2. RISK FACTORS

Our Company is exposed to a number of risks that may affect its business
and the value of its shares. The following sets out some of the
significant risks that may affect the Company. However, there are some
risks that may be unknown to the Company and other risks that the
Company currently considers to be immaterial. These risks could have an
impact upon the operation of the Company in the future.

2.1 Risks Relating to Our Industry and Our Business

  Prices of commodities in general, including natural rubber, are
  susceptible to price fluctuations.

  Prices of commodities in general, including natural rubber, have been
  volatile and we, like other participants in the natural rubber
  industry, have limited influence over the timing and extent of the
  price changes for natural rubber. The price of natural rubber and the
  Natural Rubber Products that we sell, like most commodities, are
  affected by a number of factors including but not limited to the
  following:

-   Supply and demand for natural rubber — An increase in the supply of
    natural rubber or a decrease in world consumption levels of natural
    rubber could result in an oversupply which could in turn result in a
    decrease in average selling prices of the Natural Rubber Products
    that we sell;

-   Prices of crude oil, energy and oil-based chemicals — Crude oil
    prices may affect the prices of natural rubber and other input
    materials such as oil-based chemicals used in rubber processing. In
    addition, the prices of synthetic rubber usually move along with
    crude oil prices, and the price fluctuations of synthetic rubber
    affects the pricing and demand for natural rubber;

-   Currency movements — As natural rubber is traded mainly in US
    Dollars, any fluctuations in the natural rubber exporting currencies
    against US Dollars may result in corresponding fluctuations in
    natural rubber prices in the relevant exporting countries;

-   Speculation — As natural rubber and certain of the Natural Rubber
    Products that we sell are traded at various commodity future
    exchanges, they are susceptible to price speculation in addition to
    local and global economic factors; and

-   Government intervention — The governments of natural rubber
    producing countries such as Thailand, Indonesia and Malaysia may
    from time to time introduce policies to support the natural rubber
    industry in their respective countries. For example, the Indonesian
    government had imposed export quotas in relation to natural rubber
    in 2009, in response to the drop in the price of natural rubber,
    which restricted our ability to operate our factories in Indonesia
    at full capacity. In addition, in 2012, price intervention of the
    Thai government to provide loans with total amount of THB 45.0
    billion to the state-run Rubber Estate Organization and cooperatives
    through the Bank for Agriculture and Agricultural Cooperatives to
    buy rubber from farmers at prices above market prices directly
    impacted our raw material costs. Moreover, the cooperative agreement
    among Thailand, Indonesia, and Malaysia in August 2012 to withdraw
    Natural Rubber exports of 300,000 tons during October 2012 to March
    2013 also affected the export volume of Natural Rubber producer
    during such period.

  Other unpredictable factors which affect the price of natural rubber
  and the Natural Rubber Products that we sell include economic growth
  rates, foreign and domestic interest rates and trade policies.

  If we are unable to pass on any increase in raw material costs to our
  customers and/or suppliers, our profitability may be adversely
  affected. If the market prices of the Natural Rubber Products that we
  sell are volatile, our business, financial condition and results of
  operations could be materially and adversely affected.

  A significant portion of the sales of the Natural Rubber Products that
  we sell are for use in the tyre manufacturing industry which exposes
  us to downturns in this industry.

  The Natural Rubber Products that we sell include RSS, TSR and
  Concentrated Latex. Global demand for such products, in particular
  TSR, is dependent significantly upon the tyre manufacturing industry.
  Our customers include tyre manufacturers in the emerging markets such
  as the PRC and India and leading global tyre manufacturers. The
  majority of our sales of Natural Rubber Products are made to tyre
  manufacturers. If the level of activity in the tyre manufacturing
  industry declines, the demand for the Natural Rubber Products that we
  sell may decrease and our business, financial condition and results of
  operations may be adversely affected.

  Our business, financial condition and results of operations may be
  adversely affected by fluctuations in exchange rates and foreign
  exchange controls.

  While our financial reporting currency is Baht and our raw material
  purchases for the Natural Rubber Products that we produce are
  transacted in Baht and Indonesian Rupiah, approximately 83.0% of our
  total revenues is denominated in US Dollars. In addition, the
  Company’s Shares will also be quoted in Singapore dollars on the
  SGX-ST while dividends, if any, will be paid in Baht. Fluctuations in
  the exchange rates between the Baht, Indonesian Rupiah, US Dollars,
  Singapore dollar or other currencies, could adversely affect our
  business, financial condition and operating results as well as the
  foreign currency value of any dividend distributions. Any fluctuations
  in the exchange rates between the Baht, Indonesian Rupiah and
  Malaysian Ringgit could adversely affect our price competitiveness in
  relation to other natural rubber processors from Indonesia and
  Malaysia.

