Risk Factors

DISCLAIMER: THE FOLLOWING INFORMATION IS TAKEN FROM VITROX IPO PROSPECTUS DATED ON 16 AUGUST 2005. SOME INFORMATION MAY BE OUTDATED OR NO LONGER RELEVANT.

 

INVESTMENT CONSIDERATIONS AND RISK FACTORS
NOTWITHSTANDING THE PROSPECTS OF THE VITROX GROUP OUTLINED IN THIS PROSPECTUS, APPLICANTS SHOULD CAREFULLY CONSIDER THE FOLLOWING INVESTMENT CONSIDERATIONS (WHICH MAY NOT BE EXHAUSTIVE), BOTH SPECIFIC TO THE VITROX GROUP AND RELATING TO THE GENERAL BUSINESS ENVIRONMENT, THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE PERFORMANCE OF THE VITROX GROUP, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE HEREIN, BEFORE APPLYING FOR THE PUBLIC ISSUE SHARES.
Investors should rely on their own evaluation to assess the merits and risks of the investment. Investors who are in any doubt as to the information contained in this section should consult their stockbroker, bank manager, solicitor, accountant or other professional adviser.
RISKS RElATING TO BUSINESS AND OPERATIONS OF VITROX GROUP
Operating Risks
VTSB has been profitable since its date of incorporation as at 3 March 2000. Nonetheless. there is no assurance that the ViTrox Group will be profitable in future years.
The Group’s rcvenue and operating results are difficult to forecast and could be adversely affected by many factors. These may include, amongst others, the ability of the Group to secure new contracts from their clients, the ability of the ViTrox Group to control unforeseen costs, unforeseen changes to the Group’s operating expenses, the availability of human resources to meet market demand, reliance on performance of other industries, competition, the ability of the Group to develop and market, on a timely basis, new products. market acceptance of new products or services. and other business risks common 10 going concern.
Dependence on Major Customers
For the past five (5) years, SRM Tech and SRM Integration (Malaysia) Sdn Bhd (Company No: 631935-W) have ltistorically contributed more than 50% of ViTrox Group’s revenue, as set out below:¬≠
FYE 31 December Five (5) Ten (10) months months ended 31 ended 31 December 2000 2001 2002 2003 2004 May 2005 SRM Tech’s percentage contribution to
91.5 50.7 43.5 76.0 61.9 10.3
the Group’s revenue (%)
SRM Integration (Malaysia) Sdn Bhd’s
perceDtage contribution to the Group’s 0.5 67.2
revenue (%)
SRM Tech is principally involved in the manufacturing and assembly of SMD auto test handler equipment. SRM Integration (Malaysia) Sdn Bhd is principally involved in the manufacturing of semiconductor equipment. (Source: Respective companies filing reports with the Companies C011lnfisi.cn of Malaysia dated 3 A”81′” 2(105)
The loss of SRM Tech and SRM Integration (Malaysia) Sdn Bhd (“Major Customers”) as customers may advcrsely affect the Group’s revenue and operating results. However, the possibility of the aforementioned is mitigated by the established business relationship between the Group and the Major Customers over the past five (5) years with ViTrox’s proven delivery track record. Nonetheless, the management of ViTrox Group recognises the need for revenue diversification and to further mitigate the highlighted risk, has embarked on this effort since 2001 through expansion into other geographical markets and thus, widening its clientele base. While the management of the Group will make its best effort in diversifying the Group’s revenue base, there can be no assurance that the aforesaid efforts will be able to mitigate the risk arising from dependence on the Major Customers.
Lack of Long Term Contracts
ViTrox Group has historically not entered and presently does not enter into any long-term contract with its customers on the provision of the Group’s products and services. The lack of long term contracts with the customers is in line with dynamics of the machine vision industry which is subject to rapid technological changes and thus frequent product specification changes. Hence, the contracts for the supply of ViTrox Group’s products and services are generally short-term in nature and on per order basis. Hence, the financial performance of the Group would be dependent on the ability of the Group to secure new contracts on a consistent basis. Consequently, the failure of the Group in securing new contracts in the future may have a material adverse financial impact on the Group.
Nonetheless, the risk of lack of long term contract with the Group’s customers is mitigated by the established business relationships between the Group and its customers over the past five (5) years, as evidenced by the length of customer relationship which averages about 3 years and continuous repeat orders secured by the Group. Details on the major customers of the Group for the FYE 2004 arc set out in Section 6.4 of this Prospectus. In addition, the management of the Group recognizes the need for revenue diversification and has embarked on this effort since 2001 through expansion into other ¬†geographical markets to widen its clientele base and continuous expansion and innovation on its products and services offerings. While the management of the Group will make its best efforts in diversifying its revenue base, there can be no assurance that the aforesaid efforts will be able to mitigate the risk arising from lack of long term contracts with the Group’s customers.
Dependence on Key Management and Key Technical Personnel
The ViTrox Group’s future performance will depend to a certain extent on the continued efforts and abilities of its Directors and key management and key technical personnel. The loss of the services of any of these individuals may have a material and adverse effect on the ViTrox Group. Although the ViTrox Group presently had a young management team, the ViTrox Group will make efforts to ensure
