Shinko Shoji Co., Ltd.

The Group is a trading company handling electronic components and electronic equipment centered on semiconductors, and is directly affected by demand trends and capital expenditure trends in the electronics and electrical equipment industries that constitute its customer base. If demand across the industry as a whole stagnates, net sales and profit levels could deteriorate significantly. Given the business structure's high dependence on specific industries, susceptibility to business cycle fluctuations is a challenge.

The Group provides products and services to many customers on a deferred payment basis and holds substantial accounts receivable. If a customer with a large accounts receivable balance faces financial difficulties, the occurrence of bad debt losses could have a material impact on the Group's business performance and financial condition. Although thorough credit management is required, it is difficult to completely eliminate the risk of deterioration in customers' financial condition.

The Group has made business expansion in overseas markets, primarily in Asia, a pillar of its strategy; however, if turmoil occurs in overseas financial markets or economies, or if social or political problems arise in relevant countries, there is a risk that demand from related customers could decrease significantly. Institutional and regulatory risks specific to emerging markets, as well as economic instability, could affect business performance. Addressing regional concentration risk remains an ongoing challenge.

The Group's business performance and financial condition are affected by fluctuations in foreign exchange rates arising from foreign currency-denominated transactions, which impact the yen-converted amounts of foreign currency-denominated assets and liabilities as well as net sales and purchases. While the Group works to mitigate such effects through hedging methods such as forward foreign exchange contracts and currency marrying, it is impossible to completely eliminate the impact of sharp exchange rate fluctuations. Business performance may be affected in either a yen depreciation or yen appreciation direction.

Holding distribution inventory is essential to the trading company function, but inventory levels fluctuate significantly due to demand trends and capital expenditure trends in the electronics and electrical equipment industries. In recent years, inventory has tended to increase due to responses to end-of-life (EOL) products from semiconductor manufacturers and growing needs for BCM inventory in preparation for disasters and supply-demand tightness, raising concerns about inventory valuation losses and impacts on cash flow. An increase in inventory could directly affect the Group's business performance and financial condition.

The prolongation of situations such as the war in Ukraine and the Middle East conflict has led to surging resource prices, which could cause increases in the prices of semiconductor products and electronic components, affecting the Group's procurement costs and customer demand. In addition, changes in trade policies in various countries, including the United States, could affect the production trends of customers and suppliers, and there is a risk that changes in supply-demand conditions could adversely affect business performance and financial condition. There are also concerns that prolonged geopolitical tensions could undermine the stability of supply chains.

The Group utilizes a variety of information systems in its business activities, including systems managed by third parties, and there is a risk that hardware failures, software bugs, unauthorized external access, internal misconduct, natural disasters, and other factors could cause interruptions to critical operations, data loss, or leakage of confidential information. Although safety measures have been implemented, complete defense is difficult due to the increasing sophistication of cyberattacks and other factors, and in the event of an incident, there could be a material adverse impact not only on business performance but also on corporate credibility. Continuous strengthening of the information security framework is required.