Management Policy

Business and Other Risks

Of the business and accounting conditions outlined in AEON MALL's (the "Company") annual securities filing, the items outlined below are those major items deemed to have potentially material impact on the decision-making process of investors.
The risk factors and uncertainties that may impact the future business performance and/or the financial position of the Company are not, however, limited to the items below.
Note that all items relating to the future are determinations of the AEON MALL Group (the "Group") as of the filing date of the annual securities filing(24 May 2019).

1. Relationship with Aeon Co., Ltd. and/or its Affiliated Companies

Risk Pertaining to Over Dependence of Earnings to Aeon Co., Ltd.
(henceforth Aeon Co) and/or its Affiliated Companies (henceforth "Aeon Affiliates") Gross profits from Aeon Retail Co., Ltd.
(henceforth "Aeon Retail") stood at 10.8% of the AEON MALL Group in FY2018.
Gross profits from Aeon Affiliates excluding Aeon Retail stood at 10.9%.
In developing malls, the role of anchor tenants with the ability to attract customers is extremely important.
At AEON MALL Group, we leverage our close relationship with Aeon Co to have general merchandise stores "Aeon" (operated mainly by Aeon Retail) to serve as our anchor tenants.
Going forward, we would anticipate that for malls developed by the AEON MALL Group, general merchandise store "Aeon" will continue to serve as anchor tenants.
As one can see, the relationship between the AEON MALL Group and Aeon Co and/or Aeon Affiliates provides advantages in the form of a stable source of anchor tenants.
On the other hand, earnings of the AEON MALL Group may be impacted by the business performance, store launch policies, and store closure policies of Aeon Co and/or Aeon Affiliates.

2. Risk Pertaining to Corporate Growth Limitations Imposed by Human Resource Availability

Via increases in the number of malls and enhancement of profitability, the AEON MALL Group is involved in expanding the foundations of the domestic business on the one hand, and the creation of business foundations for the Company's efforts in the new growth markets of China and ASEAN on the other.
The AEON MALL Group implements policies to secure the human resources necessary to secure growth.
These include internal employee training programs, strengthening of proprietary AEON MALL Group hiring practices, and transfers from other Aeon Affiliates via AEON MALL Group recruitment programs.
There is the possibility, however, that training/securing of staff may be insufficient to allow the Group to meet its growth targets.

3. Legal and Regulatory Aspects

(1) Regulations as Dictated by the City Planning Act and the Act on Measures by Large-Scale Retail Stores for Preservation of Living Environment (henceforth "Large-scale Retail Store Act")
The AEON MALL Group coordinates initiatives with local municipalities to develop malls firmly rooted in local communities.
However, owing to the City Planning Act and/or the Building Standards Law, construction of large retail facilities exceeding 10,000m2 are in principle not possible except in those areas designated as commercial zones, neighboring commercial zones, and/or semi-industrial zones by said acts/laws.
Furthermore, to develop large shopping centers in un-zoned city planning areas and/or un-zoned areas within semi-approved city planning projects, either a zoning designation or an approval of relaxation of purpose is needed from the relevant prefectural governor.
As such, there exists that possibility that the Company's future plans for new malls could be affected by such legal restrictions.

(2) Changes to Real Estate Related Tax Policies
In the event real estate related tax policies are revised, there exists the possibility that the Company's earnings will be impacted via higher costs associated with ownership of assets and purchase or sales of assets.

4. Business Related Aspects

(1) Development Time of Malls
Development of malls is a time consuming process requiring market research, site identification/selection, negotiations with land owners, legal documentation, mall construction, and tenant solicitation.
There is the possibility, therefore, that the earnings of the AEON MALL Group may be impacted by delays in the development process and/or situations in which development is stopped.

(2) Risk Pertaining to Rising Real Estate Prices
The AEON MALL Group is involved in the acquisition of land and property and/or the leasing of such land & property.
As such, in situations where real estate prices rise, the costs associated with real estate acquisition and/or the leasing of the same stand to rise.
Further, the risk associated with ownership of real estate assets can increase due to revisions to laws relating to real estate and/or the accounting of real estate.
All of these factors have the potential to impact business plans, financial position, and/or the earnings of the Group.

(3) Development of Contaminated Industrial Sites
There are instances where the AEON MALL Group will undertake development of land that had once been used for industrial purposes.
In such cases, environmental studies are implemented and where it is found that industrial contamination is present, the Group requires, by contract, that such contamination be eliminated at the expense of the selling party and/or in the case of a land lease, by the owner/lessor of the land.
However, in cases where further contamination is discovered at a later time, there is the possibility that the earnings of the Group could be impacted by delays in mall development.

(4) Risk Pertaining to Availability of Property for Development
The growth of the AEON MALL Group is dependent on continuous development of new malls.
In instances where the supply of new large-scale development projects suitable for mall developments is restricted, there is the possibility that the speed with which the AEON MALL Group develops malls could slow.

(5) Risk Pertaining to Trends in Domestic Markets/the Economy and Demographics
The major tenants of the AEON MALL Group are retailers and consumer services entities.
There is a tendency for demand to be sensitive to economic and personal consumption trends.
As such, where Japanese economic trends deteriorate or where unexpected intensification of competition/ market changes occur, there is the possibility of an impact to Group's earnings.

(6) Risk Pertaining to Unfavorable Weather and/or Hikes to the Consumption Tax
Tenant specialty store sales can be impacted by unfavorable weather such as unseasonably cool summers and/or unseasonably warm winters.
They are also vulnerable to deterioration in consumer sentiment from revisions to tax policies such as hikes in the consumption tax.
Such events can damage specialty store sales and the rent revenue accruing to the Group thereby impacting Group earnings.

(7) Risk Pertaining to Competition
The AEON MALL Group's businesses, financial position, and/or earnings can be negatively impacted by intensification of competition from other real estate developers and/or general merchandise retailers.

(8) Risk Pertaining to Counter-parties/ Affiliated Parties
In instances where the AEON MALL Group leases mall land/property, it makes various deposits to the lessor of the land/property in the form of guaranty and security deposits.
The Group is also exposed to accounts receivable balances emanating from mall specialty store tenants.
Whilst the Group implements rigorous credit checks of such counter-parties and affiliated parties, there remains the possibility that owing to deterioration in financial standing of the lessor, recovery of guaranty and security deposits becomes problematic.
Similarly, owing to deterioration in the credit standing of tenant specialty stores, there is the possibility of default of receivable balances.
Such events can impact the earnings of the AEON MALL Group.

(9) Risk Pertaining to Tenant Administration
At malls operated by the AEON MALL Group, the specialty store tenant base implements a broad variety of stores encompassing apparel, sundry/miscellaneous goods, and groceries.
The Group is actively involved in ensuring the quality and hygiene of products and services offered by store tenants.
However, in instances where customers suffer damages owing to product shortages or defective product, there is the possibility that Group earnings will be negatively affected via loss of Group credibility.

(10) Risk Pertaining to IT Systems Failure
The relative importance of the Group's IT systems within its overall business operations has been rising rapidly.
To date, the Group has been involved in such initiatives as consolidation of servers to data centers, multiplexing of servers and networks, and strengthening of security measures to enhance protection of systems and data.
However, it is conceivable that in the event of a natural disaster as in a major earthquake, the continued business operation of the Group could be threatened owing to damage to data centers and the Group's IT systems.
In such an event, there is the risk that the Group's earnings and/or financial position could be impacted.
In an effort to mitigate such impact, the Group implemented and began operations of a second back-up data center in western Japan in 2012.
With the implementation of this second duplicate data center, where one data center is damaged and ceases to operate, the other data center is able to take over and operate the Group's IT systems.
In such a way, the Group believes itself to have further enhanced its BCP (Business Continuity Planning) structure allowing it to minimize any impact to business operations stemming from disaster related damages.

(11) Administration of Personal Data
As regards to administration of private customer data, the AEON MALL Group rigorously enforces compliance to rules as set forth under internal regulations and administrative manuals.
It also implements meticulous employee training programs.
In the event, however, of an unforeseen accident or event that leads to leakage of personal data to unintended recipients, the Group's earnings may be negatively affected via loss of Group credibility.

(12) Risk Pertaining to Compliance
The AEON MALL Group, in conducting its business activities, adheres to all laws and regulations set forth by countries and regions, both domestically and overseas.
The Company maintains a Compliance Committee through which it endeavors to elevate awareness of compliance issues both domestically and overseas.
That said, the possibility of problems arising from administrative issues is not zero.
In the event laws and regulations are breached, there is the possibility of negative effects to the Group's business and/or its earnings.
Further, depending on the nature of an employee instigated breach, there is the possibility of impact to the Company's earnings and/or social credibility.

(13) Risk Pertaining to Natural Disasters/ Accidents
The malls operated by the AEON MALL Group are vulnerable to fire, earthquakes (and other natural disasters), terrorist activities that may damage, burn, or otherwise result in deterioration of facilities resulting in temporary stoppage of normal mall operations.
In efforts to prevent and/or minimize impact from such events, the Group has implemented a variety of measures that include reinforcement of structures for earthquake resistance and meticulous attention/ implementation of codes for crisis management administration and ancilliary codes for crisis management vis--vis natural disasters and disease outbreaks, and implementation of disaster prevention drills simulating large-scale earthquakes and terrorist attacks.
The Group has also been building and reinforcing risk countermeasure capabilities so as to minimize losses in the event of above events.
There remains, however, the possibility that above events will still lead to an impact to the Groups earnings.

For all of the malls that it operates, the AEON MALL Group subscribes to insurance products covering damages from fire as well large-scale disaster/suffering contingencies that reimburses for such items as lost rental income owing to fire and flooding amongst other items.
The Group does not, however, have insurance coverage of all physical damages to property stemming from earthquakes owing to the fact that there are no insurance companies willing to underwrite the Group's large-scale mall facilities from an economically rational perspective.
As such, the Group's earnings may be impacted by a major earthquake depending on the degree of damage, burn, or other deterioration of facilities.

(14) Pertaining to Accidents Overseas
As part of its overall business strategy, the AEON MALL Group implements an overseas mall business focused on the Chinese and ASEAN markets.
Business activity overseas is vulnerable not only to overseas economic trends and foreign exchange rates, but to unforeseen legal and regulatory changes affecting investment, trade, competition, tax, and foreign exchange.
The Group's earnings may also be affected by differences in business customs and worker practices, terrorism, war, outbreak of civil unrest, outbreak of contagious disease such as pandemic influenza, extraordinary climate and/or unfavorable weather, and other factors that may lead to social, political, and/or economic disruptions.

5. Financial Related Aspects

(1) Interest Rate Impact on Business Performance
To date, the AEON MALL Group has implemented debt financing from the likes of financial institutions.
The Group has promoted funding at fixed interest rates and as of FY2018-end, the Group's consolidated interest-bearing debt balance, including bonds, stood at JPY 506,975 million.
Of this amount, 99.7%, or JPY 505,641 million bore fixed interest rates.
In the event of rising interest rates, higher interest on variable interest rate funding, higher cost of rolling over existing funding, and higher costs associated with funding for new developments may impact the earnings of the Group.

(2) Risk Pertaining to Foreign Exchange Movement
The AEON MALL Group, as of FY2018-end, consisted of 37 consolidated overseas subsidiaries.
In reporting the Company's consolidated financial statements, the foreign currency denominated financial statements of the overseas subsidiaries are translated into the Japanese Yen (JPY).
As such, the Company's consolidated financial statements are affected by foreign exchange swings for each of the relevant currencies.
In the event of a significant swing in foreign exchange rates, there is the possibility that the Group's financial position and/or earnings will be affected.

(3) Financing (Funding Procurement)
The AEON MALL Group may implement additional debt financing and/or equity financing to support mall development based on the Group's growth strategy.
However, there may be instances where such factors as deterioration in overall capital market conditions and/or economic circumstances, deterioration in the Group's credit standing, and deterioration in the Group's business outlook may result in the Group being unable to procure funding in a timely manner under desirable terms.
There is the possibility that the Group will be unable to procure funds at all.

(4) Risk Pertaining to Effects of Impaired Asset Accounting
Announced in August 2002, the "Accounting Standard for Impairment of Fixed Assets" (henceforth "Impaired Asset Accounting Standard") is applied to the Group.
Losses from impaired asset write-downs result in such instances where on an individual business unit basis, operating losses result, where the market price of land suffers substantial decline, where facilities are made idle owing to tenant departure, and where there is substantial deterioration in the operating environment.
Such losses from impaired assets have the potential to impact the financial position and/or the earnings of the Group.