Risk Factors

The following section describes risks associated with the businesses of the Group, which could have a material impact on investor judgment. This section also includes matters that do not necessarily fall under the category of risks, but which are considered to be important for the purposes of investment decisions. The Company is aware of the potential for these risks to be realized, and is striving to both prevent this and to respond appropriately if it does happen.
The following text includes forward-looking statements that are based on judgments as of June 29, 2011. Please note that the list is not intended to include all risks associated with the businesses of the Group.

(1) Tokyu Group Management Policy and Tokyu Corporation Two-Year Medium-term Management Plan

The Group consists of 255 companies and eight legal entities (as of March 31, 2011). The Company developed the Tokyu Corporation Two-Year Medium-term Management Plan ("Two-Year Medium-term Management Plan") in May 2010 based on the Tokyu Group Management Policy. In executing the two-year medium-term management plan, the Company plans to reorganize the operations of the Group, change its consolidated subsidiaries and equity-method affiliates through investment, and bolster the financial strength of those companies. However, these initiatives may not produce expected results.
In accordance with the philosophy "Establishment of Tokyu Group governance by Tokyu Corporation," one of the principles of the Tokyu Group Management Policy, the Company has declared that it owns the Tokyu brand, and Group companies need to conclude an agreement with the Company, to undergo screening by the Company, and to pay fees for the use of the Tokyu brand. Using the collected fees for the use of the brand, the Company undertakes activities designed to enhance the value of the brand, maintains the brand, and conducts activities to eliminate risks relating to the brand. However, we cannot completely rule out the possibility of the trust in the Tokyu brand being lost due to unforeseen occurrences, in which cases the results and financial position of the Group are at risk of being adversely affected.

(2) Concentration of management resources in areas served by Tokyu's railway lines

The Tokyu Group positions urban development based on railway operations in the southwest of Tokyo and in Kanagawa Prefecture as the core of its operations and is developing businesses in areas closely connected with people's everyday lives. Our management resources are therefore concentrated in the areas served by our railway lines. Under the Two-Year Medium-term Management Plan as stated above, the Company is pursuing two visions under a basic strategy of "Developing businesses ahead of qualitative and quantitative changes in the population:" (1) Areas served by Tokyu's railway lines will continue to be the main focus; and (2) The Tokyu Group will become a self-reliant and strong profit organization centered around Tokyu Corporation. The results and financial position of the Company are therefore susceptible to the population and business situation of the areas served by Tokyu's railway lines. Worsening consumption trends, declines in the population, demographic changes (a low birthrate and an aging population), and falling land prices in the areas, among other factors, could lead to declines in revenue and could adversely affect the results and financial condition of the Group.

(3) A large amount of interest-bearing debt

The Group has raised a large percentage of the funds needed for its railway operations and other operations from corporate bonds and borrowings from financial institutions, and as a result, the percentage of interest-bearing debt* to total assets is high. (Consolidated interest-bearing debt was 1,041.3 billion yen as of March 31, 2011, about 53% of total assets.) About 83% of the interest-bearing debt of the Group is in the form of long-term funds, including corporate bonds and long-term debt, and most of the long-term funds have been raised at fixed rates. The management plan of the Group specifies that the Group will reduce interest-bearing debt to within a certain range. For these reasons, we believe that the effects of fluctuations of market interest rates and changes in ratings on the results and financial position of the Group are limited to a certain extent. However, if market interest rates rise, or if credit rating agencies downgrade the rating of the Company, the burden of interest will become relatively heavy, or conditions for financing will worsen, and this situation could adversely influence the results and financial condition of the Group.

*Interest-bearing debt is the sum of debt and corporate bonds.

(4) Legal regulations

Under the provisions of the Railway Business Act (Law No. 92 of 1986), the railway business operator must obtain a license of the Minister of Land, Infrastructure, Transport and Tourism for each route and classification of the railway business (Article 3) and must obtain the approval of the Minister of Land, Infrastructure, Transport and Tourism for the upper limits of fares and charges set or changed (Article 16). The railway business operator must set or change fares within the approved upper limits and must notify the Minister of Land, Infrastructure, Transport and Tourism of them in advance. The Company applied for approval for revisions to passenger fares on December 10, 2004, received the approval on February 22, 2005, and revised the railway passenger fares on March 20, 2005. The purpose of the revision was to ensure the sound management of the railway operations by compensating for the shortfall of funds associated with the end of the accumulation of Urban Railways Improvement Reserve and the commencement of the reversal of the reserve at the end of the period for authorizing the improvement work between Oimachi and Futakotamagawa on the Oimachi Line and the construction work to lay a four-track line between Futakotamagawa and Mizonoguchi on the Den-en-toshi Line as an urban railways improvement plan, the commencement of the accumulation of Urban Railways Improvement Reserve following the approval of the improvement work between Shibuya and Yokohama of the Toyoko Line as an urban railways improvement plan by the Ministry of Land, Infrastructure, Transport and Tourism in February 2005, and increases in capital costs (including depreciation) associated with the completion of other large-scale improvement work. Of consolidated subsidiaries, Izukyu Corp. applied for approval to revise passenger fares on February 28, 1997, received the approval on March 12, 1997, and revised the passenger fares on April 1, 1997. Ueda Kotsu transferred its railway operations to Ueda Dentetsu Corp., which was established with the demerger of Ueda Kotsu on October 1, 2005. Mergers and demergers involving railway business operators do not become effective unless they are approved by the Minister of Land, Infrastructure, Transport and Tourism under the provision of Article 26-2 of the Railway Business Act. Ueda Kotsu therefore applied for approval of the demerger on September 9, 2005 and received the approval on September 28, 2005.
The businesses of the Group, including the railway business, are subject to laws and regulations in the countries and regions in which the Group operates, including emission regulations, especially NOx regulations for the bus business. If legal regulations are tightened or changed, the Group could incur rising costs to comply with the tightened or changed regulations. If the Group cannot respond to changes in laws and regulations, the activities of the Group could be restricted, which could have adverse effects on the results and financial position of the Group.

(5) Occurrence of disasters and trouble

The Group, which has railway, real estate, and other operations, owns many facilities and Information systems needed for performing the operations and takes precautionary actions to avoid damage to facilities caused by disasters such as earthquakes, weather conditions, illegal actions such as terrorism, accidents and delays in transportation caused by a range of factors, including human factors, and trouble caused by Information system malfunctions, errors in the settings of Information systems, and other reasons. However, if unforeseen disasters or trouble occur, the results and financial position of the Group are at risk of being adversely affected by operational problems, including difficulties in continuing safe and accurate railway services or expenses required for the restoration of facilities and substitute transport.
Direct damage on the Group's fixed assets, inventories, and other assets from the Great East Japan Earthquake that took place on March 11, 2011 was limited.
Responding to this disaster, immediately after the earthquake, the Company developed a management structure that ensured that it could appropriately handle unexpected events, establishing a Crisis Management Division. The Group also took prompt action to ensure customer safety and transportation services, the mission for a railway operator. The Group will continue to focus on strengthening a range of initiatives related to safety in preparation for any similar disasters that might occur in the future.

(6) Large-scale projects

In its railway operations, the Company is also making improvements to the Toyoko Line between Shibuya and Yokohama, aiming to begin a through service linking the Toyoko Line and the Tokyo Metro Fukutoshin Line in 2012 to further enhance the functions of the transportation network in the Tokyo area. In the Real Estate business, the Group is developing the area around Shibuya Station in connection with the improvement work on the Toyoko Line and is also undertaking major development projects in the Futakotamagawa area and other areas, which are served by Tokyu railway lines. However, since those projects entails large investments, they might not progress as planned, and expected revenues and effects might not be generated, depending on changes in the circumstances surrounding the projects and changes in the population and economic situation in the relevant areas. In such cases, the results and financial position of the Group could be adversely influenced.

(7) Application of asset-impairment accounting

The Company and its consolidated subsidiaries started to apply earlier asset-impairment accounting in the fiscal year ended March 31, 2004 and has been recording impairment losses for all assets meeting the asset-impairment standard under the Accounting Standard for Impairment of Fixed Assets. Should real-estate prices fall or the business environment change, then assets could come under the requirements for the posting of impairment losses. If assets are sold, losses on the sale of fixed assets could be posted, depending on prices. In such cases, the results and financial position of the Group could be adversely affected. If losses are posted at equity-method affiliates for the same reason, investment gains/losses from the equity method could worsen, which could adversely affect the results and financial position of the Group.

(8) Ownership of real estate and investment securities

Having railway, real estate, and other operations, the Group owns a lot of properties (for sale and for business) needed to perform its business. If real-estate prices fall due to sluggish real-estate markets and other reasons, revenues could decline, or appraisal losses and losses on sales could be posted, and this could adversely affect the results and financial position of the Group.
The Group also holds investment securities such as shares, and holds many shares and bonds in corporate pension assets and employee pension trusts. The Group could post appraisal losses and losses on sales, reflecting worsening shareholders' equity at the issuers of these securities and other factors associated with sluggish stock and bond markets and changing market circumstances, a situation that could adversely affect the results and the financial position of the Group.

(9) Liability for defect warranties in real estate transactions

It is trade practice in real estate transactions for the seller to give a warranty for hidden defects in properties. The Group has a real estate sales business and sells fixed assets and cannot completely rule out the possibility of assets sold having hidden defects. For example, buried objects and soil contamination were found on a site where a condominium was to be built in March 2002 during the construction of the condominium by the buyer, and the Group cancelled the land sales contract and posted an expense for soil improvement and damages as extraordinary losses in the fiscal year ended March 31, 2004. In cases such as this, the Group may have to pay compensation to the buyer based on its liability for defect warranty, and the results and financial position of the Group are at risk of being adversely affected.

(10) Trade practices in advertising transactions

The Group offers advertising agency services in its Leisure and Services business. In advertising transactions in Japan, advertising companies deal with media firms or other companies not as agencies for advertisers but on their own responsibility. Thus, if advertisers declare bankruptcy, advertising companies may be liable for payables to media firms or other companies while being unable to collect advertising fees from advertisers.
The Group makes written agreements with advertisers as far as possible in an effort to prevent problems from arising in this business. However, to respond flexibly to changes in advertising plans and content, advertising companies often do not exchange written agreements. As a result, the Group may become subject to risks of unexpected trouble or disputes over business details, in which cases, the results and financial position of the Group are at risk of being adversely affected.

(11) Food safety

The Group sells foods in department store operations and chain store operations in the Retail business. Food safety problems have arisen in recent years. The Group complies with relevant laws, including the Food Sanitation Act, the Law Concerning Standardization and Proper Labeling of Agricultural and Forestry Products (the so-called JAS Law), and the Act against Unjustifiable Premiums and Misleading Representations (the so-called Premiums and Representations Act), and takes all possible actions for quality control. However, if problems associated with the quality control of the Group or general quality problems in society arise, expenses including recall costs and falls in sales due to rumors and other factors could adversely influence the results and financial position of the Group.

(12) Personal information management

The Group has a credit card operation as part of its Retail business and holds personal information, including customer information, in relation to the business and other operations including membership businesses, such as the golf course and gym businesses, and the sale of commuter tickets in the railway operations. The Group complies with the Act on the Protection of Personal Information and has paid sufficient attention to the management of personal information. The possibility that a personal information leaks occurs by some kind of causes is not beginning. However, if problems arise from personal information leaks or other causes, increases in expenses and decreases in revenues will result from claims for damages against the Company and the erosion of trust in the Company, a situation that could adversely affect the results and financial position of the Group.

(13) Failures in products and construction work

The Group manufactures rolling stock, special purpose vehicles, and multilevel parking equipment and has a construction business in its "Other businesses." Although the Group takes every reasonable measure for quality control, it cannot guarantee that all products and constructed objects are completely free of failures or defects. For example, product failures leading to product liability compensation and recalls could require heavy outlays, including recall costs, and result in an erosion of trust in the Group, which in turn could reduce earnings. In that case, the results and financial position are at risk of being adversely affected.

(14) Changes in the international situation and exchange rate fluctuations

The Group has operations not only in Japan but also overseas. If there are changes in the international situation that the Group cannot foresee, such as terrorist attacks, conflicts and wars, and infectious diseases, the results and financial position of the Group could be adversely influenced. Exchange rate fluctuations could also impact on the results and financial position of the Group in yen terms.