Annual Report 2016 - page 220

New World Development Company Limited
206
Risk Factors
B. Risk Relating to Financial Conditions and Results of Operations
(continued)
8.
The Group maintains a certain level of indebtedness to finance its operation. The Group’s indebtedness could have an
adverse effect on it, for example, by:
I.
requiring the Group to maintain certain financial ratios;
II.
requiring the Group to dedicate a large portion of its cash flow to repay interest and debt, thereby reducing the
availability of its cash flow to expand its business;
III.
increasing the Group’s vulnerability to adverse economic or industry conditions;
IV.
limiting the Group’s flexibility in planning or responding to the changes in its business or the industry in which it
operates;
V.
limiting the Group’s ability to raise additional debt or equity capital in the future of increasing the cost of such
funding;
VI.
restricting the Group from making strategic acquisitions or taking advantage of business opportunities;
VII. increasing the difficulty of the Group to meet its obligations in relation to its debt; and
VIII. increasing the cost of borrowings of the Group.
The Group is principally engaged in property development business. As such business operation requires substantial
capital input, the Group will still need to obtain financing from financial institutions. When the credit market contracts
or tightens, the Group cannot assure that there will be sufficient borrowings or that it can refinance, in which case its
business development will be adversely affected to a certain extent.
In the future, the Group may from time to time incur other substantial indebtedness, intensifying the risks induced by
its indebtedness. The Group’s ability to generate sufficient cash to satisfy its outstanding and future debt obligations
will depend on the Group’s operating performance in future, which will be affected by, among other things, the
prevailing economic conditions, governmental regulations, the demand for properties in the region where the Group’s
business operates and other factors, many of which are beyond the Group’s control. The Group may not generate
sufficient cash flow to pay its anticipated operating expenses and to service its debts. In this case, the Group will have
to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, disposing
of the Group’s assets, restructuring or refinancing, or seeking equity capital. These strategies may not be
implemented on satisfactory terms, or at all. Even they are implemented, they may result in an adverse effect on the
Group’s businesses, financial conditions and results of operations. In addition, if the Group fails to fulfill its payment
obligations, comply with any actual covenants or required financial ratios, or breach any restrictive covenants, it may
result in a default under the terms of such borrowing. If an event of default occurs, the loan borrower is entitled to
request the Group to repay in full or part of its outstanding indebtedness on an accelerated basis.
C. Other Risks
1.
An outbreak of any other epidemics in the region where the Group operates may result in material disruptions in the
Group’s and its tenants’ businesses. Natural disasters or other catastrophic events, such as earthquake, flood or
severe weather conditions, could, depending on its magnitude, significantly disrupt the Group’s business operations
or result in significant economic downturn in the affected regions. The Group cannot assure that there will be no
occurrence of earthquakes or other natural hazards in the area where it operates, which may result in severe
destruction of the Group’s property development projects, assets, cash flow from infrastructure and facilities.
2.
The Group is subject to extensive and increasingly stringent environmental protection laws, regulations and decrees
that imposes fines for violation of such laws, regulations or decrees and provide for the shutdown by the government
authorities of any construction sites not in compliance with government orders requiring the cessation or cure of
certain activities causing environmental damage. In addition, there is a growing global awareness of environmental
issues and the Group may sometimes be expected to meet a standard which is more stringent than the requirement
of the prevailing environmental laws and regulations and may cause negative impacts on the costs and operations of
its projects. We have adopted various environmental protection measures, including conducting environmental
assessment on the Group’s property construction project and hiring contractors with good environmental protection
and safety track records, and required them to comply with the relevant regulations or laws on environmental
protection and safety, whereas such measure may be ineffective. In addition, the Group cannot assure that more
stringent environmental projection regulations will not be imposed in the future. If the Group fails to comply with the
prevailing environmental laws or regulations, or fails to meet public expectations in relation to environmental matters,
the Group’s reputation may be damaged or may be required to pay fines or take remedial actions, in which case
suspension of operation may be required in the Group’s subsidiaries.
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