FUSO CHEMICAL CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Revenue and operating income both increased, driven by expanding demand in the Electronic Materials Business; however, the sharp rise in net income was largely attributable to a temporary factor related to extraordinary income. Revenue was ¥228.2B (+22.3% YoY), operating income was ¥61.7B (+31.5%), and ordinary income was ¥63.6B (+40.4%). Net income increased substantially to ¥66.9B (+115.4%), supported by ¥37.0B in extraordinary income related to fixed assets. Core earnings improvement is reflected in the growth at the operating income level.

Factors Affecting Earnings

【Revenue】Revenue was ¥228.2B (+22.3% YoY). By segment, the Electronic Materials Business generated ¥129.7B (+33.8%), accounting for 56.9% of total revenue and driving growth. The Life Science Business also remained solid at ¥98.5B (+9.9%). The recovery in demand for electronic materials and an improved product mix were the primary drivers of revenue growth.

【Profitability】Operating income was ¥61.7B (+31.5% YoY), and the operating margin improved to 27.0% from 25.2% in the previous year, an increase of +1.8pt. The gross margin also improved to 39.9% from 38.7%, while the SG&A ratio declined to 12.9% from 13.5%. Ordinary income was ¥63.6B (+40.4%), supported by an increase in interest income and ¥0.8B in foreign exchange gains. Net income was ¥66.9B (+115.4%); however, extraordinary income of ¥37.0B, primarily a temporary factor related to fixed assets, accounted for more than half of net income, resulting in a significant divergence from ordinary income. In conclusion, the Company achieved higher revenue and earnings, and improvement in core earnings power was confirmed, while the increase in net income was significantly affected by temporary factors.

Segment Analysis

The Electronic Materials Business is the Company’s core business, generating the majority of total operating income, with revenue of ¥129.7B (¥97.0B in the previous year, +33.8%) and segment income of ¥50.8B (¥40.7B in the previous year, +24.6%, margin of 39.1%). The Life Science Business recorded revenue of ¥98.5B (¥89.6B in the previous year, +9.9%) and segment income of ¥17.9B (¥12.2B in the previous year, +47.4%, margin of 18.2%), exceeding the Electronic Materials Business in terms of growth rate. The two businesses have an approximately 21pt difference in profit margins, creating a structure in which changes in the business mix have a significant impact on the Company-wide operating margin. Company-wide adjustments (corporate administrative expenses) were ▲¥6.9B, resulting in operating income of ¥61.7B after reflection of these adjustments.

Key Financial Indicators

【Profitability】The operating margin improved to 27.0% from 25.2% in the previous year, and the gross margin improved to 39.9% from 38.7%. ROE was 5.4%, with a net margin of 29.3% serving as an upward factor.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥47.2B, only 0.71 times net income of ¥66.9B, indicating limited cash backing for reported earnings.【Investment Efficiency】Capital expenditures were substantial at ¥50.1B, resulting in free cash flow of ▲¥10.0B. Construction in progress accumulated to ¥173.3B and forms part of property, plant and equipment.【Financial Soundness】The equity ratio was 73.7% (77.0% in the previous year), with cash and deposits of ¥382.9B and long-term borrowings of ¥119.0B. The debt level remains low, and the financial foundation is stable.

Cash Flow Analysis

OCF increased 10.7% YoY to ¥47.2B, but remained only 0.71 times net income of ¥66.9B, indicating a delay in the conversion of earnings into cash. The primary factor was an increase in trade receivables (▲¥29.2B), reflecting longer credit terms associated with revenue expansion. Investing Cash Flow was ▲¥57.1B, primarily consisting of ¥50.1B in capital expenditures, and capacity expansion investments continue, as indicated by the accumulation of construction in progress. Financing Cash Flow was ▲¥24.4B, mainly reflecting dividend payments and partial repayment of borrowings. As a result, free cash flow (OCF + investing cash flow) was ▲¥10.0B, as investment outlays exceeded operating cash generation. Cash and deposits remained ample at ¥382.9B, ensuring financial resilience even as investment continues.

