4. RISK FACTORS 4. RISK FACTORS
If you are unsure about any of the information contained in this section on “Risk Factors”. you should consult your stockbroker, bank manager. solicitor, accountant or other professional adviser_ In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Issue Shares offered by this Prospectus. The discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties. Prospective investors are cautioned that such statements are only predictions and that actual results or events may differ materially from those disclosed in this Prospectus. Factors that could cause or contribute to such differences inclUde, but are not limited to, those discussed in this section on ‘Risk Factors’, Section 5 ‘Management’s Discussions and Analysis of Financial Condition and Results of Operations’, Section 6 ‘Business and Operational Overview’ and Section 7 ‘Prospects and Future Plans’ of this Prospectus as well as those discussed elsewhere in this Prospectus. 4.1 Business and Operating Risks The Group is not insulated from general business risks as well as risk inherent and specific in the manufacturing industry. These may include constraints in labour supply; increase in cost of labour and operating costs; adverse changes in general economic. business and credit conditions and changes in Government’s policies. Although the Group seeks to limit these risks through, inter-alia, increasing automation to reduce dependency on labour; efficient cost control; increasing product range; and diversifying customers and supplier base. no assurance can be given that a change in any of these factors will not have a material effect on the Group’s business. There is no also assurance that the Group will be profitable in the future, or that it will achieve increasing or consistent levels of profitability. The Group’s revenue and operating results are difficult to forecast and could be adversely affected by many factors. These inclUde, amongst others. changes in the Group’s operating expenses, the ability of the Group to develop and market new and existing products and services and to control costs. to maintain and increase its distribution channels, market acceptance of new products and services, and other business risks common to going concerns. The directors of Techfast Holdings believe that the Group should be able to remain profitable in the foreseeable future. The Group’s cash flow management includes regular monitoring of its debtors position, having long term relationships with its customers and business partners. close monitoring of operating expenditure. and careful consideration of any proposed capital expenditure or borrowing and its effects on the Group.
4.2 Absence of Long-Term Contractual Agreements with Customers and/or Suppliers The Group does not have any long-term agreements with its customers and/or suppliers due to the price competitiveness in the electronics and computing industries. The failure to secure future orders due to the absence of long-term contracts would inevitably have a material adverse effect on the Group’s future financial performance. Despite the absence of long-term agreements with its customers, the Group has earned the confidence and recognition of its international customers due to its track record of delivering products at competitive prices. The Group has satisfied the stringent demands imposed by its customers. thus enabling long-standing business relationships to continue. in addition, the Group employs various strategies to broaden its customer base, amongst others, by marketing and venturing into new markets through participation in trade exhibitions, locally and abroad. as well as entering into strategic alliances with companies thaI already have a presence in the markets 10 which Ihe Group intends to expand. 24 The Group uses steel, aluminium and brass rods in the manufacture of SCFs and hardware components, which are generally available and thus, it is not necessary for the Group to enter into long-term contracts with its suppliers. The Group usually places orders for raw materials which can last up to four (4) to five (5) months of production. In addition, the good working relationships established with the Group’s suppliers has ensured their co-operation in terms of supply frequencies, schedule changes and technical advances. However, such co-operation cannot overcome any commercial pressures on the prices of raw materials. 4.3 Competition The Group is principally involved in the manufacture of SCFs, which are used mainly in electronics equipment, electrical appliances and computing devices. The market for the Group’s products is highly competitive and characterised by rapid product and technological innovation in the electronics and computing industries. The Group has experienced and expects to continue to experience intense competition from current and future competitors. The Group believes that its ability to compete depends upon many factors both within and outside its control, including the timing and market acceptance of new products and enhancements developed by the Group and its competitors, product functionality, ease of use, performance, price, value for money, reliability, customer service and support, sales and marketing efforts, and product distribution channels. The Group’s competitors vary in size and in the scope and breadth of tile products offered. Some of these competitors may have sUbstantially greater financial, technical and marketing resources and name recognition than the Group. The Group’s competitors may be able to respond more quickly to new or emerging technologies and changes in customer preference or to devote greater resources to the development, promotion, sale and service of tlleir products. The Group also expects to face additional competition from emerging companies that could enter the market and introduce new products. There can be no assurance that the Group will be able to compete successfully with existing or new competitors. Increased competition could result in price reductions, reduced revenue and margins, and loss of market share, anyone of which could materially and adversely affect the Group’s business, operating results and financial condition. However, the capital intensiveness of the industry in which the Group operates and the existence of other barriers to entry as described in Section 6.7.2 “Barriers to Entry” of this Prospectus may deter emerging companies from entering the market. Additionally, the Group, a manufacturer of quality SCFs, focuses on technology that is highly reliable and also invests in product innovation to ensure its competitiveness in capturing market share and garnering market acceptance.
