Risk Management
Risk Management Policy and Plan
The Board of Directors and management team have consistently implemented integrated risk management measures for the organization’s sustainable growth. This approach involves joint planning, developing a common strategy, sharing roles and responsibilities, and working in harmony. The principles of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Enterprise Risk Management are followed, with consideration given to the potential risk of corruption. The main objective is to effectively manage and control both internal and external risks to maintain an acceptable level. The management team regularly follows up and closely monitors risk management, reporting the results to the Executive Committee and conveying them to the Risk Management Committee and the Board of Directors on an annual basis. This enables the comprehensive consideration of risks and their potential consequences throughout the organization. Additionally, reports are provided when significant events occur to assess and monitor the outcomes of risk management. Collaboratively with the management team, efforts are made to update and improve risk mitigation plans to adapt to changes, issues, and potential obstacles in a timely manner.
Risk Factors to the Company's Business Operation
1. The Risk from Major Customers
In previous years, the company had a major customers whose sales accounted for more than 10% of total sales. In 2022, the company had one major customer from America, whose sales contributed more than 10% of total revenue. The increased sales were driven by policies supporting the usage of LPG for cooking and domestic travel, as well as the consequences of the trade war between China and the United States. This resulted in Thailand gaining a competitive advantage over China due to lower import tariffs. Additionally, the cost of raw materials and labor in the customer’s country has significantly increased, leading them to turn to imports. However, the company does not rely on any customers with sales exceeding 30% of total revenue.
SMPC manages this risk by increasing sales distribution in various regions and expanding into new markets to diversify its customer base. Customers from different regions have different timing of demand, allowing the company to maintain a consistent production plan throughout the year. Furthermore, SMPC maintains good relationships with its major customers by delivering high-quality products, ensuring timely delivery, and offering fair prices. This approach helps the company secure continuous purchase orders.
2. Substitute Products Risk
Currently, there are substitute products for steel LPG cylinders, such as aluminum cylinders and composite cylinders. These alternative options are lighter than traditional steel cylinders.
After closely monitoring the market situation for these two types of cylinders, it has been observed that they have not gained significant traction. This is primarily due to their lower thermal energy, shorter durability, and service life compared to steel cylinders. Additionally, the sales price of these substitute products is considerably higher. As a result, they are primarily used in countries with labor laws that restrict heavy lifting. Furthermore, the steel cylinders are favored in many countries due to their repairability and recyclability, which helps conserve energy and natural resources. Therefore, in the short term, the company is confident that the risk posed by substitute products to steel cylinders will not significantly impact the company. However, in order to expand the customer base and meet market demand, the company obtained European standard (EN) accreditation in 2013 for the manufacturing of Light Weighted Cylinders. These cylinders possess prominent properties, being nearly as light as composite cylinders while maintaining the durability of normal steel cylinders, and are priced lower than composite cylinders. The company anticipates that these cylinders will be in demand in the future. Additionally, the company’s extensive experience in the LPG cylinders industry has provided it with numerous business alliances that serve as valuable sources of information on market trends. This enables the company to proactively adjust its strategies well in advance to adapt to any future changes.
3. The Risk from New Competitors in the International Market and Trade Barriers
The company primarily serves customers in developing countries where the consumption rate of cylinders is currently low, as these countries have recently begun investing in storage plants and filling plants. Local manufacturers in these countries have just entered the gas cylinder industry and are unable to produce cylinders that meet standard requirements, resulting in insufficient supply to meet the countries’ gas demands. As a result, these governments encourage the importation of cylinders. However, if the local manufacturers can develop production technology and increase capacity to meet domestic demand, it could potentially impact the company’s sales in the future. Additionally, external factors such as international trade and economic policies, including investigations by the United States of America into the dumping and subsidies policies of cylinders imported from Thailand and China, may also affect the company’s sales in the future.
