Chugai Ro Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

Although operating and ordinary results improved from the same period of the previous year, net income turned into a loss due to the reversal of the gain on the sale of investment securities recorded in the previous year. Revenue was ¥61.2B (YoY -3.6%), the operating loss was ¥2.1B (an improvement of ¥1.6B from the ¥3.7B loss in the previous year), and the ordinary loss was ¥1.1B (an improvement of ¥1.4B from the ¥2.5B loss in the previous year). Net income was a loss of ¥0.9B, a significant deterioration from the ¥6.7B profit in the previous year, which included a ¥12.8B gain on the sale of investment securities. While an improvement in the gross profit margin lifted profitability in the core business, the disappearance of temporary extraordinary gains weighed on bottom-line profit.

Factors Affecting Performance

【Revenue】Revenue was ¥61.2B, down 3.6% YoY. By segment, the Plant Business grew significantly to ¥30.4B (YoY +51.6%), accounting for approximately 49.7% of total revenue, while the Thermal Treatment Business declined to ¥25.1B (down 32.7%), the Development Business to ¥1.8B (down 36.7%), and Other Businesses to ¥10.1B (down 21.7%). A shift in revenue toward the Plant Business is progressing.

【Profit and Loss】The gross profit margin improved by 4.2pt to 18.1% from 13.9% in the same period of the previous year due to a decline in the cost-of-sales ratio, reducing the operating loss to ¥2.1B from a ¥3.7B loss in the previous year. Meanwhile, SG&A expenses increased 5.0% YoY to ¥13.2B, and the SG&A ratio rose by 1.7pt to 21.5%, partially offsetting the gross profit improvement. Ordinary results remained at a ¥1.1B loss due to non-operating income, including ¥0.9B in dividend income. However, because the previous year’s ¥6.7B net income included the one-time factor of a ¥12.8B gain on the sale of investment securities, net income turned into a ¥0.9B loss. Profitability at the operating level improved, but bottom-line profit deteriorated due to the absence of the one-time factor; this can be characterized as earnings growth on a core-business basis despite declining revenue.

Segment Analysis

The Plant Business was the only profitable segment, with revenue of ¥30.4B (YoY +51.6%) and operating income of ¥3.7B (12.2% margin), and drove company-wide profit. The Thermal Treatment Business recorded revenue of ¥25.1B (down 32.7%) and an operating loss of ¥4.2B (margin -16.8%), representing the central earnings issue as losses deteriorated significantly from the previous year. The Development Business posted revenue of ¥1.8B (down 36.7%) and an operating loss of ¥1.6B (margin -92.6%), resulting in a high loss ratio. Other Businesses recorded revenue of ¥10.1B (down 21.7%) and an operating loss of ¥0.3B (margin -2.7%), with the loss narrowing from the previous year. In addition, beginning this period, the measurement method was changed to allocate GX project expenses to each segment; comparisons with the same period of the previous year include the effects of this presentation change.

Key Financial Indicators

【Profitability】The operating margin was -3.4%, improving by 2.4pt from -5.8% in the same period of the previous year, but remained in negative territory. The gross profit margin improved by 4.2pt to 18.1% from 13.9% in the same period of the previous year, while the SG&A ratio rose by 1.7pt to 21.5%, partially offsetting the improvement. 【Cash Quality】Accounts receivable and notes receivable were ¥235.9B, accounting for approximately 50.4% of total assets; the lengthening collection period is an issue for capital efficiency. 【Investment Efficiency】ROE (annualized) was -1.2%, primarily due to the loss in the net profit margin, rather than deterioration caused by asset turnover or financial leverage. 【Financial Soundness】The equity ratio was 62.8%, and current assets of ¥336.2B significantly exceeded current liabilities of ¥129.5B, indicating no pressure on short-term liquidity. Cash and deposits were ¥76.7B, down from ¥108.2B in the same period of the previous year.

Cash Flow Analysis

Although individual disclosure of the cash flow statement is not available, analysis of cash trends based on changes in the balance sheet indicates that cash and deposits decreased by ¥31.5B YoY to ¥76.7B. At the same time, accounts payable and notes payable decreased by ¥27.8B YoY to ¥41.0B, suggesting that the progression of payments to suppliers and subcontractors and the reduction in operating liabilities accompanying project progress were contributing factors to the decline in cash. Accounts receivable and notes receivable remained high at ¥235.9B, and the lengthening of the construction inspection, billing, and collection cycle may be affecting the timing of cash conversion. Treasury stock increased by ¥11.4B YoY and stood at negative ¥25.7B, indicating that capital outflows from share repurchases were also a factor in the decline in cash. Although ample liquidity is being maintained, trends in working capital require continued monitoring.