4.4 Management of Growth The Group’s rapid growth has placed significant demands on the Group’s management, administrative, operating and financial resources. In addition, in order to achieve the Group’s growth targets as set out in its Five-Year Business Development Plan, there may be significant strain on the Group’s management, financial, customer support, operational and other resources. The Group’s ability to manage future growth will require the Group to continue to enhance its operating, financial and management information systems and to expand, develop, motivate and manage effec;tively its professional and administrative work force. If the Group is unable to manage its growth effectively, the quality of the Group’s products, its ability to retain key personnel and its operating results are likely to be materially adversely affected. There can be no assurance that the Group will be successful in managing its growth. 25
The Group’s proposed future plan and prospects will be dependent upon, among other things, the Group’s ability to enter into strategic marketing or other arrangements on a timely basis and on favourable terms, hire and retain skilled management as well as financial, technical, marketing and other personnel, successfully manage growth (including monitoring operations, controlling costs and maintaining effective quality controls), and obtain adequate financing as and when needed. There can be no assurance that the Group will be able to successfully implement its business plan or that unanticipated expenses or problems or technical difficulties will not occur which would result in material delays in its implementation or even deviation from its original plans. In addition, the actual results may deviate from the business plan due to rapid technological changes, and market as well as competitive pressures. 4.5 Technological Change and Market Acceptance of Products The markets for the Group’s products are characterised by rapid product innovation and technological developments, evolving industry standards, swift changes in customer requirements, and frequent new product introductions and enhancements. The introduction of competing products incorporating new technologies could render some or all of the Group’s products obsolete or unmarketable. The Group’s future success depends substantially upon its ability to address the increasingly sophisticated needs of its customers by gaining expertise in technological advances and to respond qUickly to evolving industry trends. There can be no assurance that the Group will be successful in adapting to these advances in technology or in addressing changing client needs on a timely basis. In addition, there can be no assurance that the products or technologies developed by others will not significantly reduce the demand for the Group’s products or render the Group’s products obsolete. Nevertheless, the Group has expended sUbstantial resources for the enhancement of its products, and for product developments, and will continue to do so. The timely development of new or enhanced products is a complex and uncertain process, which can be subject to changing market requirements as well as unforeseen costs and delays, resulting in substantial expenditures and capital costs. Although the Group believes that it will have the funding to implement its business plan, there can be no assurance that the Group will continue to have sufficient resources to successfully and accurately anticipate technological and market trends, or to successfully manage long development cycles. The Group may also experience design, marketing and other difficulties that could delay or prevent the development, introduction or marketing of its products. The Group may also be required to collaborate with third parties to develop products and may not be able to do so on a timely and cost-effective basis, if at all. If the Group is not able to develop new products or enhancement to its existing products on a timely and cost-effective basis, or if the Group’s new products or enhancements fail to achieve market acceptance. or ff one (1) or more of the Group’s competitors introduce products that better address customer needs or for any reason gain market share, the Group’s business, operating results and financial condition would be adversely affected.
