Risk Factors

1. Natural phenomena risk, such as soil and weather conditions, which
vary from year to year, not only directly effect agricultural
activities, but also have a huge impact on the sales of insecticides.
Drought is a major hindrance of the cultivation of high quality crops,
and it reduces the volume of produce considerably, as well as the demand
for insecticides. Conversely, when there has been major crop damage, the
demand for insecticides could increase to such an extent that
manufacturers are unable to meet the increased demand.

In recognition of such risks, therefore, PATO Chemical Industry Plc. has
gone to great lengths to research and develop new products, in an effort
to minimize the variations in the demand for insecticides caused by such
natural crises. For example, in the case of drought, the use of liquid
weed killers, instead of pills, goes a long way in reducing the impact
on PATO Chemical Industry’s sales. In addition, the company’s new range
of insecticides, designed for use with a wide range of crops, such as
rice, field crops, orchards, para rubber and oil palm, helps minimize
the effect of such natural crises on these crops.

2. Marketing and production risk has hardly had any impact at all on
this company. Its extensive nationwide network of agents means that this
risk is negligible. Furthermore, its distribution strategy, which
enables each distributor to sell only one product range to avoid
competition among distributors, has proved most successful. But it is
the company's reputation, amongst farmers, for manufacturing products
which are both reliable and of a high quality that has contributed most
to the company’s success. The fact that its product prices are
considerably lower than those of imported products also helps keep the
company on solid ground.

3. Technology risk, as manufacturing processes use only a very limited
amount of advanced technology. In the absence of any technological
advantages, therefore, expertise and specialized production techniques
are emphasized, to give PATO Chemical Industry the edge over its
competitors. Whatever the processes, import, research and development,
production or distribution, it has to be authorized by the Agricultural
Toxic Substances Division as well as any other relevant government
offices, to ensure that all products meet required specifications, and
are safe. They must not have any adverse effects on the environment
either. It is, therefore, fairly obvious that running such a business
requires a great deal of time and effort.

4. Credit risk, the company is exposed to credit risk primarily with
respect to trade and notes accounts receivable. The company’s prudent
credit policy and its diversified customers. The maximum credit risk
exposure is equal to the book value of accounts receivable in the
balance sheet. To minimize the risk of accumulating bad debts, PATO
Chemical Industry has implemented a number of measures, including:

4.1 Control of credit balance

4.2 Strict consideration when opening new market

4.3 Shortening of payment period

4.4 Emphasis on crops with high potential and price, eg. rice

4.5 Reduction of granting credit to high-risk crops, eg. sugar cane

4.6 More detailed market studies by marketing personnel

5. Foreign currency risk relates from import activities of the company.
The company primarily utilizes some forward exchange contracts for
imported products.

6. Risk factors concerning the announcement banning the import of toxic
substances which come under watching list of chemical to be used with
caution  in accordance with guidelines by the Ministry of Agriculture
and Cooperatives for effective  control and use of agrochemicals for the
safety of consumers.   The company has conducted research and analysis
to find a new product to replace the previous product that has
since been declared  dangerous and banned from import. The new
researched products to be imported will not leave toxic residue and will
be safe to farmers, the environment as well as consumers.