Risk Management and Countermeasures

Risk Management and Countermeasures

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Risk Management and Countermeasures

Risks that have the potential to significantly affect the business performance, financial standing, cash flow, stock price, etc. (hereinafter "performance, etc.") of the Sinanen Holdings Group as well as investor judgment are detailed below.

Forward-looking statements herein are based on our judgment as of March 31, 2023.

The Company Group's policy is to work to avoid materialization of these risks and to address them should they materialize.

A. Risks specific to the energy business, one of the main businesses of the Group

(1)Changes in the environment surrounding the energy industry

This consolidated fiscal year, the business environment surrounding the Group in the domestic energy industry is changing significantly, including approval of the 6th Basic Energy Plan for achieving carbon neutrality by 2050 by the Japanese cabinet in October 2021. In addition, the price of crude oil and propane contract prices had been high from the beginning of the year, and with increased concern over a supply shortage arising from the manifestation of geopolitical risks, such as the war in Ukraine, prices trended at their highest levels since 2014. On the other hand, domestic demand for oil and gas continues to fall overall due to the progression of birthrate decline and population aging, the spread of energy-saving devices, lifestyle changes, and other such factors.

In the oil and gas industry, the price of crude oil is significantly affected by OPEC-plus production volumes and the situation in the Middle East on the supply side and by the economic situation in the United States, China, India, and other major consumer countries on the demand side. In addition, increased environmental awareness and public and private sector initiatives to bring about a decarbonized society in Japan are expected to result in a greater focus on conserving energy. These fluctuations in crude oil prices and changes in the domestic market and energy environment could have a significant impact on the Group's performance, etc.

The Group cannot directly address fluctuations in crude oil prices or energy conservation among consumers. As such, in the Retail/Wholesale Energy & Related Business (BtoC Business), we are working to reduce the risk of environmental changes in the industry by expanding housing equipment sales and the home & life services business such as home renovations. In the Energy Solutions Business (BtoB Business), we are moving into non-oil and gas businesses such as solar power generation facility maintenance and expanding the renewable energy business in Japan and overseas. We are also actively investing in non-energy businesses such as the bike-sharing business.

(2)Risks posed by fluctuating temperatures

The Group's main businesses are the Retail/Wholesale Energy & Related Business (BtoC Business) and the Energy Solutions Business (BtoB Business). They account for 94.3% of net sales for all segments combined. The energy business is affected primarily by fluctuations in temperature. In particular, kerosene for consumers, which is the main product in the Petroleum Division, sees peak demand in the winter, and there is a significant disparity in consumption compared to in the summer. For this reason, if kerosene consumption decreases in the winter due to warmer temperatures, it will throw off the sales plan and also impact prices. As such, fluctuations in temperature could have a significant impact on the Group's sales results, performance, etc.

In the Retail/Wholesale Energy & Related Business (BtoC Business) and the Energy Solutions Business (BtoB Business), we are working to reduce the risk posed by temperature fluctuations by expanding sales of electricity, which sees increased demand in the summer, rather than relying only on oil and gas, which sees varying demand depending on the temperature in the winter. In addition, in the Energy Solutions Business (BtoB Business), we are working to shift our existing petroleum sales facilities to Oil Square, which has the improved capacity to ship light oil, which is expected to be in demand throughout the year as fuel for construction machinery and trucks, etc.

Under the background of soaring prices for fuel such as LNG around the world, the supply and demand environment for electricity continues to change dramatically. Especially in the summer and winter demand months, sharp increases in electricity wholesale prices can have a significant impact on performance, but we are working to reduce risk by diversifying our procurement.

(3)Intensification of competition in the energy industry

Trans-industrial competition, including electricity, oil, city gas, and LP gas, is intensifying in the energy industry to which we belong due to factors such as deregulation, environmental problems, and the declining birth rate coupled with an aging society. We expect this trend to continue in the future as ecology-related product lines such as all-electric, solar power generation, and ENE FARM are developed and promoted.

Competition is also intensifying in the LP gas industry to acquire customers, and prices are going down as a result. Competition remains fierce in the oil industry with competition between gas stations for survival, route sales of kerosene, and competition between sales channels, including home improvement centers. In addition to such intensifying competition between energy types and between industry competitors, there is heightened awareness of global decarbonization and SDGs, and efforts to achieve carbon neutrality by 2050 are picking up steam in Japan. Demand will rise significantly for us to take responsible action as a general energy service group, and delays responding to such matters may have a significant impact on the performance, etc. of the Group.

In the Energy Solutions Business (BtoB Business), we offer a substantially 100% renewable energy electricity rate plan. In the Retail/Wholesale Energy & Related Business (BtoC Business) we are working to maintain and expand our business foundation through acquisition of business rights of LP gas and M&A with competitors. In addition, we are working to reduce the risk of intensified competition by encouraging customer loyalty through package sales of oil, gas, and electric energy.

(4)Risks related to security of petroleum and LP gas facilities and environmental pollution

The Group believes in prioritizing safety above all else. As such, we regularly conduct strict safety audits on equipment related to oil and LP gas sales based on relevant laws and internal regulations. At petroleum facilities, we carry out comprehensive risk management that includes risk financing in collaboration with Sompo Japan Insurance Inc. to prevent environmental pollution accidents arising from oil leaks. However, these measures do not eliminate the possibility of accidents involving oil or LP gas leaks or the resulting losses.

In the Retail/Wholesale Energy & Related Business (BtoC Business), in addition to statutory inspections, we conduct Himawari Inspections on gas equipment in detached homes as voluntary safety inspections at the request of customers.

In addition, in the Energy Solutions Business (BtoB Business), we work to ensure the safety of equipment and reduce risks related to environmental pollution by conducting daily leak checks for early detection of any oil leaks.

B. General risks in the Group's businesses

(1)Credit risk related to customers

The Group is engaged in both wholesale and retail sales. Wholesale sales are mostly on credit, and as of March 31, 2023, the balance of trade receivables such as notes and accounts receivable was 36.4 billion yen.

We are working to expedite collection of these trade receivables by shortening payment maturities and adopting a cash prepayment system for some, taking into account the customer's financial situation. In addition, we engage in thorough credit management using a computer system. Further, the Group records sufficient allowances to prepare for loss from bad debts, but in the event of unforeseen circumstances, there could be difficulty recovering credits, which could impact the Group's performance, etc.

The Group sets credit limits every year based on the database of a credit research company to ensure thorough credit management. We work to reduce customer credit risk by deciding on increases to credit limits on a case-by-case basis.

(2)Risks associated with exchange rate fluctuation

The Group engages primarily in yen-denominated transactions in Japan. However, some transactions are done in foreign currencies, such as the petroleum product imports and exports of Sinanen Co., Ltd., the bicycle imports of Sinanen Bike Co., Ltd., and the antimicrobial exports of Sinanen Zeomic Co., Ltd. For this reason, the Group's performance could be impacted by foreign currency exchange rate fluctuations. The Group conducts hedge transactions to mitigate the risk of foreign currency exchange rate fluctuations, but these risks may not be entirely avoidable.

In addition, we mostly procure our main products, petroleum and LP gas, from domestic distributors, and there is a risk that the import price of oil and LP gas could indirectly impact the Group's purchase price due to exchange rate fluctuations.

In foreign exchange transactions, we set foreign exchange contracts and assumed exchange rates and are working to reduce risk arising from foreign exchange rate fluctuations through hedge transactions.

(3)Risks related to valuation of fixed assets

The Group owns land to be used for petroleum wholesale, LP gas refilling, and gas station facilities, mostly as assets pertaining to the energy business. As of March 31, 2023, the book balance of property, plant and equipment was 28.3 billion yen. Up to now, the Group has worked on selling off inefficient assets to strengthen its financial standing.

Capital expenditures are executed after carefully considering the recoverability, and the recoverable amount is regularly evaluated. As a result, there is a risk of impairment loss.

In the 2nd Medium-Term Management Plan, the Group set forth improvement of capital efficiency as a qualitative target. We are working to reduce risks related to the valuation of fixed assets by attempting to improve the efficiency of our business, increase the profit margin, and effectively utilize low-operating assets to obtain revenue.

(4)Risks related to investments, etc.

To strengthen the management foundation, the Group may establish subsidiaries or affiliates or engage in capital alliances with other companies. When investing, the Group considers the investment risk in making the decision. The investment value is then checked regularly to determine recoverability. At that time, the irrecoverable amount is estimated if necessary, and an allowance is recorded. However, if the investee's business performance or financial standing worsens more than anticipated, it could impact the Group's performance.

The Company group holds shares long term for the purpose of strengthening and facilitating business relationships and alliances. Impairment accounting has been applied to some of these shares, but we believe there is sufficient investment value from subsequent business results of the investee, their financial standing, and stock price movement. However, in the event of unforeseen circumstances in the Japanese economy or the situation overseas, a valuation loss from a drop in stock price could impact the Group's performance.

When it comes to business investment and investments such as the acquisition of shares, the Group has established a Preliminary Review Committee to evaluate appropriateness and profitability, etc. along with a Management Meeting that serves as an advisory body for decision-making by the President and CEO. We work to reduce risks related to investments by referring to the reviews conducted by these bodies when making the final decision. We also work to reduce risk by continuing to regularly monitor investments, and if the pre-determined criteria for discussing withdrawal are met, instructions are given to either make improvements or withdraw/sell.

(5)Risks related to entering new businesses

In the Energy Solutions Business (BtoB business), as a new business, Sinagy Revo Co., Ltd., which operates a new micro wind turbine-related business, was merged into Sinanen Co., Ltd. as of April 1, 2023. We are continuing with field tests while considering the sale of held patents in this business. Furthermore, for the large-scale onshore wind power generation business in South Korea, we have recorded a share of loss of entities accounted for using equity method and impairment loss due to stricter regulations on the scope of installing power generation facilities accompanying the revision of city planning ordinance for proposed construction sites in South Korea. The Company will continue to negotiate with all parties concerned, including the possibility of selling this business.

In the Non-energy Business, bicycle sharing business operator Sinanen Mobility Plus Co., Ltd. is aiming to contribute to the resolution of issues concerning local mobility, and has developed bicycle sharing stations by making progress in agreements with local governments mainly in the Tokyo metropolitan area while actively partnering with major convenience store chains, railway operators, real estate agents and similar organizations. As of March 31, 2023, the number of stations has increased to 3,100 and the number of bicycles to over 10,000, making the company one of the largest bicycle sharing business operators in Japan. We will continue to work on developing stations to expand the scale of the business. For the closed-type bicycle sharing system, which limits the number of users, we have introduced 50 bicycles to promote tourism in the Yamanashi area, and this service began at the end of March, 2023.

In this way, the Group is actively working to uncover and cultivate new revenue streams, however, changes in the business environment may result in new businesses not being as profitable as expected, and the performance of these new businesses may have an impact on the performance, etc., of the Group in the future.

In relation to the entering new businesses as well, the Group works to reduce risks by going through a process similar to that of risks related to investment with a Preliminary Review Committee and Management Meeting and conducting feasibility studies beforehand. We also aim to reduce risks by monitoring the businesses just as we do with risks related to investment.

(6) Risks related to expanding operations overseas

In the Energy Solutions Business (BtoB Business), the Group has been participating in a large-scale wind power generation project in South Korea with an output equivalent to 90 MW since fiscal 2020. The situation for this business is as described in "(5) Risks related to entering new businesses."

In addition, we are making use of permits obtained from domestic and overseas bodies, including the U.S. Environmental Protection Agency (EPA) and the U.S. Food and Drug Administration (FDA), for Zeomic, the antimicrobial manufactured by Sinanen Zeomic Co., Ltd., and we are marketing it in the United States, Europe, China, South Korea, Southeast Asia, and other countries. In Europe, we are working to obtain EU-BPR (European Union Biocidal Product Regulation) approval through the collection of regulatory information and the exchanging of information with the relevant authorities.

In this manner, the Group is engaged in business overseas, and this entails risks such as revisions to trade laws and regulations, taxes, and other policies, political or economic changes, terrorism, war, and social disorder arising from other such factors.

When setting up operations overseas, the Group works to reduce related risks by investigating and evaluating political socioeconomic trends, legal systems, (preferential) tax systems, etc. beforehand.

(7)Risks related to product safety and quality

The Group is engaged in manufacturing and sales in the antimicrobial business, the environment and recycling business, the bicycle and other imports business, and others. Since launching production, we have been careful with quality control, and we enrolled in product liability insurance following the enactment of the Product Liability Act in order to reduce the burden of costs arising from accidents. In addition, based on the Consumer Product Safety Act, we work to thoroughly familiarize users with how to safely use our products and strengthen our response to accidents.

However, a large-scale product recall or an unexpected accident that subjects the Group to product liability in the future could impact the Group's performance, etc.

Sinanen Zeomic Co., Ltd., which is engaged in the antimicrobial business, acquired ISO 9001 certification in April 2002 and is strengthening its internal quality audit system. In addition, each operating company engaged in the manufacture and sale of products works to reduce risks related to product quality and safety by establishing departments in charge of quality control.

(8)Handling of personal information

The Group holds personal information such as data on consumers of oil, gas, and electricity, etc., in the Energy Business, and data on customers who have purchased products and services, etc., in the Non-energy Business. To protect this personal information, we have established a Risk Management and Compliance Committee, carry out educational programs for employees on protecting personal information, have introduced an information security system that includes encryption, and have established various rules.

However, were personal information to be leaked to the outside for some reason, the Group's performance, etc. could be impacted by a decrease in net sales resulting from loss of trust in the Group.

The Group has established a Privacy Policy and rules for protecting personal information to reduce risks related to the handling of personal information. Group company Minos Co., Ltd., which is engaged in the systems business, is Privacy Mark-certified and has obtained ISO/IEC 27001:2013 and JIS Q 27001:2014 certification in relation to its information security management system (ISMS).

(9)Risks related to natural and other disasters

The Group's assets include facilities used in the energy business, such as petroleum wholesale facilities, LP gas refilling facilities, and gas station facilities, and manufacturing facilities for the antimicrobial business, warehouses and stores for the bicycle business (including inventory), and bicycles and station facilities for the bike sharing business. If these facilities were to be damaged by a large-scale typhoon, earthquake, tsunami, flood, or other natural disaster, the Group's performance, etc. could be impacted as a result of not being able to engage in normal business activities.

The Group has installed emergency power supplies at core facilities, such as refilling facilities, to ensure business continuity and prepare for natural disasters and other emergency situations.

In addition, we are working to reduce risks related to natural disasters by adopting seismic isolation, seismic resistance, and seismic damping structures in our buildings.

(10)Risks related to COVID-19

The impact of COVID-19 on the Group during the fiscal year under review varies by business, with issues such as shortages of supplies and delays in delivery having been faced, but overall, there was no material impact. The Group's main business is the supply of energy necessary for daily life, so we believe that it is unlikely for consumption to fluctuate significantly and expect the impact to remain limited.