Potential investors should consider carefully all the information set out in this prospectus and, in particular, should consider and evaluate the following risks and uncertainties associated with an investment in our Company before making any investment decision in our Shares. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks and uncertainties. The trading prices of our Shares could decline due to any of these risks, and you may lose all or part of your investment. RISKS RELATING TO OUR GROUP We are dependent on our five largest suppliers for the supply of metal materials and metal products. Any shortage or delay in the supply of metal materials and metal products from them or any change in their existing marketing strategies may materially and/or adversely affect our business and results of operations if we cannot secure alternative sources of supply immediately. For each of the two years ended 31 December 2013 and the four months ended 30 April 2014, the amount of purchases from our five largest suppliers accounted for approximately 99.26%, 98.56% and 100.00% of our total purchases, respectively. During the same periods, purchases from Supplier A, being our largest supplier, accounted for approximately 69.36%, 62.08% and 85.76% respectively of our total purchases. Accordingly, we are dependent on the continuous supply of products from a few suppliers. There is no assurance that there will be no deterioration in our relationships with these suppliers which may have an impact on our ability to secure future supply of metal materials. Any shortage of or delay in the supply of metal materials or metal products by our major suppliers or any change in their existing marketing strategies, such as any sudden reduction in supply volume to us, may affect our ability to fulfill our customers demand. We cannot assure you that we are able to respond to such shortage or delay in supply or new marketing strategies effectively by finding alternative suppliers on comparable commercial terms within a short period of time and as such, our customers may choose to source products from alternative suppliers, causing a shortfall in our sales that could materially and adversely affect our business and financial results. Our five largest customers accounted for a significant portion of our revenue and have not entered into any long-term purchase agreements with us. Any decrease in sales to any of these customers would materially and adversely affect our operations and profit margin if we could not identify and obtain orders from new customers. Our five largest customers accounted for approximately 89.77%, 80.66% and 92.49% respectively of our revenue for each of the two years ended 31 December 2013 and the four months ended 30 April 2014. We have not entered into long-term purchase agreements with any of our five largest customers who are therefore not obligated in any way to continue placing orders with us at the same historical level or at all. Accordingly, the volume of purchase orders from our five largest customers may vary significantly from time to time, and it may be difficult to forecast the number and amount of future orders. If any of them were to substantially reduce the volume and/or the value of the orders it places with us or were to terminate its business relationship with us entirely, there can be no assurance that we will be able to obtain orders from new customers or other existing customers on comparable prices. As such, our operations and profit margin may be adversely affected. 23
As a metal trading company, our products have thin profit margins and we may not be able to sustain our historical profitability. As a metal trading company, we have thin profit margins. Our profit mainly depends on the spread. During the Track Record Period, our net profit margin was approximately 0.75%, 0.52% and -0.20% respectively. Since March 2014, we have sourced finished silver products that we can resell directly from two suppliers. Going forward, we intend to expand our market share in the metal trading industry in Hong Kong by engaging in more silver direct trading transactions, which may have lower spreads than those of our silver transactions which involve processing. As most of these factors are beyond our control, we cannot assure you that we will be able to maintain the current level of profit margins in the future. Our profitability will be affected by adverse price fluctuation against the Net Open Position of our Group. As we need to maintain certain levels of silver inventory to ensure a sufficient supply of silver products to our customers, our purchase orders do not always match our sales orders and we are exposed to silver price fluctuations in relation to such mismatches. In this regard, for those purchase and sale transactions of silver with quantities of not less than 1,000 oz of silver, we typically enter into forward contracts with the commodity dealers in respect of approximately 90% of the quantity of silver we purchase from our suppliers or sell to our customers once we have fixed the purchase/ selling price. For those purchase or sales transactions of silver with quantities of less than 1,000 oz, we normally do not enter into a separate contract with our commodity dealer. For each of the two years ended 31 December 2013 and the four months ended 30 April 2014, approximately 95.76%, 90.04% and 94.95% of our sales volume were covered by forward contracts respectively and approximately 98.64%, 96.49% and 90.93% of our purchases volume were covered by forward contracts respectively. For further details of our