KH Neochem Co.,Ltd. FY2026 Q2 Earnings Report

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Executive Summary

The defining feature of the quarter was an increase in profit despite declining revenue, driven by a significant improvement in profitability. Revenue declined to ¥533.0B (¥587.5B in the same period last year, YoY -9.3%), while Operating Income increased to ¥75.0B (¥60.1B last year, YoY +24.9%), Ordinary Income to ¥74.5B (¥57.6B last year, YoY +29.3%), and Net Income to ¥53.6B (¥39.9B last year, YoY +34.4%). The primary factor behind the increase in profit was the decline in the cost-of-sales ratio to 73.6% (78.5% last year), which improved the gross profit margin by +4.9pt to 26.4% (21.5% last year); SG&A expenses were held broadly in line with the previous year. In addition, lower non-operating losses and a decline in the effective tax rate resulted in progressively higher growth rates for Operating Income, Ordinary Income, and Net Income, respectively.

Factors Affecting Performance

【Revenue】Revenue was ¥533.0B, representing a year-on-year decline of -9.3%. Although segment-level disclosure was not provided, cost of sales declined by 15.0% year on year to ¥392.3B, outpacing the decline in revenue. This suggests that, in addition to lower sales volume, changes in product mix and pricing contributed to the reduction in cost of sales.

【Profit and Loss】The cost-of-sales ratio declined by -4.9pt from 78.5% to 73.6%, while the gross profit margin improved to 26.4% (21.5% last year). SG&A expenses were ¥65.7B, broadly flat year on year (-0.7%), but the SG&A ratio increased by +1.1pt to 12.3% (11.3% last year) due to the decline in revenue. As the improvement in the gross profit margin exceeded the increase in the SG&A ratio, the Operating Income margin expanded by +3.9pt to 14.1% (10.2% last year), and Operating Income increased to ¥75.0B (YoY +24.9%). In non-operating items, non-operating income of ¥4.0B and expenses of ¥4.5B resulted in a net burden of only -¥0.5B, narrowing from -¥2.5B in the previous year. This caused the growth rate of Ordinary Income (+29.3%) to exceed that of Operating Income (+24.9%). Furthermore, the effective tax rate declined from 30.8% to 28.1%, resulting in Net Income of ¥53.6B (YoY +34.4%) and a further expansion in the growth rate. Overall, the company achieved higher profit despite lower revenue, with improvements in its cost structure and cost discipline supporting earnings growth during a period of declining revenue.

Key Financial Indicators

【Profitability】ROE was 6.9% (Net Income of ¥53.6B ÷ ending shareholders’ equity of ¥776.4B). Both the Operating Income margin of 14.1% and the Net Income margin of 10.1% (6.8% last year) improved from the previous year. The core driver of the improvement in profitability was the increase in the gross profit margin to 26.4% (21.5% last year), led by the decline in the cost-of-sales ratio.【Cash Quality】Operating Cash Flow (OCF) was ¥78.1B, approximately 1.46 times Net Income of ¥53.6B, indicating strong cash-generation capacity supporting reported earnings. However, OCF was approximately 74% of EBITDA of ¥104.9B (Operating Income of ¥75.0B + depreciation and amortization of ¥29.9B), as working-capital headwinds such as an increase in inventories (-¥12.2B) and a decrease in trade payables (-¥37.4B) somewhat constrained cash conversion.【Investment Efficiency】Total asset turnover was approximately 0.41x (Revenue of ¥533.0B ÷ average total assets of ¥1311.1B). Capital expenditures of ¥29.0B were approximately equal to depreciation and amortization of ¥29.9B (CapEx/depreciation and amortization of 0.97x), indicating that capital allocation was primarily focused on replacement and maintenance investment.【Financial Soundness】The Equity Ratio improved to 58.8% (55.8% last year, +3.0pt). Cash and cash equivalents were ¥78.0B, and Operating Income coverage of interest expense of ¥1.1B was approximately 67x, indicating that the impact of interest costs was limited.

Cash Flow Analysis

OCF increased significantly by +35.1% year on year to ¥78.1B, representing high cash quality, with cash generation of approximately 1.46 times Net Income of ¥53.6B. The subtotal before changes in working capital was ¥93.7B, but an increase in inventories (-¥12.2B) and a decrease in trade payables (-¥37.4B) absorbed cash. After collection of trade receivables (+¥13.5B) and payment of corporate income taxes and other taxes (-¥16.3B), OCF settled at its final level. Investing Cash Flow was -¥29.5B, of which capital expenditures accounted for ¥29.0B, remaining at approximately the same level as depreciation and amortization of ¥29.9B and indicating maintenance and replacement investment. Financing Cash Flow was -¥37.9B and included dividend payments (-¥18.5B), adjustments to short-term funding, and share repurchases (-¥0.6B). Free Cash Flow, the sum of OCF and Investing Cash Flow, was ample at ¥48.6B, comfortably exceeding dividends and capital expenditures.

Quality of Earnings

The increase in profit for the period was not attributable to temporary non-operating factors, but was led by a structural, core-business improvement resulting from the lower cost-of-sales ratio. Non-operating income of ¥4.0B and non-operating expenses of ¥4.5B were both small, while equity-method investment income of ¥2.8B made a certain contribution to Ordinary Income. No temporary items corresponding to extraordinary gains or losses were identified. OCF reaching approximately 1.46 times Net Income indicates a low level of accruals (accounting estimation components), demonstrating strong cash support for reported earnings. However, comprehensive income was ¥68.8B, exceeding Net Income of ¥53.6B by +¥15.2B. The primary reason for this difference was an increase in valuation difference on securities of +¥15.3B. This should be noted as a non-recurring increase in net assets dependent on market fluctuations.

Earnings Forecast and Guidance

Progress against the full-year forecast was 46.8% for Revenue (¥533.0B/¥1140.0B), 55.6% for Operating Income (¥75.0B/¥135.0B), 59.1% for Ordinary Income (¥74.5B/¥126.0B), and 60.7% for Net Income attributable to owners of the parent (¥52.8B/¥87.0B). Progress on profit significantly exceeded progress on revenue, indicating that earnings were advancing ahead of schedule. The full-year forecast calls for increases of +20.0% in Operating Income and +16.7% in Ordinary Income, while Revenue is projected to decline modestly by -1.0%; first-half results are consistent with this earnings-growth scenario. No revision to the earnings forecast was made during the quarter, although the dividend forecast was revised.

Shareholder Returns

An interim dividend of ¥55 per share was paid, and the full-year dividend forecast is ¥130. The Payout Ratio against full-year forecast EPS of ¥248.45 is 52.3% (¥130/¥248.45), indicating a plan to distribute more than half of earnings to shareholders. Share repurchases were small at ¥0.6B, leaving shareholder returns primarily dividend-based. OCF and Free Cash Flow for the quarter comfortably exceeded the dividend burden (first-half actual payments of ¥18.5B), and no concerns regarding the funding source for shareholder returns are currently evident.

Risk Factors

1. Deterioration in working capital: Inventories were ¥204.6B, having increased by ¥12.2B during the first half, while trade payables declined by ¥37.4B. This partially offset the increase in OCF, and changes in inventory levels and trading terms could affect future cash-generation capacity.

2. Dependence on short-term funding: Short-term borrowings were ¥101.0B, exceeding cash and cash equivalents of ¥78.0B. Within the interest-bearing debt structure, which also includes bonds of ¥50.0B, the short-term component is relatively high. Attention to refinancing conditions will be necessary if market conditions change.

3. Market fluctuations in securities valuations: Investment securities were ¥110.0B, up +27.4% year on year, while valuation difference on securities also increased by +¥15.3B. Although these valuation gains are supporting net assets, they could work in the opposite direction due to fluctuations in market prices.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the Operating Income margin and Net Income margin exceeded the industry median, indicating that profitability was relatively high within the industry.

Growth and Capital Efficiency

The Revenue growth rate was significantly below the industry median, indicating that the company was relatively less competitive within the industry during a period of top-line growth.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Despite a -9.3% decline in Revenue, the Operating Income margin improved to 14.1% (10.2% last year), with gross-margin-led improvements in the cost structure generating higher profit despite lower revenue. Whether this improvement resulted from pricing and product-mix factors or temporary easing in raw-material market conditions will be a key point in assessing the sustainability of margins as revenue recovers.

2. Progress against the full-year forecast was ahead of schedule on the profit side, at 60.7% for Net Income and 55.6% for Operating Income, while progress on Revenue was somewhat slower at 46.8%. The trend in the second half toward the full-year Revenue forecast of -1.0% will therefore be a point of focus.

3. Increases in inventories and decreases in trade payables created working-capital headwinds against OCF growth of +35.1%. Although OCF itself was approximately 1.46 times Net Income and cash support was strong, trends in inventories and trade payables will be closely monitored as factors affecting future cash-conversion efficiency.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥2,330–¥2,463 at ±1% for the cost of equity, and ¥2,391–¥2,401 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥3.8 per share is added back to earnings (for non-cash expenses and comparability with IFRS companies).
• Because Net Income progress against the full-year forecast (61%) exceeds the standard level (50%), forecast EPS is adjusted upward within a maximum range of +10% (because companies advancing ahead of schedule tend to exceed their forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual income model / Interest rate reference month: 2026-06 / This value does not 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 release data. It does not recommend investment in any specific security. The industry benchmark is reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, consulting a professional as necessary.

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