Nippon Chemical Industrial Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

The most important point for FY2027 Q1 is that the trend of revenue and profit growth continued, while net income declined due to the reversal of the prior-year extraordinary gain. Revenue increased to ¥110.4B (+0.8% YoY), Operating Income to ¥11.7B (+5.0%), and Ordinary Income to ¥12.3B (+8.7%), while Net Income fell significantly to ¥9.0B (-24.9%). The decline in Net Income was attributable to the reversal of the ¥5.1B gain on the sale of fixed assets recorded in the same period of the previous year. Underlying earnings power remained solid, supported by an improved gross margin and control of SG&A expenses.

Factors Affecting Performance

【Revenue】Revenue was ¥110.4B, essentially flat at +0.8% YoY. The Chemicals Business expanded to ¥50.0B (+4.4%), while the Functional Products Business declined slightly to ¥57.4B (-2.2%), with the two businesses offsetting each other. The Leasing Business remained stable at ¥2.4B (+0.4%), despite its small scale.

【Profit and Loss】Gross profit was ¥25.7B, and the gross margin improved to 23.3% from the previous year. After absorbing SG&A expenses of ¥14.0B (SG&A ratio: 12.7%), the Company recorded Operating Income of ¥11.7B (+5.0%) and an operating margin of 10.6%. By segment, the Functional Products Business made the largest contribution, with Operating Income of ¥6.2B (+7.5%, margin: 10.8%), followed by the Chemicals Business at ¥4.0B (+2.6%, margin: 8.0%) and the Leasing Business at ¥1.5B (+9.4%, margin: 64.7%). Ordinary Income increased to ¥12.3B (+8.7%), supported by an improvement in non-operating income and expenses, including interest and dividend income of ¥0.8B and equity-method income of ¥0.3B. Meanwhile, Net Income was ¥9.0B (-24.9%) due to the reversal of the ¥5.1B gain on the sale of fixed assets recorded in the previous year. Extraordinary items consisted only of a ¥0.02B loss in the current period, indicating that temporary factors were limited. Overall, the Company achieved revenue and operating profit growth, while the decline in Net Income was an apparent decrease caused by the reversal of an extraordinary factor.

Segment Analysis

The Functional Products Business was the largest segment by revenue mix (¥57.4B, 52.0% of total Company revenue), and also made the largest contribution to profit, accounting for ¥6.2B of Operating Income (53.2% of total Company Operating Income). The Chemicals Business remained resilient, with revenue of ¥50.0B (45.3% of the composition), Operating Income of ¥4.0B, and a margin of 8.0%. The Leasing Business was small, with revenue of ¥2.4B, but had an exceptionally high margin of 64.7%, contributing to the stability of overall Company earnings. The margin differential between the Functional Products Business and the Chemicals Business (10.8% versus 8.0%) illustrates the impact of changes in the business mix on the Company-wide operating margin. Maintaining the proportion of the Functional Products Business will be key to future margin trends.

Key Financial Indicators

【Profitability】The operating margin improved to 10.6% from the previous year, with the balance between the 23.3% gross margin and 12.7% SG&A ratio contributing to margin expansion. The net margin was 8.2%, but the underlying earnings profile remained stable after excluding the reversal of the prior-year extraordinary gain.【Cash Flow Quality】Accounts receivable of ¥118.9B and inventories of ¥42.4B are high relative to the scale of revenue, indicating room for improvement in collection and inventory efficiency.【Investment Efficiency】ROE was 1.6%, while total asset turnover remained low. A substantial increase in investment securities (¥128.8B, +151.4% YoY) increased total assets and suppressed the turnover ratio.【Financial Soundness】The Equity Ratio was 65.1%, indicating a conservative and stable financial base.

Cash Flow Analysis

Although detailed disclosure of the Operating Cash Flow statement is unavailable, balance sheet trends indicate that working capital is becoming increasingly tied up. Accounts receivable of ¥118.9B and inventories of ¥42.4B remained high relative to the scale of revenue, and this capital lock-up may be creating a time lag in the generation of operating cash. Meanwhile, accounts payable increased to ¥44.2B (+36.8% YoY), suggesting expanded purchasing activity or changes in payment terms. Investment securities accumulated substantially to ¥128.8B, indicating progress in capital allocation toward investment activities. Construction in progress of ¥39.3B suggests that capital expenditures are continuing. Consequently, the balance between investment and working capital management will influence future Free Cash Flow trends.

