THE HANSHIN DIESEL WORKS (6018) FY2026 Q3 Earnings Report

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Executive Summary

This was a results period of higher revenue and substantially higher profit, with Operating Income reaching 4.3 times the level of the same period of the prior year due to revenue expansion and improved profitability. Revenue was ¥9.95B (+18.9% YoY), Operating Income was ¥0.51B (+329.2%), Ordinary Income was ¥0.59B (+255.5%), and Net Income was ¥0.41B (+221.3%). SG&A expenses increased by only 17.0%, compared with an 18.9% increase in revenue, while the gross margin rose from 16.7% to 20.2%. This was the primary factor behind the improvement in the Operating Margin to 5.1% from 1.4% in the prior year. Progress against the full-year forecast was 71.6% for Revenue and 72.4% for Operating Income, slightly below the standard Q3 progress rate of 75%; sales and production progress in Q4 will be key to achieving the plan.

Factors Affecting Results

【Revenue】Revenue increased 18.9% YoY to ¥9.95B. Progress against the full-year company plan of ¥13.90B was 71.6%, slightly below the standard progress rate of 75%, requiring ¥3.95B of revenue to be recognized in Q4. Contract liabilities (advance receipts) increased 22.1% YoY to ¥2.97B, and the accumulation of performance obligations as contracted projects progress is expected to support future revenue recognition.

【Profit and Loss】Operating Income increased significantly to ¥0.51B (+329.2%), Ordinary Income to ¥0.59B (+255.5%), and Net Income to ¥0.41B (+221.3%). The gross margin rose by 352bp from 16.7% to 20.2%, while the SG&A ratio declined slightly from 15.3% to 15.1%, resulting in a 368bp improvement in the Operating Margin from 1.4% to 5.1%. Ordinary Income represents the level after adding ¥0.09B in non-operating income to Operating Income, comprising ¥0.03B in dividend income, ¥0.02B in interest income, and ¥0.01B in foreign exchange gains; non-core income also made a certain contribution. The ¥0.01B extraordinary loss (impairment loss on investment securities) was small, and its impact on Net Income was limited. These results reflect higher revenue and profit growth accompanied by simultaneous improvement in profitability.

Key Financial Indicators

【Profitability】The Operating Margin was 5.1%, improving by 368bp from 1.4% in the same period of the prior year, while the Net Profit Margin also rose from 1.5% to 4.1%. The increase in the gross margin to 20.2% was the primary driver of the improvement, while the SG&A ratio remained almost flat at 15.1%, indicating progress in fixed-cost absorption.【Cash Quality】Cash and deposits totaled ¥4.81B, representing 18.8% of total assets. However, non-operating income accounted for part of Ordinary Income, and the recurring level of core earnings is more appropriately assessed using the 5.1% Operating Margin.【Investment Efficiency】ROE (annualized) remained at 3.6%, constrained by the low asset turnover ratio and the level of profitability. Basic EPS was ¥126.85 (¥39.52 in the prior year, +221.0% YoY), and BPS was ¥4,675.87.【Financial Soundness】The Equity Ratio was 59.4%. Liquidity was sound, with current assets of ¥13.17B versus current liabilities of ¥7.10B. Long-term funding stability was also secured, with fixed assets of ¥12.39B and net assets of ¥15.18B against fixed liabilities of ¥3.27B.

Cash Flow Analysis

As no data based on the disclosure of the statement of cash flows is available, an examination of fund movements based on changes in the balance sheet shows that cash and deposits declined to ¥4.81B from ¥5.47B in the prior year, while investment securities increased to ¥2.39B and finished-goods inventory expanded to ¥1.14B. Accounts receivable and notes receivable totaled ¥3.03B and increased year on year, suggesting that the accumulation of operating assets associated with higher revenue may have absorbed funds. Although accounts payable declined to ¥1.19B, electronically recorded obligations increased, indicating a change in the composition of settlement methods for trade payables. Overall, the structure suggests that internally generated funds from higher profits were allocated to increased inventories and investment assets, as well as the reduction of trade payables.