silver hedging strategy, please refer to the paragraph headed Hedging Hedging arrangements under the section headed Business in this prospectus. The Net Open Position of our Group is monitored by our executive Directors. However, we are still exposed to silver price fluctuations for the Net Open Position of our Group. Based on a sensitivity analysis of the impact of hypothetical fluctuations in the weighed average closing price quoted by our commodity dealers for silver as at the end of each quarter of 2013 and as at 30 April 2014 on our profit/(loss), significant fluctuations in the silver market may have a drastic and adverse effect on our operational results and profitability. For further details, please refer to the paragraph headed Sensitivity analysis under the section headed Business section in this prospectus. We may experience weak liquidity as we had recorded negative cash flow from our operating activities in the past. For the year ended 31 December 2013, we recorded negative cash flow from our operating activities of approximately HK$70.6 million, largely due to the increase in account receivables from customers of approximately HK$25.2 million, increase in inventories of approximately HK$25.7 million and the decrease in account payables, accruals and deposits received of approximately HK$46.3 million. Please refer to the section headed Financial information in this prospectus for a more detailed discussion. We cannot assure you that we will not experience another period of negative cash flow from our operating activities in the future. 24
Our processing facility may be subject to various operational risks such as industrial accidents, equipment failure and other catastrophic events. As our processing operation involves the use of tools, equipment and machinery, industrial accidents resulting in personal injuries or even fatalities may occur. There is no assurance that industrial accidents at our processing workshop, whether due to malfunctioning of such tools, equipment or machinery or other reasons, will not occur in the future. In such an event, we may be liable for personal injuries or fatalities claims, monetary losses, fines or penalties for violation of applicable laws and regulations as well as business interruptions caused by equipment shutdowns for government investigation or implementation or imposition of safety measures as a result of the accident. Further, enhanced safety measures imposed by government authorities could have a material adverse effect on the manner in which we conduct our operations, thereby adversely affecting our operations. Moreover, power failures or disruptions, breakdowns, failure or substandard performance of equipment, improper installation or operation of equipment and destruction of buildings, equipment and other facilities due to occurrence of catastrophic events such as fire outbreak, typhoon and severe storms, would severely affect our operations. The coverage under our insurance policies may not be sufficient to compensate for the actual cost of replacing or repairing any of such assets. We do not carry any business interruption insurance which can provide coverage on loss of profit/income and increase in expenses as a result of the losses of assets covered under the relevant insurance policy. Any such events and any losses or liabilities that are not covered by our current insurance policies could have a material adverse effect on our business, financial condition, results of operations and prospects. Risk associated with forward contracts and our commodity dealers We have entered into forward contracts with commodity dealers to hedge our exposure on metal price which changes from time to time. The commodity dealers we are cooperating with are scalable and international financial institutions. However, in the event any of these commodity dealers faces any financial difficulties which affect their ability to settle any of the forward contracts entered into between them and us, our financial position may be adversely affected. We have a concentrated products portfolio and a significant portion of our revenue was attributable to the sale of silver. For each of the two years ended 31 December 2013 and the four months ended 30 April 2014, we generated revenue of approximately HK$1,070.7 million, HK$1,399.8 million and HK$875.4 million from the sales of silver respectively, which accounted for approximately 98.39%, 93.71% and 100.00% of our total revenue from the sales of metals during the same periods indicated, respectively. Accordingly, we have a concentrated products portfolio as a significant portion of our revenue was attributable to the sales of silver. If the customers preferences or requirements change or the demand of silver declines for any reason, the potential loss in revenue would adversely affect our profitability. 25
