Choei Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥5.25B
• Operating Income: ¥910M
• Net Income: ¥473M
• EPS: ¥107.32

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: FY2026 Q2 was mixed—top-line grew solidly but profitability compressed and earnings quality weakened amid high leverage. Revenue rose 7.8% YoY to 52.55, while operating income fell 13.4% to 9.10, dragging ordinary income down 23.9% to 6.96 and net income down 24.1% to 4.73. Gross profit was 17.08 (32.5% margin), and operating margin declined to about 17.3%. Based on prior-period derivation, operating margin contracted by roughly 420 bps (from ~21.6% to ~17.3%). Net margin compressed by roughly 380 bps (from ~12.8% to ~9.0%). Non-operating expenses of 2.73 (largely interest) weighed on ordinary income, with interest coverage at 3.34x—adequate but not robust if rates rise. Cash generation lagged earnings: OCF of 4.11 vs NI of 4.73 yields an OCF/NI of 0.87x, indicating somewhat weaker earnings quality. Capex was heavy at -14.92, implying negative implied FCF of about -10.8 (OCF minus capex), before buybacks of -2.10. The balance sheet is highly levered: D/E is 4.66x and long-term loans are 469.53 against equity of 117.54, though near-term liquidity appears strong (current ratio 299.8%). ROE stood at 4.0% with very low asset turnover (0.076), and ROIC was 1.3%, well below typical cost of capital—highlighting capital efficiency challenges. Depreciation of 7.47 supports EBITDA of 16.57 (31.5% margin) but does not offset the rate-sensitive interest burden. The payout ratio is estimated at 118.2%, which, alongside negative implied FCF, raises dividend sustainability questions absent external funding or earnings recovery. With non-operating income ratio at 29.3%, results remain sensitive to financing conditions and non-core items. Forward-looking, maintaining margins and improving cash conversion will be critical as refinancing risk and potential interest rate headwinds persist. The substantial noncurrent debt stack implies heightened sensitivity to credit spreads and lending appetite. Given the asset-heavy model and low turnover, incremental returns hinge on disciplined capex, occupancy/rent optimization, and debt management.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin (≈9.0%) × Asset Turnover (≈0.076) × Financial Leverage (≈5.85x) = ROE ≈ 4.0%. The most material driver of YoY deterioration is margin compression: operating income fell 13.4% despite 7.8% revenue growth, implying operating margin contraction of about 420 bps (to ~17.3%). Business context: cost pressures (e.g., higher interest flowing through non-operating line and likely higher property-related costs) and a greater drag from non-operating expenses squeezed ordinary and net income. Asset turnover remains structurally low given the asset-heavy real estate model, limiting ROE uplift from efficiency. Leverage is high (D/E 4.66x), which props up ROE but increases financial risk and sensitivity to financing costs. Sustainability: margin headwinds from interest and cost inflation are likely to persist unless rent growth/occupancy improve or costs are reduced; leverage-driven ROE is fragile in rising rate environments. Watch for SG&A ratio (12.5% of revenue this quarter) and non-operating expense trends; if SG&A outpaces revenue or interest rises further, profitability will remain pressured.

Growth Assessment

Revenue grew 7.8% YoY to 52.55, indicating steady underlying demand or incremental rentable area/price. However, operating income declined 13.4% to 9.10, and ordinary income fell 23.9% to 6.96, showing negative operating leverage and growing financing drag. Net income declined 24.1% to 4.73, with net margin down to about 9.0%. EBITDA of 16.57 (31.5% margin) remains healthy, but margin compression at the operating and net levels underscores cost/financing pressure. The non-operating income ratio (29.3%) highlights sensitivity to items outside core operations. With ROIC at 1.3%, incremental investments appear value-dilutive unless returns can be lifted meaningfully. Near-term growth sustainability depends on improving occupancy/rent, cost discipline, and debt cost management; otherwise, revenue growth may not translate into earnings growth.

Financial Health

Liquidity is strong near term: current ratio 299.8% and quick ratio 299.8%, with cash and deposits of 118.59 comfortably exceeding current liabilities of 41.28. No warning on current ratio (<1.0) is triggered. Solvency risk is elevated: D/E is 4.66x (explicit warning: >2.0), and long-term loans are 469.53 vs equity 117.54, indicating high leverage. Interest coverage of ~3.34x is adequate now but could weaken if earnings fall or interest rises. Maturity mismatch appears limited near term (noncurrent liabilities 506.26 >> current liabilities 41.28), but refinancing concentration risk exists given the large noncurrent debt stack. No off-balance sheet obligations are disclosed in the provided data; absence of disclosure does not imply absence of risk.

Cash Flow Quality

OCF/Net Income is 0.87x (<1.0), a mild quality concern indicating earnings not fully backed by cash this period, potentially due to working capital or non-cash profit components. Implied free cash flow is approximately -10.8 (OCF 4.11 minus capex 14.92), negative before shareholder returns. Financing CF of 0.80 and buybacks of -2.10 suggest external funding/treasury utilization bridged the cash gap. No explicit working capital breakdown is provided; however, the divergence between OCF and NI warrants monitoring for receivable timing or other WC swings. Sustaining capex plus dividends under current cash generation looks challenging without incremental debt, asset sales, or higher operating cash flow.

Dividend Sustainability

The calculated payout ratio is 118.2%, exceeding earnings—a red flag for sustainability unless supported by cash reserves or financing. With implied FCF at roughly -10.8, dividend coverage from organic cash is insufficient this period. Balance sheet liquidity (cash 118.59) provides a buffer, but persistent negative FCF would erode flexibility or increase leverage if dividends are maintained. Policy outlook likely hinges on stabilizing margins and improving OCF; prudent management would align payouts with sustainable FCF trajectory. Given high leverage, maintaining generous distributions could elevate refinancing and covenant risks over time.

Risk Assessment

Business Risks:

• Margin compression risk from rising operating costs and maintenance/property-related expenses
• Demand/occupancy risk affecting rental and related revenues
• Asset concentration risk given low asset turnover and capital intensity
• Execution risk on capex projects with low current ROIC (1.3%)

Financial Risks:

• High leverage (D/E 4.66x) and large long-term debt (469.53) increase refinancing and interest rate risk
• Interest coverage only moderate at ~3.34x; earnings sensitivity to rate increases is high
• Negative implied FCF requires external funding for capex and distributions
• Potential covenant headroom risk if profitability weakens further

Key Concerns:

• Operating margin contraction of ~420 bps YoY despite 7.8% revenue growth
• OCF/NI of 0.87x indicating softer cash conversion this period
• Payout ratio at 118.2% and buybacks (-2.10) despite negative implied FCF
• Very low asset turnover (0.076) and low ROE (4.0%) driven mainly by leverage

Investment Implications

Key Takeaways:

• Top-line growth did not translate into earnings growth; operating and net margins compressed materially
• Leverage is high and a key swing factor for equity value through interest cost and refinancing risk
• Cash conversion is below-par and capex-heavy profile produced negative implied FCF
• ROIC at 1.3% signals value-dilutive reinvestment unless returns improve
• Liquidity is ample near term, but sustainability of dividends and buybacks depends on OCF recovery or asset recycling

Metrics to Watch:

• Operating margin and cost-to-revenue ratios
• Interest expense trajectory and coverage ratio
• OCF/NI and working capital movements
• Capex commitments versus realized FCF
• Debt maturity ladder and refinancing terms (spreads, covenants)
• Occupancy/rent metrics and pipeline returns (to lift ROIC)

Relative Positioning: Relative to domestic asset-heavy real estate operators, the company shows adequate near-term liquidity but higher-than-comfort leverage, weaker ROIC, and softer cash conversion, leaving it more exposed to financing conditions and requiring operational improvements to close profitability and capital efficiency gaps.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis