s products are wood based products, there exists a potentially high risk of fire hazard. All the Group’s factories, which are separately located within Kawasan Perindustrian Bukit Bakri, are equipped with sprinkler systems and fire fighting equipment such as fire extinguishers and hose reels which are maintained and inspected by a fire protection system maintenance contractor quarterly. The said contractor also trains the Group’s employees on the use of these equipment as well as basic fire-fighting techniques and jointly conducts fire drills with the Group. In addition, annual inspections are conducted by the Fire Department.. The Group has also purchased insurance coverage on :fITe and fire consequential loss on all of its assets and stocks.
w. RISK FACTORS (CONTtD) (vii) Political and efonomic considerations For the 8 month period ended 31 August 2003, the SKRB Group~s furniture products were mainly exported to countries such as North and South America~ Australia, New Zealand~ the Middle East and the UK. As such, the SKRB Group’s level of profitability and future growth are expected to be linked to the political and economic developments ofthese countries, where some of the Group~s customers and agents,. direct or indirect~ are located. The economic situations in these countries may be affected by war, changes in inflation rates~ interest rates, taxation and other political~ economic or social developments. The Group will explore the possibility of expanding into other markets lo reduce its dependence on the above export markets~ There can be no assurance that any change to these factors will not have a material adverse effect on the business of the SKRB Group. (viii) Foreign currency fluctuations risk The SKRB Group is exposed to foreign exchange fluctuation risks mainly through its exports to various countries such as North and South America, Australia) New Zealand and UK. The transactions are denominated in USD. The imposition of currency controls via the pegging of the RM to USD at the fixed exchange rate ofUSDl.OO to RMJ.80 by Bank Negara Malaysia since September 1998 has stabilised the risks arising from foreign exchange fluctuation. However~ no assurance can be given that the RM peg will be maintained and that future foreign exchange fluctuation will not have a material adverse effect on the Group’s financial perfonnance. (ix) Threat of substitutes Household furniture products are Vlide and diverse. The Group’s rubberwood furniture faces competition from glass, metal, plastic and forest wood furniture. However~ furniture lTIanufactured from rubberwood is well-received as it is recognised to be an environmentally­friendly product It also has a natural and traditional look, compared to furniture manufactured from other materials. In the near future~ it is unlikely for wooden furniture to be replaced by furniture made from other materials as certain qualities of wood are unique and cannot be replaced or replicated by furniture manufactured from aluminium, glass, metal~ plastic, rattan etCr There is also the risk that the Group’s furniture could be substituted with other types of wooden furniture manufactured from forest woods~ such as nyato~ meranti and jati. However, furniture made from forest woods are usually much more expensive. Fw1hermore~ forest wood furniture are perceived to be environmentally unfriendly in sonle countries~ since the extraction of forest wood for commercial purposes is seen as damaging to the environment. There is also the risk of the Group’s furniture being substituted with fine furniture such as those from Italy, Spain and North and South America, where fine craftsmanship in the making of furniture pieces from woods such as mahogany, beech, oak, nyatoh and meranti is a trademark of the fine furniture sector. However, the Directors of SKRB are of the view that the demand for rubbel”\Vood furniture by the export nmrket is highly correlated to the functionality and value-foT-money characteristics of such furniture and it is unlikely for rubberwood furniture to be replaced by the fine furniture range which usually caters for higher income earners and a more exclusive and niche market. (x) Competition The SKRB Group faces competition from local manufacturers, who may expand their business aggressively and from new players entering the industry as well as foreign manufacturers in countries with lower cost ofproduction like Indonesia) Vietnam. and Thailand. The possibility of increasing competition from these countries with lower cost of production and lo\v labour cost and from existing market players may result in lower profit margins and smaller market share fOT the SKRB Group. IV.. RISK FACTORS (CONT’Dj Nevertheless, the SKRB Group has in place several strategic measures, including new product­developmen~ cost control and consumer market research to increase their competitiveness. The SKRB Group is also continuously looking