HS Holdings Co., Ltd.

The Group's profits are heavily dependent on Khan Bank JSC (an equity-method affiliate) in Mongolia, and any deterioration in the bank's earnings would have a direct and material impact on consolidated results. While Khan Bank JSC has secured a competitive advantage through growth in deposit and loan balances and the promotion of digital banking, if risks inherent to the banking business—such as interest rate, foreign exchange, and credit risk—materialize, the Group's overall performance could be significantly impaired. Although the Company is considering and implementing M&A and new business entries with the aim of reducing its dependence on profit concentration, the dependency structure continues at present.

Khan Bank JSC (Mongolia), Kyrgyzkommertsbank (OJSC Kyrgyzkommertsbank) (Kyrgyzstan), and Solid Bank (JSC Solid Bank) (Russian Far East) each operate in emerging markets and regions with elevated geopolitical risk. If political or social instability, changes in laws, tax systems, or the regulatory environment occur, this could affect consolidated results through increased loan defaults or additional allowances for doubtful accounts. In particular, economic sanctions related to the Russia-Ukraine situation carry the risk of spilling over to Solid Bank (JSC Solid Bank) and Kyrgyzkommertsbank (OJSC Kyrgyzkommertsbank); although the impact is currently considered minor, further deterioration of the situation could expand the impact on performance. As these entities are subject to the regulation and supervision of the respective central banks, costs associated with responding to regulatory changes may also arise.

Khan Bank JSC, Kyrgyzkommertsbank (OJSC Kyrgyzkommertsbank), and Solid Bank (JSC Solid Bank) all conduct operations primarily denominated in local currencies, and significant fluctuations in interest rates in each country could pressure earnings through declines in lending rates or increases in interest paid on deposits. In addition, exchange rate fluctuations affect consolidated results translated into yen regardless of the underlying performance of each bank; although Khan Bank JSC hedges foreign exchange exposure using derivatives, this hedging may not function sufficiently depending on the degree of fluctuation. In the Reuse Business as well, sharp fluctuations in precious metal/bullion prices and exchange rates directly affect product pricing, meaning the Group as a whole has broad exposure to foreign exchange and interest rate risk.

Each bank records allowances for doubtful accounts based on the status of borrowers, collateral value, and economic assumptions; however, deterioration in economic conditions or in the performance of individual borrowers may necessitate additional allowances for doubtful accounts. If actual loan losses exceed the allowances recorded, additional credit costs would arise, materially affecting consolidated results. Given the underdeveloped credit information infrastructure and the high degree of economic volatility in emerging markets in particular, the precision of credit risk management is a key factor determining the stability of performance.

Solid Bank (JSC Solid Bank), based in the Russian Far East, and Kyrgyzkommertsbank (OJSC Kyrgyzkommertsbank), which is affected by the Russian economy, may be impacted by rising interest rates and deterioration of the Russian economy resulting from economic sanctions imposed in connection with Russia's military invasion of Ukraine. While the impact on consolidated results is currently considered minor, there is a risk that the impact could expand if sanctions are strengthened or the situation becomes prolonged. Heightened geopolitical tensions could also affect business continuity.

The Company continues to consider and implement group expansion and reorganization, including new business entries and M&A, with the aim of reducing its dependence on profit from Khan Bank JSC. However, if unexpected outcomes arise following an M&A transaction—such as impairment of goodwill, integration costs exceeding expectations, or failure to achieve anticipated synergies—consolidated results could be adversely affected. In addition, if the turnaround of target companies in the Investment Business (principal investment operations) does not proceed as planned, this could also impact performance.

Khan Bank JSC, Kyrgyzkommertsbank (OJSC Kyrgyzkommertsbank), and Solid Bank (JSC Solid Bank) each face competition from other financial institutions and non-bank lenders in their respective countries, and competition may intensify due to consolidation, reorganization, and business alliances among financial institutions, as well as the rise of new technologies such as fintech. If each bank is unable to establish or maintain a competitive advantage, this could affect consolidated results through declines in deposit and loan balances or fee income. Khan Bank JSC is responding by promoting digital banking services, but keeping pace with the speed of technological innovation remains a challenge.

The Reuse Business (STAYGOLD and others) relies on the purchase of precious metals, watches, branded goods, and similar items as its earnings base; changes in economic conditions, an increase in competing buyback operators, shifts in consumer sentiment, and market price fluctuations may make it difficult to secure a stable supply of merchandise. In addition, fluctuations in precious metal/bullion prices and exchange rates, as well as economic obsolescence due to changing trends, could lead to declines in product prices, affecting consolidated results. The business also inherently carries the risk of purchasing counterfeit or stolen goods, which could lead to customer disputes or reputational damage.

The Group relies on computer systems for many of its operations, including internet banking in the banking business and online auctions and inventory management in the Reuse Business. Should an unexpected system failure occur, it could seriously disrupt business operations. While the Group maintains stable operations through regular maintenance and backup systems, a system failure could also entail risks of litigation or administrative sanctions, potentially affecting consolidated results. In particular, system outages in financial services directly undermine customer trust, and the impact could be far-reaching.

The Group manages a large volume of customer personal information in its banking and Reuse Business operations, and while it maintains rigorous management through designated information management staff and officers, any leakage of information through unforeseen channels could seriously damage the Group's social credibility as a financial group. Substantial costs and losses associated with post-incident response, as well as customer attrition, could impair consolidated results. The Reuse Business is also subject to legal regulation under the Secondhand Article Dealer Act, and any violation could result in risks such as suspension of business or revocation of licenses.