Earnings Quality

The gap between ordinary income of ¥63.6B and net income of ¥66.9B was slightly less than approximately 5%, primarily due to extraordinary income of ¥37.0B, mainly a temporary factor related to fixed assets. Extraordinary income accounted for more than half of net income, indicating that the increase in net income for the period was highly dependent on temporary factors. Non-operating income was ¥2.2B, less than 1% of revenue, and was primarily composed of ¥1.3B in interest income and ¥0.8B in foreign exchange gains; its scale was limited. OCF was ¥47.2B, only 0.71 times net income, and the increase in trade receivables expanded accruals (the difference between accounting earnings and cash). Accordingly, while improvement in earnings at the operating level indicates enhanced underlying earnings power, it is appropriate to evaluate net income based on core earnings power excluding temporary factors.

Earnings Forecast and Guidance

Progress toward the full-year plan was 26.6% for revenue, 25.4% for operating income, and 26.0% for ordinary income, representing generally steady progress in line with the quarterly benchmark of 25%. Net income progress was ahead at 34.8%, primarily due to the temporary boost from the recognition of ¥37.0B in extraordinary income; on a core basis, progress can be viewed as steady. As of the current quarter, the Company has not revised its earnings or dividend forecasts, and there has been no significant change in the full-year outlook.

Shareholder Returns

The full-year forecast dividend per share is ¥28.00, and forecast EPS is ¥181.48, implying a payout ratio of approximately 15.4%, a conservative level. The Company conducted a 3-for-1 stock split effective April 1, 2026; the dividend amount for the current period is stated as the actual dividend amount before the stock split. Dividend payments for the current period were ¥1.4B, and the Company has ample payment capacity relative to cash and deposits of ¥382.9B and OCF of ¥47.2B. No revision was made to the dividend forecast during the current quarter.

Risk Factors

1. Demand volatility risk: The Electronic Materials Business accounts for 56.9% of revenue, and its operating margin of 39.1% drives the Company-wide performance. Accordingly, fluctuations in semiconductor and electronic materials market conditions could have a significant impact on overall results.

2. Delayed cash generation: OCF was only 0.71 times net income, while trade receivables increased by ¥29.2B. Cash flow could come under pressure while investments continue.

3. Risk concerning the timing of investment returns: Construction in progress accumulated to ¥173.3B and forms part of property, plant and equipment. Depending on the timing of equipment commencement, the Company may experience increased depreciation expenses and a lag in investment recovery.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability is substantially above the industry median and ranks at a high level within the manufacturing industry.

Growth and Capital Efficiency

Revenue growth also substantially exceeds the industry median, placing the Company among the high-growth companies in the industry.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The operating margin improved by +1.8pt to 27.0% due to the recovery in demand for electronic materials and an improved product mix, confirming strengthened core earnings power. The substantial increase in net income (+115.4%) was primarily driven by the ¥37.0B boost from extraordinary income; attention should be paid to the difference from ordinary income growth (+40.4%).

2. The OCF-to-net-income ratio was 0.71 times, indicating a delay in the conversion of earnings into cash, primarily due to the increase in trade receivables. Free cash flow was ▲¥10.0B, and investment is currently ahead of cash generation, as indicated by the accumulation of ¥173.3B in construction in progress.

3. Full-year progress was steady for revenue, operating income, and ordinary income (25–27%), and no revisions were made to the earnings or dividend forecasts. Net income progress was ahead at 34.8% due to temporary factors; evaluation on a normalized full-year basis is therefore appropriate.

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 period). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥1,375–¥1,459 at cost of equity ±1%, and ¥1,410–¥1,426 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).

(Calculation model: Residual income model / Interest rate reference month: 2026-07 / This value 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 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 professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a strong operating quarter for Fuso Chemical, with broad-based sales and profit growth, although reported net income was materially lifted by a non-recurring subsidy gain and cash conversion lagged earnings. Revenue increased 22.3% YoY to ¥22.82bn. Operating income rose 31.5% to ¥6.17bn, outpacing sales growth and demonstrating positive operating leverage. Ordinary income increased 40.4% to ¥6.36bn, aided by ¥0.76bn of foreign-exchange gains and ¥0.13bn of interest income. Gross profit increased to ¥9.11bn, and the gross margin expanded by 120bp YoY to 39.9% from 38.7%. The operating margin expanded by 190bp to 27.1% from 25.2%, an excellent level for a manufacturer and evidence that incremental revenue was converted efficiently into operating profit. SG&A increased 16.4% to ¥2.93bn, materially below revenue growth, supporting margin expansion. The Electronic Materials business remained the core profit engine, generating ¥5.08bn of segment profit, or 73.9% of aggregate segment profit before corporate-cost adjustments. Life Science also improved, with segment profit rising 47.4% YoY to ¥1.79bn. Net income rose 115.4% to ¥6.69bn, but this growth rate does not represent underlying operating momentum because profit before tax included ¥3.70bn of extraordinary subsidy income. Excluding the subsidy income and ¥0.10bn of fixed-asset disposal loss, pre-tax profit would have been closer to ¥6.06bn, broadly consistent with the strength of ordinary income. Operating cash flow of ¥4.72bn was positive and higher YoY, but represented only 0.71x net income, below the 0.8x earnings-quality threshold. The cash conversion shortfall was primarily associated with a ¥2.92bn increase in trade receivables and a ¥0.25bn inventory increase during a period of rapid growth. Free cash flow was negative ¥1.00bn because capital expenditure of ¥5.01bn exceeded operating cash flow. This reflects an active investment cycle rather than liquidity stress, as cash deposits were ¥38.29bn, the current ratio was 277.3%, and leverage remained conservative. The full-year operating-income forecast implies Q1 progress of 25.4%, almost exactly in line with the standard 25% first-quarter pace, while net-income progress of 34.8% is ahead of pace because of the subsidy gain. The principal forward implication is that the company is delivering high-margin growth in electronic materials while undertaking significant capacity investment, but sustainable earnings conversion will depend on collection discipline, inventory normalization, project execution, and continued demand momentum.

Profitability Analysis

Annualized DuPont ROE is 21.8%, comprising a 29.3% net profit margin, 0.547x asset turnover, and 1.36x financial leverage. The return profile is therefore driven principally by unusually high profitability rather than aggressive leverage; the 1.36x leverage factor is modest and debt-to-equity is 0.36x. The largest apparent YoY improvement is in the net-profit component, but it is not fully recurring because Q1 net income includes ¥3.70bn of extraordinary subsidy income. At the operating level, performance is more durable: revenue grew 22.3%, operating income grew 31.5%, gross margin improved 120bp to 39.9%, and operating margin improved 190bp to 27.1%. SG&A rose 16.4%, slower than revenue, creating positive operating leverage. Electronic Materials revenue grew 33.7% YoY to ¥12.97bn and segment profit grew 24.7% to ¥5.08bn; its segment margin was 39.1%, versus 18.2% in Life Science. Life Science revenue increased 9.9% to ¥9.85bn, while segment profit rose 47.4% to ¥1.79bn, expanding its segment margin by 460bp to 18.2%. The Electronic Materials segment is the core business by operating-income contribution, although its segment-margin expansion was less pronounced than Life Science in the quarter. EBITDA was ¥9.20bn and the EBITDA margin was 40.3%, indicating substantial cash earnings before depreciation. The reported five-factor tax burden was 0.671, reflecting an effective tax rate of 32.9%, while the interest burden above 1.0 reflects the substantial extraordinary gain between EBIT and profit before tax rather than financial leverage. For recurring profitability assessment, ordinary income of ¥6.36bn and operating income of ¥6.17bn are more informative than Q1 net income. Annualized profitability ratios should be interpreted cautiously because the first-quarter earnings mix contains a large subsidy gain.

