Sun A.Kaken Company,Limited

The surface protection film, a mainstay product of the Functional Materials segment, is manufactured for FPD (flat panel display) applications, primarily for touch panel use in smartphones and tablets. If design changes or component composition changes in final products lead to specification changes, substitution with alternative materials, or discontinuation of use of the Company's products, demand may decline and affect business performance. There is a constant risk that product composition could change over a short period due to advances in technological innovation.

Optical components used in FPDs are at risk of changing over a short period due to advances in technological innovation. If the target components in which the Company's products are used are replaced or discontinued, demand for the Company's products could decline sharply. The structure of high dependence on specific technologies and products carries the risk of making it difficult to respond to technological changes.

The main raw materials are petrochemical products such as polyethylene, and purchase prices are linked to fluctuations in naphtha prices. Because raw material costs account for a high proportion of manufacturing costs, if increases in raw material costs cannot be fully absorbed through production rationalization or price pass-through, this could lead to a decline in gross profit. This is a structural risk that raises concerns about its impact on revenue growth.

Geopolitical risks including the situation in the Middle East, disruptions in international logistics, global supply-demand tightness, and large-scale disasters may cause shortages, delays, or sharp price changes in the supply of key raw materials. The Company strives to secure necessary quantities by maintaining multiple procurement sources and thorough inventory management, but the risk cannot be completely eliminated. If procurement disruptions occur, production activities may be hindered, potentially affecting business performance.

Required quality levels for display-related components and electronic component products are increasing year by year, and if quality problems occur, this could lead to returns, replacement product handling, compensation costs, and a decline in customer trust. The Company carries product liability insurance, but if damages incurred by users exceed the insurance payout limit, additional compensation costs would be incurred. Although the Company's products are auxiliary materials, given their characteristic of directly affecting the quality of users' products, the liability risk is relatively significant.

Of the Company's seven production sites, five are concentrated within Shizuoka Prefecture, an area of concern for large-scale earthquakes including the Nankai Trough earthquake. If a large-scale earthquake occurs, the Group's production activities could be significantly disrupted. The Company is advancing maintenance of critical equipment, strengthening equipment inspections, and developing alternative production systems across multiple sites, but this does not enable alternative production for all products.

The consolidation of equipment and production items aimed at improving profitability, production efficiency, and quality stability carries the risk of increasing dependence on specific equipment or sites. If a factor causing suspension of operations, such as a natural disaster, fire, equipment failure, or power outage, occurs at such equipment or sites, alternative production or recovery may take time, potentially affecting business performance. The Company is working to optimize the allocation of production items and develop alternative production systems, but the risk cannot be completely eliminated.

The Company is subject to environmental laws and regulations governing air pollution, water pollution, chemical substance management, waste disposal, greenhouse gas emissions, and other matters, and regulations are becoming stricter year by year. The Japanese government has set targets to reduce greenhouse gas emissions by 46% by FY2030 (ending March 2031) compared to FY2013 (ending March 2014) levels and by 73% by FY2040 (ending March 2041), and stricter emissions regulations and reforms to energy usage systems for industry are expected. If additional or strengthened regulations result in compliance costs that are excessive relative to the scale of business and profitability, this could affect business performance.

Amid growing international momentum toward realizing a decarbonized society, new regulations related to manufacturing processes, raw materials, and energy use are expected to be imposed. As a manufacturer using petrochemical products as its main raw materials, stricter decarbonization regulations could affect both raw material procurement and manufacturing processes. The Company is engaged in environmentally conscious activities such as obtaining ISO14001 certification, but there is a risk that increased regulatory compliance costs could put pressure on profitability.