Hokuetsu (3865) FY2026 Q3 Earnings Report

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Executive Summary

This was a decline in both revenue and earnings, with profits contracting at a faster pace than revenue due to deteriorating profitability in the Pulp and Paper Business. Revenue was ¥212.71B (down -7.3% YoY), Operating Income was ¥5.36B (down -64.4%), Ordinary Income was ¥8.38B (down -41.8%), and Net Income attributable to owners of the parent was ¥6.56B (down -43.3%). The primary factors were lower sales volumes and reduced cost absorption capacity in the core Pulp and Paper Business, resulting in the Operating Income margin falling sharply to 2.5% from 6.6% in the previous year.

Factors Affecting Results

【Revenue】Revenue was ¥212.71B, down -7.3% YoY. By segment, the Pulp and Paper Business declined significantly by -8.3% to ¥194.75B, accounting for 91.5% of total revenue, and was the main cause of the company-wide revenue decline. Meanwhile, the Packaging and Paper Processing Business secured revenue growth of +5.2% to ¥13.42B, accounting for 6.3% of total revenue.

【Profit and Loss】Operating Income of ¥5.36B (down -64.4% YoY), Ordinary Income of ¥8.38B (down -41.8%), and Net Income of ¥6.56B (down -43.3%) all declined. While the gross margin fell to 19.2% from 22.6% in the previous year, SG&A expenses declined by only -3.3% to ¥35.49B, less than the revenue decline rate (-7.3%), causing the fixed-cost burden to reverse operating leverage. Segment profit in the Pulp and Paper Business fell sharply by -71.2% YoY to ¥4.01B, representing the primary cause of the deterioration in consolidated Operating Income. Ordinary Income was supported by ¥4.38B in non-operating income, including ¥1.02B in dividend income and ¥2.21B in equity-method gains and losses, and exceeded Operating Income by ¥3.01B. The gap between Ordinary Income and Net Income was attributable to extraordinary income of ¥1.37B, including a ¥1.33B gain on the sale of investment securities, and extraordinary losses of ¥1.81B, including disaster losses of ¥0.46B and losses on the disposal and sale of fixed assets of ¥1.35B, resulting in a net negative impact of ¥0.44B. Overall, the company reported declines in both revenue and earnings, with the deterioration in core operating profitability being the primary factor.

Segment Analysis

The Pulp and Paper Business was the primary cause of the deterioration in consolidated results, with revenue of ¥194.75B (down -8.3% YoY), segment profit of ¥4.01B (down -71.2%), and a profit margin of 2.1% (a significant decline from 6.6% in the previous year). In contrast, the Packaging and Paper Processing Business achieved increases in both revenue and earnings, with revenue of ¥13.42B (up +5.2%), segment profit of ¥0.52B (up +190.4%), and a profit margin of 3.9% (improving from 1.4% in the previous year). Since the Pulp and Paper Business accounts for the majority of consolidated Operating Income, the structure is such that the recovery of profitability in this business will determine the direction of consolidated earnings.

Key Financial Indicators

【Profitability】The Operating Income margin of 2.5% and gross margin of 19.2% both declined significantly from the previous year (6.6% and 22.6%, respectively), while the SG&A ratio rose to 16.7%. The Net Income margin was 3.0%, down from 5.0% in the previous year.【Cash Flow Quality】Non-operating income of ¥4.38B includes dividend income of ¥1.02B and equity-method gains and losses of ¥2.21B, which supported Ordinary Income; however, it should be noted that these are not profits derived from the core business.【Investment Efficiency】Annualized ROE remained at 3.2%, indicating that sufficient earnings returns are not being generated relative to the substantial capital base represented by an Equity Ratio of 62.0%.【Financial Soundness】The financial base remains stable, with an Equity Ratio of 62.0%, total assets of ¥435.75B, and net assets of ¥270.19B. Cash and deposits stood at ¥18.07B, declining from the previous year, while investment securities of ¥38.46B accounted for a certain proportion of assets.

Cash Flow Analysis

As detailed disclosure of the statement of cash flows is unavailable, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥18.07B, down 34.6% from ¥27.64B in the same period of the previous year, indicating a slight decline in on-hand liquidity. Meanwhile, short-term borrowings decreased by 52.4% YoY to ¥12.94B, while long-term borrowings increased by 37.4% to ¥48.35B, indicating a shift in the funding structure from short-term to long-term financing. Bonds of ¥25.00B due for redemption within one year were also recorded, making arrangements for refinancing or redemption funding an issue in cash management going forward. Investment securities increased by 25.7% to ¥38.46B, suggesting that the accumulation of securities holdings in investment activities may have represented a portion of the use of funds.

Quality of Earnings

The difference between Ordinary Income and Net Income was mainly attributable to extraordinary gains and losses and the tax burden; distinguishing these items from Operating Income from the core business is important in assessing earnings quality. Non-operating income of ¥4.38B was equivalent to 2.1% of revenue and primarily consisted of items with a strongly non-recurring nature, including dividend income of ¥1.02B and equity-method gains and losses of ¥2.21B. Of extraordinary income of ¥1.37B, gains on the sale of investment securities accounted for ¥1.33B, representing temporary gains from the sale of liquid assets. Extraordinary losses of ¥1.81B consisted of losses on the disposal and sale of fixed assets of ¥1.35B and disaster losses of ¥0.46B, both of which were non-recurring items. Extraordinary gains and losses resulted in a net loss of ¥0.44B, and Net Income remained at ¥6.56B after deducting ¥1.37B in income taxes and other items from Ordinary Income of ¥8.38B. Operating Income of ¥5.36B, which reflects the earning power of the core business, was significantly below Ordinary Income and Net Income, indicating that earnings from the ordinary-income stage onward were highly dependent on non-operating and extraordinary items.

Earnings Forecasts and Guidance

Progress against the full-year forecasts was 72.8% for revenue, 67.0% for Operating Income, and 83.8% for Ordinary Income. Progress for revenue and Operating Income was below the standard 75% level, with Operating Income in particular remaining at a low progress rate, reflecting deteriorating profitability in the Pulp and Paper Business. Meanwhile, Net Income attributable to owners of the parent reached ¥6.56B for the cumulative Q3 period, already exceeding the full-year forecast of ¥6.00B. This situation suggests that the company may be assuming a net loss or substantial earnings contraction in Q4, making changes in extraordinary gains and losses and the tax burden toward the fiscal year-end key areas of focus. No revisions to the earnings forecasts were made during this quarter.

Shareholder Returns

The Q2 dividend remains unchanged at ¥13.00 per share, as does the full-year dividend forecast of ¥26.00 per share. Based on the full-year Net Income forecast of ¥6.00B and the average number of shares outstanding during the period of 168.2 million shares, the annual total dividend is approximately ¥4.37B, resulting in a Payout Ratio of approximately 72.9%. Net Income attributable to owners of the parent for the cumulative Q3 period was ¥6.56B, already exceeding the full-year forecast, indicating that the dividend is currently covered by the earnings level. However, if results are in line with the full-year forecast, the return burden would be somewhat high. No revision to the dividend forecast was made during this quarter.

Risk Factors

1. Deterioration in the profitability of the Pulp and Paper Business: Revenue declined significantly by -8.3% YoY to ¥194.75B, while segment profit fell -71.2% to ¥4.01B. Since this business accounts for the majority of consolidated Operating Income, its profitability structurally determines company-wide performance.

2. Low-margin structure: The Operating Income margin of 2.5% and gross margin of 19.2% both declined significantly from the previous year, indicating limited resilience to increases in raw material and fuel costs and delays in passing through higher costs.

3. Maturity and refinancing management: In addition to ¥25.00B in bonds due for redemption within one year, the company has ¥48.35B in long-term borrowings. Changes in financing conditions and the execution of refinancing remain key financial areas to monitor.

Industry Benchmark (For Reference; Company Analysis)

Profitability and Returns

The company’s profitability, measured by both the Operating Income margin and Net Income margin, is significantly below the industry median and ranks low within the industry.

Growth and Capital Efficiency

While many companies in the industry are experiencing revenue growth, the company reported a revenue decline and is also lagging within the industry from a growth perspective.

※Source: Company analysis

Key Points from the Earnings Results

1. The consolidated Operating Income margin declined to 2.5%, clearly demonstrating a structure in which deteriorating profitability in the Pulp and Paper Business, which accounts for 91.5% of revenue, determines consolidated performance. The recovery trend in this business’s earnings will be the key focus going forward.

2. The Packaging and Paper Processing Business achieved increases in both revenue and earnings (revenue +5.2%, segment profit +190.4%) and improved its profit margin, confirming a certain degree of diversification benefit from the business portfolio.

3. While Net Income attributable to owners of the parent has already exceeded the full-year forecast, the progress rates for Operating Income and Ordinary Income are below standard levels. The fact that the factors supporting Ordinary Income and Net Income depend on non-operating income and extraordinary income is an important point in evaluating the quality of the earnings results.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,262–¥1,333 at a ±1% change in the cost of equity, and ¥1,287–¥1,303 at a ±0.1 change in ω.

Notes:

• Since Net Income progress against the full-year forecast (108%) exceeds the standard level (75%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with progress ahead of forecast tend to exceed their forecasts. Adjustments may be excessive for businesses with strong seasonality).
• Since forecast ROE is below the cost of equity, the theoretical value is below Book Value per Share.
• Net assets as of the quarter-end have been used (there is a timing difference from the full-year forecast).
• Since 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 reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, nor does it predict 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 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, after consulting with a professional as necessary.

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