4,6 Continuing Demand for the Group’s Products The Group’s future results will depend on the overall demand for the Group’s products. Any economic slowdown may cause the Group’s customers to defer or terminate their purchases of the Group’s products or otherwise alter their usage patterns. The Group may experience hesitancy on the part of existing and potential customers to commit to continuing or new products from the Group. However, to date, the Group’s products have been wellreceived by its customers and the Group expects that enhancements and improvements of features, quick time to market and good technical service should ensure continuing acceptance of its products. 26
4.7 Dependence on Directors and Key Personnel, and the Need to Recruit and Retain Professional Employees The Group’s future performance depends to a significant extent upon the continued efforts and abilities as well as the networking efforts of its directors, key technical, sales and marketing, and senior management personnel, in particular, Techfast Holdings’ Group Managing Director, Yap Yoon Sing, and its Executive Director Fong Kok Leong who heads production and all R&D efforts. The loss of the services of any of these individuals may have a material adverse effect on the Group. The Group’s future success also depends on its ability to attract, hire, train, retain and motivate sufficient skilled employees for its corresponding level of business operations. There can be no assurance that the Group will be able to recruit, develop and retain a sufficient number of highly skilled, motivated professionals for its forecasted growth in business operations to compete successfully. In addition, competition for qualified personnel may also lead to increased costs for such personnel which the Group may not be able to offset by increases in the prices of its products. As a mitigating factor, the Group currently enjoys a cordial relationship with its employees and they do not belong to any trade union. The employees are also frequently sent to various courses to upgrade their knowledge.
4.8 Dependence on Foreign Workers The Group employs foreign labour for its production operations. As at 18 April 2005 the Group has 146 foreign workers from various countries. The Group’s continued use of these foreign workers is dependent on the ability for the Group to obtain the necessary regulatory approvals for the employment of such workers and that there is no adverse change in the regulatory policies relating to the use of foreign workers in Malaysia. At this moment, there is an adequate supply of foreign labour from neighbouring countries and the Group does not employ all of its foreign labour from a particular country.
4.9 Continued Control by Existing Shareholders Upon the completion of this Issue, the substantial shareholders of the Company, the directors of the Group and their associates will, in aggregate, beneficially own approximately 72.56% of the issued and paid-up share capital of the Company. As a result, these shareholders, acting together, will possess voting control over the Company, giving them the ability, amongst others, to elect at least a majority of the Company’s Board of Directors and to control the vote on significant corporate transactions, unless they are required to abstain from voting by law and/or by the relevant authorities. Please see Section 2.2 “Ownership and Management” and paragraphS 4 and 5 of Section t 4.3 “Directors and Substantial Shareholders” of the Prospectus for further information on the directors’ and substantial shareholders’ interests in the Company. Nevertheless, the Company has appointed two (2) independent directors as a step towards good corporate governance to ensure that any future transactions involving related parties are entered into on arms-length terms.
4.10 Acquisitions and Joint Ventures If appropriate opportunities present themselves, the Group intends to acquire businesses, products or technologies or enter into synergistic joint ventures that the Group believes will be in the interest of its shareholders. There can be no assurance that the Group will be able to successfully identify, negotiate or finance such acquisitions and joint ventures, or to consummate or integrate such acquisitions and joint ventures with its current business. Acquisitions and joint ventures may cause the Group to seek additional capital, which may or may not be avaiiable on satisfactory terms. 27 Acquisitions involve significant risks, including the diversion of management’s time and attention to the negotiation of the acquisition and the assimilation of the businesses acquired to the Group’s existing operating structure; the need to modify financiai and other systems, and recruit additional management resources; potential liabilities of the acquired business; unforeseen difficulties in the acquired operations and the possible adverse shortterm effects on the Group’s operating results. There can be no assurance that the anticipated benefits of any acqUisition will be realised, or that the Group will be able to generate sufficient revenues from any such acquiSition to offset associated acquisition costs, Or that the Group will be able to maintain uniform standards of quality and service, controls, procedures and policies. AcqUisitions may also result in potentially dilutive issuances of equity, the incurrence of debt and contingent liabilities, and amortisation expenses related to goodWill and other intangible assets. Any joint venture investments would involve many of the same risks posed by acquisitions. 4.11 Future Capital Injections The Board of Directors of the Company is of the opinion that the net proceeds of the Issue, together with cash flow from operations and other existing sources of liquidity, will be sufficient to meet the Group’s projected capital commitments, working capital and other cash requirements. However, there is no assurance that future events may not cause the Group to seek additional capital sooner. If additional capital is required, there can be no assurance that it will be available or, if available, that it will be on terms satisfactory to the Group. The sale of additional equity or other convertible securities to non-shareholders will result in further dilution of the shareholdings of the Company’s shareholders. 4.12 Trade Facilities The Group’s borrowing facilities agreements with local financial institutions contain certain covenants, representations, warranties, undertakings and/or conditions which limit the Group’s operating and financial flexibilities. A breach in such covenants, representations, warranties, undertakings and/or conditions may allow the financial institutions to terminate the trade facilities and/or enforce any securities pledged to obtain these trade facilities. The Group is aware of such covenants, representations, warranties, undertakings and/or conditions, and endeavours to take the necessary precautions to prevent any such breach.
