Hodogaya Chemical Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥22.55B
• Operating Income: ¥1.53B
• Net Income: ¥3.94B
• EPS: ¥77.65

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Hodogaya Chemical (4112) reported FY2026 Q2 consolidated results under JGAAP showing a pronounced profit contraction amid a double-digit revenue decline. Revenue fell 15.3% YoY to ¥22.55bn, while operating income dropped 64.8% YoY to ¥1.53bn, indicating strong negative operating leverage. Despite the top-line pressure, the reported gross profit of ¥11.72bn implies a gross margin of 52.0%, suggesting a favorable mix shift and/or disciplined pricing in higher-value products even as volumes likely softened. Operating margin compressed to 6.8%, with ordinary income at ¥1.83bn (8.1% margin) supported by low interest costs. Net income declined 51.6% YoY to ¥1.23bn, with a net margin of 5.47%, reflecting weaker operations partially offset by limited financial burden. The DuPont breakdown yields ROE of 2.01%, driven by a 5.47% net margin, low asset turnover of 0.267x, and modest financial leverage of 1.37x—underscoring that lower profitability and sluggish asset efficiency are the main drags on equity returns. Balance sheet strength remains a clear positive: total assets were ¥84.29bn with equity of ¥61.52bn, implying an equity/asset ratio of roughly 73% (reported equity ratio was not disclosed), and total liabilities of ¥21.33bn. Liquidity is ample, with current assets of ¥36.38bn versus current liabilities of ¥13.88bn, producing a current ratio of 262% and quick ratio of 194%. Operating cash flow was solid at ¥4.73bn, equating to 3.83x net income, pointing to robust cash conversion helped by non-cash charges (¥1.32bn D&A) and working capital inflows. Interest coverage is strong at ~40x, reflecting low interest expense (¥38m) and providing resilience in a higher-rate or tighter credit environment. The company reported DPS of ¥0, with a payout ratio of 0%, implying retained earnings are being preserved amid earnings pressure and/or pending reinvestment needs. Free cash flow cannot be reliably assessed due to a lack of investing cash flow detail (reported as zero, which likely indicates undisclosed components rather than true zero). Overall, the quarter shows resilient cash generation and a strong balance sheet offset by pronounced earnings sensitivity to lower sales. Key issues are negative operating leverage and low asset turnover, which depress ROE despite conservative leverage. Looking ahead, stabilization in end-markets, improved utilization, and stricter cost control will be important to re-expand margins. Data limitations (notably cash and investing cash flow details, equity ratio disclosure, and share count) temper precision in certain assessments, but the core picture of balance sheet strength and cyclical earnings pressure is clear.

Profitability Analysis

ROE of 2.01% decomposes into: net margin 5.47% × asset turnover 0.267 × financial leverage 1.37. The primary headwinds are the compressed operating margin (6.8%) and subdued turnover, not financial leverage. Gross margin is relatively high at 52.0%, indicating product mix/pricing resilience; however, the drop from revenue to operating income suggests elevated SG&A/R&D or reduced overhead absorption. EBITDA was ¥2.85bn (12.6% margin), showing a moderate buffer above operating income from non-cash D&A (¥1.32bn). Ordinary income margin of 8.1% benefits from low financing costs; the interest coverage ratio is ~40x (EBIT/interest = ¥1.53bn/¥38m), underscoring minimal financial drag on profitability. Negative operating leverage is evident: revenue fell 15.3% YoY while operating income fell 64.8% YoY, implying that fixed costs remain significant relative to the current sales level. The low asset turnover (0.267x) suggests underutilized assets and/or inventory build historically; efficiency improvement would be a key lever to restore ROE. Assuming EBT approximates net income plus tax (¥1.78bn), the implied effective tax rate is ~31%, broadly in line with Japan’s statutory range (the provided 0.0% metric appears undisclosed rather than a true zero).

Growth Assessment

Revenue contracted 15.3% YoY to ¥22.55bn, indicating headwinds in end-demand (likely in specialty materials such as display/OLED, imaging, and/or agrochemical-related lines). Profit decline outpaced sales due to fixed-cost drag and possible adverse mix at the operating line despite robust gross margins. The quality of profits is mixed: gross margin stability suggests pricing/mix strength, while the sharp operating income decline underscores sensitivity to volume/utilization. Cash earnings quality is comparatively strong given OCF of ¥4.73bn versus net income of ¥1.23bn (OCF/NI 3.83x), supported by D&A and working capital inflows. Outlook hinges on end-market normalization, inventory digestion among customers, and the company’s ability to align costs with the current demand run-rate. Near-term growth recovery will likely depend on improvements in high-value specialty segments (e.g., functional materials) and successful pass-through of input costs. Without disclosed order trends or segment detail, sustainability of revenue remains uncertain; monitoring sequential sales, backlog (if available), and utilization will be key.

Financial Health

Liquidity is strong: current assets ¥36.38bn vs current liabilities ¥13.88bn yield a current ratio of 262% and quick ratio of 194%, indicating ample short-term coverage even excluding inventories of ¥9.41bn. Working capital stands at ¥22.50bn. Solvency is robust with total liabilities of ¥21.33bn and equity of ¥61.52bn; debt-to-equity (using total liabilities as a proxy) is 0.35x. Based on disclosed totals, equity/asset ratio is approximately 73% (61.52/84.29), despite the reported equity ratio metric being undisclosed. Interest burden is low (¥38m), supporting resilience. The asset base relative to sales (asset turnover 0.267x) suggests capacity underutilization; improving turnover would enhance returns without requiring additional leverage.

Cash Flow Quality

Operating cash flow of ¥4.73bn exceeds net income of ¥1.23bn by a factor of 3.83, indicating strong cash conversion. Non-cash D&A contributed ¥1.32bn, and the residual implies a net working capital inflow of roughly ¥2.18bn (OCF minus NI and D&A), likely from inventory reduction and/or receivables collection. Investing cash flow is shown as zero, which should be treated as undisclosed rather than an absence of capex; therefore, true free cash flow cannot be determined from the provided data (the listed FCF of 0 reflects non-disclosure). Financing cash flow of -¥0.96bn indicates net outflows (e.g., debt repayment, dividends, or share repurchases), but details are not disclosed. Overall, earnings quality appears solid this quarter given cash realization, though sustainability depends on whether the working capital inflows are one-off or structural.

Dividend Sustainability

Reported DPS is ¥0 with a payout ratio of 0%. Without investing cash flow and capex details, FCF coverage cannot be properly assessed (the reported 0.00x reflects non-disclosure). The balance sheet strength (approx. 73% equity ratio by our calculation) and strong OCF would, in principle, support dividends; however, the sharp YoY profit decline and negative operating leverage argue for caution until earnings stabilize. Dividend policy visibility is limited this period; future distributions will hinge on profit recovery, capex needs for growth areas, and working capital normalization.

Risk Assessment

Business Risks:

• End-market cyclicality in specialty chemicals/materials (e.g., display/OLED, imaging, agrochemicals)
• Customer inventory adjustments reducing near-term orders
• Raw material and energy cost volatility affecting margins
• Pricing pressure and competitive dynamics in niche chemical segments
• R&D and product qualification risks for advanced materials
• Regulatory and environmental compliance costs

Financial Risks:

• Negative operating leverage from volume declines compressing margins
• Low asset turnover indicating underutilization of assets
• Potential working capital volatility following a large inflow this quarter
• FX exposure impacting export competitiveness and input costs
• Limited disclosure on capex and investing cash flows complicating FCF assessment

Key Concerns:

• Operating income down 64.8% YoY versus revenue down 15.3% YoY
• ROE at 2.01% reflecting low profitability and asset efficiency
• Unspecified investing cash flows impede visibility into FCF and reinvestment
• Dependence on maintaining high gross margins to offset fixed costs

Investment Implications

Key Takeaways:

• Earnings under pressure with pronounced negative operating leverage; ROE subdued at 2.01%
• Balance sheet and liquidity are strong (current ratio 262%, estimated equity ratio ~73%)
• Cash conversion is robust this quarter (OCF/NI 3.83x) aided by working capital inflows
• Asset efficiency is a key improvement area (asset turnover 0.267x)
• Visibility on capex/FCF is limited due to undisclosed investing cash flows

Metrics to Watch:

• Sequential revenue growth and order/backlog trends in key specialty segments
• Operating margin recovery and utilization rates
• Inventory levels and working capital turns (AR/AP/inventory days)
• Capex disclosure and investing cash flow detail to assess FCF
• Gross margin sustainability vs. raw material and energy cost trends
• FX rates and pricing adjustments in export markets

Relative Positioning: Compared with typical Japanese specialty chemical peers, Hodogaya exhibits stronger balance sheet conservatism and liquidity, but weaker current-period profitability and ROE due to negative operating leverage and low asset turnover; near-term rerating hinges on demand normalization and cost/efficiency improvements while maintaining premium gross margins.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis