Chugai Ro (1964) FY2026 Q3 Earnings Report

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Executive Summary

Although revenue and earnings increased during the period, the sharp rise in net income was heavily dependent on gains on the sale of investment securities and therefore needs to be evaluated separately from the earnings power of the core business. Revenue was ¥23.78B (¥22.22B in the same period of the prior year, YoY +7.0%), Operating Income was ¥0.62B (¥0.27B in the prior year, YoY +125.8%), Ordinary Income was ¥0.82B (¥0.49B in the prior year, YoY +65.7%), and Net Income was ¥2.32B (¥1.04B in the prior year). The significant increase in Operating Income was primarily attributable to an improvement in the gross margin (18.7%, +1.6pt year on year), while the sharp increase in Net Income was driven by a gain on the sale of investment securities of ¥2.64B, which accounted for 76.4% of Profit Before Tax of ¥3.46B. Progress against the full-year forecast was low, at 63.4% for revenue versus 20.6% for Operating Income and 25.9% for Ordinary Income, making the pace of profit realization in Q4 a key focus going forward.

Factors Affecting Performance

【Revenue】Revenue increased 7.0% year on year to ¥23.78B. Progress against the full-year forecast of ¥37.50B was 63.4%, below the standard quarterly progress benchmark of approximately 75%. Although accounts receivable declined year on year, they still accounted for 52.2% of total assets, suggesting that the length of the acceptance and collection cycle may be affecting the pace at which sales are recognized.

【Profit and Loss】Operating Income increased significantly by 125.8% YoY to ¥0.62B, while Ordinary Income rose 65.7% YoY to ¥0.82B. The gross margin improved to 18.7% from 17.1% in the prior year (+1.6pt), and this improvement offset the increase in the SG&A ratio to 16.1%, constituting the primary reason for the earnings increase. However, the Operating Income margin remained low at 2.6% in absolute terms. Net Income of ¥2.32B was heavily dependent on the ¥2.64B gain on the sale of investment securities recorded as extraordinary income and should be evaluated separately from recurring earnings power. Among non-operating income, dividend income of ¥0.24B supplemented Ordinary Income. In conclusion, although revenue and earnings increased during the period, the growth in Net Income was significantly affected by temporary factors.

Key Financial Metrics

【Profitability】The Operating Income margin of 2.6% (1.2% in the prior year), Ordinary Income margin of 3.4% (2.2% in the prior year), and Net Income margin of 9.8% (4.5% in the prior year) all improved. However, the increase in the Net Income margin was significantly affected by the gain on the sale of investment securities, while the Operating Income margin of 2.6% remains low relative to the scale of the business.【Cash Flow Quality】The gain on the sale of investment securities accounted for 76.4% of Profit Before Tax of ¥3.46B, creating a structure in which the increase in Profit Before Tax cannot be explained by Operating Income of only ¥0.62B.【Investment Efficiency】ROE (annualized) was 10.6%, but its reproducibility is limited because Net Income includes a temporary gain on disposal. To measure the capital efficiency of the core business, the levels of Operating Income and Ordinary Income should also be reviewed. Total asset turnover is low, indicating room for improvement in the core business’s ability to generate earnings from invested capital.【Financial Soundness】The Equity Ratio improved to 62.3% from 58.1% in the prior year, while cash and deposits increased significantly to ¥6.73B, indicating ample liquidity. Interest-bearing debt, including long-term borrowings of ¥2.61B, is limited, and financial leverage is conservative.

Cash Flow Analysis

Although there is no direct disclosure of the cash flow statement, an analysis of funding trends based on changes in the balance sheet indicates that cash and deposits increased significantly to ¥6.73B, improving liquidity from the prior year. Meanwhile, accounts payable declined to ¥4.48B and inventories increased to ¥2.42B, suggesting that changes in the timing of payments to suppliers and subcontractors, together with the accumulation of work-in-progress projects, are increasing the funding burden of working capital. Accounts receivable remained at ¥24.42B, accounting for more than half of total assets, and the length of the collection cycle may be affecting capital efficiency. Investment securities declined to ¥5.76B, suggesting that sales during the period contributed to the increase in cash and deposits. Overall, it should be noted that the increase in funds during the period included not only the core business’s cash-generation capacity but also a temporary effect from asset sales.

