Nippon Carbide Industries Company (4064) FY2027 Q1

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Executive Summary

Revenue and operating income increased this quarter, driven by the core Film and Sheet Products. However, net income attributable to owners of the parent declined due to higher tax expenses and an increase in net income attributable to non-controlling interests. Revenue was ¥124.6B (+5.8% YoY), operating income was ¥10.4B (+7.7%), and ordinary income was ¥10.5B (+1.6%). Consolidated net income, including the portion attributable to non-controlling interests, increased 9.0% to ¥7.7B, but net income attributable to owners of the parent decreased 3.1% to ¥5.2B, as the increase in net income attributable to non-controlling interests to ¥2.5B and corporate tax expenses weighed on overall growth. The operating margin improved to 8.3% from 8.2% a year earlier, supported by more efficient selling, general and administrative expenses.

Factors Affecting Performance

【Revenue】Revenue was ¥124.6B (+5.8% YoY). By segment, Film and Sheet Products increased 15.8% to ¥58.3B, accounting for 46.8% of total company revenue and representing the largest growth driver. Engineering also grew substantially, up 46.2% to ¥11.6B, while Electronics and Functional Products declined 3.2% to ¥40.4B and Construction Materials-Related Products decreased 13.5% to ¥15.9B, reflecting a demand-adjustment phase.

【Profit and Loss】Operating income was ¥10.4B (+7.7%), and the operating margin improved to 8.3% from 8.2% a year earlier. The gross margin was essentially flat at 33.6%, while the SG&A ratio declined to 25.2% from 25.5%, indicating effective fixed-cost control. By segment, profit from Film and Sheet Products surged 62.7% to ¥9.8B, driving an increase in total company profit. In contrast, Engineering fell into a loss of ¥1.0B despite higher revenue, weighing on total company operating income. Ordinary income increased only 1.6% to ¥10.5B, as a foreign-exchange loss of ¥0.2B restrained growth below operating income. Consolidated net income was ¥7.7B (+9.0%), but net income attributable to owners of the parent was ¥5.2B (-3.1%). Corporate tax expenses, equivalent to approximately 26.7% of pretax income, and the increase in net income attributable to non-controlling interests to ¥2.5B from ¥1.8B diluted profit attributable to owners. The conclusion is that revenue and operating income increased, while net income attributable to owners of the parent declined.

Segment Analysis

Film and Sheet Products became the company’s primary earnings driver, with revenue of ¥58.3B (+15.8%), segment profit of ¥9.8B (+62.7%), and a margin of 16.8%, substantially improved from approximately 12.4% a year earlier. Electronics and Functional Products recorded revenue of ¥40.4B (-3.2%), profit of ¥3.4B (-14.2%), and a margin of 8.4%, indicating declining profitability. Construction Materials-Related Products posted revenue of ¥15.9B (-13.5%) and profit of ¥0.1B (-68.3%), with the margin falling to 0.8%, highlighting the impact of softer demand. Engineering revenue increased substantially to ¥11.6B (+46.2%), but the segment fell into a loss of ¥1.0B, as deteriorating project profitability reduced total company profit. The segment mix is characterized by increased dependence on Film and Sheet Products for earnings.

Key Financial Indicators

【Profitability】The operating margin was 8.3%, slightly improved from 8.2% a year earlier, while the gross margin was broadly flat at 33.6%. The consolidated net margin was 6.2%, equivalent to approximately 4.2% based on net income attributable to owners of the parent.【Cash Flow Quality】Accounts receivable were ¥117.6B (+1.7%), growing more slowly than revenue (+5.8%), which is healthy. However, inventories increased 7.8% to ¥50.8B, outpacing revenue growth, and changes in inventory efficiency could affect cash conversion.【Investment Efficiency】ROE, based on net income attributable to owners of the parent, was approximately 1.9%, while total asset turnover remained low.【Financial Soundness】The equity ratio remained high at 65.3%. Against cash and deposits of ¥146.4B, long-term borrowings were ¥32.8B, and the current ratio was approximately 329% (current assets of ¥392.1B ÷ current liabilities of ¥119.3B), an extremely high level.