4.13 Protection of Intellectual Property Rights The Group’s TFM™ logo has been filed for trademark registration under International Class No. 6 in Malaysia. The iogo has been registered in the UK under International Class 6 under the Trade Marks Act 1994 of Great Britain and Northern Ireland and the US under International Class NO.6 under the US Trademark Act of 1946. Existing copyright, trademark and trade secret laws afford only limited protection. Accordingly, there can be no assurance that the Group will be able to protect its proprietary rights against unauthorised third party copying, use or exploitation, any of which could have a material adverse effect on the Group’s business, operating results and financial condition. Third parties may challenge or dispute the Group’s intellectual property rights in terms of, amongst others, title and third party intellectual property rights infringement and the Group could incur substantial costs in defending or prosecuting any claims relating to its intellectual property rights. Issues relating to intellectual property rights can be complicated and there can be no assurance that disputes will not arise or that any disputes in relation to the Group’s intellectual property will be resolved in the Group’s favour. Moreover, any such disputes could be time consuming, cause delays in introducing new or improved products and could have a material adverse effect on the Group’s reputation, business, operating results and financial condition. 28
4.14 Disruption in Operations Interruption of the Group’s operating capabilities through breakdown or ma~unctionlng of machinery, and failure or damage caused by fire, storms, lightning, electrical power outage or other disruption could have an adverse material effect on the Group’s business, operating results or financial condition. To avoid major breakdowns and disruption to the Group’s operations, the machinery is constantly monitored and maintained.
4.15 Breakout of Fire, Energy Crisis and Other Emergency Crisis The Group believes that it has adequate safety and fire-fighting equipment installed at its office premises and factory building to ensure that the risk of fire is contained. The Group has in place a system of educating its employees in fire safety. Besides that, the Group’s manufacturing plant is insured against losses arising from fire. However, notwithstanding the measures taken, there is no assurance that any of the above-mentioned crises may not cause interruptions in the Group’s operations in the future.
4.16 Insurance Coverage on Assets The Group believes that it has adequate insurance coverage on its assets. Although the Group reviews its insurance policies on a regular basis to ensure that there is adequate coverage on its assets, there can be no assurance that the coverage would be adequate for the replacement cost of its assets or any consequential loss arising therefrom. The Group does not have any consequential loss insurance.
4.17 Expansion into Overseas Markets As part of its growth and marketing strategy, the Group intends to increase its sales and marketing efforts in other regional markets such as China. The Group anticipates that its overseas expansion may require significant investment by the Group in advance of anticipated future revenue. There can be no assurance that the Group’s expansion efforts will be successful or will generate significant revenue. There are a number of risks inherent in regional business activities, including unexpected changes in regulatory requirements, difficulties in managing regional operations, potentially adverse taxation consequences, currency fluctuations, uncertainties in general economic or industry conditions, difficulties in the repatriation of earnings and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have a material adverse effect on the Group’s business, operating results or financial condition. However, the Group will adopt a prudent approach in expanding into the target regional markets, especially China. The Group intends to form strategic alliances with the foreign manufacturers of SCFs in these countries, working with these partners to meet the demand for SCFs in the overseas markets.
