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Extracted from Annual Report 2014

Recognising the importance of risk management in providing sustainability to our business and in preserving our shareholders' value, Megachem is committed to incorporate effective risk management practices into our organizational processes to mitigate and manage each of these risks.

Megachem has identified 4 main risk components within the framework of its risk management

A. STRATEGIC RISK

The Executive Committee and Board members collectively formulates the strategy and charts the directions for the Group. The progress of implementation of the strategy is monitored and reviewed annually. In the process of strategy formulation and review, we evaluate the external environmental factors such as the risk profile of the industry, competitive forces within the industry, opportunities and threats, as well as the internal factors such as our key competitive strengths and weaknesses, our market position and growth strategy.

The Company views the current strategy of building our growth around our distribution and contract manufacturing activities as the 2 pillars of growth and the business model of diversification in terms of markets, customers, products and suppliers as being robust and sustainable.

B. FINANCIAL RISK

Megachem's activities expose it to a variety of risks and unpredictability of the financial markets such as changes in foreign currency exchange rates and interest rates. The following sections outline Megachem's practices with respect to our financial risk management.

Foreign Currency Risk

We operate internationally and is exposed to foreign currency risks arising from various currency exposures primarily with respect to United States Dollar, Euro Dollar, Sterling Pound, Japanese Yen and Malaysia Ringgit.

Forward currency contracts are entered into to hedge certain of its exposures to foreign currency risk. General guidelines are set with regard to the level of hedging and the type of hedging instruments that Megachem undertakes. Authority matrix is also in place that sets the authorized personnel and his/her authorization limits for hedging.

The Executive Committee monitors the foreign currency exposure on a monthly basis through monthly executive committee reports.

Interest Rate Risk

Interest rate risk arises mainly from our borrowings which are mainly at floating interest rates. Megachem manages its interest rate risk by keeping borrowings to the minimum required to sustain our operations.

Credit Risk

We sell our products globally which thus increases the risk of payment default by our customers. We manage our credit risk by diversifying credit risk exposure and dealing with high credit quality counterparties. As such, Megachem has no significant concentration of credit risk. Policies are in place to ensure that the sale of products and services are made to customers with an appropriate credit history and obtaining sufficient security and/or credit insurance where appropriate to mitigate credit risk.

Liquidity Risk

We manage liquidity risk by maintaining sufficient cash balances and availability of funding through an adequate amount of credit facilities at all times.

Capital Risk

Our objectives when managing capital are to safeguard Megachem's ability to continue its business operations as a going concern and to maintain an optimal capital structure so as to maximise shareholders' value.

In order to maintain or achieve an optimal capital structure, we seek to strike a balance between debt and equity and capping our financial gearing at a comfortable level.

C. OPERATIONAL RISK

IT Security

Megachem adopts the following 3 key principles in its IT security management :-

Confidentiality – this prevents the disclosure of information to unauthorized individuals or systems

Integrity – his prevents important data from being modified

Availability – this ensures that information is readily available when needed even at times of any disruption

With this in mind, Megachem has in place the following measures :

  • physical security is enhanced by installing security cameras at our premises which can be monitored via IP addresses;

  • content filtering has been enabled to prevent viewing inappropriate web sites or content and also to prevent access from known malware hosts;

  • disaster recovery procedures are implemented such that in the event of any system breakdown, the operation can continue with little disruption. Key applications can be run at third party disaster recovery sites located away from our premises. Overseas operations will also be able to access the disaster recovery sites via virtual private network access;

  • databases are backed up daily and kept in fire rated safe at disaster recovery sites;

  • policies are documented and our people are constantly oriented to adhere to the approved policies and procedures; and

  • internal IT security audit are conducted annually.

Business Continuity

Megachem understands the need to be resilient in its operation in face of any unforeseen disruptions in order to fulfill our obligations. In this regard, Megachem has implemented a Business Continuity Management (“BCM”) program which defines our efforts to ensure continuity of its functions and systems, in part and/or in whole, limits financial losses resulting from disruptions and to protect our reputation and branding.

The BCM program involves the integration of management, people, technology, facilities and business processes. The framework covers :

  • conducting risk assessment and business impact analysis periodically;

  • evaluating recovery strategies to be implemented; and

  • documenting detailed plans and measures to provide guidance in restoring routine operations.

Megachem is proud to be awarded SS540 Singapore Standards for Business Continuity Management for our BCM program.

Process Execution Risk

Failure in operational and business processes can jeopardise the Company's competitiveness. In order to minimize process risk, we seek to standardize our processes throughout its entire organization by adopting international Quality Management standards within the framework of ISO9001. Guided by this Quality Management System, we are able to consistently deliver quality in our products with an impeccable level of service.

D. Legal Risk

Business Ethics

Compliance with rules and regulations is set as a fundamental principle with which we conduct our business. Through staff induction program and continuous education, the principle is being reinforced to ensure that we continue to comply with all relevant rules and regulations.

Anti-graft laws are increasingly being enacted globally such as the US Foreign Corrupt Practices Act and UK Anti-Bribery Act. Recognising the adverse impact of non-compliance on our Company's reputation and the potential loss of business, Megachem puts Integrity at the core of our corporate value system. The business conducts of all employees of the Group are guided by a Business Ethics Guide which provides guidance on areas such as anti-bribery, corruption, conflict of interest, Intellectual Property protection, insider trading and fraud. These Codes of Ethics are strictly binding for all employees in the respective countries in which we operate. Trainings are provided during staff induction program and refresher trainings are also provided. This Code demonstrates our commitment to integrity in the workplace and in the way we conduct our business.

Industry Specific Regulations

Various government agencies also imposed industryspecific regulations. In this area we collaborate closely with these agencies in educational programs and exercises to keep ourselves up to speed with their rules and regulations. (For more information, please refer to Sustainability : Health, Safety and Environment section.)

Stock Exchange Listing Rules

Guided by our Catalist Sponsor, listing rules are constantly being observed and followed. All announcements are perused by our Catalist Sponsor before they are released. Our Catalist Sponsor is also frequently being engaged in board discussion on matters relating to listing rules compliance.