there is sufficient understudy of its existing management team to ensure smooth transition in the event
of loss of any key personnel.
Chu Jenn Weng, Siaw Kok Tong and Ycoh Shih Hoang have been the driving force of the ViTrox Group since its inception. The loss of their services and guidance may impact on the future performance of the ViTrox Group. However, the moratorium on their shareholdings together with their substantial interests in ViTrox will mitigate against the risk of their exit from the ViTrox Group.
The Directors of ViTrox Group recognize the importance of the Group’s ability to attract and retain its key personnel and have in place a human resource strategy, which includes a suitable compensation package and a human resource training and development program for all supporting employees in all key functions of the Group’s operations. The Group has made continuous efforts to strategically develop a dynamic and strong management team and groom the younger members of the senior management in assisting senior key personnel to operate and manage the Group’s activities. As such, the loss of any key personnel is therefore, not expected to cause any major disruption to the Group’s operations.
The ViTrox Group has also put in place an ESOS scheme which will provide incentive for commitment of employees to the ViTrox Group and shall be implemented in due course. Please refer to Section 14 of this Prospectus for further details on the ESOS. However, there can be no assurance that these measures will be able to counter the risks of loss of the ViTrox Group’s skilled personnel.
Technological Risks
The ViTrox Group operates in an environment where its operations are exposed to risks of computer
viruses, industrial espionage, theft, hacking and fraud. Any of these risks may disrupt the operations of
the ViTrox Group.
In response to this. the ViTrox Group has made all reasonable efforts to minimise potential security
breaches by the use of layers of security systems such as firewalls, encrypted keys and anti-doning
algorithms, and to undertake periodic back-ups of important computer databases which arc kept at separate secured location. To date, there has not been any material disruption or damage to the ViTrox Group’s computer systems. However, going forward, there is no assurance that the appropriate securely systems will be able to prevent thcse risks from occurring.
Protection of the ViTrox’s Group Proprietary Technology and Intellectual Property Rights
One of the principal threats to the ICT industry is infringement of copyright and illegal copying of proprietary software. The Group relies upon a combination of trade secrets, non-disclosure and other contractual agreements to attempt to protect its proprietary rights. The ViTrox Group is also protected by the general copyright and intellectual property laws in Malaysia for its proprietary processes and know-how. The ViTrox Group’s success is dependent upon its ability to protect its intellectual property rights. Accordingly, there can be no assurance that the ViTrox Group will be able to continue to protect its proprietary rights against infringement, unauthorized third-party copying, use or exploitation, any of which may have a material and adverse impact on the ViTrox Group’s business, operating results and financial condition.
However, the ViTrox Group’s proprietary machine vision solutions requires a high level of domain
knowledge as well as the requisitc pedagogical expertise before it can be applied or replicated for commercial exploitation. Additionally, the clientele of ViTrox Group is primarily made uf’ of reputable MNCs with a track record of rcspect and compliance on the intellectual property rights which in turn diminishes the probability of infringement of ViTrox Group’s intellectual properties. Thus, the ViTrox Group’s products may be less affected by risks of widesf’read unauthorised use, cOf’ying and exploitation.
As with the ViTrox Group’s employees who are required to enter into agreements with thc Grouf’ to limit the possibility of unauthorized copying and exploitation during their employment and when they leave the Group’s employment, the Group’s customers and suppliers are also bound by user/nondisclosure agreements, which prohibit them from the same. Internally, the Group has undertaken modularisation of its software codes and only certain top management personnel would have access to the full source codes, and hence, minimizing the probability of breaches by the employees of the Group.
The trademark “VITROX” is presently pending approval as at 31 July 2005 subsequent to application on 27 August 2004. The Directors of ViTrox intends to pursue trademark registrations in other
countries where its products arc sold to ensure protection of its brand names.
Nevertheless, there can be no assurance that the steps taken by the ViTrox Group to protect its intellectual property rights will prevent fully the risks of infringement.
Delays in Research and Development
The ViTrox Group carries on continuous R&D activities to expand its product and services range as well as to enhance its machine vision technologies and services. The ViTrox Group aims to continue improving its products so as to meet international standards through intensive R&D programmes. There can, however, be no a&SUrance that these R&D programmes L’8n be successfully completed on time so as to enable timely roll-<luf of new products and enhancements which meet the demands of the market.
However, the ViTrox Group believes that its existing product and services range have been well received by its clients and their continued demand will mitigate against any delays in its R&D.
Dependence on the Semiconductor Industry and OEM Market Segment
ViTrox Group’s financial performance is closely related to the performance of semiconductor industry and the related OEM market segment, and thus, is prone to the semiconductor’s business cycle. A
severe downturn in the semiconductor industry may cause significant cutbacks in infrastructure
investments by the semiconductor producers and OEMs, and thus may reduce demand for products and services by machine vision systems providers such as ViTrox Group. While the cyclical nature of the semiconductor industry affects all machine vision systems providers across the board, the management of ViTrox Group believes that the Group would be able to mitigate this cyclical risks by practicing prudent cash flow management and diversifying its income streams through expansion into other geographical markets and new segments within the semiconductor industry which may require machine vision solutions. Further details on the Company’s expansion plan have been set out in Section 8 of this Prospectus. However, there can be no assurance that the steps to be undertaken by the Group would be able to mitigate the risk posed by the cyclical nature of the semiconductor industry.
Investment Risks
If appropriate opportunities presenl themselves, whether in Malaysia or elsewhere, the ViTrox Group may decide to acquire businesses, products or technologies, or enter into joint ventures, alliances or partnerships with third parties, or to expand into other geographical markets.
There can be no assurance that the ViTrox Group will be able to successfully identify, negotiate, finance or implement these ventures or investments, to successfully integrate these ventures or investments with its current business and operations) or to benefit from the same. These ventures and investments may also require additional capital, which mayor may not be available on terms satisfactory to the ViTrox Group. However, any venture or investment of such nature will be carefully considered by the Directors of ViTrox.
The ViTrox Group may also from time to time invest in new ventures and products. These investments may not be successful, Or may have a delayed gestation period. In this event, the ViTrox Group may not be able, or may be slow, to recover its investments and/or achieve satisfactory returns. Whilst any venture or investment of such nature will be carefully considered by the Directors of ViTrox, there can be no assurance that the new ventures or investments will be successful.
Foreign Exchange Risks
ViTrox Group’s products and services afC presently sold in overseas market such as China, Taiwan,
Japan and US. Going forward, the Group intends to set up offices in China and Taiwan, and further expand its markets into Europe, US and Japan. Sales to the overseas markets are often transacted in USD, and expenditure of the ViTrox Group in these markets will also be incurred in local currencies. In such instances, the Group will be exposed to foreign exchange fluctuations.
Fluctuations in the conversion rate of RM against USD may have material financial impact on the Group’s fUlancial performance. The risk of foreign exchange fluctuation is mitigated by the managed float mechanism by the Bank Negara Malaysia adopted since 21 July 2005 on the RM-USD conversion
rate which may prevent extreme exchange rate fluctuation. No assurance can be given that the
managed float mechanism will be maintained in the future and that if the >aid managed float mechanism is removed or revised, it will not haye an adverse material effect on the performance of the Group.
Change in MSC Status
ViTrox was granted the MSC status in accordance with MDC’s procedures on 11 August 2004. With the MSC status, ViTrox is expected to enjoy financial and non-financial incentives. MDC is the body responsible for monitoring all MSC status companies. MDC has the right to withdraw any company’s MSC status at any time. There can be no assurance that ViTrox will continue to retain its MSC status or that it will continue to enjoy, or it will not experience delays in enjoying, the incentives granted to MSC status companies, all of which could materially and adversely affect the ViTrox Group’s business, operating results and financial condition. However, the Directors of ViTrox shall ensure that ViTrox will continue to comply with the conditions of the MSC status granted and that the necessary applications to renew the MSC status will be made in the future.
Risks in New Geographical Markets
Presently, ViTrox’s products arc sold in overseas markets such as China, Taiwan, Japan and US. ViTrox intends to expand its markets to other pans of Asia, Europe and US. In line with these expansion plans, there are risks associated with market expansions to these regions.
If ViTrox is not successful in penetrating these new geographical markets, it may suffer revenue shortfalls and an increase in operating costs. Substantial management resources would also have been devoted to launch its products and grow its operations in targeted markets. There can be no assurance that sales and marketing efforts of the ViTrox Group’s business development team will be successful or generate significant revenue. The ViTrox Group will be subject to further risks when it operates in foreign countries that could affect its financial conditions and operating results, including:¬≠
(i) local regulatory requirements;
(ii) costs and risks in localisation of its products for these new markets;
(iii) fluctuations in currency exchange rates;
(iv) an imposition of currency exchange controls;
(v) unexpected change in regulatory requirements; and
(vi) poor market acceptance.
Detailed analyses of new target markets will be conducted and evaluated prior to making these
decisions.

 

 

 

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