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 THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS PRIOR TO INVESTING IN OUR SHARES. lf you are in any doubt as to the information contained in this section, you should consult your stockbrokers, bank managers, solicitors, accountants or other professional advisers. 4.1 Risks in Relation to Our Business 4.1.1 Dependency on the Continued Services ofOul’ Key Management We believe that the continuing success of our Group will depend to a large extent upon the continued services of our key management. Our key management comprises amongst others, our Managing Director, Ng Aik Chuan and our Executive Director, Ng Yam Pin, both of whom have been instrumental to the growth and development of our Group over the years. The loss of any of our key management without suitable and timely replacement, or the inability to attract, hire and retain suitable candidates may adversely affect our Group’s continued ability to compete and expand in our business operations and subscquently impact our finandal perfonnance. As such, our Group’s future success will depend upon our ability to attract, retain and motivate our key management. Tn order to ensure smooth succession planning, numerous efforts have been made by our Group to train and groom younger members of our management team to gradually take on more responsibilities. Such eff011s include constantly exposing our younger management team members to various aspects of our business operations and our Group’s decision making process to ensure that they are equipped with the knowledge to succeed in senior management roles. In addition, we have put in place human resource strategies which include competitive remuneration packages and a variety ofon-going training and development programmes for the key management. Notwithstanding our effotis in seeking to limit and minimise this risk, there can be no assurance that the above measures will be successful in retaining our key manClgel1lent or ensuring s11100th management succession plan.
4.1.2 Non-Renewal or Revocation of Vehicle Permits and I or Business Licences In the event that our vehicle permits and I or business licences are not renewed or revoked, there will be a material adverse impact on our business operations as we will not be able to CatTy on our business without such valid vehicle permits and / or business licences. Wc recognise the imp0l1ance of timely renewal of the vehicle permits and business licences and our Board sball endeavour to fulfil all conditions imposed by the relevant regulatory authorities for the Clforesaid renewal. In the past, our Group has not encountered any difficulties in renewing the relevant vehicle permits and / or business licences. However, there can be no assurance that the regulatory authorities will rencw our vebicle permits and / or business licences without delay or will not vary, modify or impose further conditions on our Group for the renewal of vehicle permits and / or business licences in the future. 4. RISK FACTORS (COlli”’) 4.1.3 4.1.4 4.1.5 Reliance on Continued Port Operations Our internal port haulage transpOliation services are retiant on the continued operations of the ports that we are currently operating in, namely Johor Port, Johor Darul Takzilll, POli of Tanjung Pelepas, Johor Dal’lll Takzim and Penang Port, Pulau Pinang. The container terminals in the respective pOlis may undergo upgrading works from time to time and require repair and maintenance on an ad hoc basis. This may result in disruptions to the daily operations of the ports and subsequently affect the provision of our internal port haulage transpOliation services. In addition, we are exposed to the risk of stoppages to the operations ofthe respective ports due to labour disputes, labour unrest and formation of unions, which trUlY affect our business and financial condition. Any disruption to the services of third party vendors providing marine tug boat services, pilotage services and crane services to the respective ports may also affect the operations of the ports. As at the LPD, we are providing internal POli haulage transportation services to three (3) major ports in Peninsular Malaysia and hence, we are not dependent on the continued operations of a single port. Notwithstanding that, there is no assurance that any future disruptions to the operations of the ports will not adversely affect the business and financial perfonnance of our Group. Technological Advancemeuts and System Disruptions The logistics industry has undergone technological advancements where a variety of technology have been developed to increase the efficiency and security of services offered by logistics service providers. Om Group depends on technology such as GPS for the monitoring and tracking of cargo to ensure smooth operations of our business and to address the technological needs of our customers. As such, we are exposed to the risk of system disruptions and power failures which may result in interruptions to our business operations. Further, our ability to keep abreast with the technological changes in respect of changing market trends and evolving industry standards may also affect our business and results of operations. Although our Group seeks to limit these risks through, inter-alia, constant updates of our software and systems, regtllar service and maintenance of our systems and having a backup system performing daily backup of data, there is no assurance that our Group will be able to respond to technological changes as well as system disruptions in a cost effective and timely manner. Adequacy of Insurance Coverage Our Group is mainly involved in the land transpmi operations and warehousing and distribution operations. As such, there is a risk of non-delivery, loss or damage of goods on consignment arising tiom mechanical or vehicular failures or accidents which may result in claims for damages by our customers. In addition, our warehouse is susceptible to the usual emergency and security risks in the form of breakout of fire, flood, theft and other adverse events. Such incidences may affect the operational and financial performance of our Group. 4. RISK FACTORS (CoJl/’d) 4.1.6 4.1.7 Our Group is aware of the adverse consequences arising from inadequate insur,mce coverage for the accidents and outbreaks that could dislupt our business operations. In order to ensure that such risks are maintained to the minimum) we regularly review and ensure adequate insurance coverage for our assets. ]n addition to the insurance for our fleet of vehicles, our Group has insurance coverage for our warehouse, office premises, fixed assets and consignment goods kept in our warehouse such as 11re insurance. burglary insurance and inland transit insurance. However, there is no assurance that this coverage would be sufficient to cover all potential losses and indemnitY us against all possible liabilities arising from our operations as well as to offset the potential financial losses arising fi’om public liability, fire, thefi and personal accidents. Our business and financial performance may be adversely affected in the event that snch claims exceed the coverage of our insurance policies. Land Transportation Involving Hazardous Materials The provision of our land transportation services from time to time involves the transportation of hazardous materials such as industrial chemicals and explosive gases. As such. there is a risk of chemical spillage and contamination which may be hazardous to the handling personnel and immediate surroundings. Whilst our Group implements strict safety measures and procedures in relation to the handling of hazardous materials, there can be no assurance that accidents will not occur during the transpOliation of hazardous materials. Jf accidents do occur, our Group’s reputation, business operations and financial performance may be adversely affected. As at the LPD, there has not been ally contamination or accidents involving the transportation of hazardous materials which result in disruption to our Group’s business operations. Non-Renewal or Termination of Existing Tenancies Presently, our branch offices which are located in Pulau lndah. Selangor Daml Ehsan, Bukit Mertajam, Pulau Pinang and site office which is located in .lohor Port, Johor Darul Takzim, as well as a warehouse which is located in Skudai, .lohor DamI Takzim are rented from third pmties with tenancy terms of up to three (3) years. Our site office which is strategically located in the POlt enables us to coordinate with POlt operators in a timely manner and to closely monitor the movement of container within the pOli for our internal pOli haulage transportation services. Our Group generally commences negotiations of new tenancy terms with the respective landlords at least three (3) months before the expiry of an existing tenancy. During the negotiation process, the landlords have the absolute right to review and revise the terms and conditions of the tenancy agreements. As at the LPD, our Group has not encountered any difficulties in renewing the tenancy agreements with the respective landlords. Notwithstanding the above, there is no assurance that the landlords will not increase the rental rates unfavourably or refuse to extend the tenure or terminate the tenancies. In the event that the tenancies are not renewed or our Group is not able to secure new tenancies at reasonable rates and at strategic locations, our business operations and profitability may be adversely affected. 4. RISK FACTORS (ColI/’d) 4.1.8 Borrowings .nd Interest Rate Risks As at the LPD, our total short-tenD and long-tenD borrowings amounted to approximately RM2.90 million and RM41.89 million, respectively. Therefore, we are susceptible to fluctuations in interest rates. We may also face difficulties in obtaining additional financing from the financial institutions to fund our working capital and future business expansion in the event that we are unable to meet the repayment obligations. There can be no assurance that our gearing level will remain the same in the future and our performance would remain favourable in the event of adverse change in interest rates in respect of new financing facilities that are procured. Notwithstanding this, our Board shall evaluate and closely monitor the financial position of our Group prior to entering into any new credit facilities in order to meet the repayment obligations. 