Sanyo Electric Railway Co.,Ltd.

The Group operates under a broad range of laws and regulations, including the Railway Business Act, the Road Transportation Act, the Act on the Measures by Large-Scale Retail Stores, the Antimonopoly Act, and the Personal Information Protection Act. Significant changes to existing regulations or restrictions on corporate activities due to legal violations could affect the Group's financial position and operating results. Since maintaining permits and licenses is a prerequisite for conducting business in each segment, regulatory risk is fundamental to business continuity.

The southern part of Hyogo Prefecture, the Group's main business area, was the site of the Great Hanshin-Awaji Earthquake in 1995 and remains exposed to risks such as large-scale earthquakes, tsunamis, typhoons, floods, infectious diseases, and terrorism. Although the Group has formulated a business continuity plan (BCP), disasters exceeding assumptions could have a material impact on its financial position and operating results. Additionally, increased costs associated with the transition to a decarbonized society and the intensification of extreme weather events due to climate change are recognized as additional risk factors, and the Group is advancing disclosure based on the TCFD recommendations.

In the transportation segment, in addition to competition from other railways, buses, automobiles, and other means of transportation, the decline in the working population along the rail lines and the progression of the declining birthrate and aging population represent ongoing challenges leading to shrinking demand. If transportation demand declines due to worsening economic conditions or further intensifying competition, the Group's financial position and operating results could be affected. The declining birthrate and aging population represent a structural, long-term trend and are recognized as a risk of shrinking revenue base over the medium to long term.

The Group concentrates its management resources around its railway lines in the southern part of Hyogo Prefecture, resulting in a structure that is strongly affected by population trends, land prices, and economic conditions in that area. The Group's financial position and operating results could be affected not only by a nationwide economic downturn but also by a localized economic downturn in this area. This regionally concentrated business model makes it difficult to hedge risk through geographic diversification, resulting in high dependence on the trends of the local economy.

In the railway and bus businesses, the Group considers the provision of safe, high-quality services as its top priority and has implemented safety measures such as completing the installation of obstruction detection devices at all railway crossings, disaster prevention construction work, and the renewal and enhancement of substations and ATS (Automatic Train Stop) systems. However, if a major accident occurs that cannot be prevented by these measures, it could have a material impact on the Group's financial position and operating results. In the event of an accident, a combination of impacts is anticipated, including compensation for damages, suspension of operations, and loss of public trust.

In the department store business, which is central to the distribution segment, there is a risk that sluggish consumer spending due to economic downturn or unfavorable weather could put pressure on earnings. Intensifying competition from new competing stores entering the same or nearby trading areas could also affect the Group's financial position and operating results. A structural trend of market contraction across the department store industry as a whole also exists as a background risk.

In the Real Estate Sales Business, there is a risk of decreased sales volume during economic downturns and the recognition of valuation losses due to declining land prices. In the Real Estate Leasing Business, there is a possibility of tenant departures, bankruptcies, or requests for rent reductions, either of which could affect the Group's financial position and operating results. Since real estate market conditions are linked to economic trends, this risk structurally interacts with the risk of economic concentration in the southern Hyogo Prefecture area.

Fluctuations in crude oil prices and an increased reliance on thermal power generation due to the shutdown of nuclear power plants have led to fluctuations in electricity rates for railways and fuel prices for buses and taxis, affecting earnings. Since changes in the international situation directly impact fuel costs, sensitivity to geopolitical risk is high. Depending on future trends in electricity rates and fuel costs, the Group's financial position and operating results could be affected.

Funds for the maintenance and renewal of railway facilities, real estate investment, and department store renovations are primarily raised through borrowings from financial institutions, resulting in a high dependence on interest-bearing debt of 34.4% in FY2024 (ending March 2024), 35.2% in FY2025 (ending March 2025), and 32.6% in FY2026 (ending March 2026). The balance of interest-bearing debt reached ¥42,525 million as of FY2026 (ending March 2026) (comprising ¥30,730 million in long-term borrowings, ¥5,793 million in short-term borrowings, and ¥6,000 million in bonds scheduled for redemption within one year). If interest rates rise significantly, increased financial expenses could affect the Group's financial position and operating results, and the Group is working to diversify its funding sources and improve cash flow.

The Group utilizes information systems in many operations, including sales management and communication within and outside the Group, and has established regulations and leakage prevention measures based on its "Personal Information Protection Policy" and "Information Security Policy." However, if information systems are disrupted due to natural disasters, equipment failure, unauthorized access, or similar causes, or if personal or confidential information is leaked, the Group's financial position and operating results could be affected. Given the increasing sophistication and diversification of cyberattacks, there is a need to continuously verify the effectiveness of existing countermeasures.