NIPPON AQUA.Co.,LTD

Demand for insulation work is linked to the number of new housing starts, and deterioration of the housing construction market due to macro factors such as financial crises, tax increases, rising interest rates, and infectious disease outbreaks directly affects business performance. While the Company has maintained growth through sales expansion even as the market has struggled to grow, the risk of business deterioration increases during a structural market contraction phase. As countermeasures, the Company is pursuing the establishment of new sales offices, expansion of construction capacity, and strengthening of insulation work for buildings.

The main component of the urethane raw material used in insulation work is petroleum products, and if factors such as rising crude oil prices, yen depreciation, imposition of anti-dumping tariffs, and declines in the operating rates of base material manufacturers occur in combination, raw material procurement costs could rise significantly, adversely affecting business performance. Additionally, if procurement difficulties arise due to natural disasters or other causes, there is also a risk of construction delays. As countermeasures, the Company is strengthening cooperative relationships with raw material manufacturers, establishing raw material storage warehouses at core sites, and building a global procurement system through diversification of procurement sources.

If a contract processing partner's production facilities become inoperable due to a disaster, accident, or other cause, the supply of raw materials could be disrupted, making it difficult to continue accepting insulation work orders. To avoid dependence on a single company, the Company has concluded manufacturing contracts with six contract processing partners, establishing a system to minimize the impact on business performance even if some contract processing partners suspend production. However, if multiple companies become inoperable simultaneously, the impact could expand.

Sustainable growth requires the new hiring of construction staff and the expansion of certified installers, and if this becomes difficult for any reason, order-taking opportunities will be lost, adversely affecting business performance. As labor shortages intensify across the construction industry as a whole, securing construction personnel has become a structural challenge. As countermeasures, the Company is pursuing comprehensive strengthening of its construction workforce, including enhanced new hiring, strengthening relationships with existing certified installers, and supporting independence for certified installers.

The Company's core product, "Aqua Forme," offers high insulation performance but is relatively expensive; if rigid urethane foam products or new insulation materials with equivalent or superior performance are commercialized, the Company's competitive advantage could decline, adversely affecting business growth. The acceleration of technological innovation in the insulation materials market heightens the risk of existing products becoming obsolete. As a countermeasure, the Company seeks to maintain technological superiority through continuous new product development at its Technical Center.

Since the fiscal year ended December 2015, when contract manufacturing of proprietary brand raw materials began in earnest, the Company has needed to hold its own inventory of base materials, etc. to achieve production plans, increasing the financial burden. Because the settlement of accounts payable related to raw material manufacturing and procurement may precede the collection of accounts receivable and notes receivable, there is a risk that the mismatch in cash flow timing will widen as contract manufacturing volume increases along with business expansion. As a countermeasure, the Company is working to shorten the cash collection period.

If a serious construction accident or a defect claim related to construction work or insulation raw materials occurs involving the Company's own construction staff or certified installers, trust in the Company will decline, adversely affecting business performance. For the Company, which has an extensive construction network including certified installers, thorough quality control is fundamental to business continuity. As countermeasures, the Company conducts training and guidance for its own construction staff and certified installers, and ensures quality through repeated testing when introducing new raw materials.

Because insulation work is carried out two to three months before housing delivery, completions are concentrated in the third and fourth quarters toward the fiscal year-end in December, while sales stagnate in the first and second quarters, creating a risk of losses due to excess expenses. As an actual example, net sales in the first quarter of the fiscal year ended December 2024 were ¥6,272,648 million, compared to ¥9,447,504 million in the fourth quarter, showing a marked seasonal bias. As a countermeasure, the Company is seeking to diversify the timing of sales through expansion into the waterproofing business and the building insulation business.

The Company is a subsidiary of Hinokiya Group Inc. (voting rights ownership ratio of 54.95%), which is a wholly owned subsidiary of Yamada Holdings Co., Ltd. There is a risk that changes in the business strategies or group management policies of both companies could affect the Company's management; however, the Company's dependence on the group accounts for less than 10% of its net sales, and as a company with an audit and supervisory committee, the Company ensures management independence and transparency by appointing a majority of independent outside directors.

The Company operates its business under numerous laws and regulations, including the Construction Business Act, the Building Standards Act, and the Fire Service Act, and if officers or employees violate these laws, it could result in loss of social credibility and serious adverse effects on management. Furthermore, if the general construction business license (valid until January 2029) required for the Company's core thermal insulation construction business is revoked or suspended, business continuity would become difficult, seriously affecting business performance and financial condition. As countermeasures, the Company is strengthening compliance awareness, managing license renewal timing, and conducting regular safety management.