Quality of Earnings

The ordinary loss of ¥1.1B for the period reflects non-operating income of ¥1.3B, primarily comprising ¥0.9B in dividend income, offsetting the operating loss of ¥2.1B. This improvement from non-operating income needs to be evaluated separately from the improvement in core-business profitability. The previous year’s net income of ¥6.7B included the one-time factor of a ¥12.8B gain on the sale of investment securities, whereas no such extraordinary gains or losses occurred during the current period. Accordingly, the year-on-year comparison of net income is primarily attributable to the absence of the one-time gain, while from the perspective of recurring earnings power, the improvement in operating results (YoY +¥1.6B) represents the more substantive change. Comprehensive income was ¥2.8B, and the divergence from the ¥0.9B net loss was primarily due to a ¥3.6B increase in valuation difference on securities, resulting from market fluctuations unrelated directly to the current period’s profit or loss.

Earnings Forecast and Guidance

The full-year plan calls for revenue of ¥403.0B (YoY +7.9%), operating income of ¥36.2B (up 25.7%), and ordinary income of ¥37.2B (up 19.6%), with no revisions made during the quarter. Q1 revenue progress was 15.2%, remaining 9.8pt below the simple one-quarter benchmark of 25%. Q1 recorded an operating loss of ¥2.1B, meaning that achieving the full-year plan will depend on a concentration of revenue recognition and profitability improvement from Q2 onward. Realization of the plan as projected requires a performance structure weighted toward the second half, and key points for future monitoring include whether the delay in progress is structural or attributable to the timing of project inspections and revenue recognition.

Shareholder Returns

The full-year dividend forecast is ¥180 per share, with no revision made during the quarter. This represents an increase from the previous year’s dividend in the ¥160 range. Based on the average number of shares outstanding during the period of 7.111M shares and the full-year net income forecast of ¥2.516B, the payout ratio is calculated at approximately 50.9%. However, Q1 net loss attributable to owners of the parent was ¥0.7B, and realization of the full-year dividend depends on a recovery in earnings as planned from Q2 onward. In addition, as treasury stock increased by ¥11.4B YoY, the status of share repurchases should also be reviewed alongside the payout ratio when assessing total shareholder returns, including dividends.

Risk Factors

1. Deterioration in the profitability of the Thermal Treatment Business: Against revenue of ¥25.1B (YoY -32.7%), the business recorded an operating loss of ¥4.2B (margin -16.8%), with losses expanding from the previous year. Improving the profitability of this business is the central issue for restoring consolidated profitability.

2. Lengthening collection period for accounts receivable: Accounts receivable and notes receivable of ¥235.9B account for approximately 50.4% of total assets, and the lengthening construction inspection, billing, and collection cycle may affect cash conversion. Cash and deposits decreased by ¥31.5B YoY.

3. Uncertainty regarding achievement of the full-year plan: Against the full-year operating income target of ¥36.2B, Q1 recorded an operating loss of ¥2.1B, while revenue progress of 15.2% was below the standard 25% level. Significant performance improvement from Q2 onward is required to achieve the plan.

Industry Benchmark (For Reference; Based on Company Research)

Profitability and Returns

Profitability was significantly below the industry median, with both the operating and net profit margins ranking at the lower end of the industry.

Growth and Capital Efficiency

Revenue growth was also below the industry median, placing the company among those exhibiting a notable declining-revenue trend within the construction industry.

※Source: Company research

Key Points from the Earnings Results

1. The gross profit margin improved by 4.2pt YoY, reducing the operating loss by ¥1.6B, while the increase in the SG&A ratio (up 1.7pt YoY) partially offset this improvement. Progress in fixed-cost efficiency will be key to improving operating results going forward.

2. The Plant Business (revenue +51.6%, operating income ¥3.7B) drove the company as the only profitable segment, and the business mix is changing. Meanwhile, expanding losses in the Thermal Treatment Business are weighing on consolidated results.

3. The significant year-on-year decline in net income was primarily due to the absence of the one-time gain on the sale of investment securities (¥12.8B) recorded in the previous year, and should be viewed separately from recurring earnings trends in the core business.

Theoretical Share Price (Reference Value)

Sensitivity: ¥4,077–¥4,309 at Cost of Equity ±1%; ¥4,189–¥4,191 at ω±0.1.

Notes:

• Because forecast ROE is below the Cost of Equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used (there is a timing mismatch with 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-type, explicit 5-year fade) / Interest Rate Benchmark Month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data; it 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 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, with consultation with a professional as necessary.

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