Explanation on Business Risk

Business risks

The major risks that may affect the Group's business performance and financial conditions are as follows.

Any forward-looking information stated herein are based on judgments by the Group as of the end of the fiscal year under review.

With the recognition of possible occurrence of these risks, the Group makes efforts to avoid the occurrence and appropriately and quickly respond to them in case of the occurrence.

The following factors are specific examples of major expected risks in continuing the Group’s business, but not limited thereto.

1. Economic conditions, etc.

Given that facility works of the Group are subject to capital investment trends of Kyushu Electric Power Transmission and Distribution Co., Inc., as well as domestic private companies and governmental agencies, restraint of such capital investment may affect the Group’s business performance, etc.

In power distribution line work, the Group continues to work on the improvement of systems and contracts that enable more efficient and stable maintenance of power distribution networks in close communication with Kyushu Electric Power Transmission and Distribution Co., Inc. In general construction, the Group is working on increasing projects that are less affected by changes in economic conditions such as small-scale prime construction contracts through community-based sales activities and maintenance and renewal contracts for projects it worked on. The Group also strives for the expansion of customers and diversification of construction types.

2. Changes in costs of construction materials and labor

When costs of construction materials and labor significantly increase, and such costs are not able to be reflected in contract prices, the increased costs may affect the Group’s business performance, etc.

For large-scale works that span long periods of time, the Group always applies front loading, ordering materials, selecting contractors and making arrangements at early stages of projects, in order to avoid risks. For costs of construction materials, the Group seeks economies of scale by using its dedicated material purchasing company Q-mast Co., Ltd. and accumulates expertise in material procurement in the Group to propose, for example, alternative materials. For labor costs, the Group is increasing the number of in-house technicians while developing multi-skilled workers to reduce risks arising from external factors.

3. Credit risk

Although the Group sets a credit limit according to clients’ financial conditions and continuously reviews their credit status to prevent bad debts, any deterioration in management or financial conditions of clients may affect the Group’s business performance, etc.

The Company checks long-term accounts receivable at monthly meetings of Branch Office General Managers to avoid trade receivables from becoming bad debts. The Company practices a short-term, performance-based billing on a regular basis to reduce risks and holds a company-wide collection campaign twice a year to raise awareness about collection management.

4. Risk associated with the Group's assets

The Group holds assets such as real estate and securities related to business activities, and any significant decrease in the market value of the assets held or profitability of real estate for commercial use may affect the Group’s business performance, etc.

In general, facility works, excluding power distribution line work, do not require large capital investment. When expanding into new areas, the Group usually rents facilities. For power distribution line work, the Group holds real estate in the entire Kyushu region and responds to emergency works and others. However, as new capital investments have been largely completed in prior periods, the Company now invests only in maintenance and upgrade of existing facilities and works associated with office relocation.

5. Risk associated with business other than non-facility work

In addition to its core business of facility works, the Group is working to expand its business fields to include real estate sales, renewable energy generation, temporary staffing service, software development, environmental analysis and measurement, medical-related business, golf course management, business hotel management, and planning and operation of commercial facilities by effectively utilizing its management resources and network.

These businesses may affect the Group’s business performance in case of changes in the business environment, such as the advancement of competition with competitors.

6. Risk associated with renewable energy generation business

As projects in the renewable energy generation business generally require a long period of time, any significant changes in the business environment or occurrence of material disasters or accidents in business operations may lead to a decrease in profitability. In addition, projects not in operation yet, including the Ukujima mega solar plant, may affect the Group’s business performance, etc. as a result of a delay in business plans due to the occurrence of unexpected issues.

The Group adopts projects after conducting sufficient preliminary study and consideration, and for major power plants, it takes measures to avoid or minimize expected risks, such as by concluding insurance contracts.

7. Risk associated with overseas business

In overseas business activities, any changes in political or economic conditions or amendments to laws, regulations, and rules in local countries may affect the Group’s business performance, etc.

To speed up information collection and crisis management, the Group has established a regional headquarters in Singapore and its Japanese staff works to ensure risk management.

8. Retirement benefit obligation

When the performance results of pension plan assets of the Group differ from assumptions, actuarial differences are expensed over a certain period from the following year of occurrence. As such, any deterioration in yields or decline in discount rates for pension plan assets may affect the Group’s business performance, etc.

The Pension Management Committee evaluates investment products every year while making efforts to maximize the investment efficiency in consideration of expected returns and risks. The Group works with external consultants to build a medium-term portfolio that reflects a duration from premium collection to benefit payment.

9. Occurrence of natural disasters and epidemic of plague

When large-scale natural disasters or epidemic of plague occur, suspension or significant delay of construction work due to disrupted supply chains or business closure requests from authorities, damage to the Group’s facilities or decrease in the number of workers may affect the Group’s business performance, etc.

10. Risk associated with measures and legal procedures by regulatory authorities

The Group is subject to restrictions under various laws and regulations including the Construction Business Act, and any administrative dispositions, etc. in case of conflict with these laws and regulations may affect the Group’s business performance, etc.

To completely eliminate this risk, the Group has set “Reform of Governance” as a priority theme of the Mid-term Management Plan to create a clean and transparent corporate culture.

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