3. RISK FACTORS 3. RISK FACTORS Prospective applicants should carefully consider the following risk factors (which are not exhaustive) in addition to the other information contained elsewhere in this Prospectus before applying for the IPO Shares:
RISKS RELATING TO THE BUSINESS (a) We have a limited operating track record We have a limited operating and financial history upon which you may evaluate us. Our Group commenced operations in January 2009 and has only generated revenue since then. As a result, your evaluation of us and our prospects will be based on a limited operating and financial history. In addition, most of our products and services have been sold for only a relatively short time, which is since 2009, as elaborated in Section 9.4 of this Prospectus. Therefore, it is difficult to accurately forecast our future revenue and budget our operating expenses. Investors may take into consideration our Group’s profit and cash flow forecast, as set out in Sections 9.5 and 9.6 of the Prospectus, as well as the risk factor on the “Forward looking statements and achievability of our Group’s Forecasf’ in making an investment decision. There can be no assurance that our business model or any specific products or services will be profitable or competitive in the long term against larger, facilitiesbased mobile telecommunications operators or other MVNOs. We may experience significant fluctuations in our revenues and cash flows. We have experienced, and may continue to experience, operating losses. In the event that we do become profitable, we can provide no assurances that such profitability can or will be sustained in the future. (b) We are highly dependent on Celcom’s core network infrastructure As an MVNO, we do not own or operate our own physical network. Our Group provides mobile telecommunications services over network infrastructure that relies entirely on Celcom’s core network infrastructure. Our Group does not have control over the service provision and is completely dependent on coverage, quality, reliability, service upgrades and network capacity supplied by our host network provider. Therefore, the provision of our services may be adversely affected by: (i) damage or interruptions to Celcom’s Digital Network;
(ii) system and network management, modification or maintenance by Celcom; or
(iii) failure or obsolescence of Celcom’s network infrastructure and/or related systems. Notwithstanding the above, our host network provider will provide prior notice to our Group of any service interruption. To date, our Group has not experience any material disruptions. There is also a service level agreement within the MVNO services agreement which provides assurance that service quality to our Group’s subscribers will be the same as that provided by Celcom to its own subscribers. Celcom, in entering into the MVNO services agreement, intended for our Group to assist in capturing its loss markets and we are bound by the MVNO services agreement not to directly compete with Celcom for its existing subscribers. However, subscribers’ behaviour is beyond our control and some existing Celcom subscribers may inadvertently prefer our services over Celcom’s. Hence it is not only important that we adhere to the terms and conditions of the MVNO services agreement, such as the minimum commitment level as disclosed in Section 4.18(c) of this Prospectus, to avoid legal, operational and/or financial repercussions but imperative for us to work closely with Celcom to forge and maintain a sound relationship in light of a strategic long term partnership. The minimum commitment level is effective from FYE2010 onwards. If there is a shortfall, the difference shall be a cost payable to Celcom. 27 3. RISK FACTORS (Cont’d) (c) We may not be able to successfully extend and/or launch existing or new products and services into the market As part of our strategy, our Group intends to introduce, and to continue to develop, a number of products, services and service experiences for its subscribers, particularly services such as convergence sUbscription plans, Mobile Wallet, social portal applications and other similar services. Although our Group has, in the past, pioneered and launched innovative mobile services into the market which were well received by our targeted subscriber segments, there is no assurance that our Group will be able to successfully extend and/or launch existing or new products and services into the market, due to rapid technological changes, shifts in market expectations as well as competitive pressures. There is a risk that our Group may not identify consumer trends correctly. Any new product or services we launch may not be provided on a cost-effective or pricecompetitive basis due to a misreading of consumer demand or trends. Such misjudgment may adversely affect the operational and financial results of our Group. (d) We depend significantly on our network of traditional dealers and distributors for sales of our products and services Our mobile services are principally sold through a network of traditional dealers and distributors. Any dispute with them may disrupt sales and have an adverse effect on our Group’s operational and financial results. In FYE 2010, our Group has 17 area sales distributors. However our Group is not dependent on these area sales distributors as the appointment of area sales distributors are the sole prerogative of XOX. As at LPD, save as disclosed in Section 13.6 of this Prospectus, our Group does not have any dispute with our traditional dealers and distributors. Notwithstanding the above, in the near future, our Group plans to diversify to other non-physical dealership channels such as Internet Banking, ATMs and also our Group’s own social network portal where subscribers can purchase starter packs, recharge vouchers and perform payment of bills. (e) Dependence on directors and key personnel The technology industry is a growing and fast changing sector, and the management and operation of the business requires the employment of highly skilled knowledge workers, whether in technology or non-technology related fields. The Directors of our Group recognise and believe that the Group’s continuing success depends to a significant extent on the abilities and continuing efforts of its existing Managing and Executive Directors and key personnel, as disclosed in Sections 5.2 and 5.5 of this Prospectus, and the ability of the Group to attract new personnel and retain its existing skilled personnel. The labour market for skilled personnel in this field is highly competitive. The Group seeks to mitigate this risk by offering its employees competitive salary/remuneration, benefit packages and also to offer internships to undergraduates pursuing tertiary education in the telecommunications field for possible future employment with our Group. If one or more of these personnel are unable or unwilling to continue in their present positions, or if they join a competitor or form a competing company, our Group may not be able to replace them easily. Our Group’s business may be significantly disrupted and its financial condition and results of operations may be materially and adversely affected.
3. RISK FACTORS (Cont’d) (f) We may be unable to adequately protect our intellectual property or may face intellectual property claims that may be costly to resolve or may limit our ability to use our intellectual property in the future The popularity of our Group’s products and services is dependent on the goodwill associated with the XOX, XinXun and Short Call brand names and logos. In the case of trademarks and service marks applied and/or registered with the Intellectual Property Corporation of Malaysia, our Group has a perpetual, royalty-free licence to use such trademarks and service marks in Malaysia. Our Group relies on a combination of trademarks, service marks and domain name registrations, common law copyright protection and contractual restrictions to establish and protect their intellectual property. Any third party may challenge our Group’s intellectual property. Our Group may incur SUbstantial costs in defending any claims relating to its intellectual property rights. As at LPD, our Group is not aware of any claims on our Group’s intellectual property.
(9) Breach of customer data protection could materially affect our Group’s reputation and business and subject our Group to liability Our Group has a large database on our subscribers’ information stored in various business systems and used in many business processes. Our Group is required under our licences to take all reasonable steps to ensure that parties who have access to our subscribers’ information in the ordinary course of business do not disclose such information without the prior consent of the subscriber. Under the Malaysian General Consumer Code (“GCC”), any service provider that collects consumer information has a responsibility to adopt and implement a policy that protects the privacy of identifiable information, and should take steps that foster the adoption and implementation of an effective policy on the protection of consumer information by the service providers which they interact, for example, by sharing best practices with business partners. A breach in the Malaysian GCC could expose our Group and our officers to violations under the Malaysian GCC (which carries a fine not exceeding RM100,OOO, imprisonment not exceeding two (2) years or both), possible liability suits from subscribers, damage to reputation and business loss. As at LPD, our Group is not aware of any violations under the Malaysian GCC by our Group.
