CK SAN-ETSU Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

The quarter produced a clear increase in revenue and operating income, driven by improved profitability at the operating level; however, the sharp increase in non-operating expenses, which weighed on ordinary income and net income, is the key point of focus. Revenue increased substantially to ¥489.4B (+38.1% YoY), while operating income rose sharply to ¥56.1B (+181.6%). However, ordinary income was nearly flat at ¥26.3B (+0.1% YoY), and net income attributable to owners of the parent declined to ¥15.5B (-16.2% YoY). While volume and pricing growth in the core BRASS Business and operating leverage from improved gross margins drove the increase in operating income, higher non-operating expenses, including derivative valuation losses, significantly reduced profit at the lower levels.

Factors Affecting Earnings

【Revenue】Revenue was ¥489.4B, an increase of +38.1% YoY. By segment, the core BRASS (copper and brass products) Business drove overall growth, generating ¥472.4B in revenue (90.6% of total revenue), up +44.5%. PRECISION (precision components) also achieved strong growth of +37.9%, with revenue of ¥20.9B. Meanwhile, FITTINGGALVANIZING (piping and galvanizing) was the only segment to report a decline in revenue, at ¥28.2B, down -4.8%.

【Profit and Loss】Operating income increased substantially by +181.6% to ¥56.1B. The gross margin improved to 14.5% (approximately 10.0% in the previous year), while the SG&A expense ratio declined to 3.1%, resulting in an expansion of the operating margin to 11.5% (5.6% in the previous year). However, non-operating expenses expanded to ¥32.2B (6.6% of revenue), including derivative valuation losses of ¥20.5B, which weighed on ordinary income. Ordinary income was therefore nearly flat at ¥26.3B, up +0.1% YoY. Net income attributable to owners of the parent declined 16.2% to ¥15.5B. Although the Company achieved higher revenue and operating income at the operating level, profit at the final level declined due to non-operating factors. In conclusion, there was a divergence between higher revenue and operating income and lower net income.

Segment Analysis

BRASS (copper and brass products) is the core business, generating revenue of ¥472.4B (+44.5%), operating income of ¥49.0B (+271.1%), and a profit margin of 10.4%, accounting for approximately 88% of total Company profit. PRECISION (precision components) generated revenue of ¥20.9B (+37.9%) and operating income of ¥3.7B (+103.3%), with a profit margin of 17.5%, the highest among the three segments, contributing to the improvement in overall profitability. FITTINGGALVANIZING (piping and galvanizing) generated revenue of ¥28.2B (-4.8%) and operating income of ¥2.9B (-24.9%), with a profit margin of 10.4%, making it the only segment to report both lower revenue and lower profit. BRASS accounts for 90% of the revenue mix, indicating a high degree of dependence on this single segment.

Key Financial Indicators

【Profitability】The operating margin was 11.5%, improving by +584bp from 5.6% in the previous year. The gross margin also expanded to 14.5% (approximately 10.0% in the previous year). However, the net margin remained at 3.6% (net income of ¥17.7B / revenue of ¥489.4B), indicating that the improvement at the operating level has not been fully reflected in the final profit level. ROE was 2.8%, with the expansion of non-operating expenses acting as a downward pressure. 【Cash Flow Quality】Cash and deposits were limited at ¥14.7B, while accounts receivable of ¥239.9B and inventories of ¥114.9B accumulated. Accounts payable remained at ¥142.5B, resulting in a substantial working capital burden. 【Investment Efficiency】Total assets expanded to ¥1121.9B (¥975.2B in the previous year), while net income growth failed to keep pace with asset growth. 【Financial Soundness】The equity ratio remained high at 57.0%; however, short-term borrowings increased sharply to ¥231.0B (¥119.7B in the previous year), indicating a shortening of the funding structure.

Cash Flow Analysis

Although the detailed disclosure of the statement of cash flows in this financial report is limited, fund flows can be assessed from changes in the balance sheet. Accounts receivable increased to ¥239.9B (¥217.7B in the previous year), while inventories increased to ¥114.9B (¥100.8B in the previous year), indicating that working capital has accumulated ahead of operating income growth. Meanwhile, accounts payable increased only to ¥142.5B (¥116.0B in the previous year), and the Company continues to require time to convert working capital into cash. To compensate for this expansion in working capital, short-term borrowings increased sharply to ¥231.0B (¥119.7B in the previous year, +93.0%). Compared with cash and deposits of ¥14.7B, the Company has limited liquidity on hand. Compressing inventories and accounts receivable will be a key challenge in translating the improvement in operating profitability into actual cash generation.

Quality of Earnings

For the current period, both extraordinary income and extraordinary losses were ¥0.0B. Temporary factors recorded in the same period of the previous year, such as the ¥1.9B gain on negative goodwill, have been eliminated, indicating that current-period profit is based on recurring business activities. However, non-operating expenses were substantial at ¥32.2B, with derivative valuation losses of ¥20.5B serving as the primary factor weighing on ordinary income and net income. Interest expense was immaterial at ¥0.5B, and the interest burden itself was small. Nevertheless, highly non-cash items such as valuation losses, which are dependent on market fluctuations, are increasing earnings volatility. Comprehensive income was ¥17.1B, nearly in line with net income of ¥17.7B, and no significant divergence was observed from other comprehensive income items (foreign currency translation adjustments of ¥0.1B, valuation difference on securities of -¥0.2B, and retirement benefit adjustments of -¥0.6B). The effective tax rate was approximately 32.5%, within a standard range. However, the fact that strength at the operating level has not been sufficiently reflected in final profit due to non-operating volatility is an important consideration when assessing earnings quality.

Earnings Forecast and Guidance

Progress toward the full-year forecast was notably ahead of schedule for operating income. Revenue progress was 27.2% (¥489.4B/¥1800.0B), slightly above the standard quarterly progress rate of 25%. Operating income progress was substantially ahead of schedule at 56.1% (¥56.1B/¥100.0B), suggesting that the full-year operating income forecast of ¥100.0B, down -29.4% YoY, may have been set conservatively. Ordinary income progress was 26.3% (¥26.3B/¥100.0B), remaining at a standard level, as strength at the operating level was offset at the ordinary income level by non-operating expenses. There were no revisions to either the full-year earnings forecast or the dividend forecast.

Shareholder Returns

The full-year dividend forecast is ¥100 per share, representing a planned increase from the previous fiscal year's actual dividend of ¥45. Based on average shares outstanding during the period of 8,260 thousand shares, the estimated annual total dividend payment is approximately ¥8.3B. The payout ratio against the full-year net income forecast of ¥65.0B attributable to owners of the parent is approximately 13%, a conservative level. There has been no disclosure regarding share repurchases. At present, the Company's shareholder return policy consists solely of dividends, and given the low payout ratio, there are limited concerns regarding sustainability.

Risk Factors

1. Segment concentration risk: The BRASS (copper and brass products) segment accounts for 90.6% of revenue, resulting in a high degree of dependence on a single business. Changes in supply and demand and raw material prices in this segment have a direct impact on overall Company performance.

2. Short-term funding risk: Short-term borrowings increased sharply to ¥231.0B (¥119.7B in the previous year, +93.0%), while cash and deposits remained at only ¥14.7B, resulting in a high ratio of short-term liabilities to cash on hand. The accumulation of working capital (accounts receivable of ¥239.9B and inventories of ¥114.9B) is contributing to increased funding needs.

3. Non-operating income and expense volatility: Derivative valuation losses account for ¥20.5B of non-operating expenses of ¥32.2B, significantly weighing on ordinary income and net income. These items are affected by external factors such as market conditions, interest rates, and foreign exchange rates, and may cause quarterly fluctuations in earnings.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Return

The operating margin exceeds the industry median, while the net margin is below the industry median due to the impact of non-operating expenses, resulting in differing assessments at the operating and final profit levels.

Growth and Capital Efficiency

The revenue growth rate substantially exceeds both the industry median and the upper end of the range, positioning the Company as a high-growth company within the industry.

Source: Compiled by the Company

Key Points from the Financial Results

1. Profitability at the operating level has recovered substantially through improvements in pricing and product mix and greater SG&A efficiency. The operating margin of 11.5% exceeds the industry median. Monitoring future trends in the gross margin will help determine whether this improvement is structural or attributable to temporary market conditions.

2. A substantial divergence has emerged between operating income and ordinary and net income, with non-operating expenses, including derivative valuation losses, increasing earnings volatility. The possibility of a recurrence of this divergence will be a key point of focus when monitoring trends in non-operating income and expenses in future quarters.

3. A sharp increase in short-term borrowings (+93.0%) is occurring alongside the accumulation of working capital (accounts receivable and inventories), indicating a structural change in cash management. Future cash flow disclosures and trends in the reduction of inventories and accounts receivable will provide important information for assessing the stability of the funding structure.

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: ¥7,949–¥8,430 at a ±1% change in the cost of equity, and ¥8,174–¥8,201 at a ±0.1 change in ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

（Calculation model: residual income model / Interest rate reference month: 2026-07 / 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 summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly available earnings data. Investment decisions should be made at your own responsibility, after consulting with professionals as necessary.

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