C.S. LUMBER CO., INC

The Precut Business and Construction Contracting Business are highly dependent on the number of wooden detached housing starts, and there is a risk that demand may decline due to fluctuations in the economy, interest rates, land prices, and prices, changes in tax systems, and population decline due to the falling birthrate. In addition, in the Real Estate Leasing Business, properties are leased to operators of nursing care facilities and nursery facilities, and business performance may also be affected if rent reductions or contract cancellations occur. As countermeasures, the Group is promoting expansion into non-residential and large-scale wooden construction, strengthening sales activities, improving logistics efficiency, and diversifying lessee operators.

The Group's business operations are concentrated in the Greater Tokyo area (Tokyo, Chiba, Kanagawa, and Saitama prefectures, and the southern part of Ibaraki prefecture — one metropolis and four prefectures), and changes in economic conditions, housing demand, and land prices in this area directly affect business performance. Given the location of the Company's plants (in Togane City and Sammu City, Chiba Prefecture) and delivery cost considerations, this geographic concentration is structural in nature, making diversification difficult. On the other hand, since the one metropolis and four prefectures have a lower rate of population decline than the national average, the Company anticipates relatively resilient construction demand and intends to continue this strategy.

Since most of the timber handled by the Company is imported from overseas, exchange rate fluctuations and changes in conditions in exporting countries affect procurement costs. Timber prices also fluctuate depending on domestic and overseas housing demand trends, and if these cost changes cannot be passed on to selling prices in a timely manner, profitability may be squeezed. The Company strives to minimize price fluctuation risk by strengthening information exchange with timber manufacturers and trading companies and by reviewing selling prices as needed.

The Company is subject to numerous laws and regulations, including the Construction Business Act, the Building Standards Act, the Real Estate Brokerage Act, and the Waste Management Act, as well as regulations under various local government ordinances, and there is a risk that regulatory tightening or the enactment of new laws could increase business operating costs and administrative burdens. In addition to regularly checking a database of legal amendments, the Company utilizes the opinions of experts such as retained attorneys, administrative scriveners, and judicial scriveners, and examines legal risks at a Compliance Promotion Committee held once a month.

The Company is exposed to competition from other companies in each of its businesses, including timber processing and sales, and if it is unable to maintain an advantage in quality, price, and sales capability, this could lead to reduced orders and lower profit margins. The Company continues to promote measures such as improving timber yield rates, enhancing productivity through improved machinery and work efficiency, diversifying sales channels, reducing material costs, and improving logistics efficiency, in order to maintain and strengthen its competitiveness.

The Precut Business relies on automated processing machines based on CAD data, and if a major malfunction occurs in these machines, it may result in quality defects or delivery delays that affect business performance. The Equipment Technology Department oversees and provides guidance on regular inspections and maintenance, and has established a system for prompt repairs in the event of trouble.

The Construction Contracting Business relies on subcontractors for most of its construction work, and business performance may be affected if the Company is unable to secure sufficient subcontractors that meet its selection criteria when orders increase, or if construction delays occur due to the poor management condition of subcontractors. As risk mitigation measures, the Company schedules its operations by finalizing the annual number of housing starts and completions early, has partially brought foundation work in-house, transacts with three or more subcontractors in each trade category, and conducts interviews with subcontractor management at least once a year.

The Company extends credit in connection with trade receivables and other items, and while it thoroughly manages credit and provides for an allowance for doubtful accounts, credit risk at certain counterparties may increase due to construction delays caused by timber supply shortages, among other factors, and if actual losses exceed the allowance, business performance may be affected. The Company is strengthening its risk management through periodic review of credit limits, confirmation of construction progress, and active use of trade credit insurance.

Since the Company's business area is concentrated in the Greater Tokyo area, the occurrence of large-scale earthquakes, wind and flood damage, or other natural disasters, epidemics of infectious disease, or terrorism, fraud, and system failures including cyberattacks, could result in equipment restoration costs and delays in product delivery and contracted construction work. There is also a risk that the intensification of disasters due to global warming could damage timber-producing regions, ports, and timber manufacturers' factories in Japan and overseas, leading to disruptions in the supply chain.

Founder and Representative Director and President Chiyonosuke Nakai plays an important role as Chief Executive Officer in determining management policy and strategy, and there are concerns about the impact on business performance and financial condition should he become unable to perform his duties. In addition, if the Company is unable to systematically secure excellent human resources in the timber and construction fields as well as in administrative departments, this could also hinder business operations. As countermeasures, the Company is implementing measures such as strengthening its organizational structure, promoting collective decision-making and delegation of authority, enhancing internal education and training systems, and hiring external professional talent.