THE REST OF THIS PAGE HAS BEEN INTENTIONALY LEFT BLANK 3. RISK FACTORS (Cont’d) RISK RELATING TO THE INDUSTRY (a) Our Group is exposed to competition in the Malaysian mobile telecommunications industry The market for mobile telecommunications services in Malaysia is highly competitive. Increasing competition in the Malaysian mobile telecommunications industry has had, and is expected to ccntinue to have, a significant impact on our Group’s financial ccndition and resu~s of operations. Our Group directly competes with the incumbent MNOs as well as three (3) main other MVNOs in the market. Mobile telecommunications service providers compete for subscribers in a number of different areas including the services and features offered customer service and price. In addition, the mobile telecommunications industry in Malaysia may experience technological changes, evolving industry standards, liberalisation and changes in subscribers’ preferences. Competition in the mobile telecommunications industry in Malaysia may increase as a result of industry ccnsolidation, the entry of new competitors, regulations, foreign investment in existing competitors, and the development of new technologies, products and services. Malaysia recorded a mobile penetration rate of 116.6% in the fourth quarter of 2010. This penetration rate in Malaysia is not viewed as saturated yet, as Singapcre and Hong Kong Special Administrative Region have achieved penetration rates of 143.6% in December 2010, and 180.1% in May 2010, respectively. (Source: Independent Market Research Report of The Mobile Virtual Network Operator Industry In Malaysia prepared by Dun & Bradstreet (O&B) Malaysia Sdn Bhd). Nevertheless as consumers become more affluent and also due to the decline in costs of cellular phones, the adoption of mUltiple SIMs per individual has become more common. Under the current telecommunications laws in Malaysia, mobile operators are obliged to provide their subscribers with number portability, which allows subscribers of mobile services to retain their existing number when changing from one operator to the other. Number pcrtability decreases the hurdles for mobile subscribers to switch to another operator and cculd lead to increased churn rates and increased subscriber acquisition costs. In view of the above, our Group relies on our competitive strengths, as disclosed in Section 4.11 of this Prospectus, to ccmpete effectively in the Malaysian mobile telecommunications industry. As an MVNO, our Group relies on our host network provider’s network infrastructure and thus does not need to incur significant amount of capital expenditure to set up network infrastructure. This in turn translates into lower breakeven for our Group’s costs. In view of lower capital expenditure, our Group is able to focus our financial resources towards penetrating new market segments faster. Our Group also has flexibility in pricing and thus is able to respond to changing market demands fast without the need to obtain approvals from our host network provider. Our Group’s Convergence Charging System also presents a unique selling point which is able to gain fast subscriber acceptance based on our Group’s product and services such as our convergence SUbscription ptan. Please refer to Section 4.8.2(i)(b) of this Prospectus for details on our Group’s Convergence SUbscription plan. The MNOs may have time lag in implementing such technology and this gives our Group an edge in implementation and capturing market share. Being a new MVNO, the MNP feature may actually help our Group to acquire relatively more subscribers than other incumbent mobile telecommunications operators as it presents to mobile users a whole new mobile experience and innovation, on top of attractive pricing. Being a niche market player, our Group is able to direct all our strengths to our Group’s target market segment intensively and aggressively. 3. RISK FACTORS (Cont’d) Nevertheless, there can be no assurance however that these or other strategies will prove effective in avoiding any material adverse effects on our Group’s future growth and profitability. and there can be no assurance that the level of existing and future competition will not adversely affect the results of operations and financial condition of our Group. (bl The mobile telecommunications industry is subject to rapid technological changes The mobile telecommunications industry is subject to rapid, ongoing technological changes and has experienced signilicant changes in recent years, which we expect to continue. Emerging and future technological changes may adversely affect the viability or competitiveness of our Group. Our Group continuously evaluates and analyses new and/or suitable technologies to be adopted or assimilated into our business as we strive to keep abreast with the ever changing market frends and demand, increase competitiveness and avoid technological obsolescence timely and cost effectively. However, as an MVNO, we rely on our host network provider’s telecommunications network infrastructure, i.e. Celcom Digital Network. This frees us from investing in related heavy capital expenditures, maintenance and upgrading of network infrastructure due to technological changes. (cl Our Group’s business is sUbject to extensive regulation The provision of telecommunications services in Malaysia are subject to extensive regulation and supervision by the MCMC under the ambit of the Ministry of Energy, Green Technology and Water (formerly known as Ministry of Energy, Water and Communications Malaysia). We are further governed by the Malaysian Communications and Multimedia Act, 1998 (“CMA”) pursuant to which our Group’s NSP-I was granted. While we strongly believe that our NSP-I licence and approvals are in good standing and expect to be able to continue to fulfill our Group’s licence and approval terms to the satisfaction of the MCMC, there is no assurance that renewals will be on the same terms as the existing licences. Any inability to obtain new licences, or delay in the renewal of existing licences, could’ impede our Group’s provision of services and could therefore have a material adverse effect on our Group’s business and resutts of operations. Our Group’s operational and financial results could also be adversely affected if adverse fee charges, such as the establishment of regulated pricing, are introduced by the MCMC. Changes in laws, regulations or MCMC policy affecting our Group’s business activities and those of its competitors could adversely affect our Group’s financial condition or resutts of operations. In partiCUlar, decisions by the MCMC in the areas of the grant, amendment or renewal of licences to our Group or third parties, if unfavourable to our Group, could adversely affect our Group’s financial condition and resutts of operations. There can be no assurance that the Minister will not issue new or additional telecommunications licences to new or existing mobile operators whose services will compete with those offered by our Group. 3. RISK FACTORS (Cont’d) (d) Our Group may be liable for our distributors’ actions As our Group’s distributors are third parties, we have no control over their operations but we may be held accountable for their actions as they are deemed to be agents or representatives of our Group. Currently, liability for agent actions is limited to prepaid registration which is governed by MCMC’s Guidelines on Registration of End-Users of Prepaid Public Cellular Services (No.1 and No.2) and the Guidelines on Prepaid Registration (collectively “Prepaid Guidelines”). There is no guarantee that liabilities for agent actions will not be extended to other areas since the Minister has the power to impose additional condilions. However, all our distributors and their dealers are required to follow strictly to the Group’s standard operating procedures for prepaid registration to minimise noncompliance and possible fines by MCMC. As at LPD, our Group is not aware of any actions committed by our Group’s distributors which our Group may be held accountable. (e) Our Group is exposed to risks relating to content downloaded or uploaded by its subscribers Mobile communications providers may be subject to third party allegations of intellectual property rights infringement with regards to content downloaded or uploaded by its subscribers. There can be no assurance that our Group’s subscribers do not and will not infringe the intellectual property rights of others. In some instances, these third party allegations may have progressed to lawsuits alleging infringement of patent and other rights. Any such allegations, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel. While we continuously seek appropriate assurances and indemnification from vendors, if il is uitimately determined that a third party has enforceable intellectual property rights with respect to our products and services, it may adversely affect our resuhs of operations or prevent us from offering our services. If we are found liable for infringement, we may be reqUired to enter into licensing agreements (it available on acceptable terms or at all) or pay damages and cease selling certain products and services. In addition, we may need to redesign some of our product and service offerings to avoid future infringement liabilities. As at the LPD, we are not presently involved in any material litigation and arbitration, whether as plaintiff or defendant or as a third party, which has a material effect on our position or business, and we are not aware of any proceedings, pending or threatened, or of any fact likely to give rise to any proceedings which might materially affect our position or business. (f) Concerns about alleged mobile telecommunications health risk Certain reports, albeit not conclusive, indicate that radio frequency emissions from mobile handsets and other mobile equipment may have an adverse effect on the health of mobile telephone users and others. The issuances of such reports in the future could adversely affect the market price of the shares of mobile telecommunications service providers, including that of our Group, and the actual or perceived risk of mobile telecommunications devices could adversely affect mobile operators such as our Group through reduced subscriber growth, reduction in subscribers or reduced usage per subscriber. 3. RISK FACTORS (Cont’d) RISK RELATING TO INVESTMENT IN OUR SHARES (a) No prior trading market for our Shares and a market for our Shares may not develop
Prior to this invitation, there has been no pUblic market for our Shares. Although we have made an application to list our Shares on the ACE Market of Bursa Securities, there is no assurance as to the liquidity of any market that may develop for our Shares, or even if a market develops, will be sustained. There is no assurance of the ability of the holders or the prices at which the holders would be able to sell their Shares. The market prices of our Shares are subject to the vagaries of market forces and many other factors, such as prevailing economic, political and financial conditions in Malaysia, our operating results and the markets for similar securities. Hence, there is no assurance that the market price may not decline below the issue price.
(b) Capital market risk
The performance of the local bourse is very much dependent on external factors such as the performance of regional and world bourses and the flows of foreign funds. Sentiments are also largely driven by internal factors including political and economic conditions of the country as well as 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, which may already fluctuate significantly and rapidly as a result, inter alia, of the following factors:• differences between our actual financial and operating results and those expected by investors and analysts;
• announcements by us or our competitors of significant contracts, acquisitions, strategic alliances, joint ventures or capital commitments;
• fluctuations in stock market prices and volume;
• changes in our operating results;
• changes in securities analysts’ estimates of our financial performance and
recommendations; • changes in market valuation of similar companies; • our involvement in litigation, arbitration or other forms of dispute resolution;
• additions or departures of key personnel; and
• changes in general economic and stock market conditions.
