The risk factors discussed in this report are only some major factors that may have negative impacts on the Company. These risk factors may also have a significant impact on the investment in the Company. There may be some other unpredictable factors and some insignificant factors, which may also have an impact on the Company’s operation in the future.
- Risks in regard to changes in state regulations
Although the sales and distribution of water purifiers have not been controlled by any particular state agencies thus far, some agencies indirectly involve in the Company’s business. Office of the Consumer Protection Board, for instance, has a duty to prevent hire purchasing service providers from taking advantages over consumers. In addition, the Ministry of Commerce has imposed a law to control the direct sale business, requesting all direct sellers to obtain a particular license before launching their direct sale business, Another relevant state agency is Ministry of Industry, which oversees the extension of a license to operate industrial factories. The Company always takes the rules and regulations set by relevant state agencies seriously. However, it will be rather risky for the Company if relevant agencies add more stringent rules and regulations. Being aware of this risk, the Company thus sets operation guidelines to suit the current state rules and regulations. Meanwhile, the Company always monitors updates on any changes of relevant rules and regulations in order to ensure that the Company’s business is operated in compliance with state rules and regulations.
- Risks in regard to heavy dependency on the direct sales channel
The Company distributes its products mostly through the single level direct sales channel, by teams with their long expertise in the single level direct sales, the Company strongly believes that this sale channel remains an appropriate channel. To sell water purifiers, sales personnel are required to provide detailed technical explanations about product specifications, and conduct product demonstration to highlight advantages of the products in order to stimulate customers’ buying decisions and ensure that the sale is successfully. These sales techniques are unique ability of each salesperson. Therefore, talented salespersons are attractive as well as are interested by other companies, and may be bought by any company that have higher attractive benefits package.To retain our talented sales personnel, the Group is committed to offering attractive remuneration packages and benefits as well as training in order to engage sale staff, and enhance the sales teams’ efficiency. However, the Group is aware of risk regarding heavy dependency on the direct sales channel. They also have distributed products via other channels, to broaden its customer coverage, e.g., Telesales & telemarketing, E-commerce and online media including Facebook, E-Marketplace e.g., Lazada and shopee etc. The Company has expanded its sales in the form of Online to Offline (O2O) by leveraging its strength in the sales team to present and demonstrate product features in accordance with the lifestyle of consumers today that tend to use more online channels. The Company has also appointed product distributors to be better able to offer products and services in order to reach all target customer. In addition, there are other sales models such as manufacturing and selling OEM products to other direct selling companies.
- Risks in regard to trade liberalization and the emergence of ASEAN Economic Community that may have a negative impact on sales and production costs
The trade liberalization and the emergence of ASEAN Economic Community (AEC) in 2015, economic cooperation in the region of Southeast Asian countries (ASEAN) which includes 10 member countries, will result in relocations of funding resources, manpower, and international trades among the member countries. As a result, there might be some low-cost products from other countries to beat Thai products. Therefore, the Company has planned to expand its distribution channels and create more Annual Report 2020 | 45 varieties of products to meet customers’ demand and reach more customer targets. Moreover, The Company has developed its products to be diverse at lower costs. Regular price and quality of products comparison are provided with other similar products made by foreign-made companies. If it is found that there are better products imported from abroad, the Company may then decide to import rather than produce itself. The Company also expands its distribution channels to meet and reach more target customers. In addition, the Company has expanded its market to some CLMV countries by considering various factors and marketing possibilities. The Company started selling products through a joint venture company between the Company and Thai investors in the Lao People’s Democratic Republic and distributing through dealers in Cambodia. Business plans for other countries are being studied and developed.
- Risks in regard to contagious disease outbreak and/or pandemic
The coronavirus (COVID-19) has affected the global economy including the economic conditions in
Thailand. Terminations of employment in some sectors have contributed to a risk of decreased
purchasing power of consumers and the ability to pay installments for goods. However, the main
products of the Company are water purifiers, which are essential to health and can reduce the risk of
contracting diseases from touching the water package and/or traveling to buy bottled water. This
enables the Company to generate sales while the rate of installment payments is not lower than the
average estimation foreseen by the Company. Despite the Company’s strict policy of tracking payment
installments to avoid bad debt problems, the Company has also helped the debtors who have suffered
from the pandemic by easing payment of installments or extending the number of installments to
debtors who have financial problems. With these measures in place, some debtors will have to an
extended period of paying installments as they cannot pay consecutively every installment. This can
help reduce the incidence of bad debt from the accounts receivable.
- Risks in regard to fluctuation in raw material prices
The manufacturing of a water purifier requires varieties of components and devices, both for the body and filtration substances. Some items can be produced domestically but some have to be imported by major importers. The prices of material and equipment vary according to market prices and exchange ranges for the case of imported items. The Company may be partially impacted by the fluctuation in material and equipment prices, as well as exchange rates. To manage the exchange rate risk, the Company utilizes financial instruments Forward Contact in order to mitigate the impact on exchange rate fluctuation.
- Risks in regard to the operating license
One of the Company’s plants is located in an orange zone, i.e., a densely populated area. The plant received an operating license on 10 October 2007, under the condition that the license will be revoked anytime whenever relevant agencies lodge a complaint or the plant causes any troubles to the community. Details are as following:
- Factory 1: The Company obtained the factory license for assembling and repairing water filters. From The Industrial Office of Nonthaburi Province has already approved the renewal of the license expired on 1 January 2022.
