HIRAKAWA HEWTECH CORP. FY2027 Q1 Earnings Report

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Executive Summary

The first quarter of the fiscal year ending March 2027 saw increases in both revenue and earnings. Excluding the reversal of the one-time gain recorded in the previous year (gain on negative goodwill of ¥4.4B), the quarter was characterized by continued expansion in earnings generated by the core business. Revenue increased substantially to ¥124.4B (+52.7% year on year), Operating Income to ¥13.3B (+72.6%), and Ordinary Income to ¥14.5B (+121.5%). Net Income (Net Income attributable to owners of the parent; the same terminology applies hereinafter) was limited to ¥10.2B (+7.7%), due to the reversal effect of the ¥4.4B gain on negative goodwill recorded as extraordinary income in the same period of the previous year. Nevertheless, growth through the pre-tax stage was robust. The primary driver of revenue growth was the expansion of the core Electric Wires and Processed Products segment. On the earnings side, the emergence of operating leverage from a lower SG&A ratio and a turnaround from the foreign exchange loss recorded in the previous year pushed up Ordinary Income.

Factors Affecting Business Performance

【Revenue】Revenue increased substantially to ¥124.4B, up +52.7% year on year. By segment, Electric Wires and Processed Products generated ¥112.4B (+67.5%), accounting for 90.3% of total revenue and serving as the main growth driver; its composition ratio expanded from 82.4% in the previous year. Meanwhile, Electronic and Medical Components declined to ¥12.0B (-16.4%), with its composition ratio falling from 17.6% to 9.6%.

【Profit and Loss】Operating Income rose to ¥13.3B (+72.6% year on year), and the Operating Income margin improved to 10.7% from 9.5% in the previous year, an improvement of +1.2pt. However, the breakdown shows that the cost of sales ratio increased from 75.2% to 76.9%, while the gross profit margin declined from 24.8% to 23.1%, a decrease of -1.7pt. This appears to reflect a mix change associated with the expansion of Electric Wires and Processed Products, which has a relatively higher cost ratio. The SG&A ratio improved substantially from 15.3% to 12.3%, a decrease of -3.0pt, more than offsetting the decline in gross margin. The resulting scale benefits were the primary factor behind the improvement in the Operating Income margin. Ordinary Income increased to ¥14.5B (+121.5%), exceeding the growth rate of Operating Income. This was because non-operating income and expenses turned into a surplus of ¥113 million (a deficit of ¥120 million in the previous year), as the Company recorded a foreign exchange gain of ¥0.3B in the current period compared with a foreign exchange loss of ¥1.8B in the previous year. Net Income growth was limited to +7.7% due to the reversal of the previous year's extraordinary income (gain on negative goodwill of ¥4.4B); however, the improvement on a pre-tax income and Ordinary Income basis was substantial, leading to the conclusion that both revenue and earnings increased.

Segment Analysis

Electric Wires and Processed Products, the core segment, recorded revenue of ¥112.4B (+67.5% year on year), segment profit of ¥13.4B (+80.0%), and a segment profit margin of 11.9%, improving by +0.8pt from 11.1% in the previous year. Thus, in addition to revenue growth, the profit margin also improved. Electronic and Medical Components declined in revenue to ¥12.0B (-16.4%), but maintained segment profit of ¥2.3B (-12.5%) and a profit margin of 19.4%, improving by +0.9pt from 18.5% in the previous year. Accordingly, profitability improved on a standalone basis in both segments. Nevertheless, the decline in the consolidated gross profit margin appears to have been affected by a mix change in which the composition ratio of Electric Wires and Processed Products, which has a relatively low profit margin, expanded from 82.4% to 90.3%. The further increase in dependence on Electric Wires and Processed Products should be noted as a characteristic of the business structure.

Key Financial Indicators

【Profitability】The Operating Income margin improved to 10.7% from 9.5% in the previous year, an increase of +1.2pt, while the gross profit margin declined to 23.1% from 24.8%, a decrease of -1.7pt. The substantial improvement in the SG&A ratio to 12.3% from 15.3% was the primary driver of the improvement in the Operating Income margin. The Net Income margin (on a basis attributable to owners of the parent) was 8.2%, below 11.6% in the previous year, mainly due to the absence of the previous year's extraordinary income; profitability at the Ordinary Income stage actually improved.【Cash Quality】Although the cash flow statement has not been disclosed, accounts receivable of ¥113.4B (+21.0% year on year) and inventories of ¥35.9B (+7.6%) indicate an accumulation of working capital, suggesting a possible lag in cash conversion relative to earnings growth.【Investment Efficiency】ROE was 2.3% (quarterly basis, not annualized), while the total asset turnover ratio remained at 0.211x, indicating that improvement in asset efficiency has been gradual relative to the sharp increase in revenue.【Financial Soundness】The Equity Ratio was 77.6% (maintaining a high level with an increase of approximately +0.3pt year on year). Current assets of ¥394.7B versus current liabilities of ¥73.8B resulted in a current ratio of 534.7%. Interest-bearing debt was ¥47.8B, and long-term borrowings decreased by ¥4.2B year on year, indicating a conservative financial foundation.

