TOHO CHEMICAL INDUSTRY (4409) FY2026 Q3 Earnings Report

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Executive Summary

Although revenue declined in the current period, Operating Income remained at approximately the same level as the previous year, while Ordinary Income and Net Income deteriorated, indicating a qualitative decline in the earnings structure. Revenue was ¥3.954B (-1.0% YoY), Operating Income was ¥0.147B (+0.0%), Ordinary Income was ¥0.138B (-7.5%), and Net Income was ¥0.094B (down from ¥0.130B in the previous year). While Operating Income remained flat, the deterioration in non-operating expenses due to higher interest payments and the decline in gains on sales of investment securities recognized in the previous year pressured lower-level profits.

Factors Affecting Performance

【Revenue】Revenue was ¥3.954B, down 1.0% YoY, with no growth confirmed in terms of volume or pricing. Cost of sales was ¥3.327B and did not decline at a faster pace than Revenue, resulting in Gross Profit of ¥0.626B (Gross Margin 15.8%, improved from 15.5% in the previous year).

【Profit and Loss】Operating Income was ¥0.147B, remaining at approximately the same level as the same period of the previous year; however, SG&A expenses increased 4.8% YoY to ¥0.480B, offsetting most of the benefit from the improvement in Gross Profit. The Operating Margin was 3.7%, essentially flat. Ordinary Income was ¥0.138B (-7.5% YoY), primarily due to an increase in interest payments to ¥0.031B (¥0.028B in the previous year). Net Income declined to ¥0.094B (¥0.130B in the previous year), affected by the reduction in gains on sales of investment securities from ¥0.028B in the previous year to ¥0.001B in the current period, as well as the recognition of ¥0.007B in losses on disposal of fixed assets. In conclusion, the current period represents a decline in both revenue and profit (on an Ordinary Income and Net Income basis), with flat operating-level results coexisting with deterioration in lower-level profits.

Key Financial Metrics

【Profitability】The Operating Margin was 3.7% and the Net Profit Margin was 2.4% (down from 3.2% in the previous year); together with a Gross Margin of 15.8%, these figures remain at levels with room for profitability improvement. 【Cash Flow Quality】Annualized DSO was 98 days, DIO was 135 days, and CCC was 154 days, indicating a long working-capital cycle and that funds are tied up in accounts receivable and inventory. 【Investment Efficiency】Annualized ROE was 5.7%, ROIC was 3.4%, and ROA was approximately 1.8%, all indicating room for improvement in capital efficiency. 【Financial Soundness】The Equity Ratio was 31.4%, the Debt-to-Net-Worth Ratio was 2.19x, and the Short-Term Debt Ratio was 43.4%. Cash and deposits of ¥0.632B were below the combined ¥1.115B of short-term borrowings and bonds due for redemption within one year, requiring monitoring of the funding structure.

Cash Flow Analysis

As actual figures from the Statement of Cash Flows are not included in the data, fund movements are analyzed based on changes in the balance sheet. While inventory decreased by ¥0.024B YoY, accounts receivable increased by ¥0.038B; an increase in accounts receivable during a period of declining Revenue suggests changes in collection terms or customer composition. Accounts payable increased by ¥0.122B, strengthening the structure of using supplier credit to cover part of working capital requirements. Construction in progress increased substantially from ¥0.059B to ¥0.267B, confirming progress in capital investment, while investments and other assets also increased by ¥0.120B. Cash and deposits increased from ¥0.590B in the previous year to ¥0.632B, but compared with short-term borrowings of ¥1.107B, the degree of financial flexibility remains limited.

Quality of Earnings

The quality of earnings in the current period is characterized by the notable deterioration at the Ordinary Income and Net Income levels despite flat Operating Income. Non-operating income was ¥0.030B, including ¥0.014B in dividend income, while non-operating expenses exceeded this at ¥0.039B, mainly due to ¥0.031B in interest payments, resulting in negative net non-operating income. In extraordinary gains and losses, gains on sales of investment securities recognized in the previous year decreased from ¥0.028B to ¥0.001B in the current period, while ¥0.007B in losses on disposal of fixed assets was recognized as an extraordinary loss. Consequently, Net Income declined from ¥0.130B in the previous year to ¥0.094B. The primary causes of this decline were the disappearance and deterioration of temporary factors, while Operating Income from the core business remained at approximately the same level as the previous year. Comprehensive Income was ¥0.163B, up 42.0% YoY. The expansion of valuation differences on securities increased Net Worth by an amount exceeding Net Income, which should be noted as an accrual-related movement not visible from Net Income alone.