  We attempt to mitigate foreign exchange risks using forward foreign
  exchange contracts and foreign exchange options to hedge our foreign
  exchange exposures arising from purchase and sale of products in
  currencies other than Baht. Should we be unable to successfully hedge
  our foreign exchange exposures, we may have a greater exposure to
  foreign exchange fluctuations and our financial condition and results
  of operations may be adversely affected.

  Our Group is dependent upon the services of key management staff.

  One of the key reasons for the growth of our Group has been our
  ability to attract and retain a team of experienced professional
  managers. Our continued success will depend on our ability to retain
  key management staff, such as Dr. Viyavood Sincharoenkul, Mr. Kitichai
  Sincharoenkul and Mr. Paul Sumade Lee, and to attract and train new
  managers. If members of our senior management team are unable or
  unwilling to continue in their present positions, we may not be able
  to hire satisfactory replacements and our business may be adversely
  affected. In addition, the process of hiring new managers with the
  required combination of skills and attributes may be time-consuming
  and competitive. We may not be able to attract additional qualified
  persons to complement our expansion plans. As a result, our business
  and results of operations may be adversely affected.

  We are a capital intensive business and our operations could be
  adversely affected if we fail to maintain sufficient levels of working
  capital.

  We expend a significant amount of cash in our operations, principally
  on the purchase of raw materials such as unsmoked rubber sheets, cup
  lumps and field latex, the Natural Rubber Products which we purchase
  from third party producers and our joint venture entity, Thai Tech
  Rubber, from time to time, to meet demand from customers, and the
  storage of the Natural Rubber Products to facilitate our sales in
  overseas markets. The working capital cycle for the Natural Rubber
  Products that we produce, from the purchase of raw materials to the
  receipt of payment from our customers, is approximately two to four
  months. We may also require substantial capital expenditures to
  maintain, upgrade and expand our processing and storage facilities,
  logistics services and other facilities to keep pace with competitive
  developments, technological advances and changing safety and
  environmental standards in our industry. We fund our operations
  principally through cash flow from our operations and short and
  long-term bank loans.

  As at 31 December 2012, we had cash and cash equivalents of
  approximately Baht 1,534.0 million and the majority of our total
  borrowings comprised short-term borrowings. We can provide no
  assurance that we will not experience negative cash and cash
  equivalents in the future. In the event that we are unable to obtain
  or secure sufficient borrowings or generate sufficient revenue from
  our operations, or if we fail to maintain sufficient cash, we may not
  have sufficient cash flow to fund our operations and our business and
  operating results will be adversely affected.

  Difficult conditions in the global credit markets could adversely
  impact the cost or other terms of our existing financing.

  As at 31 December 2012, we have an aggregate of Baht 14,837.9 million
  in short and long term bank loans, accounting for approximately 82.0%
  and 18.0% of the aggregate amount of bank loans respectively, with
  interest rates ranging from 1.1% to 11.5% per annum depending on the
  currency on which the loans are denominated. Difficult conditions in
  the global credit markets could adversely impact the cost or other
  terms of our existing financing as well as our ability to obtain new
  credit facilities or access the capital markets on favourable terms. A
  significant increase in our borrowing costs could impair our ability
  to compete effectively in our business relative to competitors with
  lower amounts of indebtedness.

  We may be affected by adverse weather conditions and/or diseases which
  could lead to price fluctuations and an increase in our operating
  costs.

  Unsmoked rubber sheets, cup lumps and field latex are the primary raw
  materials for Natural Rubber Products. The availability of these raw
  materials from suppliers, as well as our ability to harvest field
  latex from our own rubber plantations in the future, may be adversely
  affected by unfavourable weather conditions such as drought, floods,
  prolonged periods of rainfall, storms etc. and/or diseases which has
  infected the rubber plantations from which suppliers purchase the raw
  materials or our own rubber plantations in the future. Such events,
  especially if continued for a prolonged period, could affect the
  overall yield of such raw materials and consequently lead to price
  fluctuations. Any substantial decrease in the supply of, and increase
  in the cost of, raw materials could increase our operating costs,
  affect our production capacity and consequently have a material
  adverse effect on our business, financial condition and results of
  operations.

  There may be disruptions at our processing facilities as well as the
  processing facilities of our associates and joint venture entity which
  would have an adverse effect on our operations and those of our
  associates and joint venture entity.

  Our production processes and those of our associates and joint venture
  entity require significant use of resources such as water and
  electricity to power our processing facilities and those of our
  associates and joint venture entity. Natural disasters, acts of God, a
  shortage of labour, major or sustained disruptions in the supply of
  utilities such as water or electricity and other calamities or events
  beyond our control. For example, the torrential floods occurred in
  southern Thailand in November 2010 and January 2012 may lead to
  significant disruption or a cessation in processing at our processing
  facilities and those of our associates and joint venture entity. Such
  disruptions would have an adverse effect on our operations and those
  of our associates and joint venture entity and would result in longer
  lead-time for processing and delayed delivery to customers.

