Risk Factors

The following items are major risks related to the business activities of the Benesse Group that could potentially have a significant effect on the judgment of investors. Recognizing the possibility that these risks may materialize, the Benesse Group considers and implements concrete measures with the aim of avoiding such risks and minimizing the impact on the Group's results and financial position in the event that they should occur. The following discussion of risk factors contains forward-looking statements, and reflects management's judgment as of June 25, 2018, the submission date of the Group's securities report (yukashoken hokokusho).

1. Trouble Arising from Information Security and Information Systems

The Group manages a variety of information on its information systems required for providing products and services and for sales activities. This includes personal information of existing and potential customers, such as their names, genders, birthdates, addresses, telephone numbers, and so forth, in addition to other information required for business activities.

Moreover, the Group provides educational services utilizing original tablet PCs and other digital devices, as well as language lessons and other services using the Internet.

The Group takes information system security measures in managing this information to completely prevent leaks caused by unauthorized external access such as cyber attack to the system or leaks by internal personnel. The Group also takes the necessary measures to ensure stable operation of its information systems, such as backing up information and appropriate server maintenance.

In response to the leak of customers' personal information that came to light in 2014, the Group carried out rigorous fact-finding surveys to identify the cause and made every effort to control the spread of damage, while implementing countermeasures to prevent leaks, which it has continued to improve.

Nevertheless, if another leak of customers' personal information should occur, such an incident would impair the Group's trustworthiness and brand value. This could also affect the Group's results and financial position.

2. Effect on Core Business

In the Group's mainstay domestic education business, the Group conducts member-based correspondence course businesses, which had an enrollment of 2.57 million members as of April 2018, such as Shinkenzemi and Kodomo Challenge for students aged from preschool to senior high school. The Group also operates the school and teacher support business and the cram and prep school businesss, and English language class business.

The largest post-war reform of Japan's education system, from elementary and secondary education to post-secondary education, is underway. It encompasses new kindergarten education guidelines and daycare centre guidelines, transitional measures for new teaching guidelines starting from elementary school in the year 2020, and a trial run of new university entrance exams. The Benesse Group is using this as an opportunity to increase market share by continuously collecting information related to education system reform as well as enhancing its correspondence course business, cram and prep school business, English language class business, and school and teacher support business in response to changes in customers' attitudes and requirements. Moreover, the Group also aims to further expand its education business in China and other East Asian and Southeast Asian countries where high growth is anticipated. The Group is also responding to population trends by expanding the nursing care and childcare business, centering on operation of nursing homes for the elderly.

However, following the education system reform, if the environment were to change rapidly and at a scale exceeding the Group's measures in the domestic education business, or if the market entry of companies in other industries were to result in price destruction and a significant change in the competition environment, this could affect the Group's results and financial position.

3. Nursing Care Insurance

The Group's Nursing Care business mainly involves operation of specified facilities. Competition for housing for the elderly is intensifying as a result of entry into the market by major competitors and other industries, soaring construction costs, and a shortage of sites. Furthermore, the shortage of caregivers is becoming more serious. Japan's social security budget is strained, and difficult financial conditions are expected to persist for nursing care insurance. The group has created a business model with a low degree of reliance on nursing care insurance revenue. Moreover, we are launching and expanding peripheral businesses such as staffing and recruitment, nursing care consultation, and food delivery services for seniors to develop businesses which are less susceptible to the impact of system changes.

Although FY2018 nursing care insurance reimbursement revisions were somewhat positive, if future revisions of related laws and reimbursements applicable to nursing care are disadvantageous to the Group's business, the Group's results and financial position could be adversely affected.

4. Damage from Natural Disasters

To ensure its readiness to cope with major earthquakes and other natural disasters, the Benesse Group is implementing business continuity measures. This includes putting in place a system for gathering data concerning damage suffered by Group companies and enhancement of key information systems and distribution bases in the domestic education business.

Nevertheless, in the event of a catastrophic natural disaster, the Benesse Group's results and financial position could be affected by the interruption of sales activities in the disaster-stricken area; the destruction of Group facilities and other property; subsequent turmoil related to transportation, communications, distribution, and other social infrastructure; and damage to outsourcers. Furthermore, most of the Benesse Group's operating companies are headquartered in Tokyo, which could adversely affect Group operations should a catastrophic event strike the city.

5. Accounting for Asset Impairment

In the event of a dramatic decline in the profitability of the Company or its individual Group companies, it is likely that impairment losses will need to be posted with respect to land, buildings, goodwill, or other assets held. The posting of such losses could affect the Group's results and financial position.

6. Overseas Procurement and Business

The Benesse Group oversees manufacturing of and procures educational tools and toys mainly in China. Elsewhere, subsidiary Berlitz Corporation operates over 480 schools in more than 70 countries and regions worldwide. The Benesse Group also operates a business primarily providing preschool education services in China and other East Asian countries. As of April 2018, the business in China had 1,150 thousand members, the business in Taiwan had 120 thousand members. In an attempt to mitigate risk, the Benesse Group actively collects data concerning legal and regulatory revisions and policy trends, particularly in East Asian countries, and ascertains the status of civil conflicts in which it could inadvertently become involved. Similarly, the Group hedges against volatility in foreign currency exchange rates, and seeks to identify new procurement sources. Nevertheless, natural disasters, cultural and religious tension, political or economic instability, or the new establishment or amendment of laws or regulations in any of these countries and regions could have an adverse impact on the Benesse Group's results and financial position.

7. Distribution

The Benesse Group relies on postal services and the distribution services of other external parties for the production and delivery of its Shinkenzemi and Kodomo Challenge educational materials and direct mailings. The Group is currently promoting further digitalization of its educational materials and is developing marketing approaches beyond direct mail. Nevertheless, the Group's results and financial position may be affected by an increase in production and distribution costs.

Last updated : 2018/06/28