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Business Risks

There are several risks relating to the Seibu group's, or our businesses that may have a material influence on investor decisions, mainly as described below. Fully recognizing these risks, we are making its best efforts to prevent any occurrence of such risks or cope with such risks if any occurred. Furthermore, the following descriptions include even matters that are not deemed to be risks from the standpoint of active disclosures of information. In addition, the future matters included in the following descriptions are generally based on our evaluations as of March 31, 2017.

(i) Risks Related to Economic Conditions

We conduct its business mainly in Japan and are thus affected by various aspects of the country's general domestic economic conditions. Economic factors, such as lower consumer spending, a deteriorating employment situation, stagnating corporate activities, decreasing demand, lower levels of private and public construction demand, a downturn in the real estate market, downward overseas economies, and geopolitical risks, etc. could have a negative impact on our results of operations and financial condition.

(ii) Risks Related to Legal Regulations

The businesses we engage in are subject to various laws and regulations.

The urban transportation and regional business is subject to the Railway Business Act, the Road Transportation Act and other related laws and regulations. In our railway operations, we must obtain permits from the Minister of Land, Infrastructure, Transport and Tourism for each railway line and each type of business that we engage in pursuant to the Railway Business Act (Article 3 of the Railway Business Act) and furthermore, we need the approval of such Minister in respect of setting or changing the maximum chargeable fares (Article 16 of the Railway Business Act). Our fares are currently set at the maximum chargeable fares and any increases in such fares must be approved by the Minister. As a result, if business costs increase or if any other similar events occur, such additional costs may not be absorbed by the fares at a sufficient time or to a sufficient extent.

In respect of the railway operations referred to above, the permits and approvals that our group currently possesses have no fixed term. Any violations of the Railway Business Act, orders by the Minister under the Railway Business Act, administrative actions under them or violations of the conditions in the various permits or approvals from the Minister are subject to business suspension orders or withdrawal of such permits by such Minister (Article 30 of the Railway Business Act). At present, to the best of our group's knowledge, there are no facts that may fall under such violations and no events have occurred that may obstruct the continuance of our railway operations. However, any occurrence of such facts or events resulting in an order to suspend our business or a withdrawal of any permits from the Minister may have a significant impact on our group's business activities. The bus and taxi operations are also subject to regulations and are to be conducted in accordance with the permission of the general passenger automobile transportation business permits under the Road Transportation Act (Article 4 of the Road Transportation Act).

In addition, our railway operations may require investments for increased requirements related to safety, access for the disabled, energy conservation and environmental matters.

Our hotel and leisure business is subject to laws such as the Hotel Business Act and the Food Sanitation Act. Among other things, the hotel business is to be conducted in accordance with the business operation permits under the Hotel Business Act (Article 3 of the Hotel Business Act).

Our real estate business is subject to extensive national and local real estate and construction-related regulations, including the Building Lots and Buildings Transaction Business Act, the City Planning Act, the Building Standards Act and the Soil Contamination Countermeasures Act. For example, if any hazardous or toxic substances, including asbestos, are discovered on any of our properties, those properties could fall in value, and we might incur substantial costs due to being required to remediate the underlying hazard and discharge the related environmental liabilities. Furthermore, any changes in such applicable laws and regulations may require us to bear new obligations or cost increases or may regulate our rights relating to our real properties, which could result in deterioration of the value of such properties, limitations on our business scope or a significant amount of reconsideration of our development plans.

In addition, our construction business is subject to the Construction Industry Act, the Building Standard Act and other related laws and regulations.

Changes in applicable laws and regulations or additional regulations could result in increased compliance costs and a failure to follow any regulations could result in restrictions on our group's activities or may have other adverse effects on our results of operations and financial condition.

In addition, changes to accounting standards and tax laws and policies may negatively impact our results of operations and financial condition.

(iii) Risks Related to Natural Disasters and Accidents

We recognize that “safety and security” are top priority issues as we operate our businesses and take the utmost care with respect to safety management. Namely, in the urban transportation and regional business, we focus on enhanced safety and maintain a safety transportation management system and in the hotel and leisure business, take the measures to ensure food security and implement safety measures at our facilities. However, a large-scale accident, natural disasters such as earthquakes and typhoons, or an act of terrorism or a similar incident, may require additional costs, which could negatively impact on our results of operations and financial condition.

In addition, typhoons or abnormal weather, such as cold summers or snowfall conditions, may decrease customers in our hotel and leisure business, and in the event any infectious diseases become epidemic, such as a super-flu, where treatment measures have not been established, it might trigger the closure of a part of our operations or may reduce the willingness of people to go out or engage in leisure activities in our urban transportation and regional business and hotel and leisure business, which may result in a decrease of operating revenues or additional costs for countermeasures, and could negatively impact on our results of operations and financial condition.

(iv) Risks Related to Declining and Aging Population

The businesses operated by the Seibu group, such as the urban transportation and regional business and hotel and leisure business, are closely related to the daily lives of customers. Therefore, we are concerned about a decline in passengers in connection with the railway operations and bus operations and a decline in leisure facility users due to a decline in the student and working population caused by a decreasing birthrate and aging population or a population decline in the present or future. Especially in the railway operations, the operating resources are concentrated in the Seibu railway's regional area, and the impact of a declining and aging population in such area is a concern. Furthermore, because we earn a significant part of its railway operating revenues from commuters, the declining day time population in Tokyo may have a negative impact on our results of operations in our urban transportation and regional business.

Many of our businesses, including our urban transportation and regional business, hotel and leisure business and construction business, require a large labor force in order to maintain efficient operations. We may encounter increasing difficulties in hiring new employees in the future in these businesses, which could adversely affect our results of operations and financial condition.

(v) Risks Related to Decline in Tourists

Our hotel and leisure business may be significantly affected by trends in the Japanese tourism market, including an increase or a decrease in overseas tourists. The Japanese tourism market may be affected by various factors, including Japanese economic conditions, exchange rates, perceptions of various countries towards Japan, natural disasters, accidents and epidemics.

In addition, we operate overseas businesses mainly in U.S. State of Hawaii. Our Hawaii operations may be affected by the aforesaid factors, and changes in international conditions, including U.S. economic conditions, leading to a decline in travelers to Hawaii, which could result in a decrease in operating revenues.

A decline in tourists in Japan and Hawaii could negatively impact our results of operations and financial condition.

(vi) Risks Related to “Seibu Group's Medium-Term Management Plan”

The Company has established a long-term target to aim as our “Challenge Target” (operating revenues of ¥1 trillion, operating profit of ¥150.0 billion, EBITDA of ¥300.0 billion, and net interest-bearing debt / EBITDA multiple of 7 times or less), and has formulated “FY2017-FY2019 Seibu Group's Medium-Term Management Plan” as a three-year road-map to achieve this target, in which we set forth strategic initiatives and management targets for the fiscal years ending March 31, 2018 through 2020. Failing to implement any of such strategic initiatives or management targets or failing to achieve other development plans could adversely impact on our results of operations and financial condition. For the details of the “Seibu Group's Medium-Term Management Plan”, please see “Issues to address”.

(vii) Risks Related to Important Litigation

We are subject to the risk of litigation and other legal proceedings from third parties or investigation from the government in connection with claims such as breach of contract, personal injury, labor issues and environmental pollution in the ordinary course of business. In addition to the costs of legal proceedings, in the event of an adverse judgment or order, our results of operations and financial condition could be adversely affected.

(viii) Risks Related to Interest-bearing Debts

The businesses that we engage in, among others, the railway operations and the hotel operations, require a large amount of capital expenditures on a continuous basis. Although the Seibu group is concerned with reducing interest-bearing debts, the net balance of interest-bearing debts, excluding cash and deposits, was 880,032 million yen as of March 31, 2017. The group raises funds mainly from long-term borrowings with fixed interest in order to mitigate the risks of a short-term increase in interest rates. In the event of an increase in interest rates or a change in financial markets in the future, a downgrade due to deterioration of our financial condition or any other event, our interest costs may increase or we may not be able to raise additional funds, including funds necessary to refinance any maturing interest-bearing debts, on favorable conditions. These events could adversely influence our results of operations and financial condition, and furthermore we may not be able to apply sufficient funds to capital expenditures due to the repayment of borrowings.

(ix) Risks Related to Value of Our Property

Due to the nature of our businesses, namely, the railway operations and the hotel operations, we hold a significant amount of real property and other fixed assets. There are price fluctuation risks with respect to our real property, securities and similar assets and therefore, economic conditions or trends, a decline in cash flows from our assets and similar factors could lead to a decline of the value of our assets, resulting in impairment losses or losses on sales of property, which may have an adverse impact on our results of operations and financial condition.

(x) Risks Related to Intensified Competition

We are subject to significant competition in various businesses.

The competition is intensifying in the hotel business, among our hotel and leisure businesses, as we are required to differentiate our services in response to diversified consumer needs while foreign companies and hotels specialized for lodging launch in succession.

While we are making efforts to maintain and enhance our competitiveness through the promotion of MICE business and the chain operations utilizing our one of the largest networks in Japan, we are required to make significant capital expenditures, including renovation of our hotels and other facilities, in order to maintain our competitiveness as our competitors continue to construct new hotels and renovate existing hotels. However, if such measures are not effective, we may be required to reduce our prices, resulting in reduction of sales. Furthermore, we may decide to close or sell the hotel and we may need to incur impairment and other related losses. As a result, our results of operations and financial condition could be materially and adversely affected.

Also, our real estate business is subject to intense competition from competitors in operation of commercial facilities under the real estate leasing business, based on factors such as price and convenience of location. Our construction business competes with a large number of participants, with contracts generally awarded based on a competitive bidding process.

Price reductions, capital expenditures and divestitures of our property, in order to maintain and enhance our competitiveness in our various businesses, could have a material adverse effect on our results of operations and financial condition.

(xi) Risks Related to Information Technology Systems and Management of Information

We depend on various information technology systems to operate our various businesses, including our urban transportation and regional business and hotel and leisure business. Malfunctions of our technology systems caused by, among others, any accident, disaster, or human error could adversely affect our business operations and result in a reduction of our sales and an increase in repair/replacement costs, and, as such, could have a negative impact on our results of operations and financial condition. We are also vulnerable to system failures of other companies, such as other railway operators or railway related service providers. Furthermore, we manage the data base containing the personal information such as lists of guest or the customer data for membership services of hotel and leisure business, information about the sales of season tickets or IC card tickets of urban transportation and regional business, and the customer data concerning the real estate business or management of point card services. Although we exercise due care with respect to the management of personal information, if any problems such as a leak of personal information occurs, it may lead to damage claims being brought against our group and the loss of public confidence in our group, which could impact our results of operations and financial condition.

(xii) Risks Related to Increases in Price of Fuel, Electricity or Raw Materials

In connection with our urban transportation and regional business, it is possible that, due to increase in the oil price, the price of fuel will increase in the bus and taxi operations, etc. In connection with the railway operations, which particularly rely on electricity supplied by TEPCO Energy Partner, Incorporated, costs for electricity may increase in the future due to a rise in the amount of the basic rate and the increase in the amount of the charges related to the promotion of renewable energy.

In our construction business, there are many cases where the length of construction period from acceptance of order and commencement of construction until the completion thereof is relatively long, and, if the amount of raw material costs or the labor costs increases during the construction period, construction costs may increase accordingly. Also, in the case that the amount of building raw materials increases and it is difficult to reflect the fluctuation in prices of such raw materials into selling prices and contract prices in the real estate business and construction business, we are not always able to realize the profits that were originally expected. In addition, with respect to the issue of the capital expenditure, the amount of capital expenditure may increase, and the depreciation costs and the funding costs may increase, or we may be forced to delay making required capital expenditures.

Consequently, although we will aim at effective business operations, it is possible that our results of operations and financial condition will be affected in the case of increase in oil price, electricity price or the raw materials costs.

(xiii) Risks Related to Profit Structure

A substantial proportion of our operating expenses consists of fixed expenses, such as personnel and depreciation costs, particularly in the case of our urban transportation and regional business, hotel and leisure business, and real estate business, among our operations, and, as a result, a relatively minor decline in sales could have a significant negative impact on our operating income. Such profit structure could have an impact on our results of operations and financial condition, and, especially, with respect to the hotel and leisure business, since the fluctuation in sales is relatively large, there may be a more significant impact on it.

(xiv) Risks Related to Rumor

Many of our businesses provide services and products directly to retail customers under the "Seibu" and "Prince" brands. Any damage to our brands, including as a result of the realization of any of the risks set forth in "Risk Factors," could have a material adverse effect on our results of operations and financial condition. In addition, because there are third parties that utilize the same or similar brands, the acts or statements of such third parties which damage these brands could indirectly damage our reputation.

(xv) Risks Related to Food-Borne Illnesses or Management of Food

We provide meals and sell food in our hotels, restaurants, and stores, etc. While we make every effort to ensure the food quality and the food hygiene, incidents of food-borne illnesses could result in our being required to temporarily shut down the operation of our affected businesses, damage our credit and brand reputation, and have a negative impact on our results of operations and financial condition.

In addition, in the case where problems occur concerning the food hygiene and the safety and security of food by, for example, norovirus or contagious diseases that affect animals, the decrease in sales or the disposal loss of inventory could adversely affect our results of operations and financial condition.

(xvi) Risks Related to Credit Management

Although we are committed to enhancing the credit management framework, our results of operations and financial condition may be adversely affected in instances such as difficulty in collecting contract fee by any of the counterparties due to their financial difficulties, etc., particularly in the construction business which involves relatively long construction periods and large obligation amounts.

(xvii) Risks Related to Subcontractors/Counterparties

In our construction business, while we depend on subcontractors for all of the execution of our construction projects except for the management thereof, primary responsibility to our customers rests with us. Although we make efforts to ensure that the services performed by our subcontractors are of a high standard, in the event that the subcontractors' work will not meet such a standard or that the subcontractors will not otherwise complete their work, our results of operations and financial condition may be adversely affected.

(xviii) Risks Related to Costs and Obligations for Our Pension and Retirement Benefit Plans

Costs and obligations related to our pension and retirement benefit plans are calculated based on the actuarial assumptions determined by the discount rate and the long-term expected rate of return on plan assets, etc. Any difference between actual results and actuarial assumptions or any change in the actuarial assumptions may affect our results of operations and financial condition.

(xix) Risks Related to Currency Fluctuations

Our operating income may decrease due to fluctuations in currency rates, which could have a negative impact on our results of operations and financial condition.

In addition, local currency-denominated financial statements of our foreign subsidiaries are converted into Japanese yen when preparing our consolidated financial statements, and thus our results of operations and financial condition may be impacted by exchange rates.

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