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There are two classifications
of risk, which are systematic risk and non-systematic risk. Systematic risk is
also known as market risk or non-diversifiable risk. This is because market
risk is not able to be eliminated through diversification. For example, political
risk, war, earthquake and currency risk. Non-systematic risk is also called
firm-specific risk or diversifiable risk. The risk is only related to specific
as it will only affect a particular company. Risk can be reduced through
diversification by carry out portfolio analysis.For Genting Berhad, one
of the systematic risk in the company is foreign currency exchange risk. Currency
exchange risk is the hidden risk of loss from the foreign exchange rate that
are fluctuating when investors are expose to the foreign currency or involve in
the foreign currency trading investments. Genting are exposed to the currency
risk as Genting are running the business in several countries and different
countries are having different currency exchange rate. For instance, Singapore,
United States, Hong Kong and Indonesia. At the end of 2016, the
total net currency exposure is 5,075.3. From that amount, 962 is from foreign
borrowings in which 198.8 is in Singapore dollar while 763.2 is in US dollar.
When the currency of Ringgit Malaysia drops, then the foreign currency exchange
risk for Genting will be increased. This is because Genting will need to pay
more for the borrowings from Singapore and United States as there is more
Ringgit Malaysia needed in order to exchange for one foreign currency. For
example, in June 2017, the average currency exchange rate of US Dollar to
Ringgit Malaysia 1USD=RM4.28; In November 2017, 1USD=RM4.17. This currency risk
is out of the control of the company, so it is important for Genting to manage
this risk well.The next systematic risk
of Genting Berhad is interest rate risk. Interest rate risk is the possibility
that the changes in the interest rate will affect the value of investments
negatively. When the interest rate increase, then the investment value will
decrease. The interest rate risk of Genting is arising mainly from the debt
securities and borrowings of the Group. The annual interest rate of the
borrowings in year 2016 is within 1.8% to 4.8% while the annual interest rate
in year 2015 is 2% to 4.9%. So, when the interest rate of these borrowings increases,
then the company will need to pay more to the creditors and the profitability
of the company will decreased. Decreased in profitability will affect the
company’s performance. For example, when annual interest rate of Genting rises
1%, and the other variables such as tax rates and foreign exchange rates remain
unchanged, then the profit after tax of Genting will be decreased by RM109.6
million as the result of increment in interest expense on the borrowings. On the other hand, non-systematic
risk of Genting Berhad is business risk. Business risk is the risk that the
company’s cash flows are not sufficient to cover the operating expenses such as
rental, cost of goods sold and wages. It can also be referring to the risk that
a company will enter into bankruptcy. For instance, in year 2016, the debt
ratio of Genting is 29% while the debt ratio in year 2014 is 27.6%
respectively. During these two years, the debt ratio of the company has
increased 1.4%. This shows that Genting is having more debt in year 2016 as
compared to 2014. Having more debts in the company is very risky as the company
may not be able to pay back the debts. The company will go into liquidation if
the company does not have the ability to repay the debt.

Besides that, the other
non-systematic risk of Genting Berhad is financial risk. It refers to the
possibility a company is not able to repay creditors and fulfil other financial
responsibilities with the current cash flows. This risk is much more related to
the amount of debts a company owes. The more debt the company has, the more
likely the company will default on its liabilities. This is because the
company’s cash flows are not able to pay off its debts if the company is having
too much risk. For example, in 2015, current ratio of Genting Berhad is 4.65
times and in 2016, it reduces 0.6 times to become 4.05 times. The decreased in
current ratio shows that the ability of the company to repay its debts is
reducing. So, the financial risk of the company will decrease as the company
might not be able to fulfil its obligations.The source of financing I
would recommend to Genting is factoring. It is also known as account
receivables financing. It is a transaction where a company sells its
receivables or invoices to a third party financial institution, which is called
factor. The factors will then be liable to collect the due amounts from the
receivables and the company who sell the receivables will not be held any liability
to chase the money. Factoring is also being seen as a form of invoice discounting
as the buyers will buy the invoices at a discount price so that the buyers are
able to make a profit upon the settlement of the invoices.

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There are two different
types of factoring, which is non-recourse factoring and recourse factoring.
Non-recourse factoring happens where the account receivables are sold at a
specific price. The factors will be liable for the collection of the accounts
and seller is not liable to pay back the factors if the accounts become bad
debts. So, it is an expensive factoring form but the seller will not have any
credit risk. Recourse factoring is that the seller is having the obligation to
repay the factors if the accounts are uncollectible as the creditworthiness of
the accounts receivable is not guaranteed by the factors. Recourse factoring is
substantially less expensive than non-recourse factoring as the seller is
expose to the credit risk.

I would recommend
factoring to Genting Berhad is because it can help the company to receive cash from
their receivables quickly without the need to wait the receivables of the
company to pay off their debts. It will assist the company to build up their
cash flow quickly as the company can receive an amount of money upon selling
the invoices to the factors. Having quick cash inflows will help the company to
pay their employees and deal with customer orders easily.

Furthermore, by using
factoring, Genting can focus on their core business. This is because the
company does not need to spend time chasing the amount owes by the receivables
as it is the responsibility of the factors after they buy the invoices. With
the time the company saved, it can be utilised for the business operations of
the company. For example, managers of Genting are able to spend more time in
order to come out with innovative ideas that can attract the customers to visit
to Genting.

Moreover, factoring is
not a type of loan or debt. So, it will not increase the leverage ratio of
Genting Berhad. This is because factoring is just selling the invoices or
receivables to another company at a lower price, there is no any form of
borrowings incurred. Hence, by using factoring as source of financing, the debt
of the company will not increase.    

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