Nissan Chemical (4021) FY2026 Q3 Earnings Report

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Executive Summary

Although the Company posted increases in revenue and earnings, the earnings growth rate was slightly below the revenue growth rate, and the operating margin declined marginally. Revenue was ¥1,954.3B (+11.8% YoY), Operating Income was ¥449.8B (+9.5%), Ordinary Income was ¥465.1B (+7.4%), and Net Income was ¥356.2B (+12.0%). The main drivers of revenue growth were expansion in the Agricultural Chemicals Business and Other Businesses. While higher profitability in the Functional Materials Business drove earnings growth, lower earnings in the Agricultural Chemicals Business exerted downward pressure on the overall margin.

Factors Affecting Performance

【Revenue】Revenue was ¥1,954.3B, an increase of +11.8% YoY. By segment, the Agricultural Chemicals Business grew significantly to ¥507.8B (+19.8%), and Other Businesses increased to ¥103.7B (+45.2%). The Wholesale Business also increased revenue to ¥716.9B (+7.7%), while the Functional Materials Business grew to ¥588.1B (+6.8%). In contrast, the Healthcare Business declined to ¥38.8B (-10.4%). The Wholesale Business accounted for the largest share of the revenue mix at 36.7%, although its profitability was low.

【Profit and Loss】Operating Income increased to ¥449.8B (+9.5%), below the revenue growth rate, and the operating margin declined slightly to 23.0% from 23.5% in the previous year, a decrease of approximately 50bp. The Functional Materials Business improved its margin to 32.3% (approximately +2pt YoY), driving overall earnings. However, the Agricultural Chemicals Business saw its margin decline by approximately 6.2pt to 27.6%, resulting in a -6.4% decrease in Operating Income. Ordinary Income reached ¥465.1B due to the recognition of non-operating income, including dividend income of ¥13.4B and foreign exchange gains of ¥4.5B. Net Income was ¥356.2B (+12.0%), exceeding the growth in Operating Income. In conclusion, the Company achieved higher revenue and earnings.

Segment Analysis

The Functional Materials Business generated revenue of ¥588.1B (+6.8%) and Operating Income of ¥267.7B (+18.9%), with a margin of 32.3%, making it the core contributor to Company-wide earnings. Its contribution to total reported segment profit reached approximately 54.6%. The Agricultural Chemicals Business increased revenue to ¥507.8B (+19.8%), but Operating Income declined to ¥169.97B (-6.4%), and its margin fell to 27.7%, clearly illustrating a pattern of revenue growth accompanied by lower earnings. The Wholesale Business was the largest in scale, with revenue of ¥945.2B, but had low profitability, with a margin of 3.1%. The Chemicals Business also had a margin of only 0.8%. The Healthcare Business experienced both revenue and earnings declines, with revenue of ¥39.7B (-10.4%) and Operating Income of ¥10.6B (-35.8%). Across the overall business portfolio, the concentration of earnings in Functional Materials and fluctuations in the profitability of Agricultural Chemicals are the primary drivers of changes in the overall margin.

Key Financial Indicators

【Profitability】The Company maintained high profitability, with an operating margin of 23.0% (23.5% in the previous year) and a net profit margin of 18.2% (approximately 18.2% in the previous year), although both declined slightly from the previous year. The gross margin was 48.1%, and the Company maintained a high level of profitability even after deducting the SG&A ratio of 25.1%.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥518.2B, approximately 1.45 times Net Income of ¥356.2B, indicating solid cash backing for earnings. A decrease in trade receivables of ¥129.1B boosted OCF, while an increase in inventories of ¥38.4B tied up funds.【Investment Efficiency】ROE of 14.5% was achieved under a conservative capital structure with an Equity Ratio of 72.2%, demonstrating high earnings efficiency without reliance on leverage.【Financial Soundness】The Equity Ratio was 72.2%, while interest-bearing debt consisted of ¥100B in bonds and ¥5.8B in long-term borrowings, both relatively small amounts. Cash and deposits of ¥340.4B exceeded these amounts. The financial foundation is generally robust.

Cash Flow Analysis

Operating Cash Flow (OCF) increased by +9.5% YoY to ¥518.2B, securing cash generation above Net Income. A decrease in trade receivables of ¥129.1B made a positive contribution, while an increase in inventories of ¥38.4B put pressure on funds. Payments of corporate income taxes and other taxes of ¥165.1B were also a deduction item. Investing Cash Flow was -¥153.4B, of which capital expenditures accounted for ¥119.6B. The Company continued to invest at a level slightly above depreciation and amortization expense of ¥110.6B. Financing Cash Flow was -¥314.5B, primarily due to dividend payments of ¥236.4B and share repurchases of ¥83.0B, demonstrating an active shareholder return policy. As a result, positive free cash flow of ¥364.8B was secured, indicating sufficient financial capacity to fund both investment and shareholder returns with internally generated funds.

Earnings Quality

Ordinary Income was ¥465.1B compared with Operating Income of ¥449.8B. The ¥15.3B difference primarily consisted of non-operating income, including dividend income of ¥13.4B and foreign exchange gains of ¥4.5B, with no temporary extraordinary gains or losses identified. The divergence between Ordinary Income and Net Income was mainly attributable to corporate income taxes and other taxes of ¥109.0B, resulting in a stable effective tax rate of approximately 23.4%. Net non-operating income remained at approximately 1.6% of revenue, and the structure in which Operating Income from the core business determines overall earnings was maintained. Comprehensive Income was ¥413.7B, exceeding Net Income of ¥356.2B, supported by positive valuation differences on securities of ¥33.7B and foreign currency translation adjustments of ¥25.4B. The increase in asset values also supported earnings quality.

Earnings Forecast and Guidance

Progress against the full-year forecast was 71.8% for Revenue, 76.2% for Operating Income, and 78.8% for Ordinary Income. While revenue progress was slightly below the standard benchmark of approximately 75%, profit progress exceeded it. However, the full-year Operating Income forecast represents only a +3.8% increase YoY, implying a slowdown from the +9.5% increase for the Q3 cumulative period. This suggests that the Q4 operating margin implied by the full-year forecast is approximately 18.3%, below the Q3 cumulative margin of 23.0%. Accordingly, profitability trends in the Agricultural Chemicals Business and increases in expenses will be key areas of focus.

Shareholder Returns

The interim dividend was ¥70 per share, and the full-year dividend forecast was ¥180. Using the full-year Net Income forecast of ¥440.0B as the denominator, the forecast Payout Ratio is approximately 55.4%. Total shareholder returns, consisting of cumulative dividend payments of ¥236.4B and share repurchases of ¥83.0B, amounted to ¥319.4B. The Total Return Ratio relative to Net Income attributable to owners of the parent reached approximately 91%. Although returns were implemented within the range of free cash flow of ¥364.8B, the combined level of dividends and share repurchases is high. Depending on future trends in working capital and capital expenditures, there is room to monitor changes in the Company’s capacity for shareholder returns.

Risk Factors

1. Prolonged working capital cycle: Against the backdrop of an increase in inventories to ¥624.0B and fluctuations in trade receivables, inventory and receivables turnover days have shown a tendency to lengthen, even taking industry characteristics into account. During periods of demand fluctuation, this could lead to funds being tied up and to valuation loss risks.

2. Profitability fluctuations in the Agricultural Chemicals Business: While revenue increased by +19.8% YoY, Operating Income declined by -6.4% and the margin fell to 27.7%. The business is susceptible to agricultural demand, market conditions, and regulatory changes.

3. Reliance on short-term funding: Short-term borrowings of ¥209.3B account for the majority of interest-bearing debt. Cash and deposits of ¥340.4B exceed this amount, and there is no immediate issue with the Company’s payment capacity. However, the short-term bias in the funding structure remains an item requiring ongoing monitoring.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s profitability significantly exceeds the industry median and ranks among the higher levels within the manufacturing sector.

Growth and Capital Efficiency

The revenue growth rate also significantly exceeds the industry median, placing the Company’s revenue growth momentum at a high level within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The combination of a 23.0% operating margin, 14.5% ROE, and 72.2% Equity Ratio indicates a financial foundation characterized by high profitability and low leverage, significantly exceeding the industry average.

2. While earnings growth and margin expansion in the Functional Materials Business support the core of Company-wide earnings, the earnings decline in the Agricultural Chemicals Business is observed as a source of earnings volatility within the business portfolio.

3. The 76.2% progress rate for full-year Operating Income exceeds the standard level of progress. However, the full-year forecast incorporates a decline in the Q4 margin, and changes in business mix and cost trends will affect future results.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,317–¥2,450 at ±1% for the cost of equity, and ¥2,369–¥2,402 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥0.9 per share is added back to earnings (due to its non-cash nature and to improve comparability with IFRS companies).
• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• Because 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 / This is a mechanically calculated value based solely on publicly available data and 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 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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AI Financial Analysis

Executive Summary

FY2026 Q3 results were strong, with double-digit sales and attributable-profit growth, although modest margin compression and an extended working-capital cycle temper the otherwise positive read-through. Revenue increased 11.8% year on year to ¥195.4bn. Operating income rose 9.5% to ¥45.0bn, and profit attributable to owners increased 10.5% to ¥35.0bn. The operating margin was 23.0%, down 48bp from 23.5% in FY2025 Q3 because operating-profit growth trailed sales growth. Gross margin was 48.1%, down approximately 16bp year on year from 48.3%, indicating that cost inflation, product mix, or pricing effects absorbed part of the top-line expansion. Nevertheless, the attributable net margin remained essentially stable at 17.9%, versus 18.1% a year earlier. Functional Materials remained the core earnings business, generating ¥26.8bn of segment profit, or roughly 55% of aggregate segment profit before corporate-cost adjustments. Agricultural Chemicals delivered the fastest major revenue expansion, but its segment profit declined, pointing to a material deterioration in mix, pricing, or input-cost absorption within that business. Operating cash flow of ¥51.8bn exceeded attributable net income of ¥35.0bn by 1.48x, supporting the quality and cash realizability of reported earnings. Free cash flow was a substantial ¥36.5bn after ¥12.0bn of capital expenditure. Cash conversion was also healthy at 0.92x of EBITDA and the accruals ratio was negative 4.9%, consistent with favorable cash earnings quality. Balance-sheet risk is low overall, with a 271.8% current ratio, 0.39x debt-to-equity, 0.38x debt-to-EBITDA, and 154.6x EBIT interest coverage. However, 97.3% of interest-bearing debt is short term, leaving refinancing and liquidity management more relevant than the headline leverage ratios alone imply. Working-capital intensity is the principal operational concern, reflected in flagged DSO of 108 days, flagged inventory days of 229 days and 168 days under alternative calculations, and a flagged 273-day cash-conversion cycle. The company has already reached 71.8% of full-year revenue guidance, 76.2% of operating-income guidance, and 79.6% of attributable-profit guidance after nine months. This implies a comparatively soft guidance-based Q4, with ¥76.8bn revenue, ¥14.0bn operating income, and ¥9.0bn attributable profit required to meet the full-year plan. The proposed full-year ¥180 DPS is supported by forecast earnings and cash generation, while the combination of dividends and buybacks remains within a reasonable capital-return range. Forward performance will depend on sustaining Functional Materials profitability, restoring Agricultural Chemicals earnings conversion, and avoiding further inventory accumulation or slower customer collections.

Profitability Analysis

The annualized DuPont ROE is 19.0%, comprising a 17.9% net profit margin, 0.766x asset turnover, and 1.39x financial leverage. The return profile is therefore primarily driven by exceptionally high profitability rather than aggressive leverage; financial leverage is conservative and leaves ROE less exposed to financing risk. The 23.0% EBIT margin and 28.7% EBITDA margin are well above typical manufacturing benchmarks, while the 17.9% net margin also remains excellent. The largest year-on-year pressure is in operating profitability: revenue grew 11.8%, whereas operating income grew 9.5%, reducing operating margin by 48bp. Gross margin declined by about 16bp, and SG&A increased 13.2% to ¥49.0bn, faster than sales growth, which limited operating leverage. The margin compression is modest rather than structurally alarming, but it should be monitored because sales growth alone did not translate fully into operating-profit growth. Interest burden was 1.034x because non-operating income exceeded interest expense, while the 0.753 tax burden and 23.4% effective tax rate were normal. Dividend income of ¥1.34bn was the largest disclosed non-operating-income component and represented 0.7% of revenue, well below a level that would distort operating analysis. JGAAP goodwill amortization was only ¥0.09bn, or less than 0.2% of EBITDA, so there is no material accounting distortion relative to IFRS comparables. The annualized 19.0% ROE appears sustainable only if the company preserves its premium margin structure and maintains asset efficiency; the current quarter does not rely on balance-sheet leverage to generate the return.

Growth Assessment

Revenue growth was broad-based across the principal operating segments. Functional Materials external revenue increased 6.8% year on year to ¥58.8bn and segment profit increased 18.9% to ¥26.8bn, lifting its segment margin from 40.9% to 45.5%. This segment is the core business by operating-income contribution and was the largest positive contributor to earnings growth. Agricultural Chemicals external revenue rose 19.8% to ¥50.8bn, but segment profit declined 6.4% to ¥17.0bn and margin fell sharply from 42.8% to 33.5%. Wholesale revenue increased 7.7% to ¥71.7bn, but segment profit declined 7.1% to ¥2.9bn, with a margin decrease from 4.7% to 4.1%. Chemical Products revenue increased 2.8% to ¥19.2bn and segment profit rose to ¥0.24bn from ¥0.21bn. Healthcare revenue declined 10.4% to ¥3.9bn and segment profit decreased 35.8% to ¥1.06bn. Other businesses increased revenue 45.2% to ¥10.4bn and segment profit rose to ¥1.00bn from ¥0.13bn, although this remains a smaller contributor. Aggregate segment profit rose 6.9% to ¥49.0bn, while the corporate-cost adjustment improved to negative ¥4.0bn from negative ¥4.7bn, producing consolidated operating-income growth of 9.5%. Full-year guidance calls for 8.3% revenue growth and 3.8% operating-income growth, indicating that management expects the final quarter to be materially less profitable than the nine-month run rate. Q3 cumulative progress of 76.2% for operating income is only 1.2 percentage points above the standard 75% seasonal benchmark, while revenue progress is 3.2 points below it. The guidance framework therefore does not signal a large formal beat relative to normal seasonality, but it embeds a lower Q4 operating margin than the nine-month 23.0% level. Revenue sustainability should be assessed through Functional Materials demand resilience and whether Agricultural Chemicals can recover its segment margin.

Financial Health

Financial health is strong. Current assets of ¥208.9bn exceeded current liabilities of ¥76.9bn by ¥132.0bn, producing a current ratio of 271.8% and a quick ratio of 190.6%. Accordingly, there is no current-ratio warning and liquid assets provide substantial near-term coverage. Interest-bearing debt was ¥21.5bn, equivalent to only 0.39x equity, 0.38x EBITDA, and 8.1% of total capital. EBIT interest coverage of 154.6x and EBITDA interest coverage of 192.6x indicate negligible interest-servicing stress. Cash and deposits of ¥34.0bn covered short-term loans of ¥20.9bn by 1.63x. The key quality alert is refinancing risk: 97.3% of interest-bearing debt is short term, substantially above the 40% alert threshold. The root cause is a debt structure concentrated in short-term loans, despite total leverage remaining modest. This is less severe than for a highly leveraged manufacturer because the company has ample liquidity, positive free cash flow, and very high debt-service coverage. Its impact is that funding costs and bank-market access could become more relevant if working capital expands further or if cash is deployed aggressively for dividends and repurchases. Long-term loans decreased 40.7% year on year to ¥0.6bn, further increasing reliance on short-term funding, while total liabilities were broadly unchanged at ¥94.6bn. Investment securities increased 27.6% year on year to ¥31.1bn, or 9.1% of total assets, increasing exposure to market-value movements and making dividend income a modest contributor to non-operating earnings. Equity increased to ¥245.5bn, with the equity ratio improving to 71.1% from 70.5%, which provides a substantial capital buffer.

Notable B/S Changes

Treasury stock: increased in absolute negative balance by ¥3.6bn to negative ¥6.2bn (139.8% change) - reflects share repurchases and reduces equity, while supporting per-share capital return. Long-term loans: decreased by ¥0.4bn to ¥0.6bn (-40.7%) - further concentrates the debt maturity profile in short-term borrowings; liquidity currently mitigates the refinancing risk. Investment securities: increased by ¥6.7bn to ¥31.1bn (+27.6%) - raises exposure to equity-market valuation movements and contributed to a higher non-operating investment-income base. Property, plant and equipment: increased by ¥4.1bn to ¥76.6bn (+5.7%) - together with CapEx/depreciation of 1.08x, indicates continued reinvestment in the manufacturing asset base. Finished goods: increased by ¥4.9bn to ¥62.4bn (+8.5%) - aligns with the flagged elevated inventory-duration metrics and warrants monitoring for demand alignment and potential write-down risk.

Cash Flow Quality

Cash-flow quality was favorable. Operating cash flow increased 9.5% year on year to ¥51.8bn and exceeded attributable net income by 1.48x, comfortably above the 0.8x quality-warning threshold. Free cash flow was ¥36.5bn after capital expenditure of ¥12.0bn, compared with ¥36.4bn in the prior-year period, demonstrating resilient internal funding capacity. OCF-to-EBITDA of 0.92x is strong and indicates that EBITDA was substantially converted into operating cash. The negative 4.9% accruals ratio also supports the conclusion that earnings are cash-backed rather than dependent on accrual recognition. CapEx was 1.08x depreciation and amortization, indicating that investment modestly exceeded the depreciation charge and is consistent with measured capacity expansion or asset renewal. Capital expenditure represented 6.1% of nine-month revenue, within a normal manufacturing investment range. Working capital nonetheless requires close scrutiny. Trade receivables declined to ¥77.0bn from ¥89.1bn year on year, but the quality alert identifies DSO of 108 days, above the 60-day warning threshold. The root cause is slow cash collection relative to annualized sales, which ties up capital and can increase counterparty exposure. Inventory was ¥62.4bn, up 8.5% year on year, driven by finished goods of ¥62.4bn, while raw materials were ¥22.0bn and work in process was ¥0.3bn. The two inventory-day alerts, at 229 days and 168 days, both exceed their applicable warning thresholds; irrespective of calculation methodology, they indicate a long inventory holding period. The 273-day cash-conversion-cycle alert is similarly material, reflecting the combined burden of slow collections and inventory intensity. For a chemical manufacturer, some inventory duration can reflect production scheduling, agricultural seasonality, and product availability requirements, but the scale of the flagged cycle raises obsolescence, demand-forecasting, and cash-absorption risk. Its investment impact is that sustained working-capital expansion could reduce free-cash-flow conversion even if accounting earnings continue to grow. There is no current evidence of weak operating cash generation, but inventory discipline and receivable collection are the most important cash-flow variables to monitor.

Dividend Sustainability

Dividend capacity appears sound. The disclosed interim DPS was ¥70, and full-year guidance specifies a ¥180 DPS. Based on forecast attributable profit of ¥44.0bn and 135.8 million issued shares, the forecast dividend payout ratio is approximately 54.8%, below the 60% sustainability benchmark. The disclosed interim payout ratio was 27.1%. Nine-month free cash flow of ¥36.5bn covered the disclosed interim dividend requirement by 3.84x. Cash dividends paid during the nine-month period were ¥23.6bn, while share repurchases were ¥8.3bn. Using the full-year dividend plan of approximately ¥24.4bn and the nine-month repurchase amount, the implied total return ratio is approximately 74.4% of forecast attributable profit. This remains below the 80% sustainability benchmark, although it is higher than the dividend-only payout ratio and should be evaluated as total shareholder return rather than dividend payout. Strong cash conversion, low leverage, and ample liquidity support continuation of the stated dividend plan. The principal constraints on future capital returns would be a deterioration in working-capital cash absorption, a material fall in Functional Materials profitability, or incremental investment requirements.

Risk Assessment

Business risks include Agricultural Chemicals: external revenue grew 19.8% but segment profit fell 6.4%, cutting segment margin by 926bp to 33.5%; the severity of this earnings-conversion deterioration is a key risk to consolidated margin resilience., Functional Materials concentration: the core segment generated approximately 55% of aggregate segment profit before adjustments, making consolidated earnings particularly sensitive to semiconductor, electronic-material, and high-value chemical demand conditions., Inventory risk: flagged inventory days of 229 days and 168 days indicate prolonged holding periods; this may expose the company to demand volatility, pricing pressure, product obsolescence, and inventory write-down risk., Chemical-manufacturing risk: raw-material and energy-cost volatility, environmental regulation, plant safety, product-quality events, and supply-chain disruption can affect margins and production continuity., Foreign-exchange exposure: disclosed FX gains were ¥0.45bn, modest at roughly 1.0% of operating income, but changes in yen exchange rates can affect export competitiveness, overseas demand, and translated earnings..

Financial risks include Refinancing risk: 97.3% of interest-bearing debt is short term. The immediate risk is mitigated by ¥34.0bn cash, 1.63x cash-to-short-term-debt coverage, and low 0.38x debt-to-EBITDA, but the maturity profile warrants monitoring., Working-capital financing risk: flagged DSO of 108 days and a 273-day cash conversion cycle indicate substantial capital tied up in receivables and inventories., Investment-security valuation risk: investment securities increased 27.6% to ¥31.1bn, exposing other comprehensive income and equity to market-price movements..

Key concerns include Highest priority: inventory and receivables efficiency, because elevated working-capital days can weaken free-cash-flow conversion and may signal slower end-demand or channel inventory accumulation., High priority: Agricultural Chemicals margin recovery, because profit declined despite strong revenue growth., Moderate priority: preservation of Functional Materials growth and margin, given its outsized earnings contribution., Moderate priority: management of the short-term debt concentration, especially if capital returns, investment spending, or working-capital needs increase simultaneously., The reported quality alerts are material, but their effect is currently mitigated by strong operating cash flow, negative accruals, very low leverage, and substantial liquidity..

Investment Implications

Key takeaways include High-quality profitability remains the central feature of the financial profile: 23.0% EBIT margin, 28.7% EBITDA margin, 17.9% net margin, and annualized 19.0% ROE., Functional Materials is the core earnings engine, with segment profit up 18.9% and margin expanding 464bp to 45.5%., Agricultural Chemicals grew revenue rapidly but suffered a 926bp margin decline, creating the clearest operational issue within the segment portfolio., Cash generation is robust: ¥51.8bn operating cash flow, ¥36.5bn free cash flow, 1.48x OCF-to-attributable-net-income, and 0.92x OCF-to-EBITDA., The balance sheet is conservatively capitalized, but the high short-term-debt share and extended cash-conversion cycle require ongoing attention., The ¥180 full-year DPS plan appears supported by forecast earnings and free cash flow; combined dividends and buybacks imply an estimated total return ratio of roughly 74.4%..

Metrics to watch include Functional Materials segment revenue growth and segment margin, Agricultural Chemicals segment margin recovery, DSO, inventory days, and cash conversion cycle, Finished-goods inventory balance and inventory write-downs, Q4 implied operating margin versus the nine-month 23.0% level, Short-term debt balance, cash-to-short-term-debt coverage, and refinancing terms, Free cash flow after capital expenditure, dividends, and share repurchases, Investment securities valuation changes and associated OCI movements.

Regarding relative positioning, Nissan Chemical exhibits a premium profitability and balance-sheet profile for a diversified Japanese chemical manufacturer, supported by a high-margin Functional Materials franchise, low leverage, and strong cash conversion. Relative positioning is moderated by unusually long flagged receivable and inventory cycles and by the current divergence between Agricultural Chemicals sales growth and profit growth.