4.1.9 Credit Risk and Defanlt in Payment by Our Customers Generally, the credit telms granted to our customers range from ninety (90) days to one hundred twenty (120) days. Our customers have v3Iying degrees of creditworthiness which exposes us to the risk of non-payment by them. In the event that our customers default all their payments. our operating cash flows, financial condition and results of operations could be materially and adversely affected. We are aware of our exposure to credit risk and have put in place stringent credit management policies in our Group through the application of credit approval, credit limit and monitoring procedures on an on-going basis. Our Group only provides credit terms to recognised and creditworthy third parties and we trade with new customers solely on cash basis. We pelform credit evaluations on our customers and an appropriate credit limit is then allocated to each customer based on their observed risk level. In addition, we also emphasise on close monitoring and efficient collection of accounts to minimise the risk of default. Although there have been no material collection problems for trade receivables and material bad debts written off during the past four (4) financial years up to the LPD, there is no guarantee that our customers wiIJ be able to fulfil their debt obligations and our Group will not encounter collection problem in the future. Any default or delay in our collection of payment which lead to impaitment losses on trade receivables or bad debts may have a material adverse impact on our financial perfonnance. I THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK I 4. RISK FACTORS (CoIlI’d)
4.2 Risks in Relation to Our Indnstry 4.2.1 Avaihlbility of Drivers Our Group1s land transpOlt operations are dependent on the availability of drivers. As at the LPD, we have a total of 448 drivers employed under contract for service which accounted for approximately 55.04% of our Group’s total workforce. Any snbstantial shortage in the snpply of drivers may lead to a disruption in our Group’s daily land transport operations, Our Group recruits drivers with valid driving licences under contract for service in order to mitigate the risk of high turnover rate of drivers. In addition, the drivers are recruited under contract for a period of one (l) year and renewable annually at the discretion of our Group. This is done in order to provide flexibility to our Group and allows us to build and maintain a stable pool of committed drivers. As part of our effOits to retain the drivers, our Group also provides oppOitunity to drivers that have been working with our Group for more than three (3) years and with satisfactoty perfonnance an option to canvert to a permanent position. We have also taken numerous effotts to attract and retain the drivers in order to ensure that there are sufficient drivers for our Group’s daily land transpOlt operations. Such efforts include the following: (i) offers competitive wages based on industry average;
(ii) provides opportunities for growth and a clear career path by assigning different types ofjob to the drivers based on their experience;
(iii) manages the allocation of contracts and orders to drivers to ensure that the drivers are able to generate consistent and stable income; and (iv) provides a variety of on-the-job training and development programmes for the drivers. Our Group is aware that shortage of drivers is prevalent. Therefore, we recognise the impOltance of motivating and retaining our existing drivers to avoid any shortage of drivers which may disrupt our land transpOit operations. As at the LPD. our Group has not experienced any shortages on drivers for our daily land transpOit operations. Notwithstanding that, there can be no assurance that such incident will not occur in the future and adversely affect our business operations and financial perfonnance.
4.2.2 Fluctuation in Fuel Priccs Due to the nature of our business, we are exposed to the risk of fluctuation in fuel prices. The cost of fuel accounted for approximately 20.46%, 21.98%, 21.82% and 21.59% of our total cost of sales for the FYE 31 December 2011, FYE 31 December 2012, FYE 31 December 2013 and FYE 31 December 2014, respectively. As such, any increase in fuel prices may result in an increase in our cost of sales, thus adversely affecting our operations and financial results. Fuel prices are affected by various factors which are beyond our control such as changes in the global demand and supply conditions, government trade policies and level of global economic activity. In order to mitigate the risk of fluctuations in fuel prices, the increase in cost of fuel is normally imputed in the pricing of our services. Should there be any significant increase in fuel prices and we are unable to pass on such increase in costs to our customers, our profitability and financial perfonnance may be adversely affected. -38 4. RISK FACTORS (Col/I’d)
4.2.3 Road Accidents and Traffic Interruptions Our Group’s business operations predominantly consist of the provision of land transportation services which exposes us to the risk of road accidents or traffic interruptions and thus, disrupting our business operations. According to the Department of Statistics Malaysia, up to August 2014, there are a total of 317,928 cases of road mishaps in Malaysia, of which 13,740 cases involves injuries or death. To mitigate the possibility of road accidents, our Group ensures that our drivers attend courses focused on road safety. We also undertake to perform regular service and maintenance works on our vehicles to minimise the possibility of accidents caused by faulty vehicles. In addition, we have sufficient insurance coverage for our employees and vehicles to cover any medical and repair expenses in the event of accidents and / or claims by third-party involved in the accident. Further, our Group factors in additional time required while planning the route for our drivers in order to mitigate the risk of traffic interruptions which may result in a delay in cargo delivery. Notwithstanding that, there can be 110 assurance that such incidents will not occur in the future and adversely affect the reputation of our Group which may have a material adverse effect on our business operations and financial performance.
4.2.4 Competition Our Group operates in a fragmented and competitive industry which is characterised by industl)’ players offering a different range of logistics services to various customers comprising, amongst others, air freight services, sea freight services and specialised warehousing services such as cold room facilities and temperaturecontrolled air-conditioning rooms. We face competition from both local and international logistics service providers paliicularly in terms of pricing, quality and reliability of services. Some of our competitors may have greater financial resources which allow them to offer a diverse range of logistics services at a lower price to our customers. Further, we may also face competition from new market entrants who seek to penetrate markets where we have established a presence as the barriers to enh·y for the industry are relatively low. Intense and / or increased competition may result in a reduction in our prices and profit margins as well as loss of market share in the existing markets which could materially affect the results of operations and financial performance of our Group. We believe that our track record, experienced personnel and quality services will help us to remain competitive in the fl1ture. However, there can be no assurance that competition from existing competitors as well as potential new entrants to the industry will not have a material adverse impact on the operating results and financial position of our Group. I THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK I 4. RISK FACTORS (ColIl’d)
4.2.5 Liberalisation of the Logistics Industry in the ASEAN Region The logistics industry in Malaysia is one of the services sectors undergoing liberalisation among ASEAN member countries under the ASEAN Framework Agreement on Services whicb was signed by the ASEAN Economic Ministers on 15 December 1995. PUJ’suant to the signing of the ASEAN Framework Agreement on Services, the Roadmap for the Integration of Logistics Services (“Roadmap”) was adopted in 2007. The Roadmap aims to create an ASEAN single market by 2015 by strengthening ASEAN economic integration through Iiberalisation and facilitation measures in the area of logistics services and to SUppOlt the establishment and enhance the competitiveness of an ASEAN production base through the creation of an integrated ASEAN logistics environment via, amongst others, removal of substantially all restrictions on trade for logistics services and allowing foreign (ASEAN) equity pal1ieipation of not less than 70% by 2013 for the logistics sector. Thus far, our Group has not experienced any adverse impact from the adoption of the Roadmap in 2007. Although our Board seeks to adopt appropriate strategies continuously in order to remain competitive, there is no assurance that our Group will be able to maintain and / or expand our market share in the logistics industry in Malaysia upon the full implementation of the Roadmap by 2015 which may result in the entty of regional market players and increase the level of competition in the logistics industry in Malaysia.
4.2.6 Political, Economic and Regulatory Considerations Like all other business entities, adverse developments in political, economic and regulatory conditions in Malaysia could unfavourably affect our financial position and business prospects. These risks include, amongst others, changes in political leadership, risk of war, changes in economic conditions, changes in interest rates, methods of taxation and unfavourable changes in government policies such as introduction ofnew regulations, import duties and tariffs. Any widespread and / or prolonged economic slowdown may also negatively affect Malaysia and its key trading nations resulting in some businesses cUl1ailing their procurement of products and services, thus affecting the demand for our land transpol1ation and warehousing and distribution services. Whilst we strive to continue to take effective measures such as prudent financial management and efficient operating procedures, there is no assurance that adverse political, economic and regulat01y factors will not materially affect our operations, financial performance and future prospects. ITHE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK I