SINKO INDUSTRIES LTD.

Operating revenue depends on capital investment in building facilities for large-scale offices, factories, hospitals, hotels, etc., and is directly affected by construction investment demand from domestic private companies and public institutions. Overseas, since the China business accounts for a major share, the Company is also affected by that country's economic conditions. While the Company seeks to diversify risk by improving the public/private replacement ratio and expanding into the small- and medium-sized building market, a contraction in demand due to an economic downturn could adversely affect business performance and financial condition.

With domestic business accounting for approximately 85% of sales, the AHU market, which is a key market, faces competition from multiple companies including major players, and there is also a possibility of entry by overseas companies. The Company aims to secure competitiveness by strengthening design and production capabilities through the SIMA project, but if these initiatives fail to achieve the expected results or if price competition intensifies, sales growth could slow.

Copper and aluminum, the main raw materials used in the Company's products, are affected by international economic conditions and always carry price fluctuation risk. The Company seeks to address sudden price fluctuations through diversified futures trading, but if there is a permanent price surge or if the Company is unable to appropriately pass on costs to product prices, profitability could be squeezed, adversely affecting business performance and financial condition.

Against the backdrop of the global semiconductor shortage, delivery times for control equipment, motors, and other components have been lengthening. The Company is responding by strengthening information coordination with suppliers and reducing the number of procured parts through modularization of some products, but if effective countermeasures cannot be implemented, delays in the timing of revenue recognition and declines in production efficiency due to increased work-in-progress are anticipated.

Due to the decline in Japan's working-age population, labor shortages and rising labor costs have become pronounced in the technical and manufacturing fields, and structural changes at production sites, such as an increase in foreign workers, are expected to be long-lasting. The Company is responding through business process innovation centered on SSA and the utilization of overseas human resources, but if rising labor costs cannot be appropriately reflected in product prices, profitability could be squeezed.

Through its business activities, the Company holds confidential business and technical information belonging to customers and business partners, and there is a risk of information leakage, data destruction, or system outages due to computer virus infection or unauthorized access. The Company is establishing an Information Security Management Office and developing regulations and employee awareness, but the risk cannot be completely avoided, and if it materializes, it could have a significant impact on social credibility and incur response costs.

The Company owns two AHU manufacturing sites in Japan, and if a natural disaster or serious epidemic beyond expectations occurs, this could significantly affect product supply through restrictions on commuting to work, inability to procure raw materials due to supply chain disruption, and delays in product shipment due to the closure of construction sites. The Company is responding by formulating business continuity plans and developing work-from-home systems, but it is difficult to reasonably estimate the likelihood of occurrence.

In overseas business, including product sales in Asian regions such as China, fluctuations in exchange rates when converting local currency-denominated sales, expenses, and assets into yen may affect business performance and financial condition. The Company responds by continuously monitoring market trends, including international political and economic developments, but the impact of exchange rate fluctuations cannot be completely avoided.

If the recoverable amount of owned assets or asset groups is determined to be below their book value, an impairment loss is recorded as a loss for that period, which could adversely affect business performance and financial condition. The Company continuously verifies the profitability and recoverability of owned assets and proceeds with the sale of assets that do not contribute to enhancing corporate value, but it may record impairment losses due to changes in the business environment or other factors.

The Company carries out corporate acquisitions to strengthen its business foundation and maintain growth, and may face business integration risks after an acquisition, including uncertainty over changes in laws and regulations, industry trends, and differences in business customs. The Company strives for early stabilization and management system development through due diligence and PMI, but if the expected synergies or profits are not realized, impairment of goodwill and other issues could occur, adversely affecting business performance and financial condition.