at ways to improve its production processes in order to increase production efficiency and maintains its competitive advantage by ensuring prompt delivery) consistent quality and price competitiveness of its products~ However, there can be no assurance that the Group will not be affected by the competitive strategy adopted by the other manufacturers ‘Nithin the saIne industry, both domestic and overseas and that the SKRB Group will always be able to maintain its existing market share in the future. (xi) Dependence on key personnel The SKRB Group believes that its continued success will depend, to a significant extent, upon the abilities and continued efforts of its existing Directors and senior management The loss of any of the SKRB Group~s DirectoTs or key members of the senior management could adversely affect the SKRB Group’s ability to compete effectively in the furniture industry. The Directors of SKRB recognise the importance of the Group’s ability to attract and retain skilled persoIll1el and have in place a human resource strategy which includes an adequate compensation package as well as a structured succession plan. Efforts are also made to groom the existing staffmembers to further support the senior management and/or to shoulder further responsibilities in preparation for long term expansion. The Group’s future success will also depend upon its ability to attract and retain skilled personnel. However, there can be no assurance that the above measures will always be successful in retaining key personnel or ensuring a smooth transition should changes occur. (xii) Government regulations on foreign labour Government regulations on foreign labour can severely affect the labour intensive furniture industry as most manufacturers employ a significant number of foreign \vorkers. Regulations which have been introduced to limit the recruitment of foreign workers may affect the industry’s expansion as it could lead to a shortage of workers. Labour shortage will not only reduce the production capacity ofthe manufacturers but also increase wage levels. As a result, productivity may decline and production costs may increase~ As at 9 January 2004, the subsidiaries of the SKRB Group employs 493 foreign workers which are sourced from Banglades~ Nepal, Myanmar, Indonesia and Vietnam. Although the Group seeks to limit the reHance on foreign labour through automating the labour intensive operations, there can be no assurance that further Government regulations regarding foreign labour would not affect the Group~s performance. (xiii) Domestic borrowings The SKRB Group’s total domestic long-term and short-term borrowings as at 9 January 2004 amounted to RM8.678 million and RM17.964 million respectively. The SKRB Group does not have any foreib’ll borrowings as at the date of this Prospectus. All the loans of the SKRB Group are interest bearing. As such) any increase in interest rates will increase the burden of the SKRB Group with respect to interest payments of the loans depending on the total outstanding loans as at the point in time. There can be no assurance that the performance of the SKRB Group would remain favourable in the event of adverse changes in the interest rate~ (xiv) Dependence on key customers The SKRB Group has a wide and diversified range of customers,. ranging from local and overseas customers~ Other than Coaster; Inc, L.G. Sourcing Inc, Endeavour Trading Sdn Bhd and COlporate Specialists Sdn Bhd, which contributes approximately 8.8%~ 7.20/0, 6.3% and 6~O°;f” respectively, of the Group’!s turnover for the 8 month period ended 31 August 2003, none of the customers ofthe SKRB Group contribute more than 100/0 to the Group’s turnover. The Group is also actively sourcing for new international customers to reduce the degree of dependency on anyone customeL
IV.. RISK FACTORS (CONT’Dj (xviii) FailurelDelay in the listing exercise The listing exercise is also exposed to the risk that it may fail or be delayed should the following events occur: (a) the Bumiputera investors approved by the MITI fail to subscribe to the portion ofthe Offer Shares allocated to them;
(b) the Underwriters exercising their rights pursuant to the Underwriting Agreement thereby discharging themselves from their obligations thereunder; or
(c) the Company is Wlable to meet the public spread requirements i,e+ at least 25% ofthe issued and paid-up capital of the Company must be held by a minimum number of 1,000 public shareholders holding not less than 100 shares each upon completion of the Public Issue and Offer for Sale and at the point of listing.

Although the Directors of SKRB and the Offerors will endeavour to ensure compliance by SKRB ofthe listing requirements by the various authorities, no assurance can be given that the abovementioned factors will not cause a delay in or failure ofthe Listing exercise. [The remainder ofthis page is intentionally left blank]

Comments are closed