1. Risk Management Policy and Procedure
| Risk Management Policy and Procedure |
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2. Risk Evaluate
(1) Operational risks - Supply chain risks:
A. Evaluate:
a.China's factories face unstable order intake due to the U.S.-China trade war, which can lead to factory shutdowns or suspensions, resulting in unstable supply and delayed delivery.
b. There is an oversupply of petrochemical raw materials, and the demand for fine chemicals is weak due to sluggish domestic demand in China. However, with Trump's election, there may be uncertainties. In the first half of 2025, there is a higher chance that raw material prices will remain stable.
c. Starting from October 2024, the Ministry of Transportation and Communications' Highway Bureau will strictly enforce container weight limits, which will reduce the volume of raw material imports in full containers, potentially increasing raw material costs.
B. Impact: In the second half of 2024, raw material prices will continue to fluctuate at lower levels. It is expected that in 2025, prices will either remain stable or experience gradual increase.
C. Response:
a.For materials with unstable delivery times, establish a safety stock level.
b.Seek customer approval to increase supply sources.
c.Closely monitor the operational status of suppliers and adjust inventory based on order demand and market trends.
(2) Operational risks - EHS risks:
A. Evaluate:
a.Being in the chemical manufacturing industry carries high potential for fire and toxicity.
b.Equipment damage or employee death or injuries due to negligent operations that might lead to suspension of operations.
c.Environmental pollution due to negligent operations that might lead to suspension of operations.
d.Net zero carbon impact.
B. Impact: :
a. In 2024, the company recognized insurance claim income of NT$430 million.
b.The fire insurance premium is approximately 28.3 million, with the current insurance coverage rate at 84.5% (deductible is 15%).
c.If the Environmental Ministry expands the scope of carbon fee collection in the future, costs will increase by 6.6 million (based on 2020 carbon emissions estimates).
d.Products exported to Europe will be subject to a carbon tariff, with the European carbon tax approximately 10 times higher than Taiwan's.
C. Response:
a.To execute standard operational procedures faithfully, ensuring adherence to ISO45000 and ISO14001.
b.To conduct educational training and fire drills and include environmental pollution and work safety incidents as factors for performance awards and punishments.
c.To have fire insurance, the current combined insurance amount of which is about NT$4.75 billion (including insurance for interruption of operations).
d.To have Insurances for public accident liability and employer liability.
e. Establishment of a Greenhouse Gas Inventory Promotion Task Force to gradually complete inventory and internal and external verification, thereby formulating policy objectives and control mechanisms.
(3) Operational risks - Quality risks:
A. Evaluate: Failing a client audit or health authority inspection or receiving warning letters,
which create issues in product quality that necessitate remake or scrapping.
B. Impact: In 2024, the loss of inventory scrapping was about NT 35.96 million, and the
amount of returns and allowances was about NT 10 million. The sulfur content in the PGA exceeds the standard, and the supplier is required to compensate for rework costs and shipping fees amounting to USD 300,000.
C. Response:
a.To implement quality assurance policies and good manufacturing practice, ensuring adherence to ISO9001.
b.To have introduced the SAP ERP and Master Control softwares for data integrity and launch the Laboratory Information Management System(LIMS).
c. To have a product liability insurance for US$2 million.
(4) Financial risks - Exchange rates risks:
A. Evaluate: 90% of the company’s revenue is derived from exports. The quoted price is mainly in US dollars, and the appreciation or depreciation of the currency impacts the company’s revenue significantly.
B. Impact: The appreciation and depreciation of NT$1 in the foreign exchange between US dollars and New Taiwan dollars approximately impact 2% of the gross margin. The position of US dollars generates non-operating exchange gains and losses, NT$ 22.60 million of non-operating exchange gains in 2024, affecting NT$0.19 in EPS after tax.
C. Response:
a.Based on developments in the international political and economic situation as well as trends in exchange rate fluctuations, determine the appropriate
timing to buy or sell foreign currencies.
b.To undertake Forward Foreign Exchange to reduce exchange gains and losses.
(5) Financial risks - FVP&L:
A. Evaluate: The current amount of financial assets at fair value through profit or loss is approximately 110 million, primarily consisting of preferred stocks from financial institutions and money market funds.
B. Impact:
a. In the year 2024, dividend income was approximately 1.95 million.
b.The evaluation gains and losses from investment positions resulted in an evaluation gain of approximately 3.61 million in 2024.
C. Response: Dispose of assets as necessary based on the utilization of operating funds.
(6) Financial risks – PVOCI:
A. Evaluate: Currently, the financial asset measured at fair value through othe comprehensive income is Energenesis Biomedical Co., Ltd., with an amount of approximately NT$ 81.43 million.
B. Impact: In 2024,other comprehensive income resulted in a loss of approximately15.38 million, mainly due to the evaluation loss of Energenesis Biomedical Co., Ltd.
C. Response: As the investments in those companies are part of a long-term strategy, there is currently no disposal plan.
(7) Financial risks - Credit risks:
A. Evaluate:
a.For the default risk of account receivables, the current account balance is NT$ 289 million.
b.For the default risk of cash and cash equivalent, the current balance is NT$ 582 million.
B. Impact: There was no bad debt loss in 2024.The interest income of cash and cash equivalent generated is approximately NT$ 8.03 million.
C. Response:
a.The company shall implement proper client credit investigation, prepayment transactions shall be requested to the clients with concerning status, and factoring of accounts receivables and insurance shall be implemented when necessary.
b. The funds are deposited with financial institutions with high credit ratings, primarily consisting of Taiwanese dollar and US dollar time deposits, as well as short-term commercial paper.
(8) Financial risks–Others:
A. Evaluate:
a. Interest rates risks.
b. Liquidity risks.
c. Inflation risks.
d. Endorsement / Guarantees risks.( Framosa Co.)
B. Impact:
a. As of the end of 2024, the accumulated capitalization amount of interest on the five-year loan from Mega Bank is approximately NT$ 28 million, which will be amortized after the operation of the Guanyin plant.
b. Interest expense for 2024 was approximately NT$ 5.54 million.
c. The inflation in 2024 has eased and has not caused significant impact.
d. If the endorser of the guarantee fails to fulfill their debt obligations, a loss must be recognized. As of the end of 2024, the actual disbursed amount is approximately NT$ 196 million.
C. Response:
a. Interest rates : Closely monitor changes in the financial market and adjust the borrowing period accordingly
b. Liquidity : Monitor changes in liquidity and financial indicators, ensure sufficient bank credit limits for fund allocation. As of the beginning of 2025, there is still a borrowing limit of 1 billion, and bank borrowing limits can be utilized if necessary.
c.Inflation : Closely monitor developments in relevant situations and adjust product prices moderately as needed. Strive to secure the return of existing customer orders and actively expand new clients to improve production capacity utilization.
d. Endorsement / Guarantees: Record relevant matters in the reference book and monitor the utilization of guarantee limits. Internal audit personnel will audit the endorsement guarantee operation procedures and their execution at leastquarterly.
(9) Strategy risks:
A. Evaluate:
a.The company joint venture with Veolia to establish the Framosa Co., Ltd in the hope to reduce the consumption and the outsourced processing of chemical solvent, enhancing the competitiveness in operation and meeting the global trend of ESG, thus the company support Framosa to construct its plant and operate within the schedule.
b. Construction of a second plant: The plant in Guanyin is to decentralize the production locations and stabilize the relationships with clients.
B. Impact:
a. The company is holding 25% of the shares of Framosa Co., Ltd., allowing it to become one of the company’s affiliated companies. The shareholding ratio will be utilized to recognize the loss on investment (NT$ 15.9 million of losses recognized in 2024).
b. If the capacity utilization rate at the Guanyin plant is low after its activation, it will affect the profitability of the core business. The estimated negative impact on the gross profit margin in 2025 is 4.5%.
C. Response:
a.To support the construction and operation of the Framosa Co., Ltd. under the schedule to secure the solvent processing service agreements within the industry and establish economic scale.
b.To strengthen the business team to maintain good relationships with existing customers while actively expanding to acquire new customers. This approach aims to enhance the sustained growth momentum of the products and subsequently improve capacity utilization.
(10) Hazard risks–Natural disaster risks:
A. Evaluate:
a. Taiwan is easily impacted by natural disasters such as typhoons, earthquakes, etc.
b. Risks of emerging infectious diseases.
B. Impact: In 2024, there were a total of three days of typhoon day, resulting in a work stoppage loss of approximately NT$ 6 million.Typhoon and earthquake-related repairs incurred costs of around NT$ 0.5 million.
C. Response:
a.To enact the continuous operation plan of the company.
b.To enact the reporting and protection measures of infectious diseases, and implement them accordingly.
c.To purchase property insurance, currently the total coverage amounts of insurance is approximately NT$4.75 billion (the scope of insurance includes the stock, machinery equipment, buildings, and the interruption in operation.)
(11) Law risks :
A. Evaluate:
a.Compliance with government laws and orders.
b.Investment agreement signed by the President’s Office.
c.Non-disclosure agreement and supply agreement signed by the Business and Purchase Department.
d.Service agreement and equipment agreement from other departments.
B. Impact: In 2024, due to deferred shipments to the DCB, compensation costs amounted to approximately NT150,000.
C. Response: a.Each department shall assign personnel to review the amendment of laws and regulations and review its impact and the corresponding measures that shall be taken by the company.
b.Each department shall review all agreements carefully, and strictly enforce the internal control procedures requiring signatures and seals.
c.To commission services from legal firms for special and significant events.
d.To consult the opinions of General Counsel from the parent company for special and significant events.
(12) Others risks–Market risks:
A. Evaluate:
a.The market for pharmaceuticals grows steadily each year under population growth, aging, and economic growth.
b.The risk of losing clients.
c.The risk of having excessive ratios of a single product and a single client in the company’s revenues.
B. Impact: Due to the impact of the fire incident, not all customers have returned. In 2024,revenue still shows a gap of approximately NT 1 billion compared to pre-disaster levels.
C. Response:
a.To continuously enhance the relationship with the clients, speed up the processes of reconstruction, returning to production, and the construction of Guanyin Plant to restore the confidence of our clients.
b.To continuously develop new products with the goal of reducing the ratio of a singleproduct to the company’s revenue to below 15%.
c.To continuously develop new clients with the goal of reducing the ratio of a single client to the company’s revenue to below 10%.