Earnings Quality

The current period’s results were primarily driven by recurring business earnings, with extraordinary items limited to an extraordinary loss of ¥0.02B. In the same period of the previous year, the Company recorded a one-time extraordinary gain of ¥5.1B from the sale of fixed assets, which was the primary cause of the decline in current-period Net Income. Non-operating income of ¥1.4B represented approximately 1.3% of revenue, indicating no excessive dependence, and consisted of stable sources such as interest and dividend income and equity-method income. The gap between Ordinary Income of ¥12.3B and Net Income of ¥9.0B (approximately a 27% decline) is consistent with the ¥3.3B tax burden. Excluding taxes, earnings quality can be assessed as having normalized after the reversal of the prior-year one-time factor. Nevertheless, the elevated levels of accounts receivable and inventories should be considered when assessing the quality of Operating Income from an accruals perspective.

Earnings Forecast and Guidance

Progress against the full-year forecast (Revenue of ¥408.0B, Operating Income of ¥28.0B, and Ordinary Income of ¥27.0B) was 27.1% for Revenue, 41.6% for Operating Income, and 45.7% for Ordinary Income in Q1, exceeding the standard quarterly progress rate of 25%. In particular, progress above the standard rate at the Operating Income and Ordinary Income levels reflects improved gross margins and a stable contribution from non-operating income and expenses. Progress toward Net Income (Company forecast: ¥45.0B) was somewhat slow at 20.1%, but this was a temporary impact caused by the reversal of the prior-year extraordinary gain and appears to have already been reflected in the full-year Company plan. The fact that the earnings forecast was revised during Q1 also indicates that management recognized changes from the initial plan for the fiscal year.

Shareholder Returns

The full-year dividend forecast is ¥240 per share, representing a full-year comparison with the prior-year dividend of ¥60 (data for the interim period or only part of the fiscal year). The Payout Ratio against the Company’s forecast EPS of ¥518.63 is approximately 46.3%, which can be assessed as a sustainable level given the Company’s financial soundness (Equity Ratio: 65.1%). No revision to the dividend forecast was made during the current quarter, and the dividend policy remains unchanged.

Risk Factors

1. Risk of prolonged working capital: Accounts receivable of ¥118.9B and inventories of ¥42.4B are high relative to the scale of revenue. If improvements in collection and inventory efficiency are delayed, this could affect the smoothing of Operating Cash Flow.

2. Risk of fluctuations in the value of investment securities: Investment securities increased substantially to ¥128.8B (15.0% of total assets), up +151.4% YoY, increasing the sensitivity of net assets (valuation difference) to market price fluctuations.

3. Risk of margin dilution due to changes in the business mix: The Functional Products Business (margin: 10.8%) is more profitable than the Chemicals Business (margin: 8.0%), and Functional Products revenue declined -2.2% YoY. Accordingly, changes in the business mix may affect the Company-wide margin.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability is above the industry median, placing the Company relatively high within the manufacturing industry.

Growth and Capital Efficiency

The Revenue Growth Rate is below the industry median, indicating that top-line growth is relatively weak within the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. The operating margin of 10.6% improved from the previous year, supported by an improved gross margin and control of SG&A expenses. The high margin of the Functional Products Business (10.8%) is driving Company-wide profitability, indicating a qualitative change in the business portfolio.

2. The -24.9% YoY decline in Net Income was caused by the reversal of the one-time ¥5.1B gain on the sale of fixed assets recorded in the previous year. Recurring earnings power excluding extraordinary items remained solid, as demonstrated by the +8.7% increase in Ordinary Income.

3. Investment securities increased substantially to ¥128.8B (+151.4% YoY), contributing to the increase in Comprehensive Income to ¥60.4B. At the same time, the resulting suppression of total asset turnover and contribution to the low ROE (1.6%) are noteworthy from a capital efficiency perspective.

Theoretical Share Price (Reference Value)

Sensitivity: ¥5,260–¥5,560 at ±1% for the Cost of Equity, and ¥5,374–¥5,428 at ±0.1 for ω.

Notes:

• Normalized EPS calculated from Ordinary Income and other figures is used to exclude the impact of temporary gains and losses (Company forecast EPS is ¥518.6).
• 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 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 / Mechanically calculated using only publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL financial results 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 financial results data. Investment decisions should be made at your own responsibility, after consulting a professional as necessary.

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