Chuetsu Pulp & Paper Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

The most important point this quarter was the return to profitability at the operating level from a loss in the previous year period, marking a shift into a phase of higher revenue and earnings. Revenue was ¥281.2B (+5.2% YoY), Operating Income was ¥5.0B (turning profitable from an operating loss of ¥-0.5B in the previous year), and Ordinary Income was ¥7.4B (¥0.5B in the previous year, +1376.0% YoY). Net Income (quarterly net income attributable to owners of the parent, hereinafter the same) increased substantially to ¥5.05B (¥-0.60B in the previous year, +941.7% YoY). The primary factors were revenue expansion and gross margin improvement in the core Paper and Pulp Manufacturing Business, along with SG&A expense control and the contribution from non-operating income, including dividend income and foreign exchange gains.

Factors Affecting Performance

【Revenue】Revenue was ¥281.2B (+5.2% YoY). The Paper and Pulp Manufacturing Business, which accounts for 91.9% of consolidated revenue on an external-sales basis, led overall performance with revenue of ¥258.5B (+5.6% YoY). The Power Generation Business experienced a slight decline in revenue to ¥12.3B (-2.1% YoY), while Other Businesses (including Nanoforest, paper products processing, transportation, and others) recorded ¥43.7B (+2.0% YoY) on a basis including intersegment transactions.

【Profit and Loss】The gross margin improved to 12.9% from 11.2% in the previous year, an improvement of approximately 1.7pt, while the SG&A ratio declined to 11.2% from 11.4% in the previous year. As a result, Operating Income was ¥5.0B, representing a return to profitability from an operating loss of ¥0.5B in the previous year. Ordinary Income was ¥7.4B, boosted by non-operating income of ¥3.8B (dividend income of ¥1.5B, foreign exchange gains of ¥0.6B, and equity-method income/loss of ¥0.1B). A non-recurring factor, extraordinary loss of ¥0.7B (loss on disposal of fixed assets), represented approximately 13% of Net Income. After deducting income taxes and other taxes of ¥1.7B from profit before tax of ¥6.7B, Net Income was ¥5.05B. In addition to higher revenue, improvement in gross margin and cost control resulted in profitability at the operating level, leading to the conclusion that the Company achieved both revenue and earnings growth.

Segment Analysis

The core Paper and Pulp Manufacturing Business recorded revenue of ¥258.5B (+5.6% YoY) and Operating Income of ¥3.8B, turning profitable from an operating loss of ¥1.7B in the previous year, with a profit margin of 1.5%. Other Businesses (figures including intersegment transactions, such as Nanoforest, paper products processing, and transportation) recorded revenue of ¥43.7B (+2.0% YoY) and Operating Income of ¥1.1B (+44.6% YoY), achieving a higher profit margin than the Paper and Pulp Manufacturing Business at 2.5%. The Power Generation Business recorded revenue of ¥12.3B (-2.1% YoY), while its operating result deteriorated to a loss of ¥0.02B, compared with a profit of ¥0.3B in the previous year. It was the only segment to experience a decline in margin. Although the Company has a high dependence on revenue from its core business, Other Businesses have the highest profitability within the segment structure.

Key Financial Indicators

【Profitability】Operating margin and Net Income margin both turned positive at 1.8% (compared with -0.2% in the previous year). ROE was 0.8% (negative in the previous year). Although profitability improved, the absolute level remains low.【Cash Flow Quality】Comprehensive income was ¥12.1B, exceeding Net Income of ¥5.05B by ¥7.0B. The primary factors were valuation differences on securities of ¥5.5B and the share of OCI from equity-method affiliates of ¥1.9B. The divergence between Net Income and comprehensive income is attributable to fair-value fluctuations separate from the Company’s recurring earnings power, and this distinction should be considered when evaluating earnings quality.【Investment Efficiency】The Equity Ratio increased to 51.7% from 50.3% in the previous year, while net assets remained broadly flat at ¥605.3B against total assets of ¥1170.8B.【Financial Soundness】The current ratio was approximately 121% (current assets of ¥493.4B / current liabilities of ¥407.2B), indicating that near-term payment capacity is secured. However, short-term borrowings of ¥216.6B were approximately twice long-term borrowings of ¥106.7B, resulting in a high short-term proportion of interest-bearing debt.

Cash Flow Analysis

As cash flow statement data was unavailable, cash trends were analyzed based on changes in the balance sheet. Cash and deposits were ¥31.2B, a decrease of ¥17.7B (-36.2%) from ¥48.8B at the end of the previous fiscal year. Trade receivables of ¥268.0B and inventories of ¥87.9B were both high relative to quarterly revenue of ¥281.2B, suggesting that funds tied up in working capital may have contributed to the decline in cash. Accounts payable were ¥137.1B, slightly down from ¥146.8B in the previous year, and the reduction in trade payables may also have been a factor in the decline in cash. Short-term borrowings remained at approximately the same level as the previous year at ¥216.6B, indicating that working capital requirements are being met primarily through existing short-term borrowings.

Earnings Quality

Recurring earnings power is evident from the improvement in gross margin (12.9%, compared with 11.2% in the previous year) and the return to operating profitability through SG&A expense control. However, Ordinary Income of ¥7.4B includes ¥3.8B of non-operating income (dividend income of ¥1.5B, foreign exchange gains of ¥0.6B, and equity-method income/loss of ¥0.1B), which represents a variable component affected by market conditions and foreign exchange trends. Extraordinary loss of ¥0.7B (loss on disposal of fixed assets) represented approximately 13% of Net Income of ¥5.05B and acted as a temporary downward factor. Comprehensive income of ¥12.1B exceeded Net Income by ¥7.0B, primarily due to fair-value fluctuations in other securities, including valuation differences on securities of ¥5.5B. These gains differ in nature from recurring profits generated by business operations. The high levels of trade receivables and inventories relative to revenue should be considered when assessing the cash backing of reported earnings.

Earnings Forecast and Guidance

The Q1 progress rates against the full-year forecast were 24.7% for Revenue (¥281.2B/¥1140.0B), 21.7% for Operating Income (¥5.0B/¥23.0B), 27.3% for Ordinary Income (¥7.4B/¥27.0B), and 31.6% for Net Income (¥5.05B/¥16.0B). Compared with the simple four-way allocation benchmark of 25%, Operating Income was somewhat behind schedule, while Ordinary Income and Net Income were ahead of schedule. This difference is considered attributable to the contribution from non-operating income. Although the full-year plan projects revenue growth (+3.3% YoY), it anticipates declines in Operating Income (-16.1% YoY) and Ordinary Income (-20.0% YoY), contrasting with the substantial earnings growth achieved in Q1. Neither the earnings forecast nor the dividend forecast has been revised.

Shareholder Returns

The annual dividend forecast is ¥120, resulting in a Payout Ratio of approximately 94.2% against forecast EPS of ¥127.4. The Payout Ratio is high and may be considered sustainable assuming that the earnings recovery seen this fiscal year continues. However, given the financial structure characterized by a 36.2% decline in cash and deposits from the previous year and a high dependence on short-term borrowings, monitoring from the perspective of the stability of dividend funding is advisable. No data on share repurchases has been disclosed.

Risk Factors

1. Dependence on short-term liabilities and a thin cash cushion: Cash and deposits were ¥31.2B against short-term borrowings of ¥216.6B, leaving a cash-to-short-term-borrowings ratio of approximately 0.14x. Resilience in terms of liquidity management is at a level requiring monitoring.

2. Working capital tied up: Trade receivables of ¥268.0B and inventories of ¥87.9B were both high relative to quarterly revenue of ¥281.2B and could constrain cash-generation capacity.

3. Concentration in the core segment: Although the Paper and Pulp Manufacturing Business accounts for 91.9% of external revenue, the Power Generation Business moved into an operating loss (-¥0.02B), limiting the diversification benefits of the business portfolio.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Return

Both Operating Margin and Net Income Margin are significantly below the industry median. Although the Company turned profitable, its profitability remains positioned at the lower end of the industry.

Growth and Capital Efficiency

The Revenue Growth Rate is broadly close to the industry median, placing the Company in the middle range of the industry in terms of growth.

Source: Compiled by the Company

Key Points from the Financial Results

1. Gross margin improved by approximately 1.7pt YoY and the SG&A ratio also declined, resulting in a return to Operating Income of ¥5.0B from an operating loss in the previous year period. Improvements in the cost structure and pricing policy contributed to bottoming out profitability.

2. The full-year progress rates for Ordinary Income and Net Income (27.3%/31.6%) exceeded the Revenue progress rate (24.7%) due to the contribution from non-operating income. The full-year plan itself anticipates declines in Operating Income and Ordinary Income. Accumulation of operating-level results in the second half will be the key focus.

3. The financial structure of ¥31.2B in cash and deposits against ¥216.6B in short-term borrowings, together with the high levels of trade receivables and inventories relative to revenue, warrants ongoing monitoring from the perspectives of liquidity management and working capital efficiency.

Theoretical Stock Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥3,748–¥3,949 at ±1% for the cost of equity, and ¥3,819–¥3,864 at ±0.1 for ω.

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 difference relative to the full-year forecast).

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not forecast or guarantee the future stock 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 available earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with professionals as necessary.

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