Nippon Denko Co.,Ltd. FY2026 Q2 Earnings Report

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Executive Summary

Although operating income increased substantially, Ordinary Income and Net Income fell from profits in the previous year into the red due to a sharp expansion in equity-method investment losses. Revenue was ¥3.879B (+1.8% YoY), while Operating Income was ¥0.525B (+164.5% YoY; operating margin of 13.5%), indicating improved profitability. However, Ordinary Income was ¥-0.291B (¥0.118B in the previous year), and Net Income was ¥-0.269B (¥0.047B in the previous year). The primary reason for this divergence was the ¥0.773B equity-method investment loss, which accounted for the majority of ¥0.849B in non-operating expenses and offset the benefits of improved operating performance. Earnings per share was ¥-21.55 (¥+3.42 in the previous year).

Factors Affecting Earnings Performance

【Revenue】Revenue was ¥3.879B, up +1.8% YoY. By segment, the Incineration Ash Recycling Business grew significantly to ¥0.607B (YoY +56.2%), serving as a support for company-wide revenue. Meanwhile, the core Ferroalloy Business declined to ¥2.377B (YoY -3.3%), the Functional Materials Business decreased to ¥0.675B (YoY -8.0%), and the Power Business declined to ¥0.057B (YoY -13.1%). Revenue composition was 61.2% for the Ferroalloy Business, 17.4% for the Functional Materials Business, and 15.6% for the Incineration Ash Recycling Business, indicating that the Company remains highly dependent on the Ferroalloy Business.

【Profit and Loss】The cost-of-sales ratio improved to 76.6% from 85.4% in the previous year, and the gross margin rose substantially to 23.4% from 14.6%. After absorbing SG&A expenses of ¥0.381B (SG&A ratio of 9.8%), Operating Income was ¥0.525B, with an operating margin of 13.5% (5.2% in the previous year), representing a substantial increase at the operating level. However, non-operating expenses expanded to ¥0.849B, of which the equity-method investment loss of ¥0.773B accounted for the majority. Extraordinary losses were limited to ¥0.017B, mainly consisting of impairment losses on investment securities and other items. Against a pretax loss of ¥-0.309B, income taxes and other taxes were ¥-0.040B, reducing the loss through tax effects, resulting in Net Income of ¥-0.269B. Operating Income increased, but Ordinary Income and Net Income turned from profits in the previous year into losses; therefore, on a bottom-line basis, the results are assessed as revenue growth accompanied by declining earnings (a shift from profit to loss).

Segment Analysis

The disclosed segment profit methodology is structured so that the aggregate of segment profits agrees with Ordinary Income, with non-operating equity-method investment gains and losses and other items also reflected in segment results. The Ferroalloy Business recorded a substantial segment loss of ¥-0.627B against revenue of ¥2.377B, making it the primary cause of the company-wide Ordinary Loss of ¥-0.291B. In contrast, the Incineration Ash Recycling Business generated revenue of ¥0.607B and profit of ¥0.222B, while the Functional Materials Business generated revenue of ¥0.675B and profit of ¥0.090B; both secured stable profits and supported company-wide earnings. The Aqua Solution Business (profit of ¥0.005B), Power Business (profit of ¥0.010B), and Other businesses (profit of ¥0.010B) remained profitable, albeit on a small scale. The structure is one in which profits from non-resource-related segments partially offset the substantial loss from the Ferroalloy Business, meaning that the degree of earnings-source diversification determines the magnitude of fluctuations in company-wide earnings.

Key Financial Indicators

【Profitability】The operating margin was 13.5%, a substantial improvement from 5.2% in the previous year, while the net profit margin deteriorated to -6.9% from +1.2% in the previous year, and ROE was -3.9% (approximately +0.7% in the previous year). The coexistence of improved profitability at the operating level and deterioration in bottom-line earnings is a notable feature.【Cash Quality】Because the statement of cash flows has not been disclosed, trends in funds are reviewed based on changes in the balance sheet. Cash and deposits were ¥0.489B, down -18.8% from ¥0.602B in the previous year, while inventories increased +14.3% to ¥1.754B.【Investment Efficiency】Total asset turnover was 0.414x, calculated as revenue of ¥3.879B ÷ total assets of ¥9.361B, indicating that asset efficiency has remained broadly flat.【Financial Soundness】The equity ratio was 73.1%, down -2.9pt from 76.0% in the previous year but still at a high level, while the current ratio was 268%, calculated as current assets of ¥4.621B ÷ current liabilities of ¥1.724B, indicating ample liquidity.

Cash Flow Analysis

Because the statement of cash flows has not been disclosed, trends in funds are reviewed based on changes in the balance sheet. Cash and deposits were ¥0.489B, down -18.8% from ¥0.602B in the previous year, while inventories increased +14.3% YoY to ¥1.754B, property, plant and equipment increased +12.8% to ¥3.076B, and construction in progress expanded substantially to ¥0.307B from ¥0.069B in the previous year. The accumulation of working capital and progress in capital expenditures have increased funding needs. In response, short-term borrowings increased +57.1% to ¥0.550B from ¥0.350B in the previous year, suggesting that funding needs are being met through short-term financing. Meanwhile, investment securities decreased -32.4% to ¥1.294B from ¥1.915B in the previous year, suggesting the possibility that funds were secured through partial disposals in addition to declines in valuation. Overall, the investment of funds in inventories and capital expenditures is resulting in a decline in cash balances and increased reliance on short-term borrowings.

Quality of Earnings

Operating Income, which indicates recurring earnings power, remained solid at ¥0.525B, and the deterioration in earnings was largely attributable to temporary and non-recurring factors in non-operating income and expenses. The ¥0.773B equity-method investment loss, which accounted for the majority of ¥0.849B in non-operating expenses, resulted from fluctuations in the performance of affiliates. Extraordinary losses of ¥0.017B, including a ¥0.013B impairment loss on investment securities, were another non-recurring factor. Non-operating income was limited to ¥0.032B, including ¥0.009B in dividend income, and was insufficient to offset the deterioration at the Ordinary Income level. Comprehensive Income was ¥-0.176B, representing a +¥0.093B difference from Net Income of ¥-0.269B. Other securities valuation difference gains of +¥0.055B and the share of other comprehensive income of equity-method affiliates of +¥0.044B partially mitigated the deterioration in Net Income. The fact that both Net Income and Comprehensive Income were negative but diverged indicates that current-period earnings were significantly affected by non-cash and valuation-related factors.

Earnings Forecast and Guidance

Progress against the full-year plan was 47.8% for revenue, at ¥3.879B/¥8.110B, and 47.7% for Operating Income, at ¥0.525B/¥1.100B, broadly standard levels for the interim period. Meanwhile, against Ordinary Income of ¥-0.291B, the full-year forecast is ¥0.150B, and against Net Income of ¥-0.269B, the full-year forecast is ¥0.050B; both plans assume a substantial improvement in earnings during the second half. The Company revised its earnings forecast and dividend forecast during the quarter, apparently reflecting a review based on the expansion of equity-method investment losses in the first half. Reversal of equity-method investment gains and losses and stabilization of impairment losses on investment securities will be key to achieving the second-half targets.

Shareholder Returns

A dividend of ¥5.5 per share was paid for the first half. The full-year dividend forecast is ¥17, and the total dividend calculated from the full-year Net Income forecast of ¥0.050B and the average number of shares outstanding during the period (approximately 124.81 million shares) is approximately ¥0.212B, resulting in a planned payout ratio of approximately 425%, an extremely high level. The Company recorded a net loss of ¥-0.269B in the first half, making calculation of the payout ratio based on first-half actual results meaningless. Although near-term payment capacity is secured by a strong equity base, reflected in an equity ratio of 73.1%, the full-year plan assumes a substantial recovery in earnings during the second half, and the sustainability of shareholder returns will depend on future earnings trends.

Risk Factors

1. Equity-method investment gains and losses volatility risk: The Company recorded an equity-method investment loss of ¥0.773B in the first half, which was the primary cause of the Ordinary Loss of ¥-0.291B. The Company’s structure is such that fluctuations in the performance of affiliates significantly affect company-wide earnings, and the direction of any reversal in the second half will be closely watched.

2. Segment concentration risk: The Ferroalloy Business accounts for 61.2% of revenue, while its segment loss reached ¥-0.627B. The Company has a high degree of dependence on specific businesses and market conditions and is susceptible to fluctuations in commodity prices.

3. Working capital and liquidity risk: Inventories increased +14.3% YoY to ¥1.754B, and short-term borrowings increased +57.1% to ¥0.550B, while cash and deposits decreased -18.8% to ¥0.489B. The buildup of inventories and increasing reliance on short-term financing require monitoring from a liquidity management perspective.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

The operating margin exceeds the industry median, whereas the net profit margin is substantially below the industry median due to deterioration in non-operating income and expenses.

Growth and Capital Efficiency

The revenue growth rate is below the industry median, representing relatively low growth within the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. While the operating margin improved substantially to 13.5% from 5.2% in the previous year, Ordinary Income and Net Income turned from profits in the previous year into losses. The clear divergence between operating performance and bottom-line earnings is a defining feature of these financial results.

2. The full-year plan forecasts Ordinary Income of ¥0.150B and Net Income of ¥0.050B, and assumes a sharp recovery in the second half from the substantial first-half losses (Ordinary Loss of ¥-0.291B and Net Income of ¥-0.269B). This assumption is an important point to monitor progress against the plan.

3. By segment, the Incineration Ash Recycling Business grew by +56.2% in revenue and generated profit of ¥0.222B, expanding the contribution of non-resource-related businesses. Meanwhile, the core Ferroalloy Business recorded a loss of ¥-0.627B, indicating an increasing polarization of earnings within the business portfolio.

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 five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥410–¥433 at ±1% for the cost of equity, and ¥417–¥424 at ±0.1 for ω.

Notes:

• Net Income is significantly compressed relative to Operating Income due to tax burdens, acquisition-related expenses, non-controlling interests, and other factors (Net Income ÷ Operating Income 5%). This value reflects that compression at face value; if the factors are temporary, normalized earnings power may be higher.
• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat on the high side.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not predict 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 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 with a professional as necessary.

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