JAPAN FOUNDATION ENGINEERING CO.,LTD.

Participation in public works requires the submission of a management review application and strict bidding procedures; if false applications or improper bidding are discovered, penalties such as revocation of construction business licenses, suspension of business, or disqualification from bidding may be imposed. For misconduct such as violations of the Antimonopoly Act or bid rigging involving government agencies, exclusion recommendations by the Japan Fair Trade Commission are also anticipated. These penalties could significantly affect the management plans of the Company Group.

The proportion of public works in domestic sales is high, at 56.6% for FY2026 (ending March 2026), and reductions in public investment stemming from the fiscal conditions of national and local governments directly affect business performance. When public investment contracts, excessive price competition with other companies in the same industry intensifies, raising the risk of decreases in order volume, sales, and profit. Trends in public investment constitute a structural challenge that greatly influences the performance of the Company Group.

Maintaining construction quality and improving/maintaining the technical capabilities of proprietary construction methods are important challenges for the Company Group, said to have a significant impact on business performance. Since each employee is required to have high skills, technical capabilities, and management abilities, the development of engineers is an ongoing management challenge. It is essential to develop an organizational and personnel structure commensurate with the volume and quality of work.

Unforeseen costs may arise from human or physical accidents and disasters occurring during construction, or from rework required after handover of completed construction. Such sudden cost increases pose a risk of adversely affecting the performance of the Company Group. Strengthening the construction management system is required.

If unprofitable construction projects arise due to unexpected additional costs incurred during the construction phase, the performance of the Company Group may be affected. Particularly in the current environment where material and energy prices continue to rise, the accuracy of construction cost estimates has become even more important. The occurrence of unprofitable projects is a risk directly linked to declining profit margins.

Since approximately 95.2% of sales (FY2026, ending March 2026) come from subcontracted construction work, there is a risk of bad debt from accounts receivable due to the bankruptcy of ordering general contractors (including local general contractors). If intensified competition due to shrinking public works and pressure from financial institutions to dispose of non-performing loans strain the management of general contractors, it could impede the Company Group's collection of receivables. The high proportion of subcontracting leads to financial vulnerability.

The Company Group has established a subsidiary in the United States as a base for entry into overseas construction projects, and in future overseas expansion, fluctuations in exchange rates and significant changes in the political, economic, and legal systems of destination countries may affect business performance. Addressing country risk and exchange rate risk specific to overseas business is a future challenge. Although currently at the stage of establishing a base, risks may become manifest as the business expands.

If large-scale natural disasters or widespread infectious disease outbreaks (pandemics) impose severe restrictions on the political and economic environment, the performance of the Company Group may be affected through stagnation of the consumer market, among other effects. Risks anticipated include the suspension of construction work, delays in material procurement, and difficulty securing personnel. Developing a business continuity plan (BCP) is an important countermeasure.

Due to unstable international conditions, such as escalating tensions in the Middle East, and the effects of yen depreciation, resource and energy prices continue to rise; if this situation becomes prolonged, the performance of the Company Group may be affected by sustained high levels of material and energy prices. Rising construction costs pose a risk of squeezing profit margins, and if it is difficult to pass these costs on through order prices, it could lead to deteriorating profitability. This concern is particularly notable given the business structure centered on subcontracted work, where there is limited capacity to absorb cost increases.