DAIWA HOUSE INDUSTRY (1925) FY2026 Q3 Earnings Report

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Executive Summary

Cumulative results for Q3 reflected higher revenue and operating income, although net income declined due to the reversal of special factors. Revenue increased to ¥4兆302.9B (up +2.0% YoY, +800.0B), while operating income rose to ¥3,635.9B (up +1.8%, +63.7B), securing increases in both revenue and operating income. On the other hand, ordinary income declined to ¥3,353.9B (down -1.4%), and net income declined to ¥2,278.3B (down -4.7%). The primary factors were the contraction in gains on the sale of investment securities, which had made a significant contribution in the previous year, from ¥128.5B to ¥14.7B, as well as an increase in non-operating expenses, mainly interest expenses. The gross profit margin improved to 21.0% (20.3% in the previous year), but this was offset by an increase in the SG&A ratio to 12.0% (11.3% in the previous year), leaving the operating margin nearly flat at 9.0%.

Factors Affecting Performance

【Revenue】Revenue increased +2.0% YoY. By segment, Rental Housing grew from ¥9,668B to ¥10兆990B (+13.7%), while Commercial Facilities increased from ¥8,950B to ¥9,415B (+5.2%), driving overall growth. Conversely, Business Facilities declined sharply from ¥10兆592B to ¥8,892B (-16.1%), while Condominiums also decreased by 2.7%, partially offsetting the benefit of higher revenue.

【Profit and Loss】Operating income increased +1.8%, but the improvement in the gross profit margin (+68bp) was almost entirely offset by the increase in the SG&A ratio (+70bp), resulting in a slight decline in the operating margin to 9.0% from the previous year. At the ordinary income level, the contraction in gains on the sale of investment securities (¥128.5B→¥14.7B) and the increase in non-operating expenses weighed on results, resulting in a -1.4% decline in ordinary income. In addition, net income was affected by the previous year's extraordinary income and expenses (including net extraordinary losses of ¥24.1B, including impairment losses of ¥20.3B), resulting in a -4.7% decline. In conclusion, the Company achieved higher revenue and operating income, but ordinary income and net income declined, indicating that the quality of revenue growth was diluted by non-operating and extraordinary factors.

Segment Analysis

Segment profit (¥B) was 1,283.7 for Commercial Facilities (margin 13.6%), 1,206.1 for Rental Housing (10.9%), 1,116.5 for Business Facilities (12.1%), 410.9 for Detached Houses (4.9%), 90.4 for Condominiums (4.8%), and 109.9 for Environmental Energy (11.6%). While Commercial Facilities and Rental Housing, which generate high margins, drove profit growth, Business Facilities experienced declines in both revenue and profit, and the margin for Condominiums declined substantially year on year. Profitability disparities within the business portfolio have widened, increasing dependence on project mix.

Key Financial Indicators

【Profitability】The operating margin of 9.0% and net profit margin of 5.6% were both broadly flat from the previous year. Although the gross profit margin improved to 21.0%, this was offset by the increase in the SG&A ratio to 12.0%, limiting the quality of earnings growth.【Cash Flow Quality】The difference between ordinary income and net income was attributable to net extraordinary losses of ¥24.1B and income taxes and other taxes of ¥1,051.5B, resulting in an effective tax rate of approximately 31.6% relative to profit before tax.【Investment Efficiency】Annualized ROE was 10.8%, indicating a structure in which the effect of financial leverage contributes more than profitability itself. Total assets expanded to ¥7兆8,782B, requiring confirmation of the balance between asset efficiency and leverage.【Financial Soundness】The equity ratio declined to 35.8% from 37.1% in the previous year. Short-term borrowings surged +375.3% YoY to ¥8,094B, indicating a shift toward shorter-term funding.

Cash Flow Analysis

Although a cash flow statement was not disclosed, analysis of funding trends based on changes in the balance sheet indicates that short-term borrowings increased substantially by +¥6,391.5B (+375.3%) YoY, while long-term borrowings also increased by +¥1,312.4B, reinforcing dependence on debt financing. Although cash and deposits increased to ¥3,906.2B, the accumulation was limited relative to the sharp increase in short-term borrowings, suggesting that the cash-to-short-term liabilities ratio is trending downward. Regarding the use of funds, investment securities increased by +¥1,860.8B and inventories of real estate for sale increased by +¥1,655.6B, respectively, indicating that funds are being directed toward investment and inventory expansion. The current ratio remained favorable at 180.9%, and short-term payment capacity itself has been maintained.