There are risks associated with the physical storage of silver by us and the Transportation Provider. Silver is stored in our workshop or is held in the vault of the Transportation Provider before delivery to our customers. Although we consider that adequate security measures have been taken by us and the Transportation Provider, there is no assurance that there will not be any accidents, fire, thefts, natural disasters or other events that could lead to damage or loss of such silver. Any damage or loss of silver in our or the Transportation Provider s possession could have a material adverse impact on our business operation and financial position. Future expansion plans are subject to uncertainties and risks and therefore may not materialise. We have set out our future plans in the section headed Statement of business objectives and use of proceeds in this prospectus. Whether our future plans can be implemented successfully may be beyond our control and future events may affect the implementation of our expansion plans, such as changes in rules and regulations applicable to us and general market conditions. In addition, the general economic environment and the development of the metals market, in particular, the silver market in Hong Kong and around the world may be unpredictable. In view of such uncertainty, there is no assurance that we will be able to secure increasing sales from existing customers or potential new customers and/or maintain profit margins that are consistent with the level that we had been able to achieve during the Track Record Period or at all. Need of additional funding to meet future business requirements and plans. Based on our future plans as set out in the paragraph headed Business strategy under the section headed Business to this prospectus, our Directors believe that the net proceeds raised from the Placing, our credit facilities and our internal financial resources should be sufficient to meet our immediate needs. However, we may come across other opportunities to expand our business. In such circumstances, the proceeds from the Placing may not be sufficient to develop these opportunities and we may need to obtain additional financing to fund our future capital expenses. If we are unable to secure adequate funds for our business needs in a timely manner, we may not be able to fully implement our future plans effectively and successfully. We will no longer obtain financing from GobiMin Group upon the Listing and we may experience an increase in finance costs. Our operation and further growth may be limited by unavailability of financing at reasonable terms. In the past, we had, to a large extent, utilised the financing from GobiMin Group instead of credit facilities obtained from our banks. The interest rate charged by GobiMin Group to us has been lower than those offered by banks. After the Listing, we will no longer obtain any financing from GobiMin Group and as such, we will rely on the credit facilities obtained from our banks. The increase in finance costs may have significant impact on our performance. 26
We require significant capital investment to meet our working capital needs for the purchase of raw materials and expansion of our market share. Substantial capital expenditure needs to be incurred before we are able to generate any revenue. If we require additional funds but we are unable to obtain funds from banks in a timely manner and at a reasonable cost, we may be unable to meet our working capital needs. These may also prevent us from implementing our future strategies entering into transactions with customers that would otherwise benefit our business. Any of these factors may have a material adverse effect on our growth, competitiveness and future profitability. Our future financial performance will be negatively affected by the Listing expenses incurred in connection with the Placing. Our financial results for the year ending 31 December 2014 will be affected by non-recurring expenses in relation to the Listing. The estimated expenses in relation to the Listing are approximately HK$14.4 million. Our Group expects to recognise approximately HK$8.0 million in the consolidated statement of comprehensive income and to deduct the remaining of approximately HK$6.4 million from our Company s capital. Whether or not the Listing eventually occurs, a major portion of the Listing expenses will have been incurred and recognised as expenses, which will reduce our net profit and therefore negatively affect our future financial performance. In addition, if the Listing were to be postponed due to market conditions, we would also need to incur additional Listing expenses for our future listing plan, which would further negatively affect our future net profit. As a result, our business, financial performance, results of operations and prospect would be materially and adversely affected. We are dependent on our key personnel and skilled employees and there is no assurance that we can retain/recruit them. Our Directors believe that our success is attributable to a large extent to, amongst other things, the contribution of Mr. Tan and Ms. Chau, our executive Directors. Details of their expertise and experience are set out in the section headed Directors and senior management in this prospectus. Our key personnel and management talent, effort and expertise in the silver industry are crucial to our operations and financial performance. If any of our executive Directors or members of the senior management terminates his/her service agreement with us and we are unable to find appropriate replacements in a timely manner or at all, our operations would be adversely affected. We also cannot assure that we will be able to attract and retain capable staff. Our Directors also believe that an integral part of our success is our ability to recruit and retain workshop staff who have the knowledge, experience and technical skills to process silver so as to meet our customers needs. While we were able to recruit and maintain the services of competent workshop staff during the Track Record Period, there is no assurance that we can continue to recruit and/or retain competent workshop staff with the necessary skills and knowledge to meet our clients needs in the future. Any resignation of our workshop staff and our inability to recruit competent replacement expeditiously may have a material adverse effect on our business and operations. 27
The capacity of our processing facilities may not be able to keep up with the growth in silver processing demand which may affect our profitability. For each of the two years ended 31 December 2013 and the four months ended 30 April 2014, the utilisation rate of our processing facilities was approximately 57.6%, 67.9% and 108.9% respectively. For further details, please refer to the paragraph headed Processing Processing facilities, capacity and utilisation rate under that section headed Business in this prospectus. In the event that our processing demand increases in future and we are unable to process the required products and/or subcontract the excess demand to suitable subcontractors for their in time processing, our operations and profitability may be adversely affected. Any failure to maintain an effective quality control system could have a material adverse effect on our business and operations. The quality and consistency of our products are critical to our ability to retain our customers and acquire and attract new customers. If we fail to maintain an effective and adequate quality control system, we may produce defective products that expose us to claims by our customers. Any such dispute would incur additional costs or damage to our business reputation and corporate image, as well as disrupt our business operations. Any failure to maintain the certificates and approvals required for our business could adversely affect our business and operations. Our business operations require certain certificates and approvals, details of which are set out in the sub-section headed Certificates and approvals in the section headed Business in this prospectus. In order to maintain such certificates and approvals, we must comply with the restrictions and conditions imposed by the relevant authorities and/or pass annual assessments where required. If we fail to comply with any of the relevant regulations or pass the required annual assessments, we may not be able to maintain our certificates and approvals. If we fail to abide by the requirements of such certificates and approvals, they could be suspended or revoked. In such cases, our operations would be significantly disrupted or even suspended, thereby, adversely affecting our profitability. Lease renewal of our workshop will be affected by conditions of the rental market. We have entered into a lease for a term of 36 months in respect of our workshop and it will expire in April 2016. The lease is renewable for 24 months at our discretion with the landlord at prevailing market rent. Unpredictable rental increases in Hong Kong may prevent us from renewing the existing lease on terms and conditions acceptable to us or we may have to renew such lease on less favourable terms and hence increasing our operation cost. If we fail to renew the lease on terms commercially acceptable to us, there could be an adverse impact to our business, operational results and financial conditions. 28
We had certain compliance irregularities which may lead to enforcement actions being taken Our subsidiaries had not complied with certain applicable laws and regulations in Hong Kong during the Track Record Period. These incidents relate to untimely notification of the establishment of a notifiable workplace under the Factories and Industrial Undertakings Ordinance, untimely registration of an air receiver under the Boilers and Pressure Vessels Ordinance, untimely laying of audited financial statements before annual general meetings of these subsidiaries under the Companies Ordinance and untimely filing of tax returns under the Inland Revenue Ordinance of Hong Kong. For further details, please refer to the paragraph headed Non-compliance incidents under the section headed Business in this prospectus. There is no assurance that the relevant authorities would not take any enforcement action against our subsidiaries and their respective directors and officers in relation to the non-compliance. In the event that such enforcement action is taken, our reputation, cash flow and results of operation may be adversely affected. Historical dividends do not guarantee future dividends. During each of the two years ended 31 December 2013 and the four months ended 30 April 2014, CPM declared interim dividends of HK$3.0 million, nil and HK$1.5 million respectively to its then shareholders. Dividends to be declared and paid in the future will be subject to, among others, the full discretion of our Directors, and would depend on our future earnings, capital requirements and surplus, the general financial condition and any other factors which our Directors may consider relevant. Accordingly, our historical dividends should not be treated as an indication of future dividend distributions. Further details on our dividend policy are set out in the paragraph headed Dividend policy under the section headed Financial Information in this prospectus. As the demand for our products fluctuates and we intend to engage in more silver direct trading transactions in future, comparison of past results may not be necessarily meaningful and our track record shall not be relied upon. The demand for our products is influenced by market trends which may change quickly. As a result, the demand for our products fluctuates from time to time. Going forward, we intend to expand our market share in the metal trading industry in Hong Kong by engaging in more silver direct trading transactions, which may have lower spreads than those of our silver transactions which involve processing. The comparison of past results may not be necessarily meaningful and our track record cannot be relied on as indicators of our future performance. If we fail to respond to changes in market conditions, our performance may be adversely affected. 29
