NICHIHA CORPORATION

The mainstay product, Fiber Cement Exterior Materials (Siding), is used predominantly for the domestic housing industry, and the company holds a share of nearly 60% in the domestic fiber cement exterior materials market, meaning that trends in housing starts directly affect business performance. Over the medium to long term, a decline in new housing starts is anticipated due to structural factors such as population decline, and there is a particularly strong correlation with starts of detached houses and low-rise apartments. While the company is pursuing expansion into overseas markets and non-residential markets, as well as entry into the mid- to high-rise building segment, dependence on the domestic new housing market remains high.

Fierce competition among companies continues in the housing-related industry, and although price increases have continued in recent years, there is a risk that price competition could intensify again depending on demand trends. As the industry leader, the company is promoting a shift to higher value-added products and cost reductions, but if price revisions do not proceed as planned, business performance could be adversely affected. There has historically been movement toward alliances, restructuring, and consolidation in the fiber cement exterior materials industry, and changes in the competitive environment could affect profitability.

Raw materials used in product manufacturing, such as paint, cement, and pulp, include petroleum-derived products, and recently there have been frequent instances of significant price fluctuations over short periods. There is a risk of further surges in crude oil and energy prices due to factors such as escalating tensions in the Middle East, as well as difficulty procuring certain raw materials. While measures such as diversifying procurement sources and switching to alternative materials are being implemented, if cost increases cannot be passed on to sales prices, profitability will be squeezed.

In the United States, the company sells premium fiber cement exterior materials for commercial facilities and the housing market, but due to persistently high interest rates and rising construction costs, the construction market for commercial facility and apartment development continues to fluctuate. Overseas expansion requires substantial upfront investment ahead of revenue recognition, and expenses may exceed profits during the startup phase. Additionally, inherent risks such as market access issues, changes in laws and regulations, political and economic factors, and war and terrorism could hinder business growth.

Foreign exchange fluctuations affect business performance and financial condition through two aspects: the impact on assets, liabilities, revenues, and expenses related to foreign currency-denominated transactions, and the impact on yen-converted amounts in the financial statements of overseas consolidated subsidiaries. Currently, the sensitivity to foreign exchange at the operating income level is said to be not significant, but the company could become more susceptible to impact due to rising material procurement costs from sharp exchange rate fluctuations or changes in the proportion of the U.S. business within consolidated results. As the U.S. business expands, the importance of foreign exchange risk may increase going forward.

During the fiscal year under review, the company received a notice of correction from tax authorities following a tax audit based on transfer pricing taxation regulations concerning transactions with its U.S. subsidiary, and paid the additional tax assessed. The company has filed for mutual agreement procedures under the Japan-U.S. Tax Treaty, but there is a risk that double taxation will not be resolved if the consultation is not successfully concluded. Similar findings could be received in the future, and the company is working to avoid tax risks through measures such as applying for APAs (Advance Pricing Agreements).

The Nagoya Plant and Nichiha Matex's Kinuura Plant and Oe Plant, among others, are located in areas where seismic intensity of "lower 6" is predicted in the event of a Tonankai earthquake, and significant impact on production facilities is anticipated. In the event of a major earthquake, in addition to supply disruptions due to production stoppages, business performance could be negatively affected by deteriorating consumer trends associated with a slowdown in economic activity. While measures such as personnel disaster response drills and building reinforcement work are being implemented, the risks associated with large-scale disasters cannot be completely eliminated.

Business activities such as production and sales depend on computer and information and communication systems, and in the event of hardware or software malfunctions or cyberattacks such as ransomware, business activities could be disrupted and confidential information could be leaked externally. While measures such as system updates, introduction of antivirus tools, addition of backup functions, and enhanced security education are being implemented, business continuity could be affected in the event of an unforeseen incident.

If climate change countermeasures are insufficient, there is a risk of flood damage to plants and supply chain disruptions due to more frequent and severe natural disasters, while conversely, if strict countermeasures are adopted, there is a risk that increased material and energy costs and capital expenditures resulting from the introduction of carbon taxes and carbon neutrality requirements could worsen business performance. The company has expressed support for the TCFD and conducted scenario analysis, but if natural disasters exceed expectations or decarbonization plans are not achieved, business continuity and performance could be affected.

Securing and developing specialized technical personnel and personnel with excellent management capabilities is essential for business continuity and development, and appropriate placement of qualified personnel required for operations is particularly required at plant sites. In addition to new graduate recruitment, the company is working on year-round recruitment of experienced personnel and planned talent development, but if securing and developing human resources does not proceed as planned, the effectiveness of long-term business operations could be impaired, potentially affecting business performance.