HARIMA B.STEM CORPORATION

The Group's business is labor-intensive, centered on building maintenance, with labor costs accounting for approximately 45% of net sales and consolidated employees numbering approximately 6,200. If labor shortages and recruitment difficulties intensify due to the declining birthrate and aging population, this could lead to increased wages and recruitment costs, as well as difficulty in maintaining operations at client facilities, resulting in decreased sales and other adverse effects on business performance. As countermeasures, the Group is implementing the acceptance of foreign technical intern trainees and utilization of the Specified Skilled Worker system, along with a unified recruitment strategy executed by a dedicated recruitment department within the Human Resources Planning Department.

The proportion of part-time workers among employees is high, and if laws and regulations related to part-time workers, including minimum wage increases, are revised, new costs may arise and affect business performance. The average hourly wage rate for part-time workers continues to rise year after year, and cost increase pressure persists. As countermeasures, the Group is engaged in negotiating contract price increases with clients and improving work efficiency and reducing costs through the use of cleaning robots and other means.

Large-scale natural disasters such as earthquakes could damage managed properties, disrupt transportation networks preventing employees from commuting to work, and incur response costs, and if the spread of infectious diseases disrupts business operations, this could also adversely affect business performance. Managed properties, which form the Group's revenue base, are at risk of direct damage, and the impact on business continuity could be extensive. The Group has formulated a Business Continuity Plan (BCP) and is working toward ensuring business continuity and fulfilling social responsibility.

Outsourcing contracts take a form in which the contract period and price are determined in advance, and it may be difficult to raise prices in line with increases in labor costs and material and equipment prices. Rising vacancy rates and falling tenant rents risk a sharp increase in price-cutting demands and cancellations from existing clients, and temporary work, which accounts for 16% of net sales, carries the risk of order fluctuations due to economic downturns. The Group aims to mitigate these risks through a diversified client base spanning private companies, condominium management associations, and government offices, as well as business expansion into the PPP field and the energy conservation and environmental fields.

In the PFI long-term repair business, which accounts for 3% of net sales, it is necessary to formulate reasonable long-term repair plans, and if repairs exceed expectations, this could adversely affect business performance. Given the nature of long-term contracts, there is an inherent risk of cost overruns if the assumptions underlying the plan formulation change. The Group aims to diversify risk across the entire business through diversification of its client base and expansion into the PPP field.

The building maintenance business is subject to regulation under numerous relevant laws, including the Construction Business Act, the Security Business Act, the Fire Service Act, and the Act on Advancement of Proper Management of Condominiums, and if a legal violation or leakage of personal information occurs, social sanctions such as business suspension, bidding disqualification, or contract termination by clients could have a wide-ranging impact on business performance. The Group aims to ensure legal compliance through the establishment of internal control systems, compliance frameworks, and risk management systems, and has obtained ISMS certification to ensure the proper management of personal information.

If an unforeseen accident at a facility where operations are conducted causes damage to a client, and although the Group has liability insurance coverage, if damages exceed the coverage limit, this could adversely affect business performance. Given the labor-intensive nature of the business, in which employees are stationed at numerous facilities, the risk of accidents is widely dispersed. The Group addresses this through thorough safety management and accident prevention, as well as by maintaining liability insurance coverage.

If confidential information or personal information is leaked, or a system outage occurs due to internal or external factors such as the loss or theft of personal computers or smart devices, computer virus infection, or cyberterrorism, this could adversely affect business performance. Information systems are utilized to perform work at client facilities, and information leaks could directly affect the trust relationship with clients. The Group has implemented multi-layered countermeasures, including antivirus software, behavior monitoring via EDR, firewalls, targeted phishing email training, and cyber insurance coverage.

The Group owns real estate for lease and other business-use assets, and if profitability declines over the medium to long term or real estate market prices decline significantly, this could adversely affect business performance through the recognition of impairment losses. Since the previous consolidated fiscal year, customer-related assets and goodwill arising from the acquisition of subsidiary shares have been recorded on the consolidated balance sheet, and the amount recorded may increase as M&A activity expands going forward. There is also a risk of impairment loss recognition if the profitability of the acquired subsidiaries declines over the medium to long term.

As the Group expands its M&A activities going forward, the amount of goodwill and customer-related assets recorded may increase, and if the profitability of acquired subsidiaries falls below expectations, the risk of impairment loss recognition will increase. There are also inherent operational risks in the management and integration processes of group companies. The Group has established a Risk Management Committee to identify and evaluate risks and develop countermeasures, along with a system for regular reporting to the Board of Directors.