3. RISK FACTORS 3. RISK FACTORS IN EVALUATING AN INVESTMENT IN THE IPO SHARES, YOU SHOULD CAREFULLY CONSIDER ALL INFORMATION CONTAINED IN THIS PROSPECTUS INCLUDING BUT NOT LIMITED TO THE FOLLOWING GENERAL AND SPECIFIC RISKS. 3.1 RISKS RELATING TO OUR BUSINESS AND OPERATIONS 3.1.1 Business risks We are subject to business risks inherent in the industrial gas sector in Malaysia. This may include, amongst others, entry of new competitors, changes in economic, business and credit conditions, changes in governmental and international policies and regulations, and other business risks common to going concerns. In mitigation, our Executive Chairman and Executive Director, collectively have more than 30 years of experience in the industrial gas industry, whilst our senior management has an average of 7 to 8 years of relevant experience. In addition, we believe that our strong working relationships with our customers and suppliers will allow us to prevail over any adversities and sustain our business operations. However, there is no assurance that any changes in the abovementioned factors will not adversely impact our business and profitability.
3.1.2 Mishaps in our manufacturing and refilling plants We may encounter various operation risks such as accidents and fire breakout, which may affect the operations of our business. Some of the gases that we deal with are flammable or aid in combustion. In addition, we deal with gases under high pressure. Any mishaps in our manufacturing or refilling plants may disrupt our operations and have a negative impact on our financial position. We have taken precautionary steps to minimise risks of fire outbreak through the installation of fire hydrants, fire extinguishers, sprinklers and Dissolved Acetylene Emergency Stop Button as well as providing safety guideline/ training to our employees in all our factories in compliance with OSHA (DaSH or JKKP) requirement. In addition, all our operating facilities are subject to stringent safety conditions to prevent any mishaps. We have also obtained ISO 9001 :2000 quality management system certification to help us reinforce quality and safety in the workplace. In the history of our operation, we have not had any major mishaps in any of our operating facilities. A further precautionary step we have taken is to ensure that we have adequate insurance coverage for our operations. We have taken up fire insurance policies for our office equipment, plant, machinery, premises and all-risks policies for our machineries. These insurance coverage are reviewed by us on a yearly basis. However, even with all the precautions we have taken to limit these risks, there is no assurance that we will not experience mishaps in our operating facilities and/or the insurance coverage we have taken would be comprehensive enough to reflect the replacement cost of the assets or any consequential loss we may suffer. 3. RISK FACTORS (Cont’d) 3.1.3 Accidents during transportation Most of our industrial gases are transported over land. There is a risk that an accident that may result in spillage, discharge of gas, fire and explosion may occur during transportation. We provide safety training to our lorry drivers and lorry attendants. Our lorry drivers and lorry attendants are not allowed to smoke during working hours. We ensure that the gas cylinders, cryogenic storage tanks and other storage vessels that we use to transport industrial gases comply with the relevant safety standards to minimise the chance of accidents. To-date, there have not been any accidents involving our industrial gases during transportation. However, even with all the precautions we have taken to limit these risks, there is no assurance that we will not experience any accidents during transportation of industrial gases resulting in potential consequential loss to our Group thus impacting our financial position. 3.1.4 Occurrence of power failure Prolonged and/or frequent power failures at our plants will disrupt our operations as electricity is used to operate many of our critical machinery and equipment including ASU and compressors. This in turn may affect our ability to fulfil our customers’ orders for industrial gases. We occasionally suffer power disruption but generally, it takes less than half a day for the power to be restored and therefore, will not materially impact our business. To mitigate against power failures, we currently maintain stand-by generators at our plants to provide electricity, which will enable us to carry out critical operations for a certain period of time. However, our stand-by generator capacity is not sufficient to operate our ASU. While we maintain insurance policies covering our production facilities and inventories, we cannot assure you that our insurance would be sufficient to cover all our potential losses. 3.1.5 Dependence on key management personnel We believe that our continued success will depend to a large extent on our management team’s abilities and continued efforts. Having a team of experienced management staff is critical in maintaining the quality of our services and products, and our relationship with our customers. A high turnover of such personnel would adversely affect our operations and competitiveness. Our success is also dependent on the continued efforts of our key personnel, especially our Executive Chairman and Executive Director, who collectively have more than 30 years of experience in the industrial gas industry. The loss of these key personnel without suitable and timely replacements, and an inability to attract or retain qualified and suitable personnel would have an unfavourable and material impact on our Group’s business and operating results. As part of our management succession plan, we have in place human resources development strategies, which include, amongst others, competitive remuneration packages, provision of on-going external and in-house training programmes, and exposure of our senior and middle management to various aspects of our business activities to enable him/her to gain greater understanding of our entire business operations and decision making process. Further, in recognition of their contributions to our Group, we have reserved Pink Form Shares for allocation to our eligible Directors and eligible employees to participate in the IPO and will be implementing an ESOS in conjunction with our listing on Bursa Securities, as a measure to instil sense of ownership in the key management and key technical personnel through direct equity participation in our Company as well as to increase the level of commitment and loyalty amongst our key management and key technical personnel. Notwithstanding our efforts to create a conducive working environment and providing motivation to our employees, there is no assurance that the above measures would be successful in retaining our key management and key technical personnel. 3. RISK FACTORS (Conf’d)
3.1.6 Lack of long-term contracts with customers We currently have minimal formal long-term contracts with our customers. As at the LPD, our order book amounted to approximately RM1.68 million. Our order book has not been significant, as we generally do not receive long-term orders from our customers. For the FYE 31 December 2009, our top 20 customers accounted for approximately 45.68% and 40.08% of our Group’s total revenue for the FYE 31 December 2009 and 4-month FPE 30 April 2010 respectively. Although dependency on key customers is essential to a certain extent in ensuring long-term growth of our business, the over dependency on such customers may significantly impact our business in the event of a deterioration of their financial position and/or businesses, or loss of such key customers. Despite the lack of formal long-terms contracts, we have developed long-term business relationships with our customers. For the 4-month FPE 30 April 2010, we have been working with approximately 14 of our 20 top customers for 5 years or more. Our long-standing relationships with our customers will provide some assurance of business continuity from our existing customer base. However, there can be no assurance that such relationships will continue or that our customers will continue placing their orders on our products.
3.1.7 Environmental regulation During the normal course of our manufacture of Acetylene, we generate calcium hydroxide sludge, which is classified as a Scheduled Waste under the Environmental Quality (Scheduled Waste) Regulations 2005. We believe that our existing operations are in compliance with the relevant environmental legislation. We have appointed companies licensed by the Department of Environment under Section 11 of the Environmental Quality Act, 1974, to collect and transport the scheduled waste daily or two days once from our Senai and Nilai plants. However, there is a possibility that the Malaysian government may change its regulations with regards to environmental matters in the future, which would require us to modify our facilities and/or business operations, or incur expenses that may have an adverse effect on our operating results.
3.1.8 Financial risks Our working capital and capital expenditure requirements are funded by internally generated funds and external financing. Given that we have borrowings and the payment of interest thereon is dependent on the prevailing interest rates, future fluctuation of interest rates could have material effects on our Group’s interest and principal repayment. Presently, we enjoy good credit standing with our bankers and have adequate credit facilities. Save as disclosed in Section 8.2 and Section 8.4.3 of this Prospectus, we do not have any other borrowings and indebtedness. As at the 30 April 2010 and LPD, our total borrowings amounted to approximately RM19.43 million and RM19.40 million respectively. Notwithstanding the above, our Directors are confident of our ability to meet our financial obligations when they become due and payable, with internally generated funds and/or external borrowings. In addition, our Listing will enable us to tap the capital markets in the future to meet long-term funding requirements when the need arise. The effective usage of the capital markets will result in relatively cheaper sources of funds, which may enhance our profitability due to interest savings and enable us to further expand our operations and lessen our exposure to fluctuation in interest rate. However, there is no assurance that future fluctuation of interest rates will not adversely impact our ability to meet financial obligations when they become due and payable. 3. RISK FACTORS (Conf’d) 3.2 RISKS RELATING TO THE INDUSTRY IN WHICH OUR GROUP OPERATES 3.2.1 Political and economic risks Any adverse development in the political situation and economic uncertainties in Malaysia in which we conduct business, directly or indirectly, could have a negative impact on our financial position. Any slowdown in the economy of Malaysia is likely to affect our business operations. Similarly, we will be affected by any changes in the political leadership and/or regulatory and government policies in Malaysia. Such political or regulatory changes or uncertainties include (but are not limited to) introduction of new laws and regulations which impose and/or increase restrictions on imports, business, employment of foreign workers, capital controls and repatriation of profits, changes in rates of interest, nationalisation, expropriation, wars or terrorism. Whilst we have not in the past experienced any severe restrictions on the conduct of our business in Malaysia and we will take steps to comply with any new laws and regulations imposed, there is no assurance that any adverse development or change in the ~conomic and political environment in Malaysia would not have an adverse impact on our ability to conduct business in this country. 3.2.2 Increase in the prices of electricity Increases in the price of electricity will increase our operating expenses as the cost of electricity represents a significant proportion of our operating expenses. For the FYE 31 December 2009, electricity represented approximately 10.07% of our total cost. Currently, there are no alternatives to Tenaga Nasional Berhad as it has a monopoly on the distribution of electricity to users in Malaysia. In addition, it is not practical for us to generate our own electricity on a long-term basis, as the capital investment and operating costs required to generate the quantity of electricity that we need are prohibitive. As such, there is a risk that increases in the price of electricity may have a negative impact on our financial position. Despite· Tenaga Nasional Berhad’s monopoly in the distribution of electricity, any price increase will require Government approval. In addition, we may be able to pass on some or all of the increases in the price of electricity to our customers. Nevertheless, there is no assurance that price of electricity will not increase in the future, or that we will be able to pass on any of the increases in the price of electricity to our customers. 3.2.3 Increase in the prices of petrol and/or diesel An increase in the prices of petrol and/or diesel will have a negative impact on our operating expenses, as it will increase our transportation costs. For the FYE 31 December 2009, transportation costs represented approximately 6% of our total cost. The prices of petrol and diesel are controlled by the Government. We apply for Government subsidy for diesel on an annual basis and currently, we obtained diesel subsidy of 34,200 litres per month, which helps reduce our transportation costs. In addition, we may be able to pass on some or all of the increases in the price of petrol or diesel to our customers as all our competitors in Malaysia will also be similarly affected. Our strategy of establishing a network of plants close to major industrial centres in Peninsular Malaysia enables us to manage our transportation costs. Nevertheless, there is no assurance that the Government will not increase the prices of petrol and diesel in the future. There is also no assurance that we will continue to receive diesel subsidy from the Government, or that we will be able to pass on any of the price increase to our customers. 32 3. RISK FACTORS (Cont’d) 3.2.4 Competition and new market entrants The overall level of competition among operators in the industrial gas industry in Malaysia is moderate. In general, operators in the industrial gas industry that have the capability to produce industrial gases in-house, such as our Group, compete primarily with the relatively small number of operators that also have the capability to produce industrial gases in-house. We face competition from few industrial gas producers, which include, amongst others, local corporation such as B.I.G. Industries Sdn Bhd and multinational corporations such as MOXLinde Gases Sdn Bhd, Air Products Malaysia Sdn Bhd and NIG Gases Sdn Bhd. However, competition from industrial gas refillers and industrial gas dealers is moderated by the fact that these operators have to purchase their industrial gases from Malaysian producers or have to import their industrial gases and are therefore at a disadvantage, particularly in terms of pricing. There is also the potential threat from new market entrants. However, our Directors believe that the competition from new entrants will not have a major impact on our business due the numerous barriers to entry which include high capital and set-up costs, high level of technical skills, the need to demonstrate a consistently high level of product quality and to have an established reputation, track record and distribution network. Although our Directors seek to continue to adopt appropriate strategies to remain competitive, there can be no assurance that competition from existing competitors and/or new entrants will not have a material adverse effect on our performance. 3.3 RISKS RELATING TO INVESTMENT IN OUR SHARES 3.3.1 No prior market for our Shares There has been no prior public market for our Shares. There can be no assurance that an active public market will develop or be sustained after our Listing or that the market price of our Shares will not decline below the IPO Price. We believe that a variety of factors could cause our Share price to fluctuate and such fluctuation may adversely affect the market price of our Shares. The IPO Price for our Shares has been determined after taking into consideration a number of factors, inclUding but not limited to, our financial and operating history and condition, the prospects of the industries we operate in and the potential of the industrial gas industry which may not be indicative of the market price of our Shares after our Listing. There can be no assurance that the IPO Price will correspond to the price at which our Shares will trade on the Main Market of Bursa Securities upon or subsequent to our Listing. 3.3.2 Capital market risks and share price volatility The performance of the local bourse is very much dependent on external factors such as the performance of the regional and world bourses, and the flows of foreign funds. Sentiments are also largely driven by internal factors such as the economic and political conditions in Malaysia 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 risk to the market price of the listed securities. In addition, the market price of our Shares may be highly volatile and could fluctuate significantly and rapidly in response to, amongst others, the following factors, some of which are beyond our control:(i) variations in our results of operations; 3. RISK FACTORS (Conf’dj (ii) success or failure of our management team in implementing business and growth strategies; (iii) gain or loss of an important business relationship; (iv) changes in securities analysts’ recommendations, perceptions or estimates of our financial performance;
(v) changes in conditions affecting the industry, the general economic conditions or stock market sentiments or other events or factors;
(vi) changes in market valuations and share prices of companies with similar businesses to our Company that may be listed on Bursa Securities;
(vii) additions or departures of key personnel; (viii) fluctuation in stock market prices and volume; or (ix) involvement in litigation. Although we are committed to the sound management of our business, there is no assurance that our Share price will not be subject to volatility due to market sentiments. Nevertheless, our profitability is not dependent on the performance of Bursa Securities, as our business activities have no direct correlation with the performance of securities listed on Bursa Securities. 3.3.3 Control by Promoters Upon our Listing, our Promoters, as set out in Section 5.1 of this Prospectus, will hold (directly and indirectly) a total of approximately 51.74% of our enlarged issued and paid-up share capital. As a result, they will still be able to, in the foreseeable future, effectively control our business direction and management as well as influence the outcome of certain matters requiring the vote of our shareholders unless our Promoters are required to abstain from voting by law and/or by the relevant gUidelines or regulations. Nevertheless, as a step towards good corporate governance, we have appointed two (2) Independent Non-Executive Directors and one (1) Non-Independent Non-Executive Director and set up an Audit Committee to ensure that, inter alia, all future transactions involving related parties, if any, are entered into on an arms’-Iength 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. 3.3.4 Payment of dividends We are principally an investment holding company and our core operations are carried out through our subsidiaries. Therefore, our major source of income comprises dividends and other distributions received from our subsidiaries. If our subsidiaries incur debts or losses, such indebtedness or losses may impair our subsidiaries’ ability to pay dividends or other distributions to us. As a result, our ability to pay dividends will be restricted. In addition, restrictive covenants in bank credit facilities or other agreements that we or our subsidiaries may enter into in the future may also restrict the ability of our subsidiaries to make contributions to us and our ability to receive distributions. Therefore, these restrictions on the availability and usage of our major source of funding may impact our ability to pay dividends to our shareholders. 3. RISK FACTORS (Cont’d) Our ability to pay dividends or make other distributions to our shareholders is also subject to the future financial performance and cash flow position of our Group. There is no assurance that we will be able to distribute dividends to our shareholders as a result of the abovementioned factors. Accordingly, our historical dividend distribution should not be used as a reference or basis to determine the level of dividends that may be declared and paid by us in the future. There is also no assurance that we will be able to record profits and have sufficient funds above our funding requirements, other obligations and business plans to declare dividends to our shareholders. Please refer to Section 8.6 of this Prospectus for details on our dividend policy. 3.3.5 Future fund raisings may dilute shareholders’ equity and/or restrict our operations We may require additional funding for our future growth. This may result in dilution of our shareholders’ equity, or restrictions imposed by additional debt funding. Our capital requirements are dependent on, amongst others, our business, the availability of our resources for attracting, maintaining and enlarging our customer base and the need to maintain and expand our production facilities. Thus, we may need additional capital expenditure for mergers and acquisitions or investments. Any issue of Shares or other securities to raise funds will dilute shareholders’ equity interests and may, in the case of a rights issue, require additional investments by shareholders. Further, an issue of Shares below the then prevailing market price will also affect the value of Shares then held by investors. Dilution in shareholders’ equity interests may occur even if the issue of Shares is at a premium to the market price. In addition, any additional debt funding would increase our gearing ratio and may restrict our freedom to operate our business as it may have conditions that:(i) limit our ability to pay dividends or require us to seek consents for the payment of dividends;
(ii) increase our vulnerability to general adverse economic and industry conditions;
(iii) require us to dedicate a portion of our cash flow from operations to repayments of our debt, thereby reducing the availability of our cash flow for capital expenditures, working capital and other general corporate purposes; and (iv) limit our flexibility in planning for, or reacting to, changes in our businesses and our industry. If we fail in obtaining more funds to meet requirements for our business, merger and acquisition plans or investments, we may not be able to implement future plans that are essential to our growth. 3.3.6 Failure or delay in our Listing The occurrence of anyone or more of the following events, which is not exhaustive, may cause a delay in or cancellation of our Listing on the Main Market of Bursa Securities:(i) the identified investors fail to subscribe to the portion of IPO Shares intended to be placed to them although they have furnished their irrevocable undertaking letters to subscribe for such Shares;
(ii) the Sole Underwriter exercising its rights pursuant to the Underwriting Agreement to discharge itself from its obligations thereunder;
3. RISK FACTORS (Cont’d) (iii) we are unable to meet the public spread requirement as determined by Bursa Securities, i.e. at least 25% of our enlarged issued and paid-up share capital must be held by a minimum number of 1,000 public shareholders holding not less than 100 Shares each at the point of our Listing; or (iv) we are unable to obtain permission from Bursa Securities for our Admission to the Official List and for the quotation of our entire enlarged issued and paid-up share capital on the Main Market of Bursa Securities. In such an event, subject to restrictions set out in Section 3.3.7 below, we will return in full without interest, all monies paid in respect of any Applications accepted. Nevertheless, our Directors will endeavour to ensure compliance with the various requirements for our successful Listing. 3.3.7 Delay between Admission and trading of the IPO Shares Delays in the Admission and the commencement of trading in shares on Bursa Securities have occurred in the past. In respect of the Public Issue Shares comprised in the IPO Shares, following their allotment and issuance to investors, a return of monies to such investors may be effected by way of either a repurchase by the Company of those shares at the IPO Price. or by way of a reduction of our share capital. A capital reduction would require the approval by special resolution of our shareholders and approval of the courts. Further, such capital reduction shall not be effected if on the date the reduction is to be effected, there are reasonable grounds for believing that we are, or after the reduction would be, unable to pay our liabilities as they become due. There can be no assurance that monies can be recovered within a short period of time. If Bursa Securities does not admit our Shares for Listing, the market for our Shares will be illiquid and it may not be possible to trade our Shares. This may also have a materially adverse effect on the value of our Shares. 3.3.8 Disclosure regarding forward-looking statements Certain statements in this Prospectus are based on historical data that may not be reflective of the future results, whilst others are forward looking in nature and are subject to uncertainties and contingencies. All forward looking statements are based on expectations and assumptions made by our Board and although believed to be reasonable, are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements expressed or implied in such forward looking statements to be materially different from any future results. performance or achievements expressed or implied by such forward-looking statements. The inclusion of such forward-looking statements in this Prospectus should not be regarded as a representation or warranty by us, the Offerors or our Adviser, that our plans and objectives will be achieved.