SHINNIHON CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

While Revenue increased substantially by +29.0% year on year, the Operating Income margin declined, indicating earnings quality weakened somewhat relative to the quantitative expansion in scale. Revenue came to ¥330.3B (+29.0% year on year), Operating Income to ¥38.5B (+5.4%), Ordinary Income to ¥40.5B (+7.9%), and Net Income to ¥27.8B (+4.4%), with the Company securing both revenue and profit growth across all measures. However, the Operating Income margin declined to 11.7%, down 2.6pt from 14.3% in the same period of the previous year. While the core Construction Business performed strongly, a sharp decline in the gross profit margin of the Development Business placed pressure on the Company-wide margin.

Factors Affecting Performance

【Revenue】Revenue of ¥330.3B (+29.0% year on year) was driven by an increase in construction work completed. The Construction Business expanded with Revenue of ¥273.9B (+45.7%), accounting for 82.9% of Company-wide Revenue, while the Development Business and Other Businesses declined in Revenue to ¥56.6B (-17.1%), resulting in a shift in the business composition toward the Construction Business.

【Profit and Loss】Operating Income increased to ¥38.5B (+5.4% year on year), Ordinary Income to ¥40.5B (+7.9%), and Net Income to ¥27.8B (+4.4%), with all profit measures increasing. However, profit growth was substantially below the Revenue growth rate (+29.0%), and the gross profit margin contracted to 15.1% from 18.3% in the previous year, a decline of 3.2pt. The primary factor was the sharp decline in the Development Business gross profit margin from 38.8% to 14.4%. Although the SG&A expense ratio improved to 3.5% from 4.1% in the previous year, indicating improved cost efficiency, this was insufficient to absorb the increase in the cost-of-sales ratio. Ordinary Income grew at a faster pace than Operating Income, supported by an expansion in non-operating income, primarily due to an increase in interest income. In conclusion, although the Company achieved both revenue and profit growth, the profit growth rate failed to keep pace with Revenue growth, resulting in a decline in profitability.

Segment Analysis

The Construction Business recorded Revenue of ¥273.9B (+45.7% year on year) and Operating Income of ¥37.1B (+130.1%), with the Operating Income margin improving substantially to 13.6% from 8.6% in the previous year. The gross profit margin on completed construction projects rose to 15.3% from 10.9% in the previous year, suggesting the benefits of economies of scale from increased construction volume and effective cost management. The Development Business and Other Businesses recorded Revenue of ¥56.6B (-17.1% year on year) and Operating Income of ¥4.0B (-82.7%), with the Operating Income margin declining substantially to 7.0% from 33.4% in the previous year. The gross profit margin also declined sharply to 14.4% from 38.8%, apparently due to a reduced contribution from the recognition of sales of high-gross-margin properties. The gap between the profit margins of the two businesses has widened to approximately 6.6pt, while the shift in the business composition toward the Construction Business and the sharp decline in the Development Business profit margin have contributed to the contraction of the Company-wide gross profit margin (15.1%, compared with 18.3% in the previous year).

Key Financial Indicators

【Profitability】The Operating Income margin was 11.7%, down 2.6pt from 14.3% in the same period of the previous year, while the Net Income margin also declined 2.0pt to 8.4% from 10.4%. The gross profit margin contracted to 15.1% from 18.3%, a decline of 3.2pt, primarily due to the sharp decline in the Development Business gross profit margin (38.8%→14.4%). Meanwhile, the SG&A expense ratio improved to 3.5% (4.1% in the previous year), indicating progress in cost management.【Cash Flow Quality】The difference between Ordinary Income and Net Income was primarily attributable to income taxes and other taxes (effective tax rate of 31.2%). No temporary factors such as extraordinary gains or losses were identified, and earnings quality was generally recurring.【Investment Efficiency】The total asset turnover ratio improved to 0.18x from 0.14x in the previous year, while financial leverage declined slightly to 1.34x from 1.38x. As the two factors offset each other, ROE was 2.1% (cumulative quarterly basis).【Financial Soundness】The Equity Ratio improved to 74.4% from 72.6% in the previous year. With current assets of ¥1,674.0B and current liabilities of ¥444.9B, the current ratio remained high at approximately 376%.

Cash Flow Analysis

Cash and deposits declined by ¥228.6B (-23.9%) to ¥729.6B from ¥958.2B at the end of the previous fiscal year, with changes in working capital affecting the cash position. Accounts receivable from completed construction contracts increased by ¥72.3B (+57.1%) to ¥198.8B from ¥126.5B in the previous year, indicating an accumulation of receivables pending billing and collection as progress on construction work was recognized. Meanwhile, advances received on construction contracts in progress declined by ¥19.4B (-23.6%) to ¥62.9B from ¥82.3B in the previous year, reducing the funding cushion provided by advances received. Costs on construction contracts in progress declined substantially to ¥4.2B from ¥13.0B in the previous year, indicating progress in work under construction. Taken together, these movements indicate that the timing of cash generation has lagged the expansion in Revenue and profit. The normalization of future billing and collection cycles will be key to restoring capital efficiency.