Cash Flow Analysis

As the cash flow statement has not been disclosed, funding trends are reviewed based on changes in the balance sheet. Cash and deposits were ¥160.9B, a decrease of ¥18.1B from ¥179.0B at the end of the previous year, suggesting that the buildup of working capital accompanying the sharp expansion in revenue absorbed funds. In fact, accounts receivable increased to ¥113.4B (+¥19.7B year on year) and inventories to ¥35.9B (+¥2.6B), while accounts payable increased only to ¥28.3B (+¥3.5B), resulting in a net expansion of the working capital burden. On the fixed-asset and financing side, long-term borrowings declined to ¥31.0B (-¥4.2B year on year) as repayments progressed, and interest-bearing debt remained at a conservative level. During a period in which revenue surged +52.7% year on year, working capital grew slightly faster than revenue and placed pressure on cash. Going forward, the collection of accounts receivable and optimization of inventory levels will determine the Company's cash-generation capacity.

Quality of Earnings

In the current period, Ordinary Income of ¥14.5B and pre-tax income of ¥14.5B were identical, with no extraordinary gains or losses recorded. A key characteristic is that earnings consisted of recurring profit generated by the core business. By contrast, in the same period of the previous year, the Company recorded a ¥4.4B gain on negative goodwill as extraordinary income in connection with the acquisition of a subsidiary in the Electric Wires and Processed Products segment. The reason Net Income growth (+7.7%) substantially undershot Ordinary Income growth (+121.5%) was the reversal of this one-time gain. Non-operating income was ¥1.5B, limited to 1.2% of revenue; however, the foreign exchange loss of ¥1.8B recorded in the previous year turned into a foreign exchange gain of ¥0.3B in the current period, and the improvement in non-operating income and expenses was one factor that pushed up Ordinary Income. The tax burden ratio rose to 27.4% from 13.7% in the previous year, apparently reflecting the reversal of the relatively low effective tax rate applicable to the extraordinary income portion in the previous year. Comprehensive income was ¥23.7B, substantially exceeding Net Income of ¥10.5B. As the primary factors were foreign currency translation adjustments of ¥6.0B and valuation difference on securities of ¥7.2B, a significant portion depended on valuation gains outside the operating business; these gains should therefore be considered separately from recurring income generated by the core business.

Earnings Forecast and Guidance

The Q1 progress rates against the Full-Year earnings forecasts were 25.9% for Revenue, 24.3% for Operating Income, 25.4% for Ordinary Income, and 24.9% for Net Income (on a basis attributable to owners of the parent; ¥10.2B against the forecast of ¥41.0B). All were around the 25% benchmark for simple quarterly linear progress, indicating that performance is tracking in line with the plan. During the quarter, revisions to the earnings forecast and dividend forecast were announced. It should be noted that the Full-Year outlook (Revenue of ¥480.0B, Operating Income of ¥55.0B, Ordinary Income of ¥57.0B, EPS of ¥263.74, and dividend of ¥57.00) reflects the revised levels.

Shareholder Returns

The Company's forecast annual dividend is ¥57.00, corresponding to a Payout Ratio of approximately 21.6% against forecast EPS of ¥263.74. The Company conducted a gratis allocation of treasury shares at a ratio of 0.05 shares for each common share on April 1, 2026. Because a simple comparison with the previous year's actual dividend of ¥23 is affected by changes in the number of shares, caution is required. Given the conservative financial structure comprising cash and deposits of ¥160.9B and interest-bearing debt of ¥47.8B, a Payout Ratio of 21.6% cannot itself be considered excessive relative to cash and deposits and earnings levels.

Risk Factors

1. Segment concentration risk: Electric Wires and Processed Products accounted for 90.3% of Revenue (82.4% in the previous year), and its composition ratio has increased further. The impact of demand fluctuations and price trends in specific fields on consolidated performance has increased from the previous year.

2. Higher cost ratio and lower gross margin: The cost of sales ratio rose from 75.2% to 76.9%, while the gross profit margin declined from 24.8% to 23.1%, a decrease of -1.7pt. Although the Operating Income margin has been offset by the improvement in the SG&A ratio, the impact on profitability could become apparent again depending on cost trends.

3. Accumulation of working capital: Accounts receivable increased +21.0% year on year to ¥113.4B, while inventories increased +7.6% to ¥35.9B. Working capital expanded at a faster pace than accounts payable, which increased +14.2%. Cash and deposits decreased by ¥18.1B from the end of the previous year, indicating a certain lag in converting revenue growth into cash.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the Operating Income margin and Net Income margin exceed the industry median, indicating relatively strong profitability within the industry.

Growth and Capital Efficiency

The Revenue growth rate is substantially above the industry median, representing an exceptionally strong pace of revenue growth within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The Operating Income margin improved from 9.5% in the previous year to 10.7%. However, the gross profit margin declined from 24.8% to 23.1%, with a reduction in the SG&A ratio (15.3%→12.3%) offsetting this decline. While fixed-cost absorption is progressing alongside revenue growth, whether the higher cost ratio continues will be a key point in assessing future margin trends.

2. Ordinary Income growth (+121.5%) exceeded Operating Income growth (+72.6%), partly because the foreign exchange loss recorded in the previous year turned into a foreign exchange gain in the current period. The impact of fluctuations in non-operating income and expenses on Ordinary Income merits continued monitoring.

3. Accounts receivable and inventories increased at a faster pace than accounts payable, and cash and deposits decreased from the end of the previous year. Together with the increased dependence on the Electric Wires and Processed Products segment, which accounts for more than 90% of Revenue, working capital trends will be a factor affecting future cash-generation capacity.

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

Sensitivity: ¥2,910–¥3,083 at ±1% for the cost of equity capital, and ¥2,993–¥2,997 at ±0.1 for 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: 2026-06 / 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 release 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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