NIHON FLUSH CO.,LTD.

A decrease in housing acquisition demand due to economic trends, rising interest rates, changes in construction-related laws and regulations, etc. may affect the business activities of major customers such as condominium developers, general contractors, and homebuilders. This could result in delays in product delivery timing or changes to order plans, potentially affecting business results and financial position. The Group operates an interior system components business in Japan and China, and has a structurally high sensitivity to fluctuations in the construction market.

The downturn in the China domestic real estate market has continued, and while the balance of trade receivables decreased from ¥18,116,930 thousand in FY2023 (ending March 2023) to ¥11,548,228 thousand in FY2026 (ending March 2026), the balance of allowance for doubtful accounts increased significantly from ¥251,892 thousand to ¥3,288,988 thousand. The Group has been recovering receivables through real estate acquired in lieu of payment, but the balance of investment real estate has accumulated to ¥8,896,634 thousand in FY2026 (ending March 2026). If the value of such real estate declines in the future, valuation losses or impairment losses (an impairment loss of ¥1,152,251 thousand was recognized in FY2025 (ending March 2025)) may occur, which could have a material impact on business results and financial position. While the Group is strengthening credit management and promoting early collection, the risk remains at a high level.

In production and sales activities overseas, mainly in China, changes in the political and economic conditions of the countries in which the Group operates, changes in laws, regulations and tax systems, exchange rate fluctuations, and geopolitical risks such as war and conflict may affect business activities. If delays in collection or uncollectibility of trade receivables occur due to business customs specific to each country or region, this may affect business results and financial position. China sales have continued to decline from ¥17,771,379 thousand in FY2023 (ending March 2023) to ¥13,557,962 thousand in FY2026 (ending March 2026), reflecting the deteriorating business environment in the figures.

Both domestically and overseas, the proportion of sales to specific condominium developers and homebuilders is relatively high, and if orders decrease due to a decline in the number of housing starts by such customers or other factors, this may affect business results. The Group strives to maintain good business relationships through proposing new products for each property and providing after-sales support, but diversification of sales destinations to spread risk is still a work in progress. The customer concentration risk is structurally amplified during downturns in the housing market.

If prices rise due to market fluctuations in wood and surface materials, which are the main raw materials, the Group may not be able to pass on such price increases to selling prices in a timely and sufficient manner, which may affect business results and financial position. The Group strives to improve productivity and reduce costs, and proceeds with price pass-through as necessary, but there is a risk of being unable to respond promptly during periods of sharp increases in raw material prices. In an environment where global supply chain disruptions and soaring resource prices continue, the importance of cost management is increasing.

If plant facilities are affected by unforeseen events such as earthquakes, tsunamis, fires, or the spread of infectious diseases, causing disruption to the production system, this may affect business results and financial position. The Group has diversified its production bases into a five-plant system consisting of two plants in Japan (Head Office Plant and Hokkaido Plant) and three plants in China (Kunshan, Qingdao, and Jiangxi) to mitigate risk, but the risk of concentration in specific regions remains. While the Group continues its crisis management response, the risk to business continuity in the event of a large-scale disaster cannot be eliminated.

The Group is subject to various laws and regulations, including the Product Liability Act, the Industrial Safety and Health Act, the Construction Business Act (General Construction Business License No. 19464, valid until January 24, 2027), and trade-related laws and regulations. If the Group encounters difficulty in complying with these regulations, or if additional costs arise due to the strengthening, revision, or new introduction of laws and regulations, this may affect business results and financial position. The Group strives to comply with various laws and regulations, but continuous monitoring of, and response to, changes in the regulatory environment both domestically and overseas is required. In particular, the China business also carries the risk of changes in local laws and regulations.

The Group uses information systems for production management, sales management, accounting management, and other purposes. If a cyberattack, unauthorized access, system failure, or other incident occurs, it may result in business interruption, information leakage, disruption to production activities, etc., which may affect business results and financial position. The Group strives to strengthen its information security measures and system maintenance framework, but continuous investment and strengthened countermeasures are required in response to the increasing sophistication and diversification of cyber threats. Attacks on production management systems in the manufacturing industry pose a risk directly linked to business continuity.

Because interior system components are installed in a later stage of the construction schedule for condominiums and other buildings, property handover timing tends to increase toward the end of the fiscal year, resulting in a structure in which both sales and profit are concentrated in the second half. Due to this seasonality, it is difficult to forecast full-year results based on first-half results alone, and construction delays or changes in orders toward the end of the fiscal year may significantly affect annual results. Investors should note that it is difficult to evaluate performance based on interim results, and the uncertainty of the full-year outlook is relatively high.