Sasbadi Annual Report 2017

SASBADI HOLDINGS BERHAD (1022660-T) 12 Anticipated or Known Risks Competition We face competition from existing competitors as well as potential new entrants in the educational publishing industry. The barriers to entry into the industry are relatively low based on the capital requirements since most of the functions within the publishing process may be outsourced to third parties. However, the operating costs can be high as there is a long lead time between writing manuscripts and transforming them into end products ready for sales to customers. Our competitive strengths such as our established track record of 32 years in the industry, brand awareness among students, teachers and parents alike, extensive distribution network, large customer base, diversity in product range, large range of publications, in-house content development, experienced management and editorial personnel, and economies of scale put us in a strong position to fend off competition. Seasonality The Group’s business operations are exposed to seasonality patterns as the Group generally experiences significantly higher quarterly sales in the second financial quarter (December to February) and lower quarterly sales in the fourth financial quarter (June to August) compared to the other two (2) financial quarters. This is primarily caused by the timing of the start of the academic year for national schools. As a result, the seasonal sales patterns may adversely impact on the Group’s quarterly revenue, profit and cash flow. The Group takes the seasonality patterns into consideration in our cash flow planning. In addition, the Group is consistently seeking ways to reduce the seasonality patterns such as stepping up efforts to grow our non-academic segment which is less prone to seasonality, and entering into new market segments (e.g. the private and international schools in Malaysia, which follow a different academic year from that of national schools, via our distribution agreement with MCE). Fluctuations in the Price of Paper Paper is a major raw material used in our business operations. As paper is a commodity, it is subject to fluctuations in world paper prices. In the event of a sustained period of increase in the price of paper, there is a risk that we may not be able to pass the price increase to our customers or, if we do, we may price our products out of the market affordability. This may then adversely affect our financial performance. To mitigate this risk, we always buy paper when prices are low to maintain the inventory level of paper for our needs for up to six (6) months, especially during the period when paper prices are volatile. Foreign Exchange Fluctuation Risk As paper is a commodity traded worldwide, its prices are quoted in United States Dollar (“USD”). In this regard, paper prices are also affected by the USD exchange rate and, unless we hedge it, we are further exposed to foreign exchange fluctuation risk. In addition, our purchases of Lego Education robotics products are also denominated in USD. As such, any unfavourable movement in USD against RM may have an impact on our profitability. For FYE 31 August 2017, we did not experience any material losses arising from these transactions. Our Group will use forward exchange contracts to hedge against this risk when necessary. Stock Returns and Obsolescence The Group typically publishes new edition of educational materials every year. Some of the educational materials that we sell may be returned to us (subject to compliance with our return policy which includes, among others, obtaining our approval prior to the return, etc) for either full refund or offset against future sales. Such returns are commonly resold to other customers. Returns that are not resold after a period of time, as with all other stocks that cannot be sold after a period of time, will be classified as obsolete and may need to be written off and sold as scrap. This may adversely affect our profitability if the volume of obsolete stocks is large. To mitigate this risk, the Group always exercises prudence in print-run and distribution management. This includes perusing historical data and analysing current trends in demand for our titles to enable us to plan our supply efficiently to reduce the risk of overproduction and sales returns. Infringement of Intellectual Properties (“IPs”) The Group develops and uses various IPs in connection with our business. In this regard, we are susceptible to claims by third parties to have infringed their IPs and, similarly, we are also susceptible to our IPs being infringed by third parties. In defending our legal rights, the Group may be exposed to suits and counter suits by third parties. Such disputes and the resolution of such disputes may be time consuming and costly. Therefore, the Group requires our authors and licensors to undertake to indemnify us for any losses and damages arising out of the contents of their works that infringe the rights of third parties. We also own the copyrights to all published versions of our titles, which are protected under the Copyright Act 1987. MANAGEMENT DISCUSSION AND ANALYSIS