AWA PAPER & TECHNOLOGICAL COMPANY (3896) FY2026 Q3

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Executive Summary

Although revenue increased, the key point of this earnings result is that the Company fell into an operating loss due to deterioration in the gross profit margin. Revenue was ¥135.0B (+7.7% YoY), while operating income was ¥-1.8B (¥1.1B in the same period last year), ordinary income was ¥-2.9B (¥0.3B in the same period last year), and net income was ¥-3.5B (¥-0.1B in the same period last year). Despite higher revenue, profitability deteriorated at every level. The primary factors were a decline in the gross profit margin, as the increase in cost of sales (+10.7%) exceeded revenue growth, and an expansion in financial expenses due to higher interest payments.

Factors Affecting Performance

【Revenue】Revenue increased 7.7% YoY to ¥135.0B. The business is a single segment engaged in the manufacture and sale of functional paper and nonwoven fabrics, and no segment-level breakdown is disclosed; however, expansion in sales volume appears to have contributed to the increase in revenue. Meanwhile, cost of sales increased 10.7% YoY to ¥118.0B, outpacing revenue growth.

【Profit and Loss】Gross profit was ¥17.0B (gross profit margin: 12.6%), down 2.4pt from 15.0% in the same period last year. SG&A expenses were limited to ¥18.8B (+6.3% YoY), and the SG&A ratio improved slightly to 13.9%; however, this was insufficient to offset the deterioration in the gross profit margin, and the Company fell into an operating loss of ¥-1.8B (¥1.1B in the same period last year). In non-operating expenses, interest payments increased by ¥0.5B YoY to ¥1.2B, causing ordinary income to deteriorate to ¥-2.9B (¥0.3B in the same period last year). Although extraordinary income of ¥0.5B partially mitigated the loss before tax, the loss before tax was ¥-2.5B, and the recognition of income taxes and other taxes of ¥1.1B caused the net loss to widen to ¥-3.5B. In conclusion, this was a case of higher revenue but lower profit—effectively, a shift from profitability to a loss despite higher revenue—because the increase in costs could not be absorbed.

Segment Analysis

The Group operates a single segment engaged in the manufacture and sale of functional paper and nonwoven fabrics, and does not disclose performance by segment.

Key Financial Indicators

【Profitability】The operating margin was -1.3%, and the net profit margin was -2.6% (-4.0% on a net income attributable to owners of the parent basis), both deteriorating from the operating margin of 0.9% and net profit margin of -1.4% in the same period last year. Annualized ROE was -6.5% (another estimate on an annualized basis indicates -9.9%), while annualized ROIC was -1.3%, indicating that the Company’s ability to generate returns using capital and assets remains low.【Cash Quality】Cash and deposits increased 81.0% YoY to ¥17.9B, providing a liquidity buffer. However, accounts receivable and notes receivable were substantial at ¥32.1B, and DSO is believed to be above 60 days, raising concerns about funds being tied up in working capital.【Investment Efficiency】Total asset turnover was 0.657x, while property, plant and equipment of ¥167.4B accounted for 61.1% of total assets, indicating a high degree of capital intensity.【Financial Soundness】The equity ratio declined to 26.2% from approximately 27.9% in the same period last year. With a D/E ratio of 2.82x and a Debt/Capital ratio of 64.7%, dependence on debt is high. Interest coverage is also negative, indicating limited financial flexibility.

Cash Flow Analysis

As figures for operating, investing, and financing cash flows have not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits increased by ¥8.0B (+81.0%) YoY to ¥17.9B, improving the cash balance. However, cash coverage of short-term interest-bearing liabilities—comprising short-term borrowings of ¥28.3B and current maturities of long-term borrowings of ¥13.5B—was limited to 0.63x. Accounts receivable and notes receivable were ¥32.1B, while electronically recorded monetary claims were ¥5.9B, both increasing in line with revenue growth and indicating a greater working capital burden. Accounts payable and electronically recorded obligations also increased to a corresponding degree. Although cash generation from operating activities cannot be determined based solely on the disclosed data, an increase in borrowings may have been one factor contributing to the increase in the cash balance.

Quality of Earnings

The current period’s earnings reflect a deterioration in recurring business activities rather than a temporary downward pressure. Non-operating income was relatively small at ¥0.4B in total, including dividend income of ¥0.1B and foreign exchange gains of ¥0.1B. In contrast, non-operating expenses reached ¥1.6B, primarily due to interest payments of ¥1.2B, resulting in a negative net contribution of ¥-1.2B from non-operating income and expenses. Extraordinary income was ¥0.5B, including gains on the sale of investment securities and gains on the sale of fixed assets. As virtually no extraordinary losses were recorded, the net ¥0.5B provided a temporary boost that mitigated the loss before tax. Without this extraordinary income, the loss before tax would have been even larger, indicating that the underlying recurring earnings power is more severe than the disclosed figures suggest. In addition, profit attributable to non-controlling interests of ¥1.9B is included within the consolidated net loss of ¥3.5B. Consequently, the loss attributable to owners of the parent (¥5.4B) is larger than the consolidated loss, requiring attention to the profit allocation structure.

Earnings Forecasts and Guidance

The full-year Company forecasts are revenue of ¥185.0B (+8.0% YoY), operating income of ¥0.4B (-90.7% YoY), ordinary income of ¥-1.7B, and forecast EPS of ¥27.03. While Q3 cumulative revenue progress was 73.0%, slightly below the standard 75%, cumulative operating income was already ¥-1.8B, below the full-year forecast, making the progress ratio impossible to calculate meaningfully. Cumulative ordinary income was also ¥-2.9B, already below the full-year forecast of ¥-1.7B. Achieving the forecast would require approximately ¥50.0B in revenue, approximately ¥2.2B in operating income, and approximately ¥8.1B in net income attributable to owners of the parent in Q4 alone, implying a plan requiring a substantial earnings turnaround from the Q3 cumulative results.

Shareholder Returns

Both the Q2 dividend and the full-year forecast dividend are ¥0 per share, reflecting a no-dividend policy. Given the recorded loss attributable to owners of the parent of ¥5.4B and the decrease in retained earnings (¥5.5B, -49.6% YoY), there is no basis for calculating the payout ratio or total return ratio. Continuing the no-dividend policy can be viewed as contributing to the preservation of earnings and the financial base.

Risk Factors

1. Gross Profit Margin Decline Risk: The gross profit margin was 12.6%, down 2.4pt YoY. Operating income is highly sensitive to increases in raw material and energy prices, delays in passing through costs, and changes in the product mix.

2. Financial Leverage and Interest Burden Risk: The D/E ratio was 2.82x and the Debt/Capital ratio was 64.7%, indicating a high dependence on debt. Interest payments increased by ¥0.5B YoY to ¥1.2B. As operating income is negative, interest payments cannot be covered by operating income.

3. Full-Year Forecast Achievement Risk: Achieving the full-year forecast would require approximately ¥2.2B in operating income and approximately ¥8.1B in net income attributable to owners of the parent in Q4 alone, representing a significant turnaround from the Q3 cumulative loss.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability is substantially below the industry median, with both operating and net profit margins at low levels within the industry.

Growth and Capital Efficiency

Although the revenue growth rate exceeds the industry median, the fact that revenue growth has not translated into profit growth is a notable characteristic within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Revenue increased 7.7% YoY, securing higher sales, but the increase in cost of sales (+10.7%) exceeded this growth. As a result, the gross profit margin declined by 2.4pt, and operating income shifted from a profit to a loss. From the perspective of the quality of revenue growth, the expansion in volume has not translated into improved profitability.

2. The D/E ratio of 2.82x and the increase in interest payments (+¥0.5B) indicate that greater dependence on debt and a higher interest burden have expanded the deterioration in ordinary income. In addition to operating performance, financial expenses are also placing pressure on profitability.

3. Against full-year revenue progress of 73.0%, operating income, ordinary income, and net income were all below their respective full-year forecast levels as of Q3 cumulative results, confirming from the earnings data that the forecast incorporates a substantial profit improvement in Q4.

Theoretical Share Price (Reference Value)

Sensitivity: ¥569–¥602 at ±1% for the cost of equity, and ¥581–¥588 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used (there is a timing difference from 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: 2026-08 / 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 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. 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 professionals as necessary.

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