- Factory 2: The Company obtained the factory license for assembling and repairing water filters from the Industrial Office of Nonthaburi Province. The license will expire on 1 January 2020 and In 2019, there was an amendment of the Factory Act – FACTORY ACT (NO. 2) B.E. 2562 (2019), resulting in the license of Factory 2 to be valid until the factory cessation is notified.
- Factory 3: The Company obtained the factory license for plastic granulation from the Industrial Office of Nonthaburi Province. The license expires on 1 January 2020. The company has already renewed the license, in which the Nonthaburi Provincial Industry Office, has authorized the renewal until 1st January 2024. And Factory license for manufacturing and repairing water heater from the Nonthaburi Industrial Office. The license expires on 1 January 2022.
- Factory 4: The Company obtained the factory license for assembling and repairing water filters as well as plastic granulation from the Industrial Office of Pathum Thani Province.The license will expire on 1 January 2020 and In 2019, there was an amendment of the Factory Act FACTORY ACT (NO. 4) B.E. 2562 (2019), resulting in the license of Factory 2 to be valid until the factory cessation is notified.
However, the company may be at risk from the factory license being revoked if there is a complaint and/or the company does not resolve the complaint. Nevertheless, the company’s management is confident that it will be able to continue operating the factory because its production does not create any pollution and the company has not received a warning from the relevant departments or significant complaints from residents in the vicinity.
- Risks in regard to the sale on credit
The Group’s water purifiers and electric appliances are sold mostly through the direct sale channel on a hire purchase basis. The quality of hire purchase receivables is a key factor for the recognition of revenue. As of 31 December 2020, the hire purchase receivables with outstanding balance overdue for three months accounted for 4.48% of total hire purchase receivables from sales of water purifier. For electric appliances, outstanding balance overdue for three months accounted for 6.12% of total hire purchase receivables from sales of electric appliance. The major customers of the Group are in the medium to low-end market segments The Group has established sales policies that enable those two customer segments to reach the Group’s products and services However, the Company has a policy to audit and control credit granting including in the case that a debtor has overdue payment of principal or interest for more than 90 days, it will be considered as a credit impairment of financial asset when the debtor has the possibility of being unable to pay back in any event, or several events that affect the forecast of future cash flows of financial assets. The credit risk of hire purchase receivables is measured at amortized cost for hire purchase receivables. Given that the Group’s gross profit margin was rather high at 77.18 % in 2020, the Group still enjoyed impressive operating profit from installment sales even after the deduction of sales expenses and bad debt and doubtful debt expenses. In 2020, the net profit margin of the Group was 7.49%.
Measures to prevent and mitigate risks in case the receivables fail to follow payment conditions and agreements which stated in the hire purchase contracts, are as follows:
- Clearly indicate basic qualification of targeted customers so that the sales teams can use as a guideline; sales staff preliminarily approve the qualification of potential customers and team leaders review the qualification once again before the hire purchase contract is signed. Then, the Credit Department examines the quality of receivables: the Credit Department meets with customers in order to evaluate each customer’s creditability against the installment plan and inspects whether the product is completely installed, and ascertains the repayment capacity of clients afterwards. Electrical appliances, which distributed via instalment payment, will be sold through the subsidiary company, Thiensurat Leasing Company Limited (TSRL). All customers will be checked through the Credit Bureau and the checker staff will review the customer information in accordance with the rules of the TSRL company, in order to provide supplementary information to consider whether to approve or disapprove.
- Offer remunerations to sales members based on the quality of debt collection. In case of bad debt, the sales members and the relative sales management team are required to share losses in accordance with the Company’s policy about bad debts.
- In case customer fails on the conditions stated in the hire purchase contract, the collection actions will be assigned to the Debt Collection Department and the Legal Department. In addition, the Group will take back the water purifier from that particular customer.
- Risks in regard to the fluctuation in the interest rates
As the Group’s main business be hire purchase, it involves with the Group’s working capital management raised from both Equities and Loans from financial institutions to be proper and efficiency with the prudent consideration about the risks in regard to the fluctuation in the interest rates and the Group’s liquidity under the uncertainty of financial market. Consequently, the Group has the agreements with the financial institutions like banks for the banks’ credit facilities to serve with the expansion of the Company’s growth and also has to take the consideration about the term loans from the banks be matching with the term of the funds provided to the customers in the Hire purchase agreements that will help the Group to avoid the risk from the fluctuation in the interest rates and the uncertainty of financial market. For the year of 2020, the Group had a few loans from the banks due to the efficiency of Group’s management funds with the granted credit facilities from the banks without any guarantee like the Clean Loans Basis for the Group’s business expansion.
Risks in regard to the fact that the major shareholders have control power over management policies.
The Changyoo family is the Company’s major shareholder group (further details can be obtained from Part: Listing Securities and Shareholding Structure). As of 30 December 2020, Changyoo group held 338,840,677 shares or 61.64% of issued shares. As a result, the Changyoo group is able to control almost all resolutions of shareholders’ meeting, including the appointment of directors or any matters that require the majority votes of shareholders. The power of the major shareholder, however, does not include the issues related to laws or regulations, for which three- fourths of the shareholders are required. Given the control power of the major shareholder, other shareholders are unable to gain votes enough to balance the power of the major shareholder group for some particular issues proposed by the major shareholder. Being aware of this risk factor, the Company arranges the management structure, consisting of the Company’s Board of Directors and the Audit Committee. The members of these committees are those with high experiences. 6, out of 11, are independent directors from outside, of which four independent directors act as the members of the Audit Committee. These members provide comments in regard to connected transactions prior to proposing to the Company’s Board of Directors and shareholders’ meeting.