  Our Company depends on distributions from our principal operating
  subsidiaries, associates and joint venture entity which may in turn
  affect our Company’s cashflow

  Our Company is dependent on distributions from our principal operating
  subsidiaries, associates and joint venture entity to meet our
  financial obligations, including the payment of principal and interest
  of our indebtedness.

  Our Company will receive distributions made by our subsidiaries,
  associates and joint venture entity based on our ownership interest.
  However, should revenues or operating performance of our principal
  operating subsidiaries, associates and joint venture entity be
  decreased, the amount of distributions in terms of both rate and value
  made by such principal operating subsidiaries, associates and joint
  venture entity will decline. Accordingly, our Company’s cashflow might
  be adversely affected.

  Our Group may be adversely affected by the imposition and enforcement
  of more stringent environmental regulations.

  Our Group is subject to a variety of laws and regulations that promote
  environmentally and socially sound operating practices. Our Group’s
  principal environmental concerns relate primarily to the discharge of
  effluent resulting from the processing of natural rubber. Any
  environmental claims or the failure to comply with any present or
  future regulations could result in the assessment of damages or the
  imposition of fines, the suspension or a cessation of our Group’s
  operations.

  Environmental regulations and social practices in the countries in
  which our Group operates tend to be less stringent than those in
  developed countries. It is possible that these regulations and/or
  social practices could become more stringent in the future and
  consequently have an adverse effect on our operations and financial
  condition. Any failure to comply with the laws and regulations could
  subject our Group to liabilities which may affect our business,
  financial condition, results of operations and prospects.

  The demand for Natural Rubber Products could be affected by the
  emergence of synthetic rubber substitutes.

  Our sales of Natural Rubber Products, which are produced from natural
  rubber, accounted for 97.9% of our Group’s revenue for the financial
  year ended 31 December 2012. There are a variety of synthetic rubber
  substitutes available in the market which can be used as substitutes
  for natural rubber in the manufacture of rubber products. Factors such
  as increased global demand for rubber, volatile pricing of natural
  rubber, increased natural rubber price compared to synthetic rubber,
  long transport distances, risks of supply disruption driven by
  political events, regional constraints and seasonal supply patterns
  may lead to an increase in demand for such synthetic rubber
  substitutes. Any resulting decrease in demand for Natural Rubber
  Products may have a material adverse effect on our business, financial
  condition and results of operations.

  Expiry of concessionary tax rates and/or exempt tax status for certain
  of our subsidiaries and associates will have an adverse impact on our
  profitability.

  Our subsidiary, Sri Trang International, enjoys certain tax benefits
  under the Global Trader Programme launched by International Enterprise
  Singapore, pursuant to which Sri Trang International is only taxed on
  10.0% of its qualifying income (i.e. income which is derived from
  offshore sales or sales to companies under the Global Trader
  Programme).

  In addition, our Company and certain of our subsidiaries and
  associates which are incorporated in Thailand have been granted
  certain privileges, including exemption from certain taxes, at various
  times by the Board of Investment of Thailand, in relation to our
  respective operations

  In the event of any expiry of such tax benefits, Sri Trang
  International, our Company and our relevant subsidiaries and
  associates which are incorporated in Thailand will be liable to the
  applicable taxes at the prevailing rates and accordingly, there will
  be an adverse impact on our profitability.

2.2 Risks Relating to the Countries in Which We Operate

  Economic, political, legal and regulatory conditions in the countries
  in which we operate may materially and adversely affect our business,
  financial condition, results of operations, prospects and the market
  price of our Shares.

  We have operations in and investments in countries such as Thailand,
  Singapore, USA, Indonesia, and the PRC, each of which contributed
  59.5%, 29.2%, 7.0%, 3.1%, and 1.2% of total revenues, respectively.
  Accordingly, we are subject to the risks associated with our business
  activities in these countries. Our business, financial condition,
  results of operations and prospects may be materially and adversely
  affected by a variety of conditions and developments in these
  countries including:

-   inflation, interest rates and general economic conditions;

-   civil unrest, military conflict, terrorism, change in political
    climate and general security concerns;

-   changes in legal and regulatory conditions;

-   changes in duties payable and taxation rates;

-   natural disasters;

-   imposition of restrictions on foreign currency conversion or the
    transfer of funds; or

-   expropriation or nationalisation of private enterprise or
    confiscation of private property or assets.

  Should any of the aforesaid risks materialise and we are unable to
  adapt our business strategies or operations accordingly, our business,
  financial condition, results of operations and prospects may be
  materially and adversely affected.