Quality of Earnings

The Company secured earnings growth on a core operating basis, as measured by operating income, but the quality of earnings varied because ordinary income and net income were affected by temporary factors. In the same period of the previous year, gains on the sale of investment securities of ¥128.5B boosted ordinary income and net income; this declined to ¥14.7B in the current period, meaning that the “withdrawal of a non-recurring upside factor” contributed to the decline in earnings. Extraordinary income and expenses resulted in a net extraordinary loss of ¥24.1B in the current period (including impairment losses of ¥20.3B, among others), which was slightly larger than the previous year's net loss of approximately ¥-13.3B, although its impact on profit before tax was limited. Non-operating expenses exceeded non-operating income by a wider margin, with non-operating income of ¥187.7B versus non-operating expenses of ¥469.7B, primarily due to interest expenses of ¥317.6B. The fact that SG&A expenses increased +8.4%, exceeding the revenue growth rate of +2.0%, warrants close monitoring as a factor that could influence future operating margin trends from an accrual perspective, namely the front-loading of expenses.

Earnings Forecast and Guidance

Progress against the full-year Company forecasts was 72.0% for revenue, 71.3% for operating income, and 72.7% for net income (forecast EPS of ¥468.60), all slightly below the simple 75% time-period benchmark. The full-year plan calls for revenue of ¥5兆6,000B (+3.0% YoY), operating income of ¥5,100B (-6.6%), and ordinary income of ¥4,610B (-10.7%), indicating that the Company has incorporated higher revenue but lower earnings (lower margins) in the second half into its plan. Operating income required in Q4 is approximately ¥1,464B based on a reverse calculation, and if the profit margin trend from the first half continues, progress is broadly consistent with this assumption.

Shareholder Returns

The Q2 dividend was ¥75.00 per share, and the payout ratio based on cumulative net income for the current period was approximately 22.0%. The full-year dividend forecast is ¥175.00 per share, and the forecast payout ratio calculated using forecast full-year net income of ¥2,900B and the average number of shares outstanding during the period of 6.187B shares is approximately 37%. From the perspective of sustainability, using approximately 60% as a benchmark, the dividend burden is not excessive, and accumulated retained earnings of ¥2兆2,633.6B also provide support for the dividend. Since no data on share repurchases is provided, this report evaluates only the payout ratio.

Risk Factors

1. Increased dependence on short-term funding: Short-term borrowings surged +375.3% YoY to ¥8,094.5B, and the short-term liabilities ratio rose to approximately 41.0%. Short-term liabilities are large relative to cash and deposits of ¥3,906.2B, increasing sensitivity to changes in refinancing conditions and the interest-rate environment.

2. Profitability disparities within the business portfolio: Revenue in Business Facilities declined -16.1% YoY, and segment profit also decreased, while the margin for Condominiums declined substantially from the previous year (¥90.4B, margin 4.8%). Relative dependence on Commercial Facilities and Rental Housing has increased.

3. Margin pressure from higher SG&A expenses: SG&A expenses increased +8.4% YoY, expanding at a faster pace than the +2.0% revenue growth rate. This offset the improvement in the gross profit margin (+68bp), leaving the operating margin flat. If the increase in expenses continues, it could become a factor driving a secular decline in margins.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

Comparative data for the Company's operating margin and net profit margin against the construction industry average is limited. In absolute terms, both metrics have remained in the upper single digits to just below 10%.

Growth and Capital Efficiency

The revenue growth rate was +2.0%, indicating a moderate upward trend. Median data for determining the Company's relative position within the industry is limited.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Operating income increased, but ordinary income and net income declined due to the reversal of the non-recurring factor of gains on the sale of investment securities. When evaluating the “quality” of higher revenue and earnings, it is necessary to distinguish between core operations and temporary factors.

2. The sharp increase in short-term borrowings (+375.3%) and the decline in the equity ratio (37.1%→35.8%) indicate a structural shift toward shorter-term and more leveraged funding. The impact of future refinancing trends and the interest-rate environment on financial indicators warrants ongoing monitoring.

3. Progress against the full-year plan was in the low 70% range for both revenue and earnings, slightly below the standard level. However, because the Company itself is planning higher revenue but lower earnings (lower margins) for the full year, this progress should be viewed as broadly in line with the plan.

Theoretical Share Price (For Reference)

Sensitivity: ¥4,824–¥5,110 at a ±1% change in the cost of equity, and ¥4,954–¥4,979 at a change of ±0.1 in ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing discrepancy relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest-rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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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 discretion and responsibility, after consulting professionals as necessary.

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