SATO SHO-JI CORPORATION

In the current consolidated fiscal year, the Steel Business accounted for 60.2% (¥175,823 million) of net sales, representing the majority of the Group's total revenue, with a high proportion attributable to the commercial vehicle and automotive parts industries. If demand trends in these industries deteriorate, this structure would have a direct and significant impact on the Group's overall performance. Steel Business sales changed from ¥151,570 million in the 99th fiscal year to ¥175,823 million in the 103rd fiscal year, but have shown a declining trend over the most recent three consecutive fiscal years.

In the Steel Business, Non-ferrous Metals Business, and Electronics Business, prices of major products and raw materials fluctuate in line with domestic and international commodity market conditions. The Group addresses this through risk hedging via consultation with users and manufacturers, as well as cost reductions, but sharp fluctuations in market conditions may affect earnings. In addition, with regard to risks of procurement difficulty or excess inventory, the Group strives to respond rationally by promptly analyzing information on users' usage volumes and manufacturers' production volumes.

The Group conducts export and import transactions denominated in foreign currencies, and the proportion of foreign-currency-denominated transactions is expected to increase with future overseas expansion. Fluctuations in exchange rates may affect sales and profit after conversion into yen, as well as financial condition. The Group hedges this risk by entering into forward exchange contracts for individual transactions, striving to fix profitability.

The Group holds cross-shareholdings mainly in business partners, and a decline in share prices may affect operating results and financial condition through the recognition of valuation losses, among other effects. As a risk mitigation measure, the Group is proceeding to reduce its shareholdings while considering business benefits and dividend yields as appropriate.

The Group holds borrowings, and a sharp rise in interest rates could adversely affect operating results and financial condition through an increase in interest expenses. The Group strives to mitigate interest rate fluctuation risk by utilizing interest rate swaps, among other means, but the risk remains that it cannot fully respond to sharp fluctuations.

Credit risk exists with respect to trade receivables and other amounts owed by domestic and overseas business partners, and if a business partner's credit standing deteriorates and default occurs, bad debt losses and similar effects may arise, affecting performance. Credit management is implemented based on the "Credit Limit Management Regulations" and the "Credit and Investment Committee Regulations," and large transactions are handled carefully following deliberation by the Credit and Investment Committee.

The Group is expanding its business through the establishment of new companies and investment in existing companies, both domestically and overseas, but if the corporate value of an investee company declines, impairment losses and similar effects may arise, affecting operating results and financial condition. The appropriateness of investments is carefully examined through internal regulations and review by the Credit and Investment Committee, but risks arising from changes in the business environment cannot be eliminated.

If natural disasters, accidents, outbreaks of infectious disease, or other social disruptions occur, they may hinder the business activities of the Group and its major business partners, affecting operating results and financial condition. This risk carries the potential to spread across the entire supply chain, and disasters affecting major business partners could also become a factor in deteriorating performance.

Amid the global trend toward reducing greenhouse gas emissions, if carbon taxes are introduced or environmental regulations are strengthened, increased compliance costs may affect operating results and financial condition. Given the nature of the Group's business, which centers on the distribution of materials such as steel and non-ferrous metals, the structure is susceptible to the effects of carbon pricing.