HIROSE ELECTRIC (6806) FY2027 Q1 Earnings Report

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Executive Summary

Revenue and operating income increased against a backdrop of expanding connector demand, although the sharp increase in the tax burden limited net income growth. Revenue reached ¥620.9B (+26.8% YoY), while operating income rose to ¥133.4B (+35.6% YoY), achieving profit growth above the rate of revenue growth. Meanwhile, due to the effective tax rate rising sharply from 29.4% in the same period of the previous year to 49.3%, net income remained at ¥73.3B (+1.4% YoY). The primary drivers of revenue growth were the expansion of the core multi-pin connector business and stronger overseas demand, particularly in China and other regions.

Factors Affecting Earnings

【Revenue】Revenue was ¥620.9B, up +26.8% YoY. Multi-pin connectors generated ¥541.2B (+24.6% YoY), accounting for 87.2% of total revenue and driving growth. Coaxial connectors generated ¥52.5B (+21.4% YoY), while other products generated ¥27.1B (+122.8% YoY), resulting in revenue growth across all segments. By region, Japan at ¥120.3B (+46.2% YoY) and other regions at ¥192.9B (+37.6% YoY) posted strong growth, while China at ¥209.3B (+16.1% YoY) and South Korea at ¥98.4B (+13.1% YoY) also secured revenue increases.

【Profit and Loss】Operating income was ¥133.4B (+35.6% YoY), and the operating margin improved to 21.5% from 20.1% in the same period of the previous year. Although the gross margin declined slightly to 41.9% from 42.4% in the previous year, the SG&A expense ratio decreased to 19.9% from 22.3%, with improved cost absorption driving the improvement in profitability. Profit before tax increased substantially to ¥144.7B (+41.3% YoY), while the effective tax rate surged to 49.3% from 29.4%, leaving net income at ¥73.3B (+1.4% YoY). Growth at the operating and pre-tax levels was not sufficiently reflected in net income, and the tax burden weighed on bottom-line profit despite higher revenue and operating income. In conclusion, the company achieved higher revenue and operating income.

Segment Analysis

Multi-pin connectors generated revenue of ¥541.2B (+24.6% YoY) and operating income of ¥115.3B (+34.1% YoY), with a 21.3% operating margin, making this the core business and accounting for 86.5% of consolidated operating income. Coaxial connectors generated revenue of ¥52.5B (+21.4% YoY) and operating income of ¥14.7B (+15.2% YoY), with a 28.0% operating margin, the highest profitability among the reported segments. The Other category generated revenue of ¥27.1B (+122.8% YoY) and operating income of ¥3.4B, turning profitable from an operating loss in the same period of the previous year. All segments achieved higher revenue and operating income, indicating improved profitability across the overall business portfolio.

Key Financial Metrics

【Profitability】The operating margin was 21.5% (20.1% in the same period of the previous year), while the net profit margin was 11.8% (14.8% YoY), indicating improvement at the operating level but a decline in the net profit margin due to the higher tax burden. 【Cash Flow Quality】Operating cash flow (OCF) was ¥122.0B, equivalent to 1.66 times net income of ¥73.3B, indicating strong cash conversion. 【Investment Efficiency】ROE was 1.9% (based on quarterly results), equivalent to an estimated annualized level generally in the 7% range. EPS was ¥224.03 (¥213.58 in the previous year, +4.9% YoY). 【Financial Soundness】The equity ratio was 86.4% (87.7% in the previous year), while the current ratio was estimated at approximately 618%, an extremely high level. Cash and cash equivalents reached ¥1,103.0B, indicating a strong financial foundation.