Earnings Forecast and Guidance

The full-year company forecast is Revenue of ¥5.400B (YoY +0.7%), Operating Income of ¥0.195B (+7.4%), and Ordinary Income of ¥0.165B (-5.9%). The Q3 cumulative progress rates were 73.2% for Revenue, 75.2% for Operating Income, 83.3% for Ordinary Income, and 82.2% for Net Income. Operating Income is consistent with the standard 75% progress rate. The above-standard progress rates for Ordinary Income and Net Income reflect the fact that the full-year forecasts themselves assume profit declines YoY, and the Operating Income required in Q4 is limited to approximately ¥0.048B.

Shareholder Returns

The Q2 dividend was ¥0 per share, while the full-year forecast for the annual dividend is ¥22.0. Based on forecast EPS of ¥54.69, the Payout Ratio is approximately 40.2%, which is not excessive relative to the profit level for a single fiscal year. A notable feature is that the annual dividend is structured to be concentrated in the year-end dividend. However, given that cash and deposits are below short-term borrowings and other debt and that the Debt-to-Net-Worth Ratio is 2.19x, dividend stability will also depend on improvements in working capital and management of borrowing burdens.

Risk Factors

1. Leverage and refinancing risk: The Debt-to-Net-Worth Ratio is 2.19x and the Short-Term Debt Ratio is 43.4%. Cash and deposits of ¥0.632B are below the combined ¥1.115B of short-term borrowings and bonds due for redemption within one year. Interest payments increased 12.1% YoY to ¥0.031B, while the interest coverage ratio was 4.67x, below the 5x level generally considered robust.

2. Working-capital efficiency: Annualized DSO was 98 days, DIO was 135 days, and CCC was 154 days, while inventory of ¥1.644B accounted for 23.1% of total assets. Concerns include the risk of inventory valuation losses during demand fluctuations and prolonged capital lock-up.

3. Low profitability: The Operating Margin of 3.7% and Gross Margin of 15.8% are both low, limiting the company’s ability to absorb fluctuations in raw-material and energy prices and selling prices.

Industry Benchmark (Reference, Company Research)

Industry Benchmark (manufacturing)

Profitability and Returns

Compared with the industry median, both the Operating Margin and Net Profit Margin are positioned in the lower range.

Growth and Capital Efficiency

The Revenue Growth Rate also falls below the industry median and is positioned close to the lower bound of the IQR.

※Source: Company research

Key Takeaways from the Earnings Results

1. Although Operating Income was secured at approximately the same level as the previous year, the Operating Margin of 3.7% and ROIC of 3.4% show substantial room for improvement both relative to the industry and the company’s own levels. The fact that SG&A expense growth exceeded Revenue growth warrants attention from the perspective of cost absorption capacity.

2. The 26.9% YoY decline in Net Income was primarily attributable to temporary factors, including the reduction in gains on sales of investment securities of ¥0.028B recognized in the previous year and the recognition of ¥0.007B in losses on disposal of fixed assets. It should be distinguished as a fact that this was not due to deterioration at the operating level.

3. The annualized CCC of 154 days, indicating a long working-capital cycle, is a structural issue in evaluating capital efficiency and the quality of inventory and accounts receivable. Its future trend will affect the company’s ability to generate funds.

Theoretical Share Price (Reference Value)

Sensitivity: ¥887–¥938 at Cost of Equity ±1%, and ¥907–¥915 at ω±0.1.

Notes:

• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net Worth as of the quarter-end is used (there is a timing difference relative to the full-year forecast).
• As Net Worth includes non-controlling interests, the theoretical value may be calculated somewhat high.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not forecast 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 discretion and responsibility, after consulting with a professional as necessary.

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