SMPC continuously monitors the market situation and assesses the potential risks involved. The company considers the possibility of investing in countries with high potential and takes all risks into account. Furthermore, the company plans to engage in joint marketing initiatives with high-potential local manufacturers, selling products under the SMPC brand. The company also anticipates positive impacts from international trade and economic policies. Nonetheless, SMPC will closely monitor the situation in order to be prepared and take timely measures.
4. The Risk of Loss and Lack of Successors in Executive Positions
The risk of losing and lacking senior positions can have a significant impact on effective operations, potentially leading to underachievement of company performance targets and disruptions to development and business growth.
To mitigate this risk, the company is implementing a decentralization strategy for top and middle management. This enables executives to support each other in accordance with the internal control system, including related duties, responsibilities, and working processes within each division’s authority structure. Guidelines have been established to enhance the quality of executives by providing training courses to improve their knowledge and skills. Moreover, the company aims to reduce reliance on any single executive to prevent potential risks. Additionally, the company is currently developing an executive succession plan to serve as a practical guideline. The Nomination Committee has tasked the management team with expediting the consideration of appropriate actions.
5. The Risk of Cyber Threats
The risk of cyber threats is of utmost importance and significantly impacts the company’s operations, particularly its key systems such as network infrastructure, financial systems, accounting systems, internal management systems, and human resources systems. These systems contain personal information held by the company. Any issues with the company’s information technology system or unauthorized access to personal information can inevitably disrupt the company’s operations and damage its reputation.
To address this risk, the company has developed a comprehensive plan and increased investment in enhancing its working systems to support new technologies and strengthen protection against cyber threats. This includes improvements to the computer network and server infrastructure to ensure smooth system functionality. The company has also implemented stringent security control measures, such as a computer security system (Firewall), restricted access protocols for specific information, and a backup network center to provide support during emergency situations to ensure business continuity.
6. The Risk from Natural Disasters
The company faces the risk of natural disasters, which can result in production interruptions and damage to company facilities. Additionally, natural disasters can disrupt logistic routes and lead to delays in product delivery. Recognizing the significance of this risk, the company has conducted a thorough risk assessment and included it in its risk register. Furthermore, the company has implemented a comprehensive plan to mitigate potential risks in both the short-term and long-term.
While the company has not yet experienced any significant impact or damage from natural disasters such as floods, it remains proactive in preparing preventive measures. These measures include staying updated on relevant news and information, conducting regular maintenance and inspections of protective equipment to ensure they are in optimal condition, and ensuring the availability of suitable equipment for anticipated scenarios. The company also closely monitors the government disaster response plans to assess the potential impact of natural disasters. Additionally, the company has obtained appropriate insurance coverage to alleviate the financial burden in the event of any damage.
7. The Risk of Corruption
The company acknowledges that corruption poses a significant challenge to both the country’s development and business operations. Consequently, the company consistently conducts its business with utmost honesty, transparency, and adherence to sound corporate governance principles. Rejecting any form of corruption is an integral part of the company’s mission. Anti-corruption measures are established as company policies for employees and executives to follow.
To further combat corruption, the company became a member of the Private Sector Collective Action Against Corruption (CAC) on April 22, 2016. The company has developed comprehensive anti-corruption policies and procedures aligned with its membership commitments. The Audit Committee and the Board of Directors diligently oversee the company’s anti-corruption efforts, providing whistleblowing channels and implementing preventive measures for complainants. A manual detailing the implementation of the Anti-Corruption Policy has been prepared for directors, executives, employees, and relevant partners, accessible through the company’s intranet. Rigorous and ongoing assessments of fraud risks and preventive control measures are conducted. Furthermore, the company recently renewed its membership with the Thai Private Sector Collective Action Coalition Against Corruption (CAC) in December 2021, extending the membership for an additional three years until January 2025.
Management and Operational Risks
1. Raw Material Shortages and Price Fluctuation Risk
Hot-rolled steel is the primary raw material used in manufacturing LPG cylinders, accounting for approximately 50-60% of the total cost. It cannot be replaced by other raw materials. Fortunately, there is no shortage of suppliers worldwide, ensuring a steady supply. Fluctuations in steel prices directly impact the company’s sales price, cost, and profit. Typically, the sales price is determined based on the global steel price index, which varies with the economy and oil prices. Therefore, there is a risk that the company may not achieve its planned sales and profit targets. Additionally, the lead time of 2 months for producing and delivering products to the destination country sometimes results in a discrepancy between the cost of raw materials and the determined sales price. To mitigate the impact of raw material price fluctuations inherent in the industry, the company must have effective manufacturing plans, sales strategies, and inventory management.
For long-term contracted sales, it is common for the contract to allow the company to adjust the selling price based on the current steel price (formula price), thereby minimizing the impact of steel price changes. When purchasing on the spot market, the company buys steel at the same price as when submitting the quotation, reducing the impact of price fluctuations. For large orders with extended delivery periods, the company usually enters into contracts with steel manufacturers in advance to mitigate the risk of raw material price fluctuations. Moreover, to optimize production and sales management, the company strategically orders steel of commonly used sizes when the steel price decreases to maintain inventory stock. Purchase orders are determined based on sales forecasts, customer demand estimations, past orders, and the current economic climate. Additionally, the company closely monitors any changes in raw material prices, leveraging its extensive industry experience to forecast steel price trends before placing orders. Before making any purchase, the company benchmarks prices among several steel suppliers with similar capabilities to ensure the acquisition of desired quality raw materials at the best prices and conditions. These management practices help mitigate the risk of late customer deliveries, enhance competitiveness, and reduce holding and reordering costs.
To effectively manage the risk associated with fluctuating raw material prices, which could potentially hinder the company’s ability to achieve its sales and profit targets, the management team regularly monitors steel price trends during monthly meetings. This proactive approach enables them to make timely revisions to the sales strategy and raw material procurement, as well as mitigate any potential impacts.
2. The Risk of Labor Force Shortages
SMPC’s manufacturing process, known as Semi-Automatic, is one of the company’s strengths, offering production flexibility for various types and sizes of cylinders. However, the Semi-Automatic process requires workers at multiple stages of production, including the delivery process, where workers are involved in conveying, packing, and loading cylinders into containers. Therefore, the availability, efficiency, and expertise of the workforce significantly impact the company’s operations.
SMPC has engaged an outside contractor to manage labor supply for the company, ensuring the availability and promptness of the workforce. This outsourcing arrangement is convenient and reduces the burden of daily worker recruitment. The outsourcing process is supervised by SMPC, ensuring the quality of work and welfare of the workers. The company treats its workers well and complies with labor laws, offering reasonable compensation packages based on employee competency and skills. Wage levels and benefits are competitive and attractive. Additionally, the company has established a Benefit and Welfare Committee to facilitate employee feedback and foster a positive work environment, aimed at supporting employees’ quality of life and retaining skilled and experienced laborers. To control long-term product quality and mitigate labor-intensive risks, the company has invested in production technology, transitioning certain machines to more automated systems.
Financial Risks
1. Exchange Rate Fluctuation Risk
The company primarily operates as an exporter, with more than 90% of total sales revenue coming from international trade transactions, predominantly in USD, Euro, and GBP. Therefore, fluctuations in exchange rates can significantly impact the company’s revenue and profit.
The majority of the company’s income is in USD, and it also imports essential raw materials such as hot-rolled steel and other materials in the same currency. In 2022, approximately 75% of the total raw material and equipment demand was imported. To mitigate the risk, the company employs a natural hedge strategy by using USD sales revenue to pay for raw materials in the same currency, thereby reducing the impact of exchange rate fluctuations. As for sales revenue in other currencies, such as Euro and GBP, which contribute a smaller portion, the company closely monitors the exchange rate and considers other relevant factors to develop financial plans and utilize financial tools like forward contracts to efficiently mitigate additional risks. The company’s Executive Directors’ monthly meeting includes regular reports on the exchange rate situation and trends for close monitoring.
2. Trade Credit Risk
The company faces the risk of late payments or bad debts that could result in financial losses.
As a general financial policy, the company requires a letter of credit (L/C) and requests full or partial advance payment before delivery. The company has established procedures to determine appropriate credit limits with clear authority levels. The credit terms typically range from 30-90 days, depending on the customer’s financial status and the duration of their trade relationship with the company. Additionally, the company conducts regular reviews of its credit policy, credit limits for all customers, and credit risk assessments. These reviews involve analyzing customers’ financial statements to assess the reliability of their financial status. Extra assessments may be implemented during special circumstances, such as the outbreak of the Covid-19 pandemic. However, it’s worth noting that the majority of the company’s customers are world-class oil and gas traders with strong financial positions, and the company has a history of no credit-related issues with its customers.
Risks of Laws and Regulations
1. The Risk of Non-Compliance with Relevant Laws
The company may face the risk of non-compliance with relevant rules and regulations if it fails to keep up with the latest updates. This could result in being ordered to pay fines or facing temporary suspension of business operations.
To mitigate the impact on the company’s production and operations, each department has been tasked with collecting and regularly monitoring data related to relevant laws. The system management department serves as the central unit for consolidating the relevant laws from each department, investigating the status of license renewals, and ensuring the implementation of new laws.
Social and Environmental Risks
1. Risk of Waste Disposal from the Manufacturing Process and Potential Environmental Lawsuits
During the manufacturing process, the company generates waste that could have an adverse impact on the environment if not properly monitored. However, the company is committed to conducting business with a sustainable and eco-friendly approach to mitigate the risk of potential environmental lawsuits in the future
SMPC has established the Occupational Health, Safety, Environment, and Energy division, which is directly responsible for efficiently controlling and managing environmental matters. The system management division consolidates relevant laws and closely monitors operational status. For industrial waste disposal that cannot be handled internally, the company engages a certified waste disposal company to manage it. Additionally, the company has obtained ISO 14001:2015 certification, the Environmental Management Standard, on 26 December 2017. The certification has been renewed, with the latest renewal valid until July 2024.
Risks Affecting Rights or Investment of Security Holders
1. Risk of Major Shareholders Influencing Management Policy
Some major shareholders of SMPC hold positions as directors, members of the management committee, and/or authorized signatories for the company. As a result, there is a risk that these major shareholders may exert influence over operational guidelines and management policies in a specific direction. This influence could include the use of their authority to determine and implement significant changes within the company. There may also be transactions that present conflicts of interest or unfair connected transactions that are not in the best interests of the company.
The company has appointed an independent audit committee, comprised of directors who have no personal interest in the company, to oversee the auditing of company operations. Professional external auditors are engaged to monitor the adequacy of the internal control system. The company has established policies and guidelines for good corporate governance, and ensures compliance with these guidelines and relevant laws and regulations, including those regarding connected transactions as per the rules of the Stock Exchange of Thailand (SET) and/or the Securities and Exchange Commission (SEC). The company has defined the scope of authority and approval processes for transactions at each level within appropriate credit limits. According to company regulations, any approval or transaction must be jointly signed by two directors who have the authority to bind the company. The presence of professional and independent directors among the board members ensures a system of checks and balances within the management structure. By strictly adhering to management policies in accordance with the principles of good corporate governance and making decisions in the best interests of the company, SMPC received an “excellent” corporate governance assessment in 2022, the highest level of five badges, for the third consecutive year from the Thai Institute of Directors Association. The company has also been recognized with the ESG 100 Award for outstanding performance in environment, society, and governance for the year 2022, presented by Thaipat Institute.
**In the past year, the company had no risk from supplier.