Earnings Quality

The quality of earnings for the period reflects a structure in which recurring earnings power and temporary factors are clearly separable. Operating Income of ¥0.62B and Ordinary Income of ¥0.82B represent recurring earnings generated primarily by the core business and non-operating income, including dividend income of ¥0.24B from cross-shareholdings. In contrast, the primary factor driving Net Income of ¥2.32B was the temporary ¥2.64B gain on the sale of investment securities. This gain accounted for 76.4% of Profit Before Tax of ¥3.46B, meaning that final profit for the period does not directly reflect the earnings power of the core business. Dividend income of ¥0.24B accounted for ¥0.24B of non-operating income of ¥0.28B, indicating a certain degree of dependence on non-business income. Comprehensive Income was ¥2.04B, creating a gap versus Net Income of ¥2.32B, primarily due to a decline of ¥0.32B in valuation differences on securities. Accordingly, when evaluating earnings quality for the period, it is appropriate to use the growth in Operating Income and Ordinary Income as indicators of core business improvement, while treating the sharp increase in Net Income separately as a temporary factor.

Earnings Forecast and Guidance

Progress against the full-year forecast was 63.4% for revenue (actual ¥23.78B / forecast ¥37.50B), compared with 20.6% for Operating Income (actual ¥0.62B / forecast ¥3.00B) and 25.9% for Ordinary Income (actual ¥0.82B / forecast ¥3.15B), meaning that progress on profit metrics was substantially below revenue progress. Even compared with the standard quarterly progress benchmark of approximately 75%, these levels are low, and significant profit generation in Q4 will be required to achieve the full-year plan. The full-year forecast assumes Revenue YoY +3.5%, Operating Income YoY +9.7%, and Ordinary Income YoY +4.9%; therefore, the full-year plan is conservative relative to the high growth pace of Operating Income through the current period, at YoY +125.8%. This progress gap may reflect the business characteristic of projects being completed and delivered in concentration at the fiscal year-end, but achievement will require further monitoring.

Shareholder Returns

The full-year dividend forecast is ¥150 per share, the same level as the prior year’s actual dividend of ¥150, suggesting a policy of maintaining stable dividends. Based on the full-year forecast EPS of ¥510.18, the forecast Payout Ratio is 29.4%, below 60%. With an Equity Ratio of 62.3% and substantial equity capital, the company appears to have sufficient resources to fund dividend payments. However, because Net Income of ¥2.32B includes a gain on the sale of investment securities, it is important to compare recurring earnings excluding the gain when evaluating dividend sustainability. Treasury shares increased from the prior year, and changes in the Payout Ratio and treasury shares should be considered separately when assessing the overall picture of shareholder returns.

Risk Factors

1. Absolute level of the Operating Income margin: Although the Operating Income margin of 2.6% and gross margin of 18.7% improved from the prior year, their absolute levels remain low, creating a structure in which profitability is susceptible to pressure from increases in materials, subcontracting, and labor costs.

2. Dependence on temporary factors: The ¥2.64B gain on the sale of investment securities accounted for 76.4% of Profit Before Tax within Net Income of ¥2.32B, and the levels of Net Income and ROE of 10.6% do not necessarily reflect sustainable earnings power.

3. Changes in working capital: Inventories increased year on year while accounts payable declined. Together with the fact that accounts receivable account for 52.2% of total assets, the efficiency of funds and the pace at which inventory is converted into sales will require close monitoring.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (construction)

Profitability and Returns

Although comparative data within the industry is limited, the company’s Operating Income margin of 2.6% appears to be low in absolute terms.

Growth and Capital Efficiency

The Revenue Growth Rate of 7.0% indicates a growth trend, but additional comparative data would be desirable to determine the company’s relative position within the industry.

Source: Company analysis

Key Takeaways from the Financial Results

1. Operating Income increased YoY by +125.8%, and the Operating Income margin improved from the prior year, indicating an improvement in core business profitability centered on the higher gross margin.

2. However, the sharp increase in Net Income was highly dependent on the gain on the sale of investment securities, and Operating Income and Ordinary Income are the appropriate metrics for evaluating recurring earnings power.

3. Progress in Operating Income and Ordinary Income against the full-year forecast was below revenue progress in both cases, making project realization in Q4 the key to achieving the full-year plan.

Theoretical Share Price (Reference Value)

Sensitivity: ¥4,419–¥4,681 at ±1% for the cost of equity, and ¥4,535–¥4,566 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 (Ohlson model; explicit 5-year fade) / Interest rate reference month: 2026-07 / A mechanically calculated value based solely on publicly disclosed data; it does not constitute a forecast of the market share price or a recommendation of any specific investment action, and does not forecast or guarantee the future share price.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release 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 with a professional as necessary.

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