Growth Assessment

Growth was led by Electronic Materials, where revenue rose ¥3.27bn YoY to ¥12.97bn, compared with a ¥0.89bn increase in Life Science revenue to ¥9.85bn. Electronic Materials accounted for 61.3% of consolidated revenue, up from 52.0% a year earlier, indicating a favorable shift toward the higher-margin segment. Aggregate segment profit increased 29.9% to ¥6.87bn, while corporate and administrative cost adjustments increased to ¥0.69bn from ¥0.59bn. The company is investing heavily to support growth: capital expenditure was ¥5.01bn and CapEx was 1.65x depreciation of ¥3.03bn. Construction in progress rose sharply to ¥17.33bn from ¥4.19bn a year earlier and represented 22.9% of PPE, indicating a sizeable capacity-expansion pipeline. This investment can support future volume growth, but also raises execution, ramp-up, and return-on-capital requirements. The full-year forecast calls for revenue of ¥85.80bn, operating income of ¥24.30bn, ordinary income of ¥24.50bn, and net income attributable to owners of ¥19.20bn. Q1 revenue progress is 26.6% of the full-year target, 1.6 percentage points above the standard 25% first-quarter pace. Operating-income progress is 25.4%, ordinary-income progress is 26.0%, and both are broadly consistent with the annual plan. Net-income progress is 34.8%, 9.8 percentage points above standard pace, but this outperformance is substantially attributable to the one-off subsidy gain and should not be extrapolated. The operating-income forecast itself implies 28.9% YoY growth, so management's unchanged guidance indicates continued confidence in demand and margin conditions. Receivable and inventory intensity require monitoring as capacity and sales scale, because working-capital growth can restrain conversion of accounting growth into cash generation.

Financial Health

The balance sheet is very strong. Current assets of ¥82.18bn exceed current liabilities of ¥29.63bn by ¥52.55bn, producing a current ratio of 277.3% and a quick ratio of 233.1%. Cash and deposits of ¥38.29bn alone exceed current liabilities, providing substantial short-term liquidity protection. Total equity was ¥123.00bn, equal to a 73.7% equity ratio, while liabilities represented only 26.3% of total assets. Reported interest-bearing debt was ¥11.90bn and debt-to-equity was 0.36x, well below the 2.0x risk threshold. Debt/capital was 8.8%, Debt/EBITDA was 1.29x, and EBITDA interest coverage was 344.28x, indicating ample debt-service capacity. Current portions of long-term loans were ¥4.00bn, but the large net working-capital position and cash balance indicate no meaningful maturity-mismatch concern. Long-term loans declined by ¥1.00bn YoY to ¥11.90bn. Total assets increased ¥145.73bn YoY, principally reflecting a ¥112.13bn increase in PPE and a ¥131.00bn increase in current assets, consistent with the large construction program and expansion of operating scale. Construction in progress increased ¥131.40bn YoY to ¥173.28bn and is the most important capital-structure item to monitor because it has not yet begun generating revenue or depreciation. Investment securities increased 31.6% YoY, or ¥0.22bn, to ¥0.89bn; the absolute amount is only 0.5% of total assets and is not material to solvency. Intangible assets were 3.1% of total assets, indicating that the asset base is predominantly tangible production capacity rather than acquisition-related intangible value. Asset retirement obligations were ¥1.53bn, equivalent to approximately 0.3% of total liabilities, a limited recorded environmental-obligation burden for a chemical manufacturer.

Notable B/S Changes

Construction in progress: +¥131.40bn YoY to ¥173.28bn (+313.7%) - large capacity-expansion pipeline; monitor completion timing, cost control, utilization and returns. Property, plant and equipment: +¥112.13bn YoY to ¥756.67bn (+17.4%) - expanding production asset base consistent with elevated CapEx and growth investment. Current liabilities: +¥97.88bn YoY to ¥296.32bn (+49.3%) - remains well covered by ¥821.79bn of current assets and ¥382.92bn of cash and deposits. Investment securities: +¥0.22bn YoY to ¥0.89bn (+31.6%) - percentage increase is notable but the holding remains immaterial at 0.5% of total assets. Finished goods: -¥11.05bn YoY to ¥131.00bn (-7.8%) - lower balance is favorable YoY, but the absolute level and elevated inventory-day alerts still require monitoring. Trade receivables: +¥29.95bn YoY to ¥196.21bn (+18.0%) - sales growth supports part of the increase, but Q1 receivable expansion absorbed operating cash flow.

Cash Flow Quality

Operating cash flow was ¥4.72bn, up from ¥4.26bn in the prior-year quarter, but it trailed net income of ¥6.69bn and produced an OCF/net-income ratio of 0.71x. This explicitly triggers the earnings-quality alert because the ratio is below 0.8x. The root cause is primarily working-capital absorption: trade receivables increased ¥2.92bn and inventories increased ¥0.25bn in Q1. The impact is that the large reported net-income increase has not yet been fully monetized in cash, particularly as net income was also elevated by a non-cash accounting recognition of subsidy income. Cash conversion, measured as OCF/EBITDA, was 0.51x, below the 0.7x alert level and signaling that EBITDA is currently being absorbed by working capital and tax payments rather than translating promptly into operating cash. The low 1.2% accruals ratio remains favorable and suggests that balance-sheet accrual intensity itself is not excessive. Receivable-days alerts of 78 days indicate slow collection relative to the 60-day warning threshold; the likely business impact is a higher funding requirement as electronic-materials revenue expands. Inventory-days alerts of 122 days and 87 days both exceed their respective warning thresholds, requiring attention despite the quarter's strong sales growth. Finished goods were ¥13.10bn, raw materials were ¥4.16bn, and work in process was ¥1.02bn; the concentration in finished goods increases exposure to demand timing, product-mix changes, and potential obsolescence. The reported cash-conversion-cycle alert of 178 days, above the 120-day threshold, confirms that the operating cycle is lengthy and is the principal cash-flow risk. These working-capital metrics can be partly characteristic of specialty chemical and electronic-material supply chains with customer qualification and inventory-buffer needs, but their elevated level makes trend improvement important. Capital expenditure of ¥5.01bn exceeded depreciation by ¥1.98bn and resulted in free cash flow of negative ¥1.00bn. Negative free cash flow is presently consistent with deliberate capacity expansion rather than a financing shortfall, given the cash balance and low leverage. Investing cash outflow was ¥5.71bn, primarily capital expenditure, while financing cash outflow was ¥2.44bn, including ¥1.44bn of dividends and ¥1.00bn of loan repayments. Cash decreased by ¥3.31bn to ¥34.58bn on a cash-and-equivalents basis, but liquidity remains substantial.

Dividend Sustainability

The full-year dividend forecast is ¥28.00 per share. Against forecast EPS of ¥181.48, the implied dividend payout ratio is 15.4%, which is conservative and comfortably below the 60% sustainability benchmark. The forecast dividend is therefore readily covered by projected earnings. Q1 operating cash flow of ¥4.72bn exceeded the ¥1.44bn cash dividend payment made during the quarter, providing 3.3x operating-cash-flow coverage. Free cash flow was negative ¥1.00bn because expansionary capital expenditure was high, so dividend funding must be considered alongside the cash reserve rather than relying solely on quarterly free cash flow. Cash and deposits of ¥38.29bn, low leverage, and interest coverage above 200x provide substantial financial capacity to maintain the stated dividend through the current investment cycle. No dividend revision was announced. The announced FY2027 dividend per share should be assessed in the context of the April 2026 three-for-one stock split when comparing per-share amounts across periods.

Risk Assessment

Business risks include Electronic Materials is the core earnings driver, contributing 73.9% of segment profit before corporate-cost adjustments; a slowdown in semiconductor and electronics-material demand, customer inventory corrections, or qualification delays would have a disproportionate earnings effect., Finished-goods inventory of ¥13.10bn and elevated inventory-days alerts of 122 days and 87 days create risk of slower sell-through, inventory valuation pressure, or production adjustments if demand weakens., A cash-conversion-cycle alert of 178 days and receivable-days alert of 78 days indicate material working-capital intensity; slower customer collection would reduce operating cash conversion., Construction in progress of ¥17.33bn, 22.9% of PPE, exceeds the 20% high-CIP alert threshold. The root cause is an extensive capacity-investment program. The impact is project-delay, cost-overrun, utilization, and return-on-invested-capital risk before new assets contribute earnings., For a chemical manufacturer, raw-material, energy-cost, environmental-compliance, plant-safety, and product-quality risks can affect gross margins and continuity of supply., Foreign-exchange gains of ¥0.76bn supported ordinary income in Q1; exchange-rate movements can introduce volatility into earnings where overseas sales, procurement, or foreign operations are significant..

Financial risks include OCF/net income of 0.71x is below the 0.8x quality threshold. The root cause is receivable and inventory absorption combined with subsidy-inflated net income. The impact is that reported profit growth is not yet fully reflected in cash generation., OCF/EBITDA cash conversion of 0.51x is below the 0.7x alert threshold. While expansion and working capital can explain the shortfall, a sustained ratio at this level would constrain internally funded growth., Free cash flow was negative ¥1.00bn as ¥5.01bn of capital expenditure exceeded operating cash flow. This is manageable with the current cash balance and leverage, but it raises dependence on successful commissioning and future cash conversion., The ¥3.70bn extraordinary subsidy gain materially raises Q1 profit before tax and net income. The impact is elevated risk that headline EPS and ROE are interpreted as recurring operating performance., The effective tax rate was 32.9%, and the tax burden was 0.671; tax expense reduced the conversion of pre-tax income into recurring earnings..

Key concerns include Highest priority: convert revenue growth into cash through improved receivable collection and inventory discipline., High priority: execute and ramp the construction pipeline efficiently, given construction in progress equal to 22.9% of PPE., High priority: distinguish recurring operating profit from the non-recurring ¥3.70bn subsidy gain when evaluating FY2027 earnings momentum., Moderate priority: preserve Electronic Materials demand and margins as that segment has become a larger share of group sales and the clear core profit contributor., Balance-sheet risk is currently low: liquidity, equity capitalization, debt service capacity, and leverage provide significant resilience against the identified operating risks..

Investment Implications

Key takeaways include Revenue growth of 22.3% and operating-income growth of 31.5% delivered 190bp operating-margin expansion to 27.1%., Electronic Materials generated ¥12.97bn of revenue and ¥5.08bn of segment profit, making it the core business and primary determinant of consolidated earnings momentum., Life Science delivered a meaningful margin improvement, with segment profit rising 47.4% on 9.9% revenue growth., Q1 net income of ¥6.69bn was boosted by ¥3.70bn of extraordinary subsidy income; ordinary income and operating income provide a clearer recurring-profit reference., The company has a strong funding base for investment, with ¥38.29bn of cash and deposits, a 277.3% current ratio, 0.36x debt-to-equity, and 1.29x debt/EBITDA., Capacity-expansion investment is material: CapEx/depreciation was 1.65x and construction in progress was 22.9% of PPE., Working-capital efficiency is the principal near-term financial monitoring issue, as OCF/net income was 0.71x, OCF/EBITDA was 0.51x, and the reported cash conversion cycle was 178 days..

Metrics to watch include Electronic Materials revenue growth, segment profit, and segment margin, Operating margin and gross margin after the Q1 expansion, Trade receivables and reported receivable days, Finished-goods inventory and reported inventory days, Cash conversion cycle and OCF/EBITDA conversion, Construction-in-progress balance, CapEx, commissioning timing, and subsequent asset utilization, Operating-income progress against the ¥24.30bn full-year forecast, Recurring ordinary income excluding foreign-exchange volatility and net income excluding extraordinary subsidy effects.

Regarding relative positioning, Fuso Chemical combines high operating profitability, very low balance-sheet risk, and a substantial investment program. Its 27.1% operating margin, 40.3% EBITDA margin, and annualized 21.8% ROE place profitability at an excellent level, while low leverage distinguishes the return profile from debt-driven growth models. Relative to manufacturing working-capital benchmarks, however, the reported receivable days, inventory days, and 178-day cash conversion cycle are weak and require improvement for the company to translate high accounting profitability into consistently strong free cash flow.