Cash Flow Analysis

Operating cash flow was ¥122.0B, a modest increase of +3.0% YoY, and represented 1.66 times net income, demonstrating strong cash generation. In terms of working capital, accounts receivable increased by ¥65.3B and inventories increased by ¥34.0B, creating total cash outflows of approximately ¥99B, while the ¥38.0B increase in trade payables partially offset these outflows. Income taxes paid decreased to ¥48.9B from ¥58.5B in the previous year. Investing cash flow was positive at ¥192.0B, primarily due to a ¥268.8B net decrease in time deposits, reflecting a reallocation of investment assets; this should be distinguished from recurring operating cash generation. Capital expenditures were ¥46.7B, down from ¥52.3B in the previous year. Financing cash flow was an outflow of ¥89.4B, of which dividend payments accounted for ¥85.1B. As a result, cash and cash equivalents increased by +¥229.6B from the end of the previous fiscal period to ¥1,103.0B.

Earnings Quality

Against profit before tax of ¥144.7B, financial income of ¥13.0B exceeded financial expenses of ¥1.7B, supporting recurring earnings through the characteristics of a net cash company. Meanwhile, the effective tax rate rose sharply to 49.3% from 29.4% in the same period of the previous year, serving as a temporary factor preventing the high profitability at the pre-tax level from being sufficiently converted into net income. Operating cash flow reached 1.66 times net income, and accruals were generally in negative territory, indicating good earnings quality from the perspective of cash conversion. However, increases in trade receivables and inventories indicate a growing working capital burden associated with growth, and cash conversion efficiency should be monitored going forward. Comprehensive income was ¥97.7B, exceeding net income of ¥73.3B, with other comprehensive income, including ¥14.1B in foreign currency translation adjustments for foreign operations, serving as a positive contributor.

Earnings Forecast and Guidance

The full-year company forecast is revenue of ¥2,500.0B, operating income of ¥500.0B (+16.3% YoY), and forecast EPS of ¥1,069.63. Q1 progress was 24.8% for revenue and 26.7% for operating income, either exceeding or broadly in line with the standard 25% progress rate. Meanwhile, the net income progress rate was approximately 20.9% (equivalent to quarterly net income of ¥73.3B divided by the full-year forecast profit), indicating a delay relative to the operating level. This was attributable to the high effective tax rate in Q1, and normalization of the tax burden toward the second half of the year or further increases in operating income will be key to achieving the full-year forecast. The earnings forecast was revised during the quarter.

Shareholder Returns

The full-year company forecast for dividends per share is ¥520. The forecast payout ratio against forecast full-year EPS of ¥1,069.63 is approximately 48.6%, a sustainable level when assessed on a dividend-only basis. Dividend payments during Q1 were ¥85.1B, while share buybacks remained at ¥0.0B, making shareholder returns effectively dividend-centered. There was no revision to the dividend forecast, and abundant cash and cash equivalents of ¥1,103.0B and strong operating cash flow are supporting factors for the dividend.

Risk Factors

1. Prolonged collection period for accounts receivable: Trade receivables were ¥568.8B, an increase of +¥70.1B from the end of the previous fiscal period. Given the high proportion of overseas customers, deterioration in collection terms could affect operating cash flow.

2. Increase in inventories: Inventories were ¥337.3B, an increase of +¥35.4B from the end of the previous fiscal period. While this reflects preparations for increased demand, it entails a risk of inventory valuation losses if demand fluctuates.

3. Persistently high effective tax rate: The effective tax rate rose sharply to 49.3% from 29.4% in the same period of the previous year, while net income growth remained at +1.4% compared with +41.3% growth in profit before tax. Normalization of the tax burden will be key to achieving the full-year forecast.

Industry Benchmark (For Reference; Company Analysis)

Key Takeaways from the Earnings Results

1. Revenue growth of +26.8%, operating income growth of +35.6%, and improvement in the operating margin to 21.5% indicate the effect of operating leverage from expanding demand and a lower SG&A expense ratio of 19.9% (22.3% in the previous year).

2. The primary reason net income growth remained at +1.4% was the increase in the effective tax rate to 49.3%. The extent to which strong performance at the operating and pre-tax levels will be reflected in bottom-line profit will be a key focus going forward.

3. In addition to a strong financial foundation, including an equity ratio of 86.4% and cash and cash equivalents of ¥1,103.0B, operating cash flow reached 1.66 times net income, indicating good earnings quality in terms of cash conversion.

Theoretical Share Price (Reference Value)

Sensitivity: ¥11,496–¥12,159 at ±1% for the cost of equity, and ¥11,815–¥11,828 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).

(Calculation model: Residual income model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / These are mechanically calculated values based solely on publicly disclosed data and do not constitute forecasts of market prices or recommendations for any specific investment action, nor do they 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 disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with professionals as necessary.

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AI Financial Analysis

Executive Summary

Hirose Electric delivered a strong FY2027 Q1 operating performance, with broad-based connector demand driving substantial sales and operating-profit growth. Revenue increased 26.8% year on year to ¥62.1bn. Operating income rose faster, by 35.6% to ¥13.3bn. The operating margin expanded 140bp to 21.5% from 20.1%, demonstrating favorable operating leverage despite a 13.3% increase in SG&A expenses. Gross profit increased 25.2% to ¥26.0bn, while the gross margin was broadly stable at 41.9%, down 50bp from 42.4%. Accordingly, margin expansion was primarily attributable to SG&A growing materially more slowly than revenue. Multipolar connectors remained the core business, contributing ¥11.5bn of operating income, or 86% of consolidated operating income. The smaller coaxial connector segment maintained the highest segment margin at 28.0%, although this was 150bp below the prior-year level. Other operations moved into profitability, producing ¥0.3bn of operating income versus a ¥0.4bn loss a year earlier. Geographic revenue growth was led by Japan and other overseas markets, while China remained the largest single regional market at 33.7% of group revenue. Profit before tax climbed 41.3% to ¥14.5bn, aided by a sharp reduction in finance costs and higher finance income. Net income rose only 1.4% to ¥7.3bn because the effective tax rate increased sharply to 49.3% from 29.4% in the prior-year quarter. This elevated tax burden is the principal disconnect between operating momentum and bottom-line growth. Earnings cash conversion was strong, with operating cash flow of ¥12.2bn equaling 1.66x net income and an accruals ratio of negative 1.1%. However, receivables and inventories both increased during the quarter, absorbing ¥10.0bn of operating cash before offsetting movements in payables and other working capital. The balance sheet remains exceptionally conservative, supported by an 86.4% equity ratio, ¥110.3bn of cash and equivalents, and low leverage. Full-year guidance implies Q1 sales progress of 24.8%, operating-profit progress of 26.7%, and net-income progress of 20.9%, broadly consistent with a normal 25% first-quarter run rate. The revised forecast calls for full-year revenue of ¥250.0bn, operating income of ¥50.0bn, and net income of ¥35.0bn; sustaining the current operating margin while normalizing the tax burden will be central to delivery.

Profitability Analysis

The annualized DuPont ROE is 7.7%, comprising an 11.8% net profit margin, 0.565x asset turnover, and 1.16x financial leverage. The low leverage is deliberate rather than a financial-stress signal, reflecting the company’s equity-funded balance sheet. The key quarter-on-quarter operating improvement was margin-led: EBIT margin increased 140bp year on year to 21.5%, while gross margin was nearly stable at 41.9%. Revenue growth of 26.8% materially exceeded SG&A growth of 13.3%, creating positive operating leverage and lifting operating income 35.6%. Multipolar connectors are the core business by operating-income contribution, with revenue up 24.6% to ¥54.1bn and operating income up 34.1% to ¥11.5bn; its operating margin improved 150bp to 21.3%. Coaxial connector revenue increased 21.4% to ¥5.2bn and operating income increased 15.2% to ¥1.5bn, but its operating margin compressed 150bp to 28.0%. Other operations posted revenue growth of 122.8% to ¥2.7bn and turned profitable, with a 12.5% operating margin versus a 3.4% loss margin a year earlier. The high 49.3% effective tax rate reduced the tax burden to 0.507, well below the 0.70 level associated with a normal tax profile, and constrained net-margin improvement. Conversely, the interest burden was favorable at 1.085 because finance income of ¥1.3bn substantially exceeded finance costs of ¥0.2bn. The 7.7% annualized ROE is below an 8% threshold despite excellent operating profitability, principally because of the tax drag, low asset turnover inherent in a large cash and financial-asset base, and conservative leverage. The operating-margin gain appears supported by revenue scale and cost discipline, but the lower coaxial margin and elevated tax rate warrant monitoring.

Growth Assessment

Revenue growth was diversified across product categories and regions. Multipolar connector sales expanded ¥10.7bn year on year, accounting for roughly 82% of the group’s ¥13.1bn revenue increase. Coaxial connectors added ¥0.9bn of sales growth, while other operations added ¥1.5bn. Japan revenue increased 46.2% to ¥12.0bn, China rose 16.1% to ¥20.9bn, Korea grew 13.1% to ¥9.8bn, and other overseas markets increased 37.6% to ¥19.3bn. This mix reduces reliance on any single market, although China remains the largest regional exposure. Full-year sales guidance of ¥250.0bn requires a further ¥187.9bn after Q1, and the 24.8% progress rate is essentially in line with a standard seasonal run rate. Operating-income progress is modestly ahead of the 25% reference point at 26.7%, consistent with the Q1 margin expansion. Net-income progress is 20.9%, below the standard run rate because Q1 taxation was unusually high; a normalization in the effective tax rate would support full-year net-income conversion. The company has revised its full-year forecast, indicating that management’s outlook has been updated during the quarter. Growth sustainability depends on maintaining multipolar connector volume and mix gains while preventing further erosion in coaxial connector profitability. The quarterly increase in receivables and inventories is consistent with higher activity, but it raises the importance of conversion into subsequent-period sales and cash.

Financial Health

Financial health is very strong. The current ratio is 6.18x, calculated from current assets of ¥238.7bn and current liabilities of ¥38.6bn, and is substantially above the 1.0x warning threshold. Current assets exceed current liabilities by ¥200.1bn, providing a very large liquidity buffer. Cash and equivalents totaled ¥110.3bn, equivalent to 2.86x current liabilities. Total liabilities were only ¥59.8bn against equity of ¥379.4bn, producing a debt-to-equity ratio of 0.16x and an equity ratio of 86.4%. Lease liabilities totaled ¥67.4bn, consisting of ¥10.7bn current and ¥56.7bn non-current, and are readily supported by cash resources and the operating cash-flow profile. There is no maturity mismatch: liquid current assets materially exceed all short-term obligations. Other financial assets totaled ¥122.2bn across current and non-current classifications, further strengthening financial flexibility, though these assets should be assessed for market-value sensitivity. Treasury stock improved by ¥18.8bn year on year to negative ¥29.0bn, a 39.3% reduction, primarily reflecting the cancellation of treasury shares and corresponding equity reclassification rather than a cash-generating event. Property, plant and equipment remained broadly stable at ¥90.3bn, or 20.5% of total assets, indicating that the quarterly growth was not dependent on a step-up in fixed-asset investment. Deferred tax liabilities of ¥13.9bn are the largest non-current liability item and should be considered alongside the large financial-asset base. Capital structure is therefore a source of resilience rather than a constraint on operations or shareholder distributions.

Notable B/S Changes

Treasury stock: +¥187.8bn year on year (39.3% reduction in the negative balance) to -¥290.0bn — primarily reflects cancellation of treasury shares and equity reclassification; it materially reduced the contra-equity balance without a corresponding Q1 cash outflow. Cash and equivalents: +¥229.6bn quarter on quarter to ¥1,103.0bn — driven largely by a ¥268.8bn release of time deposits, materially increasing immediately available liquidity. Other current financial assets: -¥251.1bn quarter on quarter to ¥324.9bn — mirrors the reallocation from time deposits into cash and equivalents rather than a deterioration in liquidity. Accounts receivable: +¥70.1bn year on year (14.1%) to ¥568.8bn — requires monitoring alongside the 84-day annualized DSO and growth in sales. Inventories: +¥35.4bn year on year (11.7%) to ¥337.3bn — supports higher activity but is associated with elevated 85-day annualized DIO and potential demand-cycle exposure.

Cash Flow Quality

Cash-flow quality was high. Operating cash flow was ¥12.2bn, 1.66x reported net income of ¥7.3bn, comfortably above the 1.0x benchmark and not indicative of weak cash conversion. The negative 1.1% accruals ratio also supports the conclusion that reported earnings were backed by cash flow. Depreciation and amortization of ¥4.9bn provided a meaningful non-cash contribution to operating cash generation. Working capital consumed cash as receivables increased ¥6.5bn and inventories increased ¥3.4bn. Payables increased ¥3.8bn, partly funding this build, while other working-capital movements added ¥3.8bn. The resulting net working-capital outflow was approximately ¥6.1bn, meaning operating cash conversion should be reassessed if receivables and inventory continue to rise faster than collections and shipments. The receivables quality alert is material: annualized DSO was 84 days, above the 60-day warning level, implying a relatively long collection cycle and greater exposure to customer-demand or credit deterioration. The inventory quality alert is also material: annualized DIO was 85 days, above the 60-day benchmark, indicating elevated capital tied up in production and finished-product inventories for an electronics-component manufacturer. Based on annualized cost of sales and period-end payables, DPO was approximately 52 days, within the 30–60 day benchmark; the implied annualized cash-conversion cycle was about 117 days. This working-capital profile is not presently undermining cash generation, but it increases execution risk if end-demand weakens or product mix changes. Capital expenditure was ¥4.7bn, and operating cash flow exceeded capex by ¥7.5bn. Reported free cash flow was ¥31.4bn, boosted by a ¥26.9bn release of time deposits within investing cash flow; this is a liquidity reallocation rather than recurring operating free cash generation. Dividends of ¥8.5bn exceeded operating-cash-flow-after-capex of ¥7.5bn in the quarter, but were covered by reported free cash flow and the company’s substantial cash holdings.

Dividend Sustainability

The full-year dividend forecast is ¥520 per share, unchanged despite the forecast revision. Against forecast EPS of ¥1,069.63, the prospective dividend payout ratio is 48.6%, within the sub-60% sustainability benchmark. Share repurchases were immaterial at ¥0.01bn in Q1, so the prospective total return ratio is also approximately 48.6%. Q1 cash dividends paid were ¥8.5bn, slightly above Q1 net income of ¥7.3bn and above operating cash flow after capex of ¥7.5bn. That quarterly comparison does not by itself impair sustainability because dividends are seasonal, reported free cash flow was ¥31.4bn, and cash and equivalents were ¥110.3bn. The balance sheet’s 86.4% equity ratio and 0.16x debt-to-equity ratio provide substantial distribution capacity. The key determinant of dividend coverage is whether full-year net income reaches the ¥35.0bn forecast and whether the Q1 tax rate moderates. At the forecast level, the stated dividend appears funded by earnings, cash flow, and the liquidity reserve without reliance on incremental debt.

Risk Assessment

Business risks include Electronics-component demand and customer inventory cycles: annualized inventory days of 85 and the ¥3.4bn quarterly inventory build increase the risk of later destocking, price pressure, or inventory obsolescence if demand softens., Customer collection and regional exposure: annualized DSO of 84 days is above the warning threshold, while China represents 33.7% of revenue; a slowdown or credit stress in major Asian end markets could delay cash collection., Product-mix and pricing risk: coaxial connector operating margin declined 150bp year on year to 28.0% despite 21.4% revenue growth, suggesting that mix, pricing, or cost conditions require monitoring., Manufacturing supply-chