NATOCO CO.,LTD.

The Group's products are used as production materials across a wide range of fields, including metals, machinery, electrical and electronic equipment, housing, and automobiles, and a downturn in these demand industries directly affects business performance. Where dependence on a specific industry is high, there is a risk that a decline in demand in that industry could spread to affect the Group's financial position and operating results. The securities report does not describe specific countermeasures, indicating a structural vulnerability to demand fluctuations across industries.

While the Group is promoting the development of new products and technologies that respond to customer and market needs, rapid technological advances or the emergence of substitute products may prevent the Group from delivering products at the optimal timing. Delays or failures in development could lead to the loss of future growth opportunities and lower profitability, adversely affecting the Group's financial position and operating results. As the pace of technological innovation in the coatings and coating agents industry accelerates, continued R&D investment and maintaining market sensitivity remain challenges.

There is a risk that selling prices will decline due to changes in demand or intensifying competition in the product market. Intensified price competition directly compresses gross profit margins and may adversely affect the Group's financial position and operating results. The securities report does not describe specific measures to defend against price declines (such as differentiation strategies), raising questions about the Group's ability to maintain prices amid changing market conditions.

Petrochemical feedstocks are used extensively in the manufacture of the Group's products, and fluctuations in crude oil prices and exchange rate movements significantly affect raw material costs. When raw material prices rise, manufacturing costs increase, and if it is difficult to pass these costs on through selling prices, profit margins come under pressure. The Group faces a structural risk of being simultaneously exposed to two external factors: crude oil market conditions and foreign exchange rates.

The Group is subject to a variety of legal regulations at its business sites and sales destinations both in Japan and overseas, and is also required to comply with social rules relating to the global environment, biodiversity, and social systems. If unexpected changes in laws or regulations occur, business activities may be restricted, and increased compliance costs may affect the Group's financial position and operating results. The chemicals and coatings industry is particularly susceptible to the effects of tightening environmental regulations, making continuous monitoring of regulatory trends essential.

The Group conducts business activities in five countries—South Korea, China, the Philippines, Thailand, and Vietnam—and inherently faces risks such as difficulty in recruiting and retaining personnel in each country, as well as economic, social, and political turmoil. Should these risks materialize, the continuity of local operations could be impaired, potentially adversely affecting the Group's financial position and operating results. Geopolitical tensions and changes in the labor market environment in each country create a structure in which the stability of the Group's overall business could be affected.

Sales, expenses, assets, and liabilities denominated in foreign currencies at the South Korea branch and the subsidiaries in China, the Philippines, Thailand, and Vietnam are translated into yen when preparing the consolidated financial statements, so fluctuations in exchange rates directly affect consolidated business performance. During yen appreciation phases, the performance of overseas subsidiaries shrinks when translated into yen, while during yen depreciation phases, this compounds with rising raw material costs to have a combined effect on the profit structure. The Group has exposure spanning multiple currencies, and the securities report does not provide specific disclosure regarding the status of foreign exchange hedging.

Although the Group manufactures products under strict quality control standards, there is no guarantee that the occurrence of serious product defects can be completely eliminated. While the Group has product liability insurance, in the event of large-scale compensation claims or recalls, substantial costs would be incurred, and significant damage to product reliability and social reputation could result, potentially affecting the Group's financial position and operating results. As a manufacturer of production materials whose products are incorporated into customers' manufacturing processes, there is a risk that the scope of impact in the event of a defect could be extensive.

Although the Group conducts disaster prevention drills, disaster prevention activities, equipment inspections, and earthquake resistance measures at its manufacturing sites and other key facilities, there is no guarantee that the effects of large-scale disasters such as earthquakes or flooding can be completely prevented or mitigated. In the event of a major earthquake, the Group could suffer severe damage, resulting in the suspension of production activities, delays in product supply, and the need to repair manufacturing facilities, which could have a significant impact on the Group's financial position and operating results. Given the nature of manufacturing operations, damage to production sites carries the risk of affecting not only short-term sales losses but also relationships with customers.