Earnings Quality

Non-operating income for the current period was ¥1.9B, consisting primarily of interest income of ¥1.7B and dividend income of ¥0.2B, and was composed of highly recurring income. Non-operating expenses were virtually zero, meaning that the Company effectively incurred no financial cost burden. The difference between Ordinary Income of ¥40.5B and Net Income of ¥27.8B was primarily attributable to income taxes and other taxes of ¥12.6B (effective tax rate of 31.2%). No temporary items such as extraordinary gains or losses were identified. Comprehensive income was ¥30.5B, exceeding Net Income of ¥27.8B by ¥2.7B, primarily due to a +¥3.0B valuation difference on other securities, while adjustments related to retirement benefits made a negative contribution of -¥0.3B. The decline in the gross profit margin (15.1%, compared with 18.3% in the previous year) appears to have resulted from a change in the Development Business mix. Further quarterly trends will need to be monitored to assess the structural nature of the change in profitability.

Earnings Forecast and Guidance

Q1 progress against the Full-Year plan was 21.2% for Revenue (¥330.3B/¥1,560.0B), 15.1% for Operating Income (¥38.5B/¥255.0B), 15.6% for Ordinary Income (¥40.5B/¥260.0B), and 15.9% for Net Income (¥27.8B/¥175.0B). Compared with the benchmark of 25% for evenly distributed quarterly progress, all items were below target, with the delay particularly pronounced for profit items. The primary factor was dilution of the Company-wide margin due to the sharp decline in the Development Business gross profit margin (38.8%→14.4%), while progress in the Construction Business was relatively strong. During the quarter, the Company revised its earnings and dividend forecasts. For the Full Year, it expects both revenue and profit growth, with Revenue up +12.7% year on year and Operating Income up +25.0%. Going forward, the pace of recovery in Revenue and gross profit recognition in the Development Business will be key to recovering Full-Year progress.

Shareholder Returns

The Company forecasts an annual dividend of ¥80 and revised its dividend forecast during the quarter. Based on forecast Net Income of ¥175.0B and approximately 58.49 million shares outstanding (after deducting treasury shares), total dividends are estimated at approximately ¥46.8B, resulting in a conservative Payout Ratio of approximately 26.7%. With an Equity Ratio of 74.4% and Cash and deposits of ¥729.6B, the Company has a strong financial base and little concern exists regarding the availability of funds for dividends.

Risk Factors

1. Development Business earnings volatility: The gross profit margin declined sharply from 38.8% in the previous year to 14.4% in the current period, and Operating Income declined to ¥3.96B, down -82.7% year on year. Quarterly profit and loss is structurally subject to significant fluctuations depending on the sales mix and timing of recognition of individual projects.

2. Changes in working capital and cash-generation capacity: While accounts receivable from completed construction contracts increased to ¥198.8B (+57.1%), advances received on construction contracts in progress declined to ¥62.9B (-23.6%), and Cash and deposits decreased to ¥729.6B, down ¥228.6B (-23.9%) from the end of the previous fiscal year. Management of the billing and collection cycle will affect capital efficiency going forward.

3. Company-wide margin dilution due to changes in the segment mix: While the Revenue mix of the Construction Business increased, the Development Business profit margin (7.0%) was below that of the Construction Business (13.6%). Changes in the composition of the two businesses have pushed down the Company-wide Operating Income margin (11.7%, compared with 14.3% in the previous year).

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (construction)

Profitability and Returns

The Company's Operating Income margin and Net Income margin both substantially exceed the industry median and are at a high level within the industry.

Growth and Capital Efficiency

The Revenue growth rate substantially exceeds the industry median and represents an exceptionally strong pace of revenue growth even among peers.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Revenue increased substantially by +29.0% year on year, but the Operating Income margin declined to 11.7% from 14.3% in the previous year, a decline of 2.6pt. A key characteristic is that expansion in volume has not translated directly into an improvement in profitability.

2. By segment, the Construction Business Operating Income margin improved from 8.6% to 13.6%, while that of the Development Business declined sharply from 33.4% to 7.0%, indicating an ongoing change in the earnings structure within the business portfolio.

3. Progress against the Full-Year plan was 21.2% for Revenue and 15.1% for Operating Income, both below the benchmark of 25% for evenly distributed quarterly progress. The pace of recovery in Development Business Revenue and gross profit toward the second half of the fiscal year will determine Full-Year performance.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson type with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥2,571–¥2,724 at ±1% for the cost of equity, and ¥2,638–¥2,658 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the Full-Year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: residual income model / interest rate reference month: 2026-06 / This value does not predict or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI through analysis of XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, and you should consult a professional adviser as necessary.

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