KH Neochem Co., Ltd.

Demand for the Group's products is influenced by final product demand in automobiles, housing, electronic and electrical equipment, consumer goods, and other sectors, and fluctuations in domestic and overseas industrial production as well as geopolitical risks may affect operating results. In addition, if oversupply occurs due to the construction of large-scale production facilities by competitors, there is a risk that the market environment could fluctuate significantly. As a countermeasure, the Group strives to reduce the impact by implementing production and inventory adjustments and sales measures in response to product demand.

The Group uses propylene, ethylene, and other substances derived from naphtha cracking as its main raw materials, and LNG and other raw fuels, and has global business characteristics that are affected by crude oil prices, supply-demand balance, and exchange rates. If these prices fluctuate sharply or continue to rise, there is a risk of a material impact on operating results and financial condition. As a countermeasure, the Group strives to reduce the impact by implementing timely and appropriate pass-through to product sales prices.

The Group imports a portion of its raw materials from overseas and exports a portion of its domestically manufactured products overseas, and significant fluctuations in exchange rates may affect operating results and financial condition. The Group has a structural exposure whereby increases in import costs and fluctuations in export revenue can occur simultaneously. As a countermeasure, the Group implements risk hedging through foreign exchange forward contracts and other means.

The Group is subject to various domestic and overseas laws and regulations concerning chemical substances, including permits and licenses under the High Pressure Gas Safety Act, and amid a continuing trend of tightening regulations, if major changes occur or the Group fails to respond in a timely manner, there is a risk that business restrictions, increased compliance costs, administrative dispositions, penalties, and other consequences may arise. In addition, if compliance violations such as human rights infringements, including harassment, come to light, there is a possibility of loss of social credibility, damage to brand image, and claims for damages. As a countermeasure, the Group has established a system for continuously monitoring regulatory changes through the responsible department, established a compliance code and regular training, and set up a Group hotline for reporting and consultation.

The Group conducts production activities using various chemical substances, and if equipment or machinery damage or malfunction, safety accidents such as fires or explosions, or industrial accidents occur, there is a risk that production stoppages, administrative dispositions, and loss of social trust may affect operating results and financial condition. Due to the nature of the chemical manufacturing industry, a single major accident carries the risk of causing wide-ranging impacts. As a countermeasure, the Group implements maintenance and inspection of manufacturing facilities, planned inspections and repairs, and safety equipment investment, while also establishing an Environment and Safety Committee to promote RC (Responsible Care) activities.

Due to intensifying competition for talent acquisition and increased labor mobility in the labor market, if the Group is unable to secure the human resources necessary to execute its business strategy, or if the development of core personnel does not proceed as planned, there is a risk that operating results and financial condition may be affected. In the specialized chemical manufacturing industry, a shortage of core personnel carries the risk of directly leading to a decline in technical capability and competitiveness. As a countermeasure, the Group is working to strengthen its recruitment activities and structure, formulate recruitment plans with clearly defined personnel requirements, and develop core personnel development plans and training systems.

Large-scale earthquakes, major typhoons, and other natural disasters may cause harm to officers and employees, production stoppages due to damage to manufacturing facilities, repair costs, and opportunity losses due to supply chain disruptions. In addition, in cases where the Group depends on specific suppliers for particular raw materials or supplies, there is a risk that a disaster affecting or withdrawal from business by such suppliers could result in a long-term supply shortage or stoppage. As a countermeasure, the Group has established a business continuity system by formulating a Business Continuity Management (BCM) basic policy document, regularly conducting BCP drills, procuring from multiple suppliers, and maintaining appropriate inventory levels.

If cyberattacks, unauthorized access, or network failures, which are becoming increasingly sophisticated year by year, occur, there is a risk that operating results and financial condition may be affected due to disruption to business activities and a decline in competitiveness. In addition, if information leaks involving personal data or other data tampering occur, there is a risk of a decline in social credibility. As a countermeasure, the Group has established a cybersecurity policy and a personal information protection policy, and is promoting the strengthening of a Group-wide management structure and the enhancement of security monitoring functions.

In addition to physical risks arising from an increase in extreme weather events, there is a risk that financial burdens will increase due to the introduction of carbon pricing measures such as carbon taxes accompanying the transition to a decarbonized society. Under the IEA's NZE2050-based 1.5°C scenario, the carbon price in 2030 is projected to be USD130 per ton, and if a carbon tax or similar measure were introduced, it is estimated that, against GHG emissions of approximately 375,000 tons in fiscal 2024, the additional burden would be approximately ¥7.31 billion per year (at an exchange rate of USD1 = ¥150). In addition, the GX-ETS, which will become fully operational in fiscal 2026, will cover the Yokkaichi and Chiba plants, and although the current outlook suggests a surplus of emission allowances, there is a possibility that additional allowances may need to be acquired due to changes in the allocation method or fluctuations in market prices. As a countermeasure, the Group introduced internal carbon pricing (¥10,000 per ton of CO2 emissions) in 2024, and is working to reduce GHG emissions through the expansion of advanced plant control systems, renewal of in-house power generation facilities, and utilization of the CO2 capture equipment completed in February 2025.

The Group conducts overseas business primarily in Asia and the Americas, and if changes in political and economic conditions, unforeseen changes in laws and regulations, natural disasters, social and economic disruption caused by terrorism or war, or unpredictable events arising from customary practices occur, there is a risk that operating results and financial condition may be affected. The Group carries the risk that country- and region-specific risks may materialize in combination. As a countermeasure, the Group strives to gather local information through the dispatch of resident staff, among other measures.