(e) We may require additional funding for our future growth Although we have identified our future plans as set out in the Section 4.23 of this Prospectus as avenues to pursue growth in our business, the proceeds from the IPO may not be sufficient to fully cover the estimated costs of implementing these future plans. We may also find opportunities to grow through acquisitions that cannot be predicted at this juncture. Under such circumstances, secondary issue(s) of securities after the IPO may be necessary to raise the required capital to develop these growth opportunities. If we then fail to utilise the new equity to generate a commensurate increase in earnings, our EPS will be diluted, and this could lead to a decline in our share price. Any additional debt financing may, apart from increasing interest expense and gearing, contain restrictive covenants with respect to dividends, future fund-raising exercises and other financial and operational matters in any such events, our growth or financial performance will be adversely affected. 33 3. RISK FACTORS (Cont’d) (d) We may not be able to pay dividends to shareholders Our ability to pay dividends or make other distributions to our sharehoiders may be sUbject to, amongst others:(i) the availability of adequate distributabie reserves and cash fiows of the Company; (Ii) our operating cash fiow requirements and financing commitments; (iii) our anticipated future operating conditions, as well as future expansion, capital expenditure and investment pians; and (iv) any material impact of tax iaws or other reguiatory requirements. Our shareholders’ ciaims wiil generaily rank junior to all other creditors and ciaimants against our Group. in the event of liquidation, there may not be sufficient assets for us payout dividends. (e) Forward looking statements and achievability of our Group’s Forecast Certain information in this Prospectus is based on the historical experience of the Group and may not be refiective of future results. Whilst the interpretation of this information may be forward-looking, the contingencies and inherent uncertainties underlying these information, which is based on a number of best estimate and/or assumptions regarding the future events and actions which the Directors expect to take place, should be carefuily considered by investors and should not be regarded as a representation by the Group and its advisers that the objectives and the future pians of the Group wiil be achieved. Any differences in the expectation of the Group from its actual performance, such as not being able to achieve the forecasted subscribers growth rate, may result in the Group’s financial and business performances and plans to be materiaily different from those anticipated. A summary of our Group’s profit and cash flow forecast is disclosed in Section 9.5 of this Prospectus. For FYE 2010, our Group’s total registered subscribers is approximateiy 315,000 subscribers, representing approximately 0.9% of the total subscribers in Maiaysia. (f) There may be a delay in our listing or our listing may be aborted The occurrence of anyone or more of the foilewing events, which may not be exhaustive, may cause a delay in our listing or our listing to be aborted:• the identified investors under the Public Issue fail to subscribe for the portion of our Shares ailocated to them although they have furnished their irrevocable undertaking letters to subscribe for such Shares;
• the underwriters exercising its rights pursuant to the Underwriting Agreement to discharge itself from its obligations thereunder; or
• we are unable to meet the public spread requirement as determined by Bursa Securities, inciuding at least 25% of our total issued and paid-up share capital being in the hands of a minimum of 200 public sharehoiders holding not less than 100 Shares each at the point of Listing.
3. RISK FACTORS (Cont’d) Our Directors will endeavour to ensure compliance by our Company of the Listing Requirements, including inter-alia, the public spread requirements imposed by the SC and Bursa Securities for the successful listing. In the event the listing is aborted, we will retum 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. (g) 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 issue to investors, a retum 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 capitai reduction shall not be affected 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. (h) Ownership and control by our existing shareholders Alter the IPO, our Promoters as set out in Section 5.1 of this Prospectus will collectively directly control 45.9% of our Group’s enlarged issued and paid up share capital. Therefore, our Promoters will be able to exercise some influence over the direction and matters goveming our Group requiring the vote of our Group’s shareholders unless they are required to abstain from voting by law, covenants, and/or by relevant authorities. Nevertheless, our Group has appointed independent directors to ensure that any future transaction involving related parties are entered into on an arms-length terms which are not detrimental to our Group, so as to facilitate good corporate governance whiist promoting greater corporate transparency. THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK