HEIWA PAPER CO.,LTD.

In the domestic market, which accounts for approximately 95% of net sales, the ongoing digitalization of printing and communication paper caused domestic paper demand to decline 4.3% year on year in 2025, with further contraction expected in 2026. The shift to online media in the publishing and advertising industries, the declining birthrate and aging population, and consumption stagnation due to soaring prices are collectively pushing down demand. Although increased inbound demand and demand for plastic-free alternatives may be expected for premium printing paper and similar products in which the Company excels, if the contraction in demand proceeds more rapidly than anticipated, it could materially affect the Company's business results and financial position.

As of March 31, 2026, merchandise inventory stood at ¥3,600 million, accounting for approximately 21% of total assets. While this supports the Company's strength in supplying a wide variety of products in small lots, it also carries the risk of slow-moving inventory. Against the backdrop of heightened military tensions between the U.S. and Israel and Iran, including the de facto closure of the Strait of Hormuz, the risk of excessive inventory reduction has also become apparent. If slow-moving inventory increases more than expected, revaluation or impairment losses may occur, which could affect the Company's business results and financial position.

In fiscal 2025, procurement costs rose due to price revisions by paper manufacturers, and further increases in logistics costs are expected due to vehicle and driver shortages in the logistics industry as well as rising fuel costs stemming from crude oil price and exchange rate fluctuations. If the Company is unable to pass on cost increases to customers or fails to maintain its conventional service levels, this could lead to decreased customer satisfaction, affecting business results and financial position. There is also a risk that procurement costs may increase due to discontinuation or renewal of handled products resulting from equipment shutdowns at paper manufacturers.

The prolonged situations in Ukraine and the Middle East, as well as heightened military tensions between the U.S. and Israel and Iran, including the de facto blockade of the Strait of Hormuz, may cause raw material and fuel price surges, sharp exchange rate fluctuations, and increased logistics costs beyond the Company's expectations. The consolidated subsidiary Heiwa Paper (Hong Kong) Co., Ltd. handles specialty paper for the U.S. market and is thus indirectly affected by shifts in U.S. trade policy. In addition, heightened geopolitical risk in the areas surrounding Hong Kong (including Taiwan) may cause delays or disruptions in receivables collection and business execution.

Working capital is basically funded through internal funds and short-term borrowings from financial institutions, but the Company may pursue long-term borrowings or bond issuances for future investments, including M&A. There is a risk that fundraising on desired terms could become difficult due to an economic downturn, deterioration of financial markets, rising interest rates, or a decline in creditworthiness. Borrowings and bonds may be subject to covenants, and if financial deterioration leads to a covenant breach, the Company could be required to immediately repay outstanding debt in full, face higher interest rates or fees, or be required to provide new collateral.

Although the Company requests strict quality control from suppliers and manufacturers, there remains a possibility that large-scale recalls or product defects and quality issues may occur due to unforeseen circumstances. If a large-scale recall occurs, substantial handling costs would be incurred and the credibility of the products sold would be significantly affected, potentially leading to reduced demand that affects business results and financial position.

Although the Company maintains geographic diversification with seven locations nationwide and a logistics base in Fuji City, Shizuoka Prefecture, if logistics infrastructure is damaged by large-scale earthquakes, typhoons, heavy rain, tsunamis, or other natural disasters, unknown infectious diseases, terrorism, or similar events, this could result in recovery costs, lost sales opportunities, and product damage. If an IT system failure occurs, this could lead to reduced customer satisfaction due to difficulty providing services and significant damage to the Company's social credibility, as well as secondary effects such as disruption to customers' businesses and reduced consumer activity.

In the course of conducting business activities, there is a risk of litigation or other legal proceedings being brought regarding product or service defects, labor management, leakage of personal or confidential information, intellectual property infringement, and similar matters. Legal proceedings can be lengthy and costly, with outcomes that are difficult to predict. If an unfavorable ruling is made against the Group, or if the Group becomes subject to investigation or sanction by authorities, this could result in substantial expenditures and disruption to business activities, affecting business results and financial position.

In the publishing, advertising, and other industries, the shift of information transmission and services from paper media to online formats is progressing, and media diversification driven by digitalization and advancing IT technology is causing a long-term structural decline in paper demand. A further decline in printing and communication paper is expected in 2026, and this contraction in demand may also affect the specialty paper segment, including premium printing paper, in which the Company excels, requiring ongoing responses such as discontinuation or renewal of handled products.

The consolidated subsidiary Heiwa Paper (Hong Kong) Co., Ltd. is exposed to country risks such as changes in Hong Kong's political, economic, and social conditions, and changes in various laws and regulations, including the risk of nationalization or suspension of fund remittances. If geopolitical risk increases in areas surrounding Hong Kong (including Taiwan), this may cause delays or disruptions in receivables collection and business execution, and the effects of U.S. trade policy through the handling of specialty paper for the U.S. market may also indirectly affect the Group's business results and financial position.