■Company overview of E Guaranty <8771>

3. Market Size

The market size of accounts receivable (bills receivable, trade accounts receivable, etc.) targeted by the Company's main services exceeds 200 trillion yen*. While not all of these accounts receivable require credit risk guarantee services, we at the Company see it as a service that is commonly adopted in Europe and the United States, with high potential for growth**.

*1 According to the Ministry of Finance's "Corporate Statistics Survey," the market size was over 240 trillion yen as of the end of March 2024 (excluding financial and insurance industries).

**2 For example, in Japan, the penetration rate of credit risk guarantee services remains in the 1% range, whereas in the UK it is 12-14%, in France 30-35%, and in Germany over 40%.

Furthermore, looking at the trend of the number of corporate bankruptcies that affect the guarantee fee rate, the number peaked at 13,234 cases in fiscal year 2008 and continued to decrease. While there was a temporary increase in fiscal year 2019, it decreased again after 2020 due to the introduction of a government financial institution's policy of providing actual interest-free and unsecured loans for funding support during the COVID-19 pandemic. However, with the expiration of these policies, as well as the inflation caused by soaring energy prices and factors such as labor shortages, the number of bankruptcies in fiscal year 2022 increased by 14.9% to 6,799 cases, a three-year high. In fiscal year 2023, the number further increased significantly by 30.6% to 8,881 cases. On the other hand, the Company's average guarantee fee rate fluctuated: in fiscal year 2020 when credit risks rose due to the pandemic, it increased to 1.63%, the highest in 11 years. However, in fiscal year 2022, despite the increase in corporate bankruptcies, it decreased from the previous year's 1.46% to 1.34%, and further decreased to 1.26% in fiscal year 2023. This was influenced by strategically pursuing the acquisition of large-scale trade accounts receivable guarantee contracts with low risk, while refraining from contracting high-risk cases. In other words, it can be said that efforts to reduce the risk of guarantee performance and promote defensive management have been made.

4. Risk Factors

While three main risk factors can be cited in the Company's performance, we currently do not consider any of them to be a cause for concern.

Revenue structure risk

The company's revenue structure records the income from customer guarantee fees as revenue, while recording the costs paid to financial institutions and others as expenses, resulting in the company's profit. The costs paid to the risk transfer destination are determined by the guarantee fulfillment performance over multiple years, so even if a large amount of guarantee fulfillment occurs temporarily, it does not become a short-term factor contributing to the increase in cost of sales. However, in times of economic downturn where guarantee fulfillment occurs continuously, the risk transfer costs increase. If the increase in risk transfer costs cannot be passed on to the guarantee fees, it becomes a factor in deteriorating profit margins. In addition, during an economic downturn, due to the increase in bankruptcy risks, there may be an increase in demand for the company's services. However, if the guarantee fee rate increases too much, the merits of using the services may decrease, leading to a possible decrease in the number of contracts and the renewal rate, resulting in a decrease in guarantee obligations. In addition, in an unprecedented recession, there is a risk that if financial institutions and others, which are the risk transfer destinations, go bankrupt, guarantee fulfillment may become impossible.

Competitive risk

There are few companies that specialize in providing sales receivable guarantee services like the company. Similar services include guarantee factoring provided by major financial institution-affiliated factoring companies, and transaction credit insurance provided by casualty insurance companies. However, the company's strength lies in its ability to flexibly meet diverse needs in terms of the range of target companies for guarantees, guarantee limits, and target receivables. At the present time, there is little competitive risk. Also, it appears that there are business companies offering similar sales receivable guarantee services, but due to the lower accuracy of risk assessments as mentioned earlier, they are struggling to monetize and do not pose a threat to the company. In addition, in the small sales receivable guarantee services for small businesses, there is competition with Raccoon Financial Co., Ltd., a subsidiary of Raccoon Holdings <3031>, but the proportion of small receivable guarantees in the company as a whole is small, so the impact is minimal.

Legal regulatory risk

As for sales receivable guarantee services, they are not subject to legal regulations such as the Insurance Business Act or the Financial Instruments and Exchange Act. In the future, if new legal regulations regarding the same services are enacted, it may affect business performance due to changes in the business model or competitive environment.

(Written by FISCO guest analyst, Jo Sato)