Our levels of indebtedness and potential unavailability of credit may materially adversely affect our business. Our current levels of debt and the instability in debt markets may affect our ability to secure funding for current operations and future business expansions. During the Track Record Period, we incurred an increasing amount of indebtedness (including bank borrowings and other borrowings) to finance our operations. As of 31 December 2012 and 2013 and 30 April 2014, our total short-term and longterm bank and other borrowings were HK$32.1 million, HK$110.5 million and HK$44.4 million respectively. As of the same dates, our gearing ratios, defined as (i) interest-bearing debt divided by (ii) total equity were approximately 2.1 times, 4.7 times and 2.2 times, respectively. For each of the two years ended 31 December 2013 and the four months ended 30 April 2014, our finance costs were HK$3.0 million, HK$1.6 million and HK$1.0 million respectively. In light of our operating cash outflow situation in the year ended 31 December 2013, we may not have sufficient funds to meet our capital commitment in the future. We may seek additional financing in the form of loans for planned capital expenditures and expansion plans. The level of our indebtedness and the amount of our interest payments could limit our ability to obtain the necessary financing or obtain favorable terms for the financing to fund future capital expenditures and working capital. Such limitations could reduce our competitiveness and increase our exposure and sensitivity to adverse economic and industry conditions, which could materially adversely affect our financial condition and results of operations. Material fluctuations in foreign exchange rates may adversely affect our business and performance. Our sales and purchases are predominantly denominated in US$. However, some of our purchases, sales, expenses and payments are denominated in RMB and HK$ and therefore we are subject to currency risks. The exchange rates of different currencies are subject to fluctuations affected by international political and economic conditions and changes in the PRC government s economic and monetary policies. The possible ongoing appreciation of the RMB against the relevant foreign currencies would have an adverse effect on purchasing power of the relevant foreign currencies and our business and performance. We strongly caution you not to place reliance on any information contained in press articles, media coverage and/or research analyst reports regarding us, our industry or the Placing. There may be press articles, media coverage and/or research analyst reports regarding us, our industry or the Placing, which may include certain financial information, financial projections and other information about us that are not included in this prospectus. We have not authorised the disclosure of any such information in the press, media or research analyst reports. We do not accept any responsibility for any such press articles, media coverage or research analyst report or the accuracy or completeness or reliability of any such information or publication. We disclaim any such information appearing in publications other than this prospectus which is inconsistent or conflicts with the information contained in this prospectus. Accordingly, prospective investors should not rely on any such information. In making your decision as to whether to purchase our Shares, you should rely only on the financial, operational and other information included in this prospectus. 30
RISKS RELATING TO THE INDUSTRY IN WHICH WE OPERATE Our business and results of operations are dependent on the demands in the end-user market for, and the market price of silver products, which are driven by factors beyond our control. We derived approximately 98.39%, 93.71% and 100.00% of our revenue from sales of metals for each of the two years ended 31 December 2013 and the four months ended 30 April 2014 from sales of silver products. Our operating results are affected by fluctuations in the price of silver. The price of silver generally follows the trend of silver price in the international market and have mainly been driven by various market forces, such as global end-user market demands for silver products, supplies from mine production and silver scrap, investment trading, fluctuations in the US$, inflation fear and changes in prevailing interest rates, which are all beyond our control. As silver is an industrial material as well as a tangible asset which can be used to hedge against risk, macroeconomic circumstances have a great impact on the silver price. During an economic boom, increased end-user market demand for silver products pushes up silver price. During an economic recession, decreased end-user market demand exerts downward pressure on silver price. Details of historical price movements of silver are set out in the section headed Industry Overview Silver market pricing in this prospectus. Therefore, high levels of revenue in one period are not necessarily predictive or indicative of continued high levels of revenue in any future period. As a result, our income and profitability may be unpredictable. We operate in a highly competitive industry and if we are unable to compete successfully against other players, our business, financial condition and results may be adversely affected. The industry in which we operate is highly competitive. Silver traders compete against each other, among other things, for customers, suppliers of raw materials, skilled workers and technologies. Some of our competitors may have longer track records, larger operational scale, greater financial resources and more established market reputation than us. There is no assurance that we can compete successfully in the future. In the event that we are unable to compete with other market players effectively, our business, financial condition, results of operations and prospects will be materially and adversely affected. 31
RISKS RELATING TO THE PLACING There has been no prior public market for our Shares and the liquidity, market price and trading volume of our Shares may be volatile. Prior to the Listing, there is no public market for our Shares. The listing of, and the permission to deal in, our Shares on the Stock Exchange do not guarantee the development of an active public market or the sustainability thereof following completion of the Placing. Factors such as variations in our revenues, earnings and cash flows, strategic alliances or acquisitions made by us or our competitors, industrial or environmental accidents suffered by us, loss of key personnel, litigation or fluctuation in the market prices for our products or raw materials, the liquidity of the market for our Shares, the general market sentiment regarding the industry could cause the market price and trading volume of our Shares to change substantially. In addition, both the market price and liquidity of our Shares could be adversely affected by factors beyond our control and unrelated to the performance of our business, especially if the financial market in Hong Kong experiences a significant price and volume fluctuation. In such cases, you may not be able to sell your Shares at or above the Placing Price. You may experience dilution if we issue additional Shares in the future. We may issue additional Shares upon exercise of options to be granted under the Share Option Scheme in the future. The increase in the number of outstanding Shares after the issue would reduce the shareholding percentage of our Shareholders and may result in a dilution in the earnings per Share and net asset value per Share. In addition, we may need to raise additional funds in the future to finance business expansion or new development and acquisitions. If additional funds are raised through the issuance of new equity or equity-linked securities other than on a pro-rata basis to our existing Shareholders, the shareholding of such Shareholders in our Company may be reduced or such new securities may confer rights and privileges that take priority over those conferred by the Placing Shares. Any disposal by our Controlling Shareholders of a substantial number of Shares in the public market could materially and adversely affect the market price of our Shares. There is no guarantee that our Controlling Shareholders will not dispose of their Shares following the expiration of their respective lock-up periods after the Listing. We cannot predict the effect, if any, of any future sales of our Shares by any of our Controlling Shareholders, or that the availability of our Shares for sale by any of the Controlling Shareholders may have on the market price of our Shares. Furthermore, sales of a substantial number of Shares by any of our Controlling Shareholders or the market perception that such sales may occur could materially and adversely affect the prevailing market price of our Shares. 32
RISKS RELATING TO THIS PROSPECTUS Statistics and industry information contained in this prospectus may not be accurate and should not be unduly relied upon. Certain facts, statistics, and data presented in the section headed Industry Overview and elsewhere in this prospectus relating to the global and Hong Kong markets of the silver industries have been derived, in part, from various publications and industry-related sources prepared by government officials or independent third parties. We believe that the sources of the information are appropriate sources for such information, and the Sponsor and our Directors have taken reasonable care to extract and reproduce the publications and industry-related sources in this prospectus. In addition, we have no reason to believe that such information is false or misleading or that any fact that would render such information false or misleading has been omitted. However, neither we, our Directors, the Sponsor, nor any parties involved in the Placing have independently verified, or make any representation as to, the accuracy of such information and statistics. It cannot be assured that statistics derived from such sources will be prepared on a comparable basis or that such information and statistics will be stated or prepared at the same standard or level of accuracy as, or consistent with, those in other publications within or outside Hong Kong. Accordingly, such information and statistics may not be accurate and should not be unduly relied upon. Our future results could differ materially from those expressed or implied by the forwardlooking statements. Included in this prospectus are various forward-looking statements that are based on various assumptions. Our future results could differ materially from those expressed or implied by such forward-looking statements. For details of these statements and the associated risks, please refer to the section headed Forward-Looking Statements in this prospectus. 33