4.18 Foreign Exchange Risk The Group is exposed to foreign exchange risk on sales to foreign customers, which are billed mainly in the USD and to a lesser extent, the SGD, Thai Baht and Euro. The Group’s raw materials are mainly billed in RM. Currently the RM is pegged to the USD at an exchange rate of RM3.80 for every USD1, thus eliminating currency fluctuations. However, there is no assurance that the currency peg will continue indefinitely. Any future significant fluctuations in exchange rates may have a significant impact on the revenue and earnings of the Group. 29
4.19 No Prior Market for Techfast Holdings Shares and Possible Volatility of Share Price There has been no prior public market for the Company’s Shares. The Issue Price was determined by agreement between the Company and the Underwriters based upon several factors and may not be an indication of the market price of the Shares upon or subsequent to listing and quotation on the MESDAQ Market of Bursa Securities. See Section 3.5 “Pricing of the Issue” for a discussion of the factors considered in determining the Issue Price. There can be no assurance that an active public market in the Shares will be developed or be sustained after listtng and quotation on the MESDAQ Market of Bursa Securities or that the market price of the Shares will not decline below the Issue Price. The Group believes that a variety of factors could cause the price of the Shares to fluctuate. including sales of substantial amounts of the Shares in the public market. announcements of developments relating to the Group’s business, fluctuations in the Group’s operating results and revenue levels. general industry conditions or economic conditions, and announcements of new products or product enhancements by the Group or its competitors.
4.20 Forward-Looking Statements All statements contained in this Prospectus, statements made in press releases and oral statements that may be made by Techfast Holdings, Directors or employees acting on the Group’s behalf, that are not statements of historical fact, constitute “forward-Iooking statement”. Some of these statements can be identified by forward-looking terms such as “expect”, “believe”, “plan”, “intend”, “estimate”, “anticipate”, “may”, “will”, “would”, and “could” or similar words. These words are not the exclusive means of identifying forward-looking statements as all statements regarding the Group’s expected financial position, business strategy, plans and prospects are also forward-looking statements. These forward-looking statements, Including statements as to the Group’s revenue and profitability, cost measures, planned strategy and any other matters discussed in this Prospectus regarding matters that are not historical facts are only predictions. Statements such as these involve known and unknown risks, uncertainties and other factors that may cause the Group’s actual results, performance or achievements to be materially different from any future resuits, performance or achievements expressed or implied by such forward-looking statements.
4.21 Political, Economic and Regulatory Conditions Like all other business entities, changes in political, economic and regulatory conditions in Malaysia and elsewhere could materially and adversely affect the financial and business prospects or the overall profitability of the Group. These political, economic and regulatory uncertainties include but are not Iimrted to changes in political leadership, the introduction of new regulations. war, economic downturn, financial crises, and changes in rates of interest. methods of taxation and foreign exchange regulations. The Group had adopted a proactive approach in keeping abreast of political, economic and regulatory developments of the countries to which it markets or intends to market its products.
4.22 Failure or Delay in the Listing The success of the listing of Techfast Holdings on the MESDAQ Market is also exposed to the risk that it may fail or be delayed due to any of the following reasons, amongst others:(a) The placees under the private placement tranche of the Issue fail to acquire the Issue Shares allocated to them;
(b) The Underwriting Agreement is terminated; and
30 (cl Techfast Holdings is unable to meet the pUblic shareholding spread requirements Le. at least 25% but not more than 49% of the issued and paid-up share capital of the Company must be held by a minimum of 200 public shareholders at the time of the Company’s admission to the Official list of the MESDAQ Market. In the event of the failure of the proposed listing ot Techfast Holdings on the MESDAQ Market, investors shall be reimbursed their application money without interest. THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 31