Business Risks
The main risks that could impact the Group’s operating results, share prices, financial status, etc., are listed below. Statements concerning future matters are based on the judgements of the ES-CON JAPAN Group as of the end of the fiscal year ended December 2022.
1) Impacts of Changes in Economic Conditions, Interest Rate Trends, Real Estate Market Conditions, Etc.
In the real estate sales business, we selectively acquire good-quality land for business, develop it making the best use of its locational characteristics, and provide attractive products including advantageous pricing. Upon the sale of properties, we take into account various factors in individual business plans by property and carefully consider price range. However, when sale at the price determined in the business plan fails to progress as planned due to worsening supply-demand balance caused by rising construction costs, economic trends, economic conditions, trends in interest rates, tax systems and land prices and other factors, or when delay in delivery or unexpected cost burden arises due to various factors, including unexpected defects such as underground obstacles, disorder in construction at the construction stage, the business performance of the ES-CON JAPAN Group may be impacted.
Likewise, in the real estate leasing business, depending on the effects of economic trends or conditions, or moving out of main tenants or usage situations at commercial facilities, rents or occupancy rates of assets owned may decline, which can have an impact on the Group’s operating results.
Amid periodic recurrent waves of COVID-19, whereas social and economic activities have been normalizing steadily, if the infectious disease spreads further, the economic environment is expected to take a sharp turn for the worse. In such case, investor appetite may be dampened, leasing of commercial facilities by new tenants may fall behind, sales in the columbarium business may weaken, and loss on valuation of inventory or impairment loss associated with real estate we own may be recorded, which could have a material impact on the Group’s financial position, operating results, or cash flows.
2) Legal Restrictions, Etc.
In addition to the restrictions of the Companies Act and the Financial Instruments and Exchange Act, the real estate industry to which the ES-CON Japan Group belongs is subject to the restrictions of the National Land Use Planning Act, Real Estate Brokerage Act, Building Standards Act, Act on Maintenance of Sanitation in Buildings, Act on Specified Joint Real Estate Ventures, Act on Securitization of Assets, Trust Business Act, Money Lending Business Act, and Act on Prevention of Transfer of Criminal Proceeds, etc.
Furthermore, the ES-CON Japan Group conducts real estate sales and related business as a real estate company licensed under the Real Estate Brokerage Act and the Act on Advancement of Proper Condominium Management, etc., but the abolition of these or creation of new legal restrictions could affect the Group’s business performance.
3) Dependence on Interest-Bearing Liabilities
The Group procures funds for land acquisition, etc. related to its real estate business primarily through borrowings from financial institutions involved in project finance. In our condominium sale business, it takes time to get from land acquisition to commercialization or sale, so the ratio of interest-bearing liabilities to total assets is relatively high. We are committed to building and maintaining good business relationships with financial institutions, including the main banks, and ensuring an expeditious financing environment after becoming a consolidated subsidiary of Chubu Electric Power Company, but if financing ends up being insufficient or unsatisfactory due to higher interest rates or a significant deterioration of the financial environment, it could affect the Group’s business performance and financial position.
4) Human Resources
As opposed to vertical integration, the Group seeks to build an efficient and agile organizational structure that is closely linked horizontally so that it can flexibly promote business and produce the greatest value and performance with the smallest number of people. Our real estate-related business requires diverse expertise, making personnel an extremely important business resource. In order to conduct reliable business and grow as a Group, it is indispensable that we strive to share expertise and information and continue to improve employees’ abilities as well as secure highly specialized personnel and employ, nurture, and educate executives and young employees who will be the leaders of the next generation. However, failing to secure or nurture the human resources sought by the Group or losing outstanding personnel could affect the Group’s business performance and future business development.
5) Personal Information Leakage and Information System Risks
As a business operator handling personal information under the Act on the Protection of Personal Information, the Group receives personal information of customers and clients in each of its businesses when developing in a multidimensional way. This includes customers who purchase or consider purchasing condominiums or detached houses through the condominium sales business or reside in rental apartments as well as customers who purchase or consider purchasing permanent use rights in the columbarium business or are looking for jobs in the employment placement business. The Group has set rules for the handling of personal information (basic policy, regulations, and manual) to establish an internal system and keeps personal data files under strict safekeeping with monitoring software and restricts access authority on the system in a bid to enhance the entire system as a whole to also manage information other than personal information.
ES-CON JAPAN outsources part of the sale of condominiums to sales companies, and these companies are required to use part of ES-CON JAPAN’s management system to prevent customer information from being leaked to third parties and handle customer information within the scope to ensure confidentiality.
As malware (Emotet)(*1) infection spreads rapidly in Japan, the Group’s information system has been exposed to cybersecurity threats, including cyberattacks or fraudulent access, in recent months. To minimize system risk, ES-CON JAPAN has revamped its security environment, including enhancing employee training and conducting security training programs periodically. Should personal information be leaked due to unforeseen circumstances, however, the Group’s sales could fall due to its ruined credibility or compensation for damages may arise, and such may affect the Group’s business performance.
*1 Malware is a general term for malicious software, combining these two words. Emotet is malware that downloads a variety of malicious software in addition to stealing information. It is found to be attached to suspicious emails by malicious people, which accelerates the spread of infection.
6) Important Litigation
Regarding the risk of becoming subject to litigation, the Risk Management Committee consisting of directors and risk management members from each division monitors risks and shares information across the Group. Important litigation could affect the Group’s business performance and financial condition.
7) Risks Related to Climate Change
A society with increasing climate damage is assumed to be seen in the future, and the increasing risk on business continuity caused by climate change may have an impact on ES-CON JAPAN’s management results and financial position.
In June 2022, the Company endorsed the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, which assess the financial impact of risks and opportunities from climate change on management and encourage companies to make disclosures about it. We disclose information on the impact from climate change on our business based on TCFD’s framework.
The information disclosed based on TCFD recommendations is provided on ES-CON JAPAN’s corporate website.
8) Legal Violation Risks
Should an employee or officer of the Group or Company violate any relevant laws as the Group conducts business (including the Companies Act, Real Estate Brokerage Act, Construction Industry Act, Licensed Architect Act, Financial Instruments and Exchange Act, Act on Investment Trusts and Investment Corporations, Act on the Protection of Personal Information, Money Lending Business Act, Act on Advancement of Proper Condominium Management, Labor Standards Act, and Employment Security Act), administrative disposition may be imposed by the authorities concerned. In this case, due to the Group’s ruined social credibility and compensation for damages, its financial position, business performance, and reputation in the market may be affected.
9) Risks Related to M&As
The Group is to promote sustainable growth by seeking expansion of business domains and changing the revenue structure through implementation of strategic M&As. However, there are no guarantees that appropriate candidate target companies that match the Group’s business strategies will be found or that M&As can be implemented with the candidate target companies under appropriate conditions. ES-CON JAPAN fully takes into account the financial status and business details of the target companies before implementing the M&As, but in case the initially assumed business projects do not progress as planned, it could impact the Group’s operating results and financial status through impairment of goodwill, etc.