UMC Electronics Co.,Ltd.

Overseas consolidated subsidiaries account for over 80% of consolidated net sales, with China and Hong Kong subsidiaries accounting for 50% of that total. Inherent risks include unstable political conditions, changes in laws and tax systems, rising labor costs, and tariffs/trade regulations, and if these risks materialize, they may lead to increased costs, reduced profits, and operational disruption. In particular, growing attention to employee-related costs such as social security in China raises concerns about increased response costs.

Since the EMS business conducts contract manufacturing linked to clients' production status, large-scale and rapid production fluctuations at clients could have a significant impact on business performance. Client companies are pursuing global optimization of production sites against the backdrop of exchange rate fluctuations and cost reduction requests, with agile consolidation and reorganization of production sites occurring. Such changes in production trends and shifts in site strategy are expected to continue occurring going forward.

6,000 shares of Class A preferred stock (¥1 million per share) allotted to Mizuho Bank have been issued, and if the bank fully exercises its right to request acquisition in exchange for common stock, theoretical dilution of approximately 70% could occur. The floor exercise price is set at ¥157, and while full materialization will not occur due to the 5% rule under the Banking Act, the impact on shareholder value is significant. The shares were issued in 2021 during management restructuring for the purpose of repaying borrowings.

Since the company holds foreign currency-denominated assets such as US dollars for factory operations in China, Vietnam, Thailand, and other locations, it is affected by fluctuations in the US dollar, Hong Kong dollar, Chinese yuan, Vietnamese dong, Thai baht, Mexican peso, and yen. While the company strives to hedge through same-currency purchasing/sales and arrangements with customers to share exchange rate risk, sudden exchange rate fluctuations could result in losses. In addition, since the local currency-denominated financial figures of overseas consolidated subsidiaries are converted into yen, this also affects consolidated business performance and financial position.

In capital expenditures aimed at expanding production capacity and maintaining competitiveness, if equipment becomes excessive due to changes in client policy or economic downturn, the burden of depreciation expenses could pressure business performance. For tangible fixed assets such as factories and production equipment, recoverability is periodically evaluated based on estimates of future cash flows, but impairment recognition becomes necessary if business profitability declines. The company prioritizes highly versatile capital investments and seeks to mitigate risk for dedicated equipment through measures such as requesting partial cost-sharing from clients.

Materials necessary for production are procured from external material manufacturers and trading companies, and supply chain disruptions or tight material market conditions caused by natural disasters, infectious diseases, geopolitical risks, etc., could result in an inability to secure planned materials. While the company strives for stable procurement through diversification of supplier locations and securing second sources, an inability to procure materials would affect business performance and financial position. Given the nature of the EMS business, delays in material procurement pose a risk of directly leading to production and shipment halts.

If natural disasters such as earthquakes and floods, computer virus infections, the spread of infectious diseases, or wars, terrorism, riots, labor disputes, etc. occur at business sites in Japan, China, Hong Kong, Vietnam, and Thailand, there is a risk of operational suspension and halts in production and shipment. Also anticipated are declines in production capacity due to instability in electricity and infrastructure, disruption of logistics routes, difficulty in procuring raw materials, and delays in product supply. Since the company has business sites spanning multiple countries, damage at any one site could spread to affect overall consolidated business performance.

Given the nature of the EMS business, the company has many opportunities to access highly confidential information related to clients' production plans and the development and manufacturing of new products. While the company has established an information management system, if unexpected information leakage occurs, it could adversely affect the business, performance, reputation, and credibility through the filing of damage claim lawsuits, etc. The company states there is no guarantee that management of confidential information will always remain effective going forward, and risks including external threats such as cyberattacks also exist.

Toyota Industries Corporation, the largest shareholder (holding 34.6% of issued shares), is a related party, and contract production of automotive equipment products for this company accounted for 30.0% of total net sales in the fiscal year under review. While transaction terms are determined through individual negotiations and there is no competitive relationship, if Toyota Industries changes its production policy or reduces transactions, it could have a material impact on the group's business performance. Two of the six directors are former Toyota Industries personnel (having transferred employment), and continued attention to independence from a governance perspective is necessary.

The company may consider acquisitions of domestic and overseas companies for the purpose of expanding and growing the EMS business, which carries risks such as significant funding requirements, goodwill amortization burden, and time lag before contributing to business performance. There is a possibility that increased investment could exceed returns, and overseas M&A also carries inherent risks of encountering exchange rate risk, differences in business customs, investment regulations, and political/legal obstacles. Since a certain period is required before investment recovery and profit realization, there is a risk that financial burden will precede returns.