Cash Flow Analysis

Cash flow statement figures were outside the scope of disclosure, but funding trends can be assessed from balance sheet movements. Accounts receivable increased 1.7% YoY to ¥117.6B, below the 5.8% growth in revenue, indicating generally healthy collections. In contrast, inventories—products of ¥50.8B, raw materials of ¥32.5B, and work in process of ¥20.8B—increased 7.8% YoY, accumulating faster than revenue growth and suggesting that funds are being tied up in working capital. Cash and deposits were ¥146.4B, slightly below the ¥150B range recorded a year earlier, while short-term borrowings declined YoY to ¥26.8B, indicating progress in reducing interest-bearing debt. Overall, the company has a robust funding base, but the impact of rising inventories on future cash-generation capacity warrants monitoring.

Earnings Quality

The change from operating income to ordinary income was limited (+1.6%), with non-operating income of ¥1.1B, including dividend income of ¥0.1B, and non-operating expenses of ¥1.0B, including interest expenses of ¥0.3B and a foreign-exchange loss of ¥0.2B, broadly offsetting each other. The foreign-exchange loss of ¥0.2B can be viewed as a temporary fluctuation factor and should reasonably be excluded when assessing recurring earnings power. The gap between net income attributable to owners of the parent and consolidated net income—¥5.2B versus ¥7.7B—resulted from net income attributable to non-controlling interests of ¥2.5B. Thus, subsidiary performance boosted consolidated net income while reducing the portion attributable to owners of the parent. Comprehensive income was ¥10.1B, exceeding net income of ¥7.7B, primarily due to an increase of ¥3.2B in foreign currency translation adjustments, representing an uplift from factors separate from the earning power of the underlying businesses.

Earnings Forecast and Guidance

Progress against the full-year plan was 24.0% for revenue, at ¥124.6B / ¥520.0B, and 23.1% for operating income, at ¥10.4B / ¥45.0B. Both were close to the standard quarterly progress rate of approximately 25%. Ordinary income was ¥10.5B / ¥47.0B, or 22.3%, while EPS was ¥55.58 / ¥332.55, or 16.7%, indicating that progress on net-income-related metrics is lagging behind revenue and operating income. This reflects the structural impact of the increased weighting of tax expenses and net income attributable to non-controlling interests. Progress toward the full-year revenue and operating income plans, which imply YoY growth of +4.2% and +9.9%, respectively, can therefore be viewed as generally on track. No revisions were made to the earnings or dividend forecasts during the quarter.

Shareholder Returns

The company’s published full-year dividend forecast is ¥134 per share, representing an increase from the previous year’s annual dividend in the ¥41 range. The payout ratio against the full-year EPS forecast of ¥332.55 is approximately 40.3% (¥134 ÷ ¥332.55), which is not excessive. No revision was made to the dividend forecast as of the current quarter. There was no new disclosure regarding share repurchases, and the shareholder return policy remains centered on dividends.

Risk Factors

1. Segment profitability risk: Engineering revenue increased to ¥11.6B (+46.2%), while the segment fell into a loss of ¥1.0B. Deteriorating project profitability is weighing on total company operating income, and continued losses could impede improvement in the overall profit margin.

2. Cash efficiency risk from inventory buildup: Inventories increased 7.8% YoY to ¥50.8B, outpacing revenue growth of +5.8%. The increase in accounts receivable of +1.7% was below revenue growth and is therefore healthy, but the accumulation of inventory could affect working capital efficiency.

3. Dilution risk from net income attributable to non-controlling interests and tax expenses: While consolidated net income increased 9.0% to ¥7.7B, net income attributable to owners of the parent was limited to ¥5.2B (-3.1%), and net income attributable to non-controlling interests increased to ¥2.5B from ¥1.8B a year earlier. The burden on pretax income, including corporate tax expenses of ¥2.8B, is high and is structurally constraining growth in the portion attributable to owners of the parent.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (manufacturing)

Profitability and Returns

The company’s profitability is slightly below the industry median but remains within the industry IQR (4.2%–14.2%).

Growth and Capital Efficiency

The revenue growth rate is also slightly below the industry median but remains within the industry’s range of dispersion.

※Source: Company compilation

Key Points from the Financial Results

1. The core Film and Sheet Products segment improved its profit margin to 16.8% and is driving growth in total company operating income. Meanwhile, performance divergence among segments has widened, with Engineering falling into a loss despite higher revenue.

2. Consolidated net income increased (+9.0%), but net income attributable to owners of the parent declined (-3.1%) due to the increase in net income attributable to non-controlling interests and tax expenses. Attention should therefore be paid to the differing trends in consolidated net income and net income attributable to owners of the parent.

3. Inventories are increasing faster than revenue, and changes in the balance sheet in subsequent periods will be a key focus in assessing how working capital trends affect future cash-generation capacity.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on 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: ¥4,109–¥4,346 at ±1% for the cost of equity, and ¥4,218–¥4,230 at ±0.1 for ω.

Notes:

• Since 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, creating a timing mismatch with the full-year forecast.
• Because net assets include non-controlling interests, the theoretical value may be calculated at a somewhat high level.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value is not intended to 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 available earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting a professional advisor as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a solid operating start, with revenue and operating profit growth exceeding the company’s full-year sales-growth assumption. Revenue increased 5.8% year on year to ¥12.46bn, while operating income rose 7.7% to ¥1.04bn. The operating margin improved by 10bp to 8.3%, from 8.2% in the prior-year quarter. Gross profit increased 5.6% to ¥4.18bn and the gross margin was broadly stable at 33.6%. SG&A expenses rose 4.9% to ¥3.14bn, slower than revenue growth, creating modest positive operating leverage. Ordinary income increased only 1.6% to ¥1.05bn because non-operating income declined and foreign-exchange losses of ¥24m were recorded. Profit attributable to owners decreased 3.1% to ¥518m, despite operating-income growth. The decline in parent profit reflected a larger share of earnings attributable to non-controlling interests, which rose to ¥255m from ¥176m, as well as the composition of tax and below-the-line items. Consolidated net income increased 9.0% to ¥774m, and the consolidated effective tax rate was 26.3%. However, the owners’ earnings-to-pre-tax-profit tax burden was 49.3%, a quality alert driven by the allocation of profit to non-controlling interests and making parent EPS less responsive to consolidated pre-tax earnings. Film and sheet products were the clear earnings engine, with revenue up 15.8% and segment profit up 62.7%. Engineering revenue also grew strongly, but the segment moved into a loss, partially offsetting the improvement in film and sheet products. The balance sheet remains highly liquid, with cash of ¥14.64bn, a 328.6% current ratio, and interest-bearing debt of ¥5.95bn. Working-capital intensity is the principal operating issue: annualized receivable days were 86 days, inventory days 115 days, and the annualized cash conversion cycle 148 days. Q1 operating-income progress against the full-year plan was 23.1%, modestly below the seasonal 25% reference point, whereas revenue progress was 24.0%. The unchanged full-year forecast therefore requires margin improvement and a normalization of the weaker business lines as the year progresses.

Profitability Analysis

Annualized DuPont ROE was 5.0%, decomposed into a 4.2% net profit margin, 0.786x asset turnover, and 1.53x financial leverage. The low ROE is principally explained by the modest net margin and sub-1.0x annualized asset turnover rather than aggressive leverage. Financial leverage is conservative and does not materially amplify shareholder returns. The operating margin increased 10bp year on year to 8.3%, placing profitability at the lower end of the stated 8-15% good operating-margin range. Gross margin was essentially stable at 33.6%, indicating that revenue growth translated into gross profit without a meaningful deterioration in manufacturing economics. SG&A grew 4.9%, below the 5.8% increase in revenue, providing modest operating leverage and supporting the 7.7% operating-income increase. The main movement within the earnings structure was segment mix: film and sheet segment profit increased ¥378m to ¥981m, lifting its segment margin by 4.9 percentage points to 16.8%. Electronic and functional products saw revenue decline 3.1% and segment profit fall 14.2% to ¥339m, with margin down 1.2 percentage points to 8.4%. Building-materials revenue declined 13.5%, while segment profit fell 68.3% to ¥13m and margin compressed to 0.8%. Engineering revenue increased 36.1%, but segment profit deteriorated from a ¥105m profit to a ¥103m loss, implying negative incremental profitability. Interest coverage was strong at 37.11x, and the 1.011x interest burden confirms that financing costs are not constraining operating returns. The tax burden on profit attributable to owners was low at 0.493, while the consolidated effective tax rate was 26.3%; the difference reflects non-controlling-interest attribution rather than a deterioration in consolidated tax expense. Sustainable ROE improvement will depend primarily on restoring asset efficiency and converting the film-and-sheet margin gains into broader segment profitability.

Growth Assessment

Revenue growth was led by film and sheet products, where external sales increased ¥796m year on year to ¥5.83bn. This segment represented 46.8% of consolidated revenue and 79.8% of total segment profit before corporate-cost adjustments, making it the core business in the quarter. Engineering sales increased ¥270m to ¥1.02bn, although the associated loss indicates that revenue growth alone is not currently creating value. Electronic and functional products remained a major revenue contributor at ¥4.03bn, but lower sales and reduced margin limit its near-term contribution. Building materials contracted to ¥1.59bn and generated only ¥13m of segment profit, leaving this business highly sensitive to small changes in volume or cost. The company forecasts full-year revenue of ¥52.0bn, up 4.2%, operating income of ¥4.5bn, up 9.9%, ordinary income of ¥4.7bn, and profit attributable to owners of ¥3.1bn. Q1 revenue progress was 24.0% of the full-year target, 1.0 percentage point below the standard 25% pace. Q1 operating-income progress was 23.1%, 1.9 percentage points below the standard pace. Q1 ordinary-income progress was 22.3%, 2.7 percentage points below the standard pace. The full-year plan implies operating-margin expansion to approximately 8.7%, versus 8.3% in Q1, so execution in the remaining quarters must improve. Film and sheet products provide the most visible source of upside to the plan, but engineering loss reduction and stabilization in electronic and building-material businesses are necessary to improve the quality and breadth of growth. The unchanged forecast indicates that management views the Q1 shortfall versus linear progress as recoverable.

Financial Health

Liquidity is very strong. Current assets of ¥39.21bn exceeded current liabilities of ¥11.93bn by ¥27.28bn, producing a 328.6% current ratio and ¥27.28bn of working capital. The 286.0% quick ratio confirms that liquidity is not dependent on inventory realization. Cash and deposits of ¥14.64bn were 5.47x short-term loans of ¥2.68bn, providing substantial refinancing capacity. Interest-bearing debt was ¥5.95bn, equal to a conservative 0.53x debt-to-equity ratio and 12.6% debt-to-capital ratio. Interest coverage of 37.11x further supports a low near-term solvency risk. Short-term loans declined ¥900m, or 25.2% year on year, to ¥2.68bn; this deleveraging improves the near-term funding profile. Nevertheless, the 44.9% short-term debt ratio exceeds the 40% alert threshold, so part of the debt structure remains exposed to refinancing and interest-rate conditions. This maturity risk is well mitigated by the company’s large cash balance and substantial excess current assets. Noncurrent liabilities of ¥10.07bn include a ¥3.55bn net defined-benefit liability, which is a meaningful long-duration obligation relative to total debt. Total equity increased ¥425m year on year to ¥41.37bn, while the equity ratio remained robust at 61.1%. PPE represents 34.1% of total assets, consistent with a manufacturing business with a meaningful fixed-asset base. Land accounted for ¥10.68bn, or roughly half of PPE, which provides balance-sheet asset backing but does not itself generate operating cash flow. Intangible assets were only 1.1% of total assets, indicating low balance-sheet dependence on acquired intangible values.

Notable B/S Changes

Short-term loans: -¥0.90bn (-25.2%) to ¥2.68bn - reduces near-term leverage and refinancing needs, although short-term debt remains 44.9% of interest-bearing debt. Inventories: +¥0.37bn (+7.8%) to ¥5.08bn - inventory build coincides with annualized DIO of 115 days and should be monitored for cash conversion and demand alignment. Cash and deposits: -¥0.92bn (-5.9%) to ¥14.64bn - liquidity remains very strong, but the decline alongside higher working capital warrants monitoring. Net defined-benefit liability: +¥0.33bn (+10.4%) to ¥3.55bn - a meaningful long-term obligation that increases sensitivity to pension assumptions and market rates.

Cash Flow Quality

The operating cash flow, investing cash flow, financing cash flow, capital expenditure, free cash flow, and OCF-to-net-income measures are not reported in the available financial data. Balance-sheet movements nevertheless point to elevated working-capital absorption risk. Trade receivables increased ¥197m year on year to ¥11.76bn, while electronically recorded monetary claims increased ¥166m to ¥1.44bn. Using the reported annualized metric, receivable days were 86 days, above the 60-day warning level, indicating slow cash collection relative to revenue. Inventories increased ¥367m to ¥5.08bn, and annualized inventory days were 115 days, above the 90-day warning level. Finished goods were ¥5.08bn, work in process ¥2.08bn, and raw materials ¥3.25bn; the inventory classifications are additive in the reported manufacturing detail and signal a sizable production-and-stock commitment. Trade payables increased ¥316m to ¥4.82bn, while electronically recorded obligations declined ¥202m to ¥477m. The reported annualized cash conversion cycle was 148 days, exceeding the 120-day warning threshold. This long cycle raises the likelihood that reported earnings require material working capital funding before conversion into cash. The combination of high receivable days, high inventory days, and a long cash conversion cycle is a key cash-flow-quality concern rather than evidence of confirmed manipulation. Cash of ¥14.64bn and low leverage provide a substantial buffer against the working-capital burden. The priority for earnings quality is to reduce collection days and inventory days while preserving the improved operating margin.

Dividend Sustainability

The full-year dividend forecast is ¥134 per share. Against forecast EPS of ¥332.55, the implied dividend payout ratio is approximately 40.3%. This is below the 60% sustainability benchmark and leaves a reasonable earnings retention buffer. The forecast dividend is supported by the company’s strong liquidity, including ¥14.64bn of cash and a 0.53x debt-to-equity ratio. The forecast payout also remains covered by forecast profit attributable to owners of ¥3.1bn. The capacity to sustain the dividend ultimately depends on cash conversion because receivable days, inventory days, and the cash conversion cycle are elevated. The Q1 parent EPS of ¥55.58 represents 16.7% of full-year forecast EPS, below linear quarterly progression, so delivery of the full-year earnings plan is important for maintaining the indicated payout ratio. No revision to the dividend forecast was announced.

Risk Assessment

Business risks include Film and sheet products are the core profit contributor, representing ¥981m of segment profit; a reversal in this segment’s 16.8% margin would have an outsized effect on consolidated earnings., Engineering recorded a ¥103m segment loss despite 36.1% revenue growth, creating project execution, cost-overrun, and margin-recovery risk., Building materials generated only a 0.8% segment margin after revenue declined 13.5%, leaving profitability vulnerable to demand weakness and fixed-cost absorption., Electronic and functional products experienced a 3.1% sales decline and a 14.2% segment-profit decline, indicating competitive, volume, or product-mix sensitivity., As a chemical and manufacturing company, the business is exposed to raw-material and energy-cost volatility, production disruption, product-quality requirements, and environmental compliance costs., Foreign-exchange losses of ¥24m in Q1 demonstrate some currency sensitivity, although the direct P&L impact was modest relative to operating income..

Financial risks include The 44.9% short-term debt ratio is above the 40% alert threshold, creating refinancing exposure, albeit strongly mitigated by cash equal to 5.47x short-term debt., Annualized receivable days of 86, inventory days of 115, and a 148-day cash conversion cycle create working-capital funding risk and can weaken cash conversion., Profit attributable to owners declined 3.1% despite 7.7% operating-income growth because non-controlling interests increased, limiting the translation of operating gains into parent EPS., The ¥3.55bn net defined-benefit liability is a material long-term obligation that can be affected by discount rates and asset-return assumptions..

Key concerns include Highest priority: monetize working capital through receivable collection and inventory normalization; this has high likelihood and potentially high cash-flow impact., High priority: return engineering to profitability and stabilize building-material margins; both are needed for the full-year operating-margin target of approximately 8.7%., Moderate priority: monitor parent-profit conversion, including non-controlling-interest allocation and the owners’ tax burden of 49.3%., Moderate priority: preserve the reduced short-term borrowing balance and avoid a renewed reliance on short-term refinancing..

Investment Implications

Key takeaways include Operating performance improved, with revenue up 5.8%, operating income up 7.7%, and operating margin up 10bp to 8.3%., Film and sheet products are the principal earnings driver, delivering ¥981m of segment profit and a 16.8% margin., Segment earnings are uneven: engineering is loss-making, while building materials and electronic and functional products weakened year on year., The balance sheet is conservative, with 328.6% current ratio, 0.53x debt-to-equity, 12.6% debt-to-capital, and 37.11x interest coverage., Working-capital efficiency is the main financial-quality issue, with annualized DSO of 86 days, DIO of 115 days, and CCC of 148 days., The full-year operating-income forecast requires acceleration from Q1’s 23.1% progress rate and further margin expansion..

Metrics to watch include Film and sheet segment revenue growth and segment margin, Engineering segment loss recovery and project profitability, Electronic and functional products sales and margin trend, Building-materials demand and segment margin, Annualized receivable days, inventory days, and cash conversion cycle, Operating-income progress versus the ¥4.5bn full-year forecast, Short-term debt ratio and cash relative to short-term borrowings, Profit attributable to owners relative to consolidated operating-income growth.

Regarding relative positioning, The company combines a sound liquidity and solvency profile with mid-range operating profitability, but its annualized 5.0% ROE remains below the 8% concern threshold. Relative to a typical manufacturing peer, balance-sheet resilience is a strength, while working-capital efficiency and earnings concentration in film and sheet products are the principal areas requiring improvement.