THE HANSHIN DIESEL WORKS,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥6.71B
• Operating Income: ¥309M
• Net Income: ¥255M
• EPS: ¥78.80

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Integrated Analysis

Analysis integrating XBRL data (GPT-5) and PDF earnings presentation (Claude)

Executive Summary

Hanshin Internal Combustion Engine Mfg. Co., Ltd. (単体, JGAAP) delivered a strong FY2026 Q2 performance with clear signs of operating leverage and improved profitability. Revenue grew 20.4% YoY to ¥6.709bn, while operating income surged 191.6% YoY to ¥309m, indicating substantial fixed-cost absorption and improved mix or pricing. Ordinary income reached ¥362m, implying net non-operating gains of roughly ¥53m, likely from financial income or foreign exchange, given the negligible interest expense. Net income rose 131.7% YoY to ¥255m with EPS of ¥78.80, underscoring meaningful profit recovery. Gross profit margin is reported at 13.9%, and EBITDA margin at 8.2%, reflecting modest but improving profitability for a heavy-industry manufacturer. The DuPont breakdown shows a net margin of 3.80%, asset turnover of 0.267, and financial leverage of 1.68x, culminating in an ROE of 1.70%; this indicates profitability recovery is underway but still moderate on equity. Cash generation was robust: operating cash flow was ¥849.1m, 3.33x net income, suggesting strong earnings quality aided by working capital inflows and non-cash charges. Liquidity is solid with a current ratio of 186.6% and working capital of ¥6.043bn, supporting near-term operations and project execution. The balance sheet is conservatively positioned with liabilities of ¥10.204bn versus equity of ¥14.989bn (debt-to-equity 0.68x), implying ample solvency headroom. Interest expense was only ¥0.142m, yielding an exceptionally high interest coverage (over 2,100x), so financial risk from borrowing costs is low. Reported effective tax rate shows 0.0%, but actual tax paid of ¥37m against ordinary income suggests taxes are present; reported metric likely reflects data capture limitations. Several items are undisclosed (inventories, cash & equivalents, investing cash flows, equity ratio, shares outstanding), so some ratios (quick ratio, FCF, per-share metrics beyond EPS) should be interpreted with caution. Notably, gross profit stated (¥932.9m) is lower than Revenue minus Cost of Sales as presented, so we anchor margin commentary to the provided margin metrics. Dividend appears not paid (DPS ¥0.00) or not disclosed; with strong OCF, the company has capacity but likely prioritizes reinvestment or balance sheet strength. Overall, FY2026 Q2 shows healthier operations, strong cash conversion, and low financial risk, though sustained margin gains and clearer disclosure on capex/investments and inventory are key to assessing durability.

From Earnings Presentation: Hanshin Internal Combustion Engine Co., Ltd.'s first half of fiscal year 2026/3 showed significant revenue and profit growth with sales of 6,709 million yen (+20.4% YoY) and operating profit of 309 million yen (+191.6% YoY). Strong overseas demand for main engines and improved operating rates were key drivers, while profit margins were pressured by increased sales of high-cost parts, rising material costs, and higher personnel expenses. Under the medium-term management plan 'Go for it! Yattemina-hare!!', the company targets sales of 15 billion yen, operating profit margin of 8.0%, and ROE of 6.0% for fiscal year 2028/3, advancing three pillars: maximizing added value in existing businesses, expanding CMR business/improving production efficiency/overseas development, and developing new fuel-compatible engines/new businesses. The company plans major investments totaling 4 billion yen over the next five years (1.7 billion yen for new fuel development, 450 million yen for production capacity enhancement, 1.5 billion yen for CMR business expansion, etc.), aiming for PBR of 1x. The dividend policy has been revised to the higher of 40% payout ratio or 1.5% DOE, with an annual dividend of 75 yen planned for fiscal 2026/3 (interim dividend of 35 yen already paid). Recognizing the low ROE and asset efficiency challenges identified in the GPT analysis, the company has articulated a strategy to balance growth investment with shareholder returns.

Financial Analysis

Profitability

ROE_decomposition: Net margin 3.80% x Asset turnover 0.267 x Financial leverage 1.68 = ROE 1.70%. ROE improvement is driven primarily by operating margin expansion rather than leverage, as leverage remains modest. margin_quality: Gross margin 13.9% and EBITDA margin 8.2% indicate moderate manufacturing profitability with improving overhead absorption. Operating income of ¥309m versus EBITDA of ¥551.7m implies D&A intensity of 3.6% of revenue, consistent with a capital equipment producer. Net margin of 3.80% benefited from positive non-operating items (¥53m) and minimal interest burden. operating_leverage: Revenue +20.4% YoY versus operating income +191.6% YoY highlights strong operating leverage, suggesting fixed-cost dilution and/or favorable mix/pricing. The scale of OP growth suggests cost controls or better utilization, though sustainability depends on backlog visibility and pricing discipline.

Growth

revenue_sustainability: Top-line growth of 20.4% YoY indicates recovering demand across core marine/industrial engines and services. Sustainability will depend on order backlog, replacement/overhaul cycles, and export demand sensitivity to FX. profit_quality: Net income growth (+131.7% YoY) is supported by operating improvements and strong OCF (OCF/NI 3.33x), indicating high earnings quality. Non-operating tailwinds contributed but were not the primary driver. outlook: If current utilization and pricing hold, margins can remain elevated versus prior year. Risks include input cost volatility, supply-chain tightness, and cyclical capital spending by customers. Continued throughput, service/aftermarket mix, and FX could further support revenue and margins.

Financial Health

liquidity: Current assets ¥13.026bn vs current liabilities ¥6.982bn yields a current ratio of 186.6%; working capital is ¥6.043bn. Quick ratio is reported equal to the current ratio due to undisclosed inventories; actual quick liquidity may be lower once inventories are included. solvency: Total liabilities ¥10.204bn vs equity ¥14.989bn implies debt-to-equity of 0.68x and a conservative capital structure. Interest coverage is exceptionally high (over 2,100x), indicating minimal debt-servicing pressure. capital_structure: Financial leverage in DuPont is 1.68x, reflecting prudent balance sheet usage. The reported equity ratio is 0.0% due to non-disclosure; by balance sheet math, equity/asset ratio approximates 59–60%.

Cash Flow

earnings_quality: Operating cash flow of ¥849.1m vs net income of ¥255m (3.33x) indicates strong conversion, supported by D&A of ¥242.7m and likely working capital inflows. FCF_analysis: Investing cash flow is undisclosed (reported as 0), so Free Cash Flow cannot be reliably calculated despite a system-reported FCF of 0. The large positive OCF suggests capacity to fund maintenance capex and some growth capex, but the capex profile remains unknown. working_capital: Working capital is ample at ¥6.043bn. Specific components (inventories, receivables, payables) are not fully disclosed, limiting analysis of cash conversion cycle and sustainability of OCF strength.

Dividend Sustainability

payout_ratio_assessment: DPS is shown as ¥0.00 and payout ratio 0.0%, which may indicate no interim dividend or non-disclosure. Given EPS of ¥78.80, any payout decision would be easily serviced by earnings. FCF_coverage: FCF coverage cannot be assessed without investing cash flow disclosure. On OCF alone, coverage of a modest dividend would be strong. policy_outlook: With recovering profitability and conservative leverage, the company has capacity to consider distributions; however, capital intensity and cyclicality may keep management focused on reinvestment and balance sheet resilience in the near term.

Business Outlook

Full-year guidance maintained at sales of 13,900 million yen (+4.2%), operating profit of 700 million yen (+14.4%), and net income of 530 million yen (-1.2%). While first half results were below forecast, second half is expected to benefit from improved contract pricing for main engines and increased production volume driving higher operating rates. Medium-term targets (fiscal 2028/3) are sales of 15 billion yen, operating profit margin of 8.0%, and ROE of 6.0%. Order environment expected to remain favorable due to replacement construction demand for domestic coastal vessels, but improving contract pricing and multifaceted cost reduction are urgent priorities. CMR business expected to recover in second half with large new machine tool projects. Sales growth targeted through overseas market (Southeast and East Asia) development and strengthened active sales. Development of new fuel-compatible engines (DF, methanol, ammonia, hydrogen) aims to establish position as leading company toward achieving carbon neutrality by 2050.

Management Guidance

While CEO comments are not included in the PDF, the medium-term management plan slogan 'Go for it! Yattemina-hare!! - Opening the Future Through Challenge and Innovation' represents management's intent. Expresses commitment to continuous corporate innovation without yielding to failures. Dividend policy revision clearly states the policy to 'position profit distribution as a key management priority, aiming for active shareholder returns alongside corporate development and expansion.' Declares target of medium-term ROE of 6.0% exceeding capital cost of 5.0% to achieve PBR of 1x, with active disclosure of growth strategies and execution of 4 billion yen investment over next five years. Demonstrates strong determination to build foundation for future business expansion while acknowledging risk of temporary profit decline.

Strategic Initiatives

• Product Contract Price Improvement: Pass through material cost increases to pricing, comprehensive active sales covering all customers, vessels, and shipyards (integrated sales, service, and dealer visit-based sales and proposal-based sales)
• GHG Reduction in Existing Engines: DF (dual fuel) engine development, diesel engine fuel efficiency improvement. Methanol fuel engine completed (2024, world's first marine low-speed 4-cycle), biofuel compatibility preparation, ammonia and hydrogen engines targeting practical application by 2040
• Major Investment Return Monitoring: Productivity monitoring equipment investment, reflection in future capital expenditure plans
• CMR Business Development: Consider dedicated CMR manufacturing line, optimize mixed production on current lines, secure supply chain and strengthen sales capability, develop new customers, establish quality assurance system for internal and outsourced products
• Production Optimization: Re-emphasize standard work review, digitalize production instructions, eliminate waste through robotization, consider consolidating Akashi factory engine testing area to Harima factory
• Overseas Development: Strengthen integrated dealer-service-sales visit-based and proposal-based sales activities targeting Southeast and East Asia, China market development, parts online sales, pursue OEM deployment possibilities
• New Business/Products/Services: Experimental sales and market research for new casting products, AI technology application, consider automation of advanced vessel safety management system responses
• Human Resource Development: Cultivate future talent, new hiring and compensation improvement
• IR and Corporate Governance Enhancement: Further enhance IR materials and website with active information disclosure, active dialogue with institutional and individual investors, introduce Board effectiveness evaluation, establish voluntary compensation committee

Risk Assessment

Business Risks:

• Cyclical demand in marine/industrial engine markets affecting order intake and utilization
• Input cost volatility (steel, components) and supply-chain constraints impacting margins and deliveries
• Foreign exchange fluctuations influencing export competitiveness and non-operating income
• Project execution risk and potential cost overruns on large orders
• Aftermarket/service demand variability tied to fleet activity levels

Financial Risks:

• Limited disclosure of cash, inventories, and investing cash flows complicates liquidity and FCF assessment
• Potential working capital swings given long production cycles
• Customer concentration risk typical in capital goods could impact receivables and credit risk
• Tax rate variability given discrepancies between reported metrics and paid taxes

Key Concerns:

• Sustainability of margin gains amid cost inflation and pricing dynamics
• Lack of visibility on capex and FCF due to undisclosed investing cash flows
• Incomplete inventory data obscuring quick liquidity and cash conversion cycle analysis

Risk Factors from Presentation:

• Increased proportion of high-cost equipment in parts sales leading to profitability deterioration
• Ongoing struggle with rising material procurement costs
• Increased personnel expenses from new hiring and compensation improvements
• CMR struggling with downturn in semiconductor manufacturing equipment and machine tool industries
• Difficulties in internal process coordination for CMR projects due to increased engine production
• Competition with Chinese casting products
• Possibility of temporary profit decline from depreciation burden of major investments (4 billion yen over next five years)
• Urgent need for contract price improvement and multifaceted cost reduction (challenge for securing profitability)
• While replacement construction demand for domestic coastal shipping is strong, supply-demand fluctuation risk exists due to multi-year lead time from contract to delivery

Investment Implications

Key Takeaways:

• Significant operating leverage: revenue +20.4% YoY vs operating income +191.6% YoY
• Improved profitability: EBITDA margin 8.2%, net margin 3.80%
• Robust cash generation: OCF ¥849.1m (3.33x net income)
• Conservative balance sheet: debt-to-equity 0.68x and very high interest coverage
• Data gaps on investing cash flow, cash balance, and inventories constrain FCF and liquidity precision

Metrics to Watch:

• Order backlog and book-to-bill to gauge revenue sustainability
• Gross and operating margins for evidence of durable pricing/mix gains
• Capex and investing cash flows to assess true FCF and reinvestment needs
• Working capital components (inventories, receivables) and OCF sustainability
• FX impacts on ordinary income and margins
• Tax expense trajectory and effective tax rate normalization

Relative Positioning: Within Japanese capital goods/engine peers, the company appears to be in a recovery phase with improving operating efficiency, strong OCF, and low leverage, albeit with margins still moderate and disclosure gaps limiting full comparability.

Supplementary Insights (Key Highlights)

• Main Engines: Overseas sales (primarily South Korea) significantly increased, with 31 units sold (+19.2% YoY) and sales of 3,961 million yen (+39.9%). Large engines including low-speed 4-cycle electronically controlled engines increased to 8 units (vs. 5 units prior year)
• Orders: Main engine order value of 5,828 million yen (+21.9%), 38 units ordered (+26.7%). Replacement construction projects for domestic coastal vessels increasing, with rapid growth in uncommitted prospective projects
• Order Backlog: Main engines at 8,876 million yen (+9.3%), 52 units in backlog (+8.3%). Further increases expected from incoming prospective orders
• CMR Business: Sales of 280 million yen (-17.9%). Impacted by downturn in semiconductor manufacturing equipment and machine tool industries. Recovery expected in second half through large new projects
• Three Pillars of Medium-term Management Plan: ①ORIGINAL HANSHIN (maximizing added value in existing businesses), ②NEW HANSHIN (CMR business expansion, production/administrative efficiency improvement, overseas development), ③FUTURE HANSHIN (new fuel-compatible engine development, new business creation)
• Carbon Neutral Roadmap: DF engine commercialization, methanol fuel engine completion (2024), targeting ammonia and hydrogen engine practical application by 2040
• Dividend Policy Revision: Higher of 40% payout ratio or 1.5% DOE. Interim dividend initiated from fiscal 2026/3, annual dividend of 75 yen planned (payout ratio 45.8%, DOE 1.6%)
• Investment Plan: Total of 4 billion yen over next five years (1.7 billion yen for new fuel development, 450 million yen for production capacity, 1.5 billion yen for CMR, 300 million yen for human resource development and new businesses, 50 million yen for sales capability)
• Topics: 'Kakushin-maru' equipped with advanced vessel safety management system won the Reiwa 7 Seafarer Safety and Labor Environment Initiative Grand Prize (SSS Grand Prize), methanol/gas engine patents acquired
• PBR Improvement Initiatives: Medium-term target ROE of 6.0% set to exceed capital cost of 5.0%. Aiming for PBR of 1x through active disclosure of growth strategies, achievement of medium-term plan, and execution of major investments

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis