Hokuetsu (3865) FY2027 Q1 Earnings Report

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Executive Summary

The most important point in this earnings report is that Operating Income declined sharply due to deteriorating profitability in the core business, despite flat Revenue. Revenue was ¥725.6B (+0.3% YoY), while Operating Income was ¥6.9B (-78.9%), Ordinary Income was ¥16.9B (-52.9%), and Net Income was ¥16.6B (-25.2%). The gross margin deteriorated to 17.6% from 21.4% in the previous year, and the 84.6% YoY decline in segment profit from the core Pulp and Paper Business weighed on overall profit. Meanwhile, dividend income of ¥8.4B supported Ordinary Income and Net Income, limiting the decline in Net Income relative to the decline in Operating Income alone.

Factors Affecting Earnings

【Revenue】Revenue was ¥725.6B, essentially flat at +0.3% YoY. By segment, the Pulp and Paper Business generated ¥662.7B (-0.4%), the Packaging and Paper Processing Business ¥44.5B (+3.5%), the Timber Business ¥17.8B (+5.5%), and Other Businesses ¥70.4B (+2.7%). The core Pulp and Paper Business declined slightly, while non-core businesses supplemented Revenue.

【Profit and Loss】Operating Income was ¥6.9B, down 78.9% YoY. The primary factor was the decline in the gross margin to 17.6% from 21.4% in the previous year. Although SG&A expenses decreased 1.2% YoY to ¥121.0B, indicating progress in cost reductions, the Company was unable to absorb higher costs. Segment profit in the Pulp and Paper Business fell to ¥4.5B (-84.6%), with the profit margin declining to 0.7%, making it the central factor behind the decline in consolidated profit. Ordinary Income was ¥16.9B (-52.9%), supported by an increase in dividend income to ¥8.4B from ¥5.6B in the previous year. Extraordinary gains of ¥11.4B and losses of ¥10.5B, including an impairment loss on investment securities of ¥7.2B, were almost offset, resulting in a limited impact on Profit Before Tax of ¥17.8B. Net Income of ¥16.6B (-25.2%) was also supported by the low effective tax rate of 6.9%. In conclusion, the Company recorded higher Revenue but lower profit.

Segment Analysis

The Pulp and Paper Business generated Revenue of ¥662.7B (-0.4%), Operating Income of ¥4.5B (-84.6%), and a profit margin of 0.7%. Although it is the core business, accounting for more than 91% of consolidated Revenue, its profitability deteriorated substantially. The Packaging and Paper Processing Business generated Revenue of ¥44.5B (+3.5%), profit of ¥0.4B (-36.2%), and a profit margin of 0.8%, recording a similar decline despite its smaller scale. The Timber Business generated Revenue of ¥17.8B (+5.5%), profit of ¥0.9B (+1.1%), and a profit margin of 5.0%, maintaining relatively high profitability and achieving the only profit increase among the segments. Other Businesses generated Revenue of ¥70.4B (+2.7%) and profit of ¥1.0B (-28.9%). Fluctuations in overall profit are primarily determined by the deterioration in profitability of the Pulp and Paper Business.

Key Financial Indicators

【Profitability】The Operating Income margin declined sharply to 0.9% from 4.5% in the previous year, while the gross margin also deteriorated to 17.6% from 21.4%. The Net Income margin was 2.3%, and annualized ROE was 2.6%, both at low levels. 【Cash Flow Quality】Dividend income of ¥8.4B exceeded Operating Income of ¥6.9B, indicating that non-core factors made a meaningful contribution to the increase in Ordinary Income and Net Income. Extraordinary gains of ¥11.4B and losses of ¥10.5B were almost offset, limiting their impact on Net Income. 【Investment Efficiency】Asset turnover on an annualized basis was not high relative to total assets of ¥4159.2B, indicating room for improvement in capital efficiency. 【Financial Soundness】The Equity Ratio remained high at 60.3% (59.9% in the previous year), while current assets of ¥1844.4B exceeded current liabilities of ¥818.9B. Interest-bearing debt consisted of long-term borrowings of ¥536.7B, bonds of ¥150.0B, and bonds due within one year of ¥250.0B. Short-term borrowings increased 46.2% YoY (from ¥79.8B to ¥116.7B).

Cash Flow Analysis

Although an individual disclosure of the cash flow statement is not available, an analysis of funding trends based on changes in the balance sheet indicates that cash and deposits declined to ¥250.5B from ¥301.2B in the previous year. During this period, short-term borrowings increased from ¥79.8B to ¥116.7B, while long-term borrowings increased from ¥478.9B to ¥536.7B. Thus, although funding through borrowings progressed, the cash balance contracted. Inventories were ¥360.4B, representing a slight YoY increase, while accounts receivable were ¥623.7B, down YoY. This indicates that working capital contraction has proceeded gradually amid the decline in Operating Income. Retained earnings were ¥1223.5B, slightly down from ¥1227.9B in the previous year, suggesting that external outflows such as dividends exceeded current-period Net Income.