Quality of Earnings

The ¥0.41B increase in Net Income can be considered high quality because it was supported by improved core earnings resulting from a higher gross margin and the relative containment of SG&A expenses. Non-operating income of ¥0.09B comprised ¥0.03B in dividend income, ¥0.02B in interest income, and ¥0.01B in foreign exchange gains, meaning that a portion of Ordinary Income depended on non-core earnings. However, Operating Income alone increased by ¥0.39B YoY, and the core of the profit increase was the recovery in core operating earnings. The ¥0.01B extraordinary loss (impairment loss on investment securities) was a temporary factor with a limited impact on Net Income. A provision for loss on orders of ¥0.26B and a provision for product warranties of ¥0.01B were recorded; fluctuations in the profitability of individual projects remain factors that could affect future earnings quality.

Earnings Forecast and Guidance

Progress against the full-year company forecast was 71.6% for Revenue, 72.4% for Operating Income, 79.2% for Ordinary Income, and 77.5% for Net Income. Revenue and Operating Income were slightly below the standard Q3 progress rate of 75%, but the full-year forecast Operating Margin of 5.0% is broadly consistent with the cumulative 5.1% for the current period, indicating limited concern regarding profitability. The stronger progress rates for Ordinary Income and Net Income reflect the contribution of non-operating income, and the primary Q4 challenges are the recognition of ¥3.95B in Revenue and progress in production. Full-year forecast Net Income is expected to decline by 1.2% YoY, indicating that the pace of profit growth in the second half is planned to moderate compared with the results for the first half.

Shareholder Returns

The Q2 dividend was ¥35.00 per share. Based on the full-year company forecast annual dividend of ¥75.00 and forecast EPS of ¥163.56, the full-year forecast Payout Ratio is 45.9%; the payout burden viewed solely through dividends is below the generally cited sustainability benchmark of 60%. Retained earnings of ¥9.96B and cash and deposits of ¥4.81B support the capacity to pay the planned dividend. There has been no disclosure regarding share repurchases, and shareholder returns currently consist solely of dividends.

Risk Factors

1. Lengthening of the working capital cycle: Inventory consists of ¥1.07B in raw materials, ¥1.92B in work in process, and ¥1.14B in finished goods, with work in process accounting for approximately 46% of total inventory. Finished-goods inventory surged 174.5% YoY, creating the possibility that delays in shipment or acceptance, or fluctuations in demand, could lead to inventory accumulation and timing mismatches in revenue recognition.

2. Low capital efficiency: ROE (annualized) remained at 3.6%, and the low asset turnover ratio continues to constrain improvement in capital efficiency despite higher profits. The key issue going forward is whether improved profitability can be translated into higher invested capital efficiency.

3. Market volatility risk relating to investment securities: The Company holds ¥2.39B in investment securities, creating a structure in which net assets and comprehensive income are affected by market price fluctuations through valuation differences.

Industry Benchmark (For Reference; Based on Company Research)

Industry Benchmark (manufacturing)

Profitability and Returns

Although the Company's profitability improved significantly from the prior year, both its Operating Margin and Net Profit Margin remain below the industry median.

Growth and Capital Efficiency

The Revenue Growth Rate significantly exceeded the industry median, indicating high growth within the industry.

※Source: Based on Company research

Key Points from the Results

1. Revenue increased by +18.9%, while Operating Income increased by +329.2%; the Operating Margin improved significantly to 5.1%, primarily due to the improvement in the gross margin (16.7%→20.2%). The simultaneous progress in fixed-cost absorption associated with higher revenue and profitability improvement was a structural feature of these results.

2. Progress against the full-year forecast was 71.6% for Revenue and 72.4% for Operating Income, slightly below the standard progress rate of 75%. However, the full-year forecast Operating Margin of 5.0% is consistent with the cumulative 5.1% for the current period, indicating that the focus in Q4 is not profitability but the pace of revenue recognition.

3. Financial soundness is strong, as indicated by an Equity Ratio of 59.4% and current assets substantially exceeding current liabilities. However, the sharp increase in finished-goods inventory (+174.5%) and the high proportion of work in process warrant attention when assessing the sustainability of profit growth.

Theoretical Share Price (Reference Value)

Sensitivity: ¥3,723–¥3,932 at ±1% for the Cost of Equity, and ¥3,800–¥3,843 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).

(Model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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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 available earnings data. Investment decisions should be made at your own responsibility, after consulting a professional as necessary.

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