4. RISK FACTORS 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS (WHICH MAY NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS BEFORE INVESTING IN OUR SHARES. If you are in any doubt as to the infonnation contained in this section, you should consult your stockbroker, bank manager, solicitors, accountants or other professional adviser. 4.1 RISKS RELATING TO OUR BUSINESS AND INDUSTRY 4.1.1 We do not have long-term contracts with our customers Our Group does not have long-tenn contracts with OUf customers. OUf business relationships with customers were established and have continued in the absence of any formal long-term contracts. This is considered a norm in the industry that we are participating in. As such, there can be no assurance that our customers will continue to purchase our products in the future. However, we have established long term business relationship with our customers, where approximately 60.00% of our customers have been dealing with us for more than five (5) years up to the LPD. In addition, approximately 21.00% of our customers have established business relationship with us for more than 10 years up to the LPD. The termination of a business relationship with any particular customer is not expected to materially affect our sales given that we have a diversified clientele base of approximately 2,700 customers located both in Malaysia and overseas. Moreover, none of our customers contribute more than 5.00% towards our Group’s sales in each of the past four (4) financial years. We believe that we have been successful in retaining our customers despite not having long-tenn contracts with them due to our past track record in supplying quality automotive parts and components to our customers. Nevertheless, there can be no assurance that our business relationships with our customers will be maintained in the future or the order flow for our products from these customers will continue at the same or higher levels in the future. 4.1.2 We do not have formal contracts for distributorships of third party branded products Our distributorships of third party branded products are granted by our suppliers without any formal contracts, save for Mercedes-Benz Malaysia Sdn Bhd which grants a non-exclusive dealership agreement to our subsidiary, Twinco for the supply of automotive engine and mechanical parts. Sales from Mercedes-Benz Malaysia Sdn Bhd’s products constitute less than 2.00% of our Group’s revenue for FYE 30 April 2013. There can be no assurance that these third party branded products suppliers will continue to grant us the distributorships in the future. Nevertheless, approximately 68.00% of our third party branded products suppliers have established business relationships with us for more than three (3) years as ofFYE 30 April 2013. Some ofthe third party brand names which we successfully obtained the renewal of distributorship in tl,e past 20 years include New-Era, Unipoint, Bosch, ZF and Mercedes-Benz. Our Group has not experienced any termination of material distributorships of third party branded products in the past four (4) financial years up to the LPD. Moreover, no individual third party brands constitute 5.00% or more of our Group’s revenue for FYE 30 April 2013, except for New-Era which constituted 5.50%. 4. RISK FACTORS (Cont’d) Our Group had entered into a Trademark Licence Agreement with Lucas Industries Limited (“Lucas Ltd”) in 2012 which grants our Group the exclusive use but not the ownership of the Lucas trademark on our automotive electrical parts and components for Malaysia and designated countries in Asia such as Singapore, Indonesia, Vietnam, Brunei and Cambodia from 1 January 2013. In February 2013, our Group commenced sales of automotive electrical parts and components under the Lucas brand which were manufactured by our contract manufacturers. The contribution from Lucas brand for the three (3) months ended 30 April 2013 is approximately RMO.187 million. Although our Group had entered into the Trademark Licence Agreement with Lucas Ltd, there is no assurance that the Trademark Licence Agreement may not be terminated by either our Group or Lucas Ltd should there be a breach of the terms and conditions of the agreement. Please refer to Section 16.3(x) of this Prospectus for further details on the Trademark Licence Agreement. We have also started to introduce our in-house brands since 1990 to mitigate any potential loss due to the failure in securing any distributorship renewal. More than 50.00% of our Group’s annual revenue over each of the past four (4) fmancial years is generated from the trading and distribution of our inhouse branded automotive parts and components. For FYE 30 April 2013, 57.35% of our Group’s revenue and 65.08% of our Group’s GP is derived from our in-house branded products. However, there can be no assurance that our business relationships with our suppliers will be maintained in the future or the purchase of the products from these suppliers will continue at the sanue or higher levels in the future. 4.1.3 We operate in a competitive environment The automotive aftermarket for parts and components in Malaysia (which includes the automotive aftermarket for electrical and non-electrical parts and components) is huge and provides market opportunities to a large and wide range of participants. 1t is a mature and competitive market and estimated to be over 5,000 market players ranging from small to medium size companies known to participate in the automotive aftermarket for parts and components. (Source: IMR Report) Given the competitive environment, there can be no assurance that our Group will continue to be able to compete successfully with the other competitors and new entrants in the future. Our Group’s future success will depend upon our ability to increase our market share, to maintain or increase revenues from sales to existing customers as well as to sell additional products to existing and new customers. Notwithstanding that our Group will be actively planning and implementing our marketing strategies and future plans to increase our revenue as well as our portfolio of customers, there can be no assurance that changes in the competitive enviroument will not have any adverse and material effect in our fmancial performance. Notwithstanding the competitive environment in our industry, we believe that our competitive strengths will provide us with the edge to maintain our market position and market share. For further details of our competitive strengths, please refer to Section 6.6 of this Prospectus. 4.1.4 We are dependent on our continuing ability to identify and keep abreast with the latest models of automotive parts and components Existing automotive parts and components are constantly being improved or innovated from the advancement in automotive technologies while new materials are also being explored for their potential usages in the manufacture of automotive parts and components that can offer cost savings and better performance. The remanufactured alternators and starters produced by our Group may also be substituted by other different automotive parts and components that can offer similar or better functionalities and/or performance. 4. RISK FACTORS (Cont’d) As such, the automotive parts and components industry that our Group participates in requires us to keep abreast with the latest models of automotive parts and components introduced to the market. This is important to our efforts in staying competitive by enabling us to expand our products range, increase our market share and penetrate into new markets. Our Group’s business and operating results could be materially and adversely affected if we fail to identify and introduce new products for the automotive aftermarket on a timely basis. Nevertheless, we always strive to keep abreast with the latest development in the industry. In addition, we have been participating in various international trade fairs and exhibitions to get the necessary industry exposures. We also actively seek feedback from our customers in respect of their new product requirements. 4.1.5 We are dependent on the continued employment and performance of our Directors and key management We believe that our Group’s continuous success will depend, to a significant extent, upon the abilities and continued efforts of our Directors as well as our key management. The loss of any of our Directors or key management may adversely affect our continued ability to compete and grow in the industry. Our Group’s success also depends on our ability to hire, train and retain qualified and competent personnel. The process of locating personnel with the combination of skills and attributes required to execute our Group’s strategies can be difficult, time-consuming and expensive. We recognise the importance of attracting and retaining our Executive Directors and key management. We believe that we have in place competitive compensation packages and reward schemes. At the management level, we have also initiated the succession planning for our Group whereby we train and groom the younger members of our management team to gradually take on more responsibilities. We have also documented our technical and standard operating procedures for our operations. Our standard operating procedures include the work instructions and other reference documents. With the documented standard operating procedures, on-the-job training and the grooming of our middle level management, we believe that we are less vulnerable to any disruption which may be caused by the resignation/loss of any of our key management. Nevertheless, there can be no assurance that the above measures will always be successful in retaining our Directors and key management or ensuring smooth succession should changes occur. 4.1.6 We are exposed to fluctuations in the foreign exchange rates We are exposed to the foreign currency risk as a significant portion of our sales and purchases are transacted in foreign currencies namely the USD, Euro, Japanese Yen, Sterling Pound and SGD. For FYE 30 April 2013, approximately 75.42% of our total purchases and 39.74% of our total sales involved foreign currencies. To mitigate this risk, we maintain foreign currency accounts for the purpose of holding foreign currencies for future payments on purchases to be transacted in foreign currencies and/or for future receipts from export sales. We shall use the foreign currency denominated proceeds from our export sales to pay for our imports when possible. For example, the proceeds in USD will be used to pay for any of our USDdenominated purchases. We constantly monitor our foreign exchange exposure and will convert part of our cash into foreign currency as and when it is necessary, mainly based on expected payments to be made and our expectation on the future receipts from export sales as well as movement of the exchange rate. However, there can be no assurance that any future fluctuations in the foreign exchange will not adversely impact our Group’s operating and financial perfonnance. 4. RISK FACTORS (Conl’d) 4.1.7 We are subject to political, ecouomic aud regulatory risk Given that our Group purchases and sells our products in both the local and overseas markets, any adverse development in the political, economic and regulatory environment in the countries involved may adversely affect the financial and operational conditions as well as the overall profitability of our Group. Political, economic and regulatory lll1certainties include but are not limited to changes in general economic and business conditions, government legislations and policies affecting our industry, inflation, fluctuations in foreign exchange rates and interest rates, political or social development, risks of war, expropriation, nationalisation, renegotiation or nullification of existing contracts, methods of taxation and currency exchange controls. Our Group will continue to adopt prudent management and precautionary measures but there can be no assurance that these measures are sufficient to address any future changes in the political, economic and regulatory environment in the countries involved. Besides that, our operations in Malaysia are subject to various local laws and regulations such as Factories and Machinery Act 1967, Industrial Co-ordinance Act 1975, Sales Tax Act 1972 and Contracts Act 1950. Our Group cannot predict what regulatory and statutory requirements will be enacted in the future and how existing or future laws and regulations will be administered or interpreted. The compliance expenses if required can be significant and any violations of the existing and future regulatory and statutory requirements may result in substantial fines and/or penalties which may include the suspension of our Group’s licences. Although our Group has put in place internal controls to ensure compliance with the relevant laws, there can be no assurance that any changes to the regulatory will not have a material impact to our Group. Market players involved in the remanufacturing activities may have to consider sourcing for their raw material needs (used parts and components) solely from the domestic market in light of the gradual prohibition on the importation of used automotive parts and components by the Malaysian Government. (Source: IMR Report) As disclosed in Section 6.11.1 of this Prospectus, the raw materials for our Group’s remanufacturing business are only sourced locally. However in view of the gradual prohibition by the Malaysian Government, there is no assurance that our Group may be able to continue to source adequate supply of raw material for the remanufacturing business in the future at competitive prices. As at the LPD, our Group has not experienced any shortages of raw materials for our remanufacturing business. 4.1.8 We are exposed to product warranty claims Due to the nature of our business, our Group is exposed to the risk of product warranty claims for manufacturing defects. Any substantial claim relating to our products could have an adverse impact on our business operations and financial perfonnance. The automotive parts and components that we distribute and supply must meet our customer’s requirements in terms of specifications and flillctionalities. Generally, we give a product warranty period from three (3) to 12 months from the date of invoice of our in-house branded products. For third party branded products that we sell, a product warranty is given to our customers provided that a warranty is obtained on a back-to-back basis from our suppliers. Our Group seeks to only engage contract manufacturers and suppliers who are able to provide us with a warranty against manufacturing defects for our products. To date, our Group has not been subject to any material product warranty claims which had adversely impacted our financial performance. For the past four (4) FYE 30 April 2010 to 2013, our product warranty claims for in-house branded products has not exceeded 0.600/0 of our Group’s total revenue for the financial years under review. 4. RISK FACTORS (Cont’d) 4.1.9 We are exposed to risk relating to adequacy of insurance coverage on our Group’s assets At present, our Group’s factory, office premises, plant and machinery, inventory of raw materials and finished products are insured based on the replacement cost of our assets in order to ensure that all our assets are adequately insured against unforeseen circumstances such as fIfe, flood, loss, damage, robbery and theft. We ensure the continuity of our insurance by renewing all the insurances annually and reviewing the adequacy of existing insurance coverage for all our assets. The total amount insured is RM49.630 million, which fully insured our Group’s properties NBV (net ofNBV for land amounting to RM8.423 million) and inventory as at FYE 30 April 2013. Although we have taken reasonable steps to ensure that all our key assets are adequately covered by insurance, no assurance can be given that the insurance coverage will be sufficient to compensate for the replacement cost of our assets or any consequential loss arising thereof. 4.1.10 We are subject to the risk of shipping disruptions As some of our products are imported/exported, directly and indirectly, from/to overseas, there is reliance on marine transportation for this purpose. Hence, we may be subject to shipping disruptions arising from adverse weather conditions, political turmoil, pirate attacks, social unrest, port strikes, oil spills, delayed and lost shipments, which may have an adverse impact on our business. However, we always ensure that all our products are adequately insured against any loss or damage to our products during shipment. Our Group actively monitors the movement of goods from our overseas suppliers and delivery to our customers. In addition, we generally hold approximately 150 days of inventories on hand to meet the orders from our customers on a timely basis. However, there can be no assurance that any future shipping disruptions will not adversely impact our Group’s operating and financial performance. Further, any major fluctuation in charter and freight rates may have substantial impact on our cost. If we are unable to pass on such costs to our customers, our profitability may be adversely affected. 4.1.11 Trade liberalisation in the regional automotive industry The Association of South East Asian Nations (“ASEAN”) automotive industry, which includes the Malaysian automotive industry, had also experienced trade liberalisation among ASEAN member countries for its products. This development is expected to lead to the entry of more big regional market players into the field, not only automotive manufactures, but also their suppliers who provide the necessary parts and components. The competition in the local and ASEAN automotive industry is anticipated to increase significantly with the liberalisation trend and global automotive players are poised to position themselves strategically in this region. These global automotive players are likely to invite their suppliers from other regions for automotive parts and components to participate as well and they may not source their raw materials like automotive parts and components from local manufa~turers or suppliers. On a more positive note, market players are able to explore export opportunities in the vast regional market which has been opened up by the liberalisation within the ASEAN automotive industry and stand to benefit from potential economies of scale. (Source: IMR Report) Our Group has not experienced any adverse impact from the trade liberalisation for the past four (4) financial years under review. There can be no assurance that our Group may not be affected by new or further trade liberalisation in the automotive industry. 4. RISK FACTORS (Conl’d) 4.1.12 No assurance that our future plans will be successful Our Group intend to expand our business by amongst others, manufacturing/assembly of new alternators and starters as well as expansion of distribution network. Please refer to Section 6.16.1 of this Prospectus for further details on our Group’s future plans. Our future plans involve a number of risks, including but not limited to new investment costs for the manufacture/assemble new alternators and starters as well as expansion of distribution network, increased marketing and promotional expenses, and cost of land acquisition. Although our management has exercised due care in assessing the risks and merits of undertaking the future plans, there is no assurance that we will be successful in increasing our market share, revenue and/or profitability through such business expansion. Notwithstanding the above measures, steps and efforts undertaken by our Company to mitigate the abovementioned risks relating to our business and industry, there can be no assurance and guarantee that we can successfully manage all the risks including our ability to compete successfully in the future, our ability to obtain sufficient supply of products and materials from our regular suppliers, no assurance that our customers will continue to place orders with us in the future and at the same levels as they had previously, our ability to successfully manage our exposure to exchange rate fluctuations risks and our ability to attract and retain our Directors and key management with similar level of experience and capabilities. Failure to do so could have a material and adverse impact on our business, financial condition and the results of our operations. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 4. RISK FACTORS (Cont’d) 4.2 RISKS RELATING TO INVESTMENT IN OUR SHARES 4.2.1 Delay or abortion of our Listing Our Listiug may be potentially delayed or aborted in the event of the following: (a) Our Underwriter exercising its rights pursuant to the Underwriting Agreement to discharge itself from its obligations; or
(b) We are unable to meet the public spread requirement of at least 25.00% of our enlarged issued and paid-up share capital to be held by a minimum of 1,000 public shareholders holding not less than 100 Shares each, at the time ofour Listing.
We expect to meet the public shareholding requirement at the point of Listing by allocating the IPO Shares to the required number of public shareholders during the balloting/private placement processes. However, in the event that we are unable to meet the above requirement, monies paid in respect of any application accepted will be returned to you without interest within 10 days after we become liable to repay it. 4.2.2 No prior market for our Shares and possible volatility of our Share price There is no prior market for our Shares. Accordingly, there can be no assurance that an active market for our Shares will develop upon our Listing or if developed, that such market will be sustained. In addition, our Shares could trade at prices that may be lower than our IPO Price as a result of many factors, some of which are not within our control and may be unrelated or disproportionate to our operating results. These include, amongst others, prevailing global and local economic conditions, the depth and liquidity of the market for our Shares and investors’ individual perceptions of our Group. 4.2.3 Control by Promoters Upon Listing, our Promoters will collectively hold approximately 61.28% of our enlarged issued and paid-up share capital. Depending on how they choose to vote and because of their shareholdings, our Promoters will generally be expected to have significant influence on the outcome of certain matters requiring the vote of our shareholders, unless they are required to abstain from voting by law and/or as required by the relevant authorities. Nevertheless, as a step towards good corporate governance, we have appointed three (3) Independent Non-Executive Directors and set up an Audit Committee to ensure that, inter-alia, any future transactions involving related parties are entered into on ann’s length basis and on nonnal commercial terms which are not more favourable to the related parties than those generally available to the public and are not detrimental to our minority shareholders. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK