Heiwa Corporation FY2027 Q1 Earnings Report

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Executive Summary

Although substantial revenue growth in the Amusement Equipment Business drove consolidated revenue, the Company recorded higher revenue but lower earnings, as increased interest expenses and deteriorating profitability in the Golf Business prevented an increase in operating income. Revenue was ¥777.6B (+10.7% YoY), operating income was ¥155.7B (-1.5%), ordinary income was ¥124.5B (-10.0%), and net income was ¥79.5B (-10.1%). In addition to the cost of sales growth rate (+15.9%) exceeding the revenue growth rate, interest expenses increased to ¥30.5B (+33.2%), widening the earnings outflow from operating income to ordinary income.

Factors Driving Performance Changes

【Revenue】Consolidated revenue was ¥777.6B, up +10.7% YoY. Revenue in the Amusement Equipment Business increased substantially to ¥152.5B (+81.3%), while revenue in the Golf Business was ¥625.1B (+1.1%), remaining virtually flat. The Amusement Equipment Business expanded to 19.6% of segment revenue composition and was the primary driver of revenue growth.

【Profit and Loss】Operating income declined to ¥155.7B (-1.5%). While segment income in the Amusement Equipment Business improved substantially to ¥40.8B (+195.1%; margin 26.8%), segment income in the Golf Business deteriorated to ¥127.0B (-19.1%; margin 20.3%, down from 25.4% in the prior-year period), becoming the primary cause of the contraction in the consolidated margin. Non-operating expenses expanded to ¥34.5B due to higher interest expenses, resulting in ordinary income of ¥124.5B (-10.0%) and net income of ¥79.5B (-10.1%), with the decline exceeding that at the operating level. In conclusion, the Company recorded higher revenue but lower earnings.

Segment Analysis

The Amusement Equipment Business achieved substantial growth, with revenue of ¥152.5B (+81.3% YoY), segment income of ¥40.8B (+195.1%), and a margin of 26.8% (+10.3pt improvement from 16.5% in the prior-year period). The Golf Business remained broadly flat in terms of revenue at ¥625.1B (+1.1%), but profitability deteriorated, with segment income of ¥127.0B (-19.1%) and a margin of 20.3% (-5.1pt from 25.4% in the prior-year period). The Golf Business is the core business, accounting for 75.7% of total segment income, and its margin decline has a decisive impact on consolidated performance. The key focus going forward will be the extent to which high-margin growth in the Amusement Equipment Business can offset the decline in Golf Business earnings.

Key Financial Indicators

【Profitability】The operating margin was 20.0%, down from 22.5% in the prior-year period, while the net profit margin was 10.2%, down from 12.6% in the prior-year period. The gross margin contracted to 34.6% from 37.5% in the prior-year period, primarily because the cost of sales growth rate (+15.9%) exceeded the revenue growth rate (+10.7%).【Cash Quality】Operating cash flow (OCF) was ¥59.0B, equivalent to only 0.74x net income of ¥79.5B. This was attributable to an ¥80.3B cash outflow resulting from an increase in trade receivables; the accrual ratio itself remains low, and no excessive accumulation of accrual-based earnings is evident.【Investment Efficiency】Annualized ROE was 12.6%, decomposed into a net profit margin of 10.2%, total asset turnover of 0.286x, and financial leverage of 4.30x. ROE is structurally highly dependent on financial leverage.【Financial Soundness】The equity ratio was 23.3%, remaining broadly at the same level as 23.1% in the prior-year period. Fixed assets accounted for ¥9672.5B of total assets of ¥10860.4B, indicating an asset-intensive structure.

Cash Flow Analysis

Operating cash flow was ¥59.0B, down -7.7% YoY, primarily due to an ¥80.3B cash outflow resulting from an increase in trade receivables. Investing cash flow was -¥14.4B, including ¥77.2B in capital expenditures, indicating continued investment exceeding depreciation and amortization of ¥62.6B. As a result, free cash flow (OCF + investing cash flow) was positive at ¥44.6B; however, funding capital expenditures of ¥77.2B solely through OCF would result in a shortfall of ¥18.2B. Financing cash flow was an inflow of ¥32.5B, with financing through long-term borrowings covering part of this shortfall. The quality of future cash flow should be closely monitored from both the normalization of trade receivables collection and the level of investment in golf facilities.

Earnings Quality

The decline in earnings for the current period was primarily attributable to recurring factors—namely, higher costs, deteriorating profitability in the Golf Business, and increased interest expenses—and there were no notable temporary special income or loss factors. Non-operating income was small at ¥3.2B, while interest expenses of ¥30.5B accounted for most of non-operating expenses of ¥34.5B and increased +33.2% YoY, raising the burden. Consequently, the outflow from operating income to ordinary income widened, and the ordinary income decline rate (-10.0%) exceeded the operating income decline rate (-1.5%). Although the accrual ratio remains low, the fact that OCF was only 0.74x net income indicates lower cash conversion efficiency due to the working capital factor of increased trade receivables. This point should be considered when evaluating the quality of earnings for the current period.

Earnings Forecast and Guidance

The full-year company forecast calls for revenue of ¥2859.0B (+10.8% YoY), operating income of ¥520.0B (+19.8%), and ordinary income of ¥378.0B (+12.3%). Progress against the full-year forecast in Q1 was 27.2% for revenue, 29.9% for operating income, 32.9% for ordinary income, and 39.1% for net income, all exceeding the standard quarterly progress rate of 25%. However, operating income declined in the current quarter, and achieving the full-year plan for substantial earnings growth will require the Amusement Equipment Business to maintain its sales momentum and the Golf Business to restore profitability. The earnings forecast was revised during the current quarter.

Shareholder Returns

The full-year dividend forecast is ¥80.0 per share, and the forecast payout ratio based on full-year forecast EPS of ¥205.83 is 38.9% (dividend-only basis). No share repurchases have been confirmed; evaluation is therefore based on the payout ratio rather than the total return ratio. Although the forecast payout ratio is below the generally accepted sustainability benchmark, OCF of ¥59.0B in the current quarter was below the combined amount of capital expenditures of ¥77.2B and dividend payments of ¥37.9B, indicating that these outlays were not fully covered by internally generated cash for the time being. The dividend forecast was not revised.

Risk Factors

1. Declining profitability in the Golf Business: While revenue was virtually flat at +1.1% YoY, segment income declined -19.1% and the margin fell to 20.3% from 25.4% in the prior-year period. As the core business accounting for 75.7% of consolidated segment income, any delay in restoring profitability would have a significant impact on consolidated performance.

2. High leverage and increasing interest burden: The equity ratio was 23.3%, while interest expenses increased to ¥30.5B, up +33.2% YoY. With long-term borrowings of ¥5596.9B, continued increases in the interest burden could continue to pressure ordinary income.

3. Increase in trade receivables and cash conversion efficiency: Accounts receivable were ¥187.4B, increasing at a pace exceeding revenue growth and contributing to an ¥80.3B cash outflow in OCF. OCF remained at only 0.74x net income, requiring confirmation of future collection trends.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin substantially exceeded the industry median, placing profitability at a high level within the industry.

Growth and Capital Efficiency

The revenue growth rate also exceeded the industry median, but did not reach the upper bound of the IQR (14.6%).

※Source: Compiled by the Company

Key Earnings Highlights

1. The structure of higher revenue but lower earnings is clearly divided between the businesses: high-margin rapid growth in the Amusement Equipment Business (margin 26.8%, +10.3pt YoY) partially offset the decline in the Golf Business margin (20.3%, -5.1pt YoY).

2. Annualized ROE of 12.6% is favorable relative to the industry level, but the high dependence on financial leverage of 4.30x makes it important to monitor the capital structure in combination with the equity ratio of 23.3%.

3. The fact that OCF remained at only 0.74x net income was attributable to the working capital factor of increased trade receivables. Future collection trends and cash conversion efficiency will be key points in assessing earnings quality.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,635–¥2,788 at cost of equity ±1%; ¥2,706–¥2,715 at ω±0.1.

Notes:

• Goodwill amortization of ¥76.0 per share is added back to earnings (due to its non-cash nature and to enhance comparability with IFRS companies).
• Because net income progress against the full-year forecast (39%) exceeds the standard level (25%), forecast EPS is adjusted upward within a maximum range of +10% (because companies with leading progress tend to exceed forecasts. For businesses with strong seasonality, the adjustment may be excessive).
• Net income is substantially compressed relative to operating income due to tax burden, acquisition-related expenses, minority interests, and other factors (net income ÷ operating income 39%). This value reflects that compression at face value; if these factors are temporary, underlying earnings power may be higher.
• The ratio of goodwill to net assets is high, and the assumptions would change substantially if impairment were recognized.
• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).

(Calculation 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; it is not a forecast of the market share price or a recommendation of any specific investment action, and does not forecast 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 disclosed earnings data. Investment decisions should be made at your own discretion and, where necessary, after consulting with a professional.

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