Risk Management for Emerging risk , Impact and Mitigation plan

1. Operational Risk Factors

1.1 Risks in Business Operations

Somboon Advance Technology Public Company Limited has continuously analyzed the environment based on both internal and external factors i.e., economic trends, industries, technologies, competitors and other trends, whether global, regional and national, in its future planning. This was to identify and assess key risks that may affect the operations and achievement of the organization's objectives. The Company had prepared a risk management plan to reduce the impact of potential risks. In 2022, SAT assessed and prepared a risk management plan as follows:

Strategic Risks

(1) Risks from competition and requirements of customers

The competition within the industry had been increasing mainly in cost, technology and changes in customers’ requirements, which had possibly led to uncertainty in the performance. So, the Company had formulated risk management to cut impacts by developing raw materials and product quality through utilizing technology and automation to help reduce waste from the production process. Also, a group of engineers had been trained to develop projects for continuous production efficiency improvement. Similarly, the Company continued to monitor customer needs to explore business opportunities in expanding new products based on the Company's production capability and technology to meet their needs. Furthermore, a product portfolio planning had been carried out, focusing on the appropriate levels of revenue, profit margins and production capacity utilization. In addition, the Company managed the relationships and build confidence among customers at all levels to achieve sustainability in parallel to the future plans.

(2) Risks from implementation of corporate strategies

The change of the mega trend of the world that had introduced the era of electric vehicles and the needs of customers to reduce the cost of automotive parts could affect the operation. According to the Company's revised vision, missions, and the above factors, the strategies had been adjusted. The Company strives to generate operation’s value growth by exploring some opportunities in new products/customers. The Company also created growth through cooperation with business partners to improve its market opportunities and competitiveness to support new business. Based on these strategies, in 2022, the Company partnered with Tron Energy Technology (Tron E) to establish Somboon Tron Energy (STRON), a joint venture company, to expand the business into the area of production, assembly and sales of drivetrain and batteries for electric vehicles (EV). As for automotive part manufacturing, the Company focus on improving product designs and studying new materials in production to resonate with evolving business landscape while diversifying the risk of sluggish growth or decline of the parts manufacturing business unit in the long run.

Operational Risks

(1) Risks related to human resource management and human resource development to prepare for business growth

In 2022, the Company launched the new vision and missions to emphasize the corporate strategies that created growth in new business. Due to changing external factors, risks could emerge in the preparation of executives and personnel regarding skills, competence and culture that were in line with the corporate strategies. This might pose an obstacle in the continuation of business operations. Accordingly, the Company has formulated a plan, regarding the organizational restructuring and succession planning for management and critical positions to ensure business continuity. In addition, employees will be trained and developed to cope with the rapid changes in the industry. The Company encouraged employees to participate in innovation development and continual improvement of the working processes. Likewise, incentives have been rolled out to attract employees with high knowledge, skills and abilities to meet the needs of the Company to develop new business, both from inside and outside the organization.

(2) Business interruption risk

The Company had applied the business continuity plan (BCP) to the operation by assessing business impact analysis and risk event assessment and detected the following significant issues as listed below:

2.1 Some of the production lines are critical to ensuring customer continuity. If an unexpected event occurs, for example, to the machine, the damage will impact the production line of key customers. As a result, the subsidiaries in the Somboon Group directly related to customers have prepared for contingencies and rehearsed a run-through for intergroup production line relocation on customer’s approval in order to resume the production within the timeframe as accepted by the customer.

2.2 The risks posed by the global and domestic COVID-19 outbreaks had gradually subsided, with tourists beginning to return to Thailand according to the government's economic stimulus. But some impacts could be felt from the zero Covid policy in China and this might affect the supply chain of the automotive industry in Thailand. Concerning the operational control, the Company's working group continued to ensure business continuity management by rolling out basic policies for employees to reduce risks, such as face mask mandate, required symptom self-checks for employees before entering workplaces, hybrid work, etc. During the past year, no business interruption risks were identified.

Financial Risk

(1) Risks from price volatility of raw material due to exchange rate

Price volatility of raw material, especially steel which is the main raw material for production, could cause uncertainty in cost and performance of the Company. For this reason, the Company rolled out the guidelines for risk management by evaluating terms and conditions in purchase agreements and regular monitoring with customers to adjust product prices in line with agreement cycles.

In addition, fluctuation in the prices of steel purchased in foreign currencies, which were the main raw material in the production process, might affect the overall costs and performance. Consequently, the Company negotiated with its business partners and customers in order to mitigate the risks associated with exchange rate fluctuations. Additionally, the Company's export income and expenses for raw materials purchased in foreign currencies could mitigate the impact of fluctuating exchange rates (natural hedge). In an overall picture, risks and impacts on the performance of the Company were lessened.

(2) Production cost and transportation cost risks posed by the rise of energy prices

The risks posed by rising energy prices was mostly caused by a scarcity of fuels used in electricity generation, such as natural gas and coal. This resulted in higher global energy prices. Lesser natural gas production in Thailand and Myanmar had raised overreliance on foreign fuel imports. The situation had a knock-on effect on Thailand's rising variable electricity (FT or fuel tariff) and consequently the organization's manufacturing costs and profit. As a result, the Company has improve the manufacturing process to be more efficient, resulting in lower electricity consumption, and also installed the 3.66 MW solar energy system in 2022 to minimize electricity bills. Production line flexibility had been to lower electricity expenditures at peak periods. New ways of production line management had been explored to cut huge quantities of demand at the same period of time, for instance, all furnaces must not be operated at the same time as they consumed significantly high quantity of energy during the cold start. At the same time, SAT had negotiated with clients to compensate for the increased energy costs.

Furthermore, rising crude oil prices in 2022 and high freight prices in its first and second quarters affected domestic and international transportation costs. To lower risk associated with profitability levels, the Company had worked with clients to counterbalance transportation costs. As a result, the risk led by rising transportation expenses had lowered. Since the third quarter, the risk had gradually dropped, lessening the impact of such risks proportionally.

Compliance Risks

(1) Risks from changes in laws, regulations, and law enforcement related to the industrial sector

The Company had expanded into a new business area that might be subject to special laws and regulations and their changes. So, the Company required that regular study and assessment should be carried out for important rules and regulations in the operation or when significant changes arose. The Company had rolled out the policies to support change in laws, appointed responsible employees and formed a working group to take appropriate action to prevent compliance issue, which could lead to the Company's tarnished reputation, punishment and fine by governmental agencies and industrial estates.

Risks of the Environmental, Social, Governance (ESG) Impacts

The guideline of the sustainable operation was widely adopted in corporate operations across the globe. In this regard, the ESG principle managed environmental, social and governance, and were served as a strategic risk management tool to ensure stakeholders' confidence. Listed below are the risks that were reviewed and monitored by the Company:

(1) Risk of Risks of impacts and climate change-related opportunities Impact and possibility on climate change related

The Company had adopted the "TCFD" (Task Force on Climate-related Financial Disclosures). In the near future, Corporate-level evaluation of greenhouse gas emissions will become mandatory. The transition risk concern that the Company had focused on and regularly evaluated to prepare for the upcoming legalization of the Climate Change Act. Currently, the Company had been continuously followed this practice for two years in a row, allowing all involved parties to accurately and effectively prepare data for the. pre-cross-border price adjustment measures in the European Union (CBAM).

Although the Company did not directly export products to Europe, the customers might demand supply chain information at the product level. And this could cause a possible impact, because the regulation was applicable to the supply chain in the GHG Scope 3. Similarly, the stance of the United States, a significant consumer base, over this measure was critical. At present, the Company was awarded with the main product carbon footprint certification by the Greenhouse Gas Management Organization and it would be valid for 3 years. The risk associated with the policy of vehicle changing from combustion to electric types posed little impact in the short term. The reason was that combustion parts accounted for less than 3% of the Company's products. However, the long-term repercussions of the drop in exports must be monitored and it's critical to devise a strategy for adjusting technology to meet the changing needs of consumers.

(2) Risk in human rights

This had been the key risk that the Company paid attention to as part of operation monitoring. Now, the human rights policy was put in place. Among crucial issues included non-discrimination that started at the recruitment process; and the risk assessment guideline through human resources on evident concerns such as forced labor, child labor, etc. Various complaint channels were available while whistleblowers were justly protected and compensated. At the moment, no risk issues had been discovered.

1.2 Risks of securities holder in investment of the Company

Risks of uncertain returns on investment for shareholders

SAT share price depended on the Company's performance and creation of long-term growth, which were affected by several factors such as:

• Thailand automotive production
• Thailand agricultural machinery production
• Change in government policies, regulations, requirements, or terms that affected automotive and agricultural machinery industries.
• Increased production costs caused by raw material prices and rising energy prices
• Economic situation, crisis, or abnormal situation such as COVID-19 pandemic, shortage of semiconductor components which were used in cars, etc.

These factors could affect the performance of the Company and hence, share prices.

Risk from Dividend Affordability Below Investors’ Expectation

SAT dividend affordability was subject to several factors such as maintaining cash flow for operating activities, normal capital expenditure and investment budgets that support SAT’s business growth, etc. These factors affected the cash level that was used for dividend payment for shareholders. However, SAT’s dividend policy was to have minimum rate of dividend payout ratio at 30% of net profit after deducting all reserves under the law and the Company’s policy.

1.3 Foreign Investment Risk (in Case the Issuer is a Foreign Company).

-N/A-

1.4 Emerging Risk

(1) Risks arising from the war between Russia and Ukraine

The war between Russia and Ukraine began in early 2022, directly affecting the energy industry, causing the rises of crude oil and natural gas prices and affecting exchange rates around the world. This caused a lot of risks, for example, production costs were likely to increase and the price of raw materials as part of the production process fluctuated due to the exchange rate and the global economic slowdown. All of these might affect the supply chain and later hit the automotive industry and harm both domestic and international demand and supply. For this reason, the Company had formulated the guideline to monitor the situations such as the war between Russia and Ukraine, and issues that could impact the Company such as crude oil and natural gas prices, transportation costs, exchange rates, etc. The Company had introduced preventive measures to tackle negative factors of the Company, which had been discussed in the risk section above.

(2) Cybersecurity risk

Somboon Advance Technology had adopted information technology to assist with the operation surrounding data recording, communication and coordination. As a result, this led to more efficient corporate operations. However, it's feasible that the information system was the key issue that exposed the organization to the risk of business disruption, as well as data and system loss. The Company realized the security of all stakeholders' information throughout the value chain. For this reason, the Company had undertaken the cyber security maturity risk assessment through the NIST Framework. The implementation was cooperated by the Stock Exchange of Thailand's project and plans and operations had been overhauled. These included the formulation of security policies for corporate information technology, the employee's requirement regarding assessment and monitoring of risks. Key risk indicators were implemented to risk assessment at the function level on a monthly basis.