CREEK & RIVER (4763) FY2027 Q2 Earnings Report

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Executive Summary

Revenue and operating income increased, but net income attributable to owners of the parent declined due to a higher income tax burden, resulting in a mid-year financial performance in which operating income and net income moved in opposite directions. Revenue was ¥32.06B (+14.1% YoY), and operating income was ¥2.76B (+32.7% YoY). Interim net income attributable to owners of the parent was ¥2.11B (△3.6% YoY). In the prior-year period, income taxes and other taxes amounted to △¥0.095B (a benefit), whereas the current period incurred a tax burden of ¥0.56B. This was the primary cause of the decline in net income. Improved gross margin and a smaller operating loss in the CRES segment supported the increase in operating income.

Factors Behind Changes in Results

【Revenue】Revenue growth was driven primarily by the domestic creative and CRES segments. Revenue in the domestic creative segment was ¥21B (+9.9%), an increase of approximately ¥1.89B, and accounted for 65.5% of total revenue. Revenue in the CRES segment was ¥2.16B (+454.8%), an increase of approximately ¥1.77B. The contribution from consolidating subsidiaries acquired in the previous period appears to have been significant. The Medical segment recorded revenue of ¥3.98B (+10.9%), and the Korean creative segment recorded ¥1.61B (+15.0%); both achieved double-digit growth.

【Profit and Loss】Gross margin improved by approximately 1.6pt, from 37.3% to 38.9%. SG&A expenses rose 15.4%, from ¥8.41B to ¥9.7B, exceeding revenue growth. Even so, the operating margin improved by 1.2pt, from 7.4% to 8.6%. Non-operating income and expenses were nearly balanced, with income of ¥0.1B and expenses of ¥0.1B. Extraordinary income of ¥0.01B and extraordinary losses of ¥0.05B were small, one-time factors. Income before taxes was ¥2.72B (+28.9%), while income taxes and other taxes were ¥0.56B. The tax burden in the prior-year period was light, and the resulting comparison contributed to the decline in net income. In summary, revenue and income increased at the operating and ordinary income levels, while only net income attributable to owners of the parent declined.

Segment Analysis

The Medical segment recorded revenue of ¥3.98B, operating income of ¥1.59B (+27.1%), and a margin of 39.9%. It was the largest source of profit, generating approximately 57% of total segment operating income of ¥2.77B. Revenue in the domestic creative segment grew +9.9%, but operating income was nearly flat at ¥1.34B (+0.2%). Its margin remained at 6.4%, indicating that revenue growth has not translated sufficiently into profit.

The CRES segment’s operating loss narrowed from ¥0.53B to ¥0.15B, but it remained loss-making. The Korean creative segment recorded a loss of △¥0.02B, the Accounting and Legal segment recorded income of ¥0.06B, and Other recorded a loss of △¥0.04B. Goodwill in the CRES segment was revised from the provisional amount of ¥0.56B to ¥0.3B following the finalization of the purchase price allocation.

Key Financial Metrics

【Profitability】The operating margin was 8.6% (7.4% in the prior-year period), gross margin was 38.9%, and the SG&A ratio was 30.2%. Basic EPS was ¥99.54, down △3.7% from ¥103.37 in the prior-year period. Annualized ROE was 21.1%. 【Cash Quality】Cash and deposits were ¥17.93B, up from ¥17.696B at the end of the prior-year period. Accounts receivable declined from ¥12.18B to ¥8.91B. Meanwhile, work in process increased from ¥0.3B to ¥1.75B, indicating that working capital movements were mixed. 【Investment Efficiency】Property, plant and equipment increased from ¥2.52B to ¥3.19B, and investment securities increased from ¥2.33B to ¥5.32B. Goodwill was ¥0.45B, equivalent to approximately 2.2% of net assets. 【Financial Soundness】The Equity Ratio was 45.0%, and the current ratio was 132.1%. Short-term borrowings were ¥10.25B, while cash and deposits were approximately 1.75x that amount. Long-term borrowings increased from ¥0.27B to ¥1.18B.

Cash Flow Analysis

As no cash flow statement was disclosed, funding trends are assessed based on changes in the balance sheet. Cash and deposits edged up from ¥17.696B to ¥17.927B. Total assets declined from ¥46.84B to ¥45.51B. Accounts receivable decreased by ¥3.27B, and electronically recorded monetary claims also declined from ¥2.59B to ¥0.02B. Collection of these receivables appears to have contributed to cash generation. Meanwhile, work in process increased by ¥1.44B. Deposits received increased from ¥0.2B to ¥1.99B, changing the composition of current liabilities. Uses of funds included a ¥2.99B increase in investment securities, a ¥0.68B increase in property, plant and equipment, and a ¥0.9B increase in long-term borrowings. The reduction in receivables and increase in work in process moved in opposite directions, so the conversion of earnings into cash should be assessed from both perspectives.

Earnings Quality

Operating income of ¥2.76B and ordinary income of ¥2.76B were nearly the same, with non-operating income and expenses (income of ¥0.1B and expenses of ¥0.1B) having little impact. Interest income was ¥0.04B, and interest expense was ¥0.07B. Extraordinary income of ¥0.01B (gain on sale of investment securities of ¥0.01B) and extraordinary losses of ¥0.05B were one-time factors, but small in scale. The change in the final profit figure was driven by the tax burden: in the prior-year period, income taxes deferred were △¥0.29B, and total income taxes and other taxes were △¥0.095B. In the current period, income taxes and other taxes were ¥0.56B, representing an effective tax rate of approximately 20.6%. Comprehensive income was ¥2.17B (¥2.12B attributable to owners of the parent), nearly in line with net income of ¥2.16B. The impact of valuation differences was minor, with foreign currency translation adjustments of △¥0.02B and valuation difference on available-for-sale securities of ¥0.03B. The impact of the increase in work in process on earnings quality should be monitored alongside progress in project completion and acceptance.

Earnings Forecast and Guidance

The full-year forecast is revenue of ¥66.5B (+8.3% YoY), operating income of ¥5.65B (+14.4%), ordinary income of ¥5.55B (+15.0%), net income attributable to owners of the parent of ¥3.55B (△13.5%), and EPS of ¥167.77. Interim progress rates are 48.2% for revenue, 48.8% for operating income, 49.7% for ordinary income, and 59.4% for net income. Operating income of ¥2.89B is required in the second half, approximately ¥0.13B above the first-half figure of ¥2.76B. The high progress rate for net income may reflect the incorporation of a higher tax burden for the full year; net income progress is running ahead in the first half. Revisions to the earnings and dividend forecasts have been announced.

Shareholder Returns

The dividend at the end of Q2 was ¥0, and the full-year dividend forecast is ¥52 per share. Based on the weighted-average number of shares during the period of 21,175 thousand, the estimated total annual dividend is approximately ¥1.1B. The Payout Ratio against the full-year forecast of ¥3.55B in net income attributable to owners of the parent is approximately 31.0%. Cash and deposits of ¥17.93B provide ample capacity relative to the estimated total dividend. However, the dividend is structured so that most of it is paid at fiscal year-end, and payment is contingent on achieving the second-half earnings plan.

Risk Factors

1. Concentration in the domestic creative segment: The segment accounts for 65.5% of revenue, while operating income was nearly flat at +0.2% and the margin was 6.4%. The segment’s profitability will affect the company-wide margin and the achievement of the full-year forecast.

2. Reliance on short-term borrowings: Short-term borrowings of ¥10.25B account for approximately 90% of interest-bearing debt of ¥11.43B. Cash and deposits of ¥17.93B are approximately 1.75x short-term borrowings, providing a substantial near-term capacity to meet payments. However, changes in refinancing terms warrant attention.

3. Work in process and monetization of the CRES segment: Work in process increased from ¥0.3B to ¥1.75B. Despite revenue growth of +454.8%, the CRES segment still recorded an operating loss of ¥0.15B. Delays in project completion or acceptance, or delays in monetizing acquired businesses, could affect the earnings plan.

Industry Benchmarks (Reference; Compiled by the Company)

Profitability and Returns

Both the operating margin and net margin are slightly below the median, but remain within the IQR.

Growth and Capital Efficiency

Revenue growth is above the median and positioned toward the upper end of the IQR.

※Source: Company calculations

Key Points to Watch in the Results

1. Divergence in earnings quality: Operating income increased +32.7%, while net income declined △3.6%. Operating performance and bottom-line performance should be evaluated separately, as normalization of the tax burden will determine full-year net income.

2. Concentration of profit sources: The Medical segment accounts for approximately 57% of operating income. Revenue growth in the domestic creative segment has not translated into profit, making trends in segment profitability, along with the CRES segment’s return to profitability, key areas of focus.

3. Changes in the financial structure: The company has cash of ¥17.93B and substantial capacity to cover interest payments, but the proportion of short-term borrowings is high. The increase in work in process and the required second-half operating income of ¥2.89B are points to monitor.

Theoretical Share Value (Reference)

Sensitivity: ¥1,174 to ¥1,243 for cost of equity ±1%; ¥1,202 to ¥1,217 for ω ±0.1.

Notes:

• Net assets are taken at the quarter end (there is a timing gap with the full-year forecast).
• Net assets include non-controlling interests, so the estimate may be somewhat high.

(Model: residual income model (Ohlson-type, explicit 5-year fade) / rate reference month: 2026-09 / a mechanical estimate from public data only; it is not a forecast of the market price or a recommendation of any investment action, and it does not predict or guarantee future share prices)

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This report is an earnings analysis document automatically generated by AI from XBRL earnings release data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the company based on publicly available earnings data. Investment decisions should be made at your own responsibility and, where necessary, in consultation with a professional.

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