TECHNOFLEX CORPORATION

Sales of the Pipe Fittings Business's mainstay products, pipe fittings and related products, are significantly affected by economic fluctuations and trends in domestic and overseas capital investment, particularly construction investment. While the Group is expanding its business portfolio into growth markets such as Disaster Prevention & Construction, Automotive & Robotics, and Nursing Care, if capital investment in related industries declines more than expected, this could affect business performance or financial condition. The Group is responding by establishing a product supply system tailored to demand trends by industry.

The Group operates a global production system in China and Vietnam, which carries potential risks such as unexpected changes in laws and regulations, significant increases in labor costs and prices, disruption to production activities due to strikes, and economic, social, or political turmoil. Although the Group strives to gather information on and respond to changes in laws, regulations, and social conditions, if unforeseen events occur, this could affect business performance or financial condition. The Group has established a diversified production structure to avoid the risk of concentration in production bases, but complete elimination of this risk is difficult.

The Company and its three overseas subsidiaries hold assets and liabilities denominated in Chinese yuan and US dollars, and exchange rate fluctuations directly affect business performance. In addition, since the Group raises funds through borrowings from financial institutions, there is a risk that rising interest rates could increase interest expenses, worsening business performance or financial condition. The Group implements risk hedging measures based on policies established by the Board of Directors, but responding to unforeseen events may prove difficult.

Stainless steel, the Group's principal raw material, is subject to market pricing conditions. While the basic policy is to pass on price increases to product prices, in the event of a sharp price surge, delays in passing on costs could cause increased costs to affect business performance or financial condition. Since stainless steel market conditions are linked to international supply-demand trends and resource prices, the Group's ability to control prices independently is limited. The longer the delay in passing on price increases, the greater the risk of impact on profitability.

As the Group extensively uses IT systems and networks, it is constantly exposed to increasingly sophisticated and advanced cyberattack risks, including ransomware and intrusions via the supply chain. Should a system breach occur, it could result in temporary suspension of operations, leakage of customer information, loss of social credibility, legal liability, and substantial damages. The Group continuously implements the latest security technologies, strengthens monitoring systems, and provides employee training, but it is explicitly stated that the risk cannot be completely eliminated due to the evolving nature of attack methods.

Although the Group has established a quality control system compliant with ISO9001, there is no guarantee that defects will not occur in any products. While the Group has taken out product liability insurance to mitigate product liability risk, if substantial costs arise that are not covered by insurance, this could affect business performance or financial condition. Given the characteristics of products such as pipe fittings, there is a risk that defects could lead to serious accidents, requiring continuous strengthening of quality control.

The Group has pursued business expansion through the acquisition of companies with strong technologies, and intends to continue actively considering M&A going forward. While the Group plans to conduct thorough due diligence and scrutinize industry trends regarding target companies, if unforeseen circumstances arise, such as sudden changes in market conditions or a decline in the competitiveness of acquired companies, this could result in impairment of invested capital and affect business performance or financial condition. As the scale and frequency of M&A increase, the risk of impairment of goodwill and other assets also accumulates.

To differentiate its products from those of competitors, the Group acquires intellectual property rights such as patents and receives licenses through technology partnerships with overseas companies. However, if counterfeit products are manufactured or sold in specific overseas regions, or if difficulties arise in renewing license agreements, this could reduce competitiveness and affect business performance or financial condition. While the Group maintains intellectual property management regulations and examines countermeasures at its Risk Management Committee, there are limits to the effectiveness of legal enforcement against counterfeit products overseas.

In its domestic and overseas business operations, the Group is subject to a wide range of laws and public regulations, including the Construction Business Act and the Long-Term Care Insurance Act, and has built a compliance system through the establishment of internal controls. Should the Group be found not to be in compliance with laws or regulations, this could affect business performance or financial condition through administrative sanctions or business suspension. As the Group's business areas extend to regulated industries such as disaster prevention, nursing care, and construction, costs associated with responding to regulatory changes will also continue to arise.

While the Group has established a certain degree of continuity of supply through the diversification of production bases, if large-scale natural disasters or fires occur simultaneously in multiple production base regions and damage production facilities or logistics functions, this could result in operational shutdowns or shipment delays, affecting business performance or financial condition. Having production bases both domestically and overseas reduces the risk associated with a single location, but in the event of a wide-area disaster or compound disaster, the effect of diversification becomes limited. Such a situation would test the effectiveness of the Group's business continuity plan (BCP).