Earnings Quality

The earnings structure for the current period reflects the coexistence of profit from the core business and non-recurring factors. Non-operating income reached ¥14.8B, including dividend income of ¥8.4B, compared with Operating Income of ¥6.9B, making a substantial contribution to Ordinary Income of ¥16.9B. Extraordinary gains of ¥11.4B and extraordinary losses of ¥10.5B, including an impairment loss on investment securities of ¥7.2B and a loss on disposal and sale of fixed assets of ¥3.3B, were almost offset. Net extraordinary income was ¥0.9B, resulting in a limited impact on Net Income. Comprehensive Income was ¥0.1B, substantially diverging from Net Income of ¥16.6B, due to deterioration in valuation items such as valuation difference on securities of -¥15.1B and adjustments related to retirement benefits of -¥5.1B. This divergence indicates a gap between the performance reflected in Net Income and fluctuations in comprehensive asset value, including changes in market prices.

Earnings Forecasts and Guidance

The full-year forecasts are Revenue of ¥3050.0B (+6.0% YoY), Operating Income of ¥30.0B (-60.2%), and Ordinary Income of ¥40.0B (-64.5%). Q1 progress rates were 23.8% for Revenue, 22.9% for Operating Income, and 42.4% for Ordinary Income. Progress for Revenue and Operating Income was slightly below the standard 25%, while progress for Ordinary Income exceeded the standard due to support from non-operating income such as dividend income. The Company expects a substantial YoY decline in profit for the full year, and its forecasts reflect the view that the decline in profitability is not limited to temporary factors. There were no revisions to the earnings or dividend forecasts during the current period.

Shareholder Returns

The full-year dividend forecast is ¥26.00 per share, and the Payout Ratio calculated based on the full-year EPS forecast of ¥31.49 is 82.6%. This figure is calculated based solely on dividends and the forecast of Net Income attributable to owners of the parent; it is not the Total Return Ratio, which includes share repurchases. The full-year forecast represents an increase from the previous year's actual dividend of ¥13 (comparison as of the interim period), but a Payout Ratio of 82.6% exceeds the generally cited sustainability benchmark of 60%. Net Income attributable to owners of the parent in Q1 reached 32.7% of the full-year plan, while the progress rate for Operating Income from the core business remained at 22.9%. Accordingly, the quality of the dividend funding requires close monitoring of the recovery in core business profit.

Risk Factors

1. Deterioration in the profitability of the core business: Segment profit in the Pulp and Paper Business declined 84.6% YoY to ¥4.5B, with the profit margin falling to 0.7%. Unless profitability in this business, which accounts for more than 91% of consolidated Revenue, recovers, improvement in consolidated Operating Income will remain constrained.

2. Declining interest-payment capacity: Interest coverage, calculated based on Operating Income of ¥6.9B and interest expense of ¥3.2B, remained in the low 2x range and below 3x. Short-term borrowings increased 46.2% YoY, while long-term borrowings increased 12.1%. If Operating Income remains low, the interest burden will require monitoring.

3. Price fluctuation risk relating to investment securities: Investment securities of ¥709.3B account for 17.1% of total assets, and the Company recorded an impairment loss on investment securities of ¥7.2B as an extraordinary loss during the current period. The valuation difference on securities was -¥15.1B and also affected Comprehensive Income, resulting in a structure whereby market price fluctuations affect both Net Income and Comprehensive Income.

Industry Benchmark (For Reference; Prepared by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company's profitability is substantially below the industry median and is positioned at the low-profitability end even within the manufacturing sector.

Growth and Capital Efficiency

The Revenue growth rate is also below the industry median, and the pace of Revenue growth is relatively moderate within the industry.

※Source: Prepared by the Company

Key Points from the Earnings Results

1. While Revenue was flat, Operating Income declined 78.9%. The earnings data indicates that margin deterioration in the Pulp and Paper Business was the central factor driving fluctuations in consolidated performance.

2. Ordinary Income and Net Income declined less sharply than profit from the core business due to dividend income of ¥8.4B and the offsetting of extraordinary gains and losses. Consequently, Ordinary Income alone is not a reliable measure of the profitability of the core business.

3. The Company's full-year forecast anticipates YoY declines of more than 60% in both Operating Income and Ordinary Income, reflecting management's view that the decline in profitability during the current period is not limited to temporary factors.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,200–¥1,266 at ±1% for the Cost of Equity, and ¥1,222–¥1,239 at ±0.1 for ω.

Notes:

• Normalized EPS calculated from Ordinary Income and other figures is used to exclude the impact of temporary profit and loss items (the Company's forecast EPS is ¥31.5).
• As 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, resulting in a timing gap relative to the full-year forecast.
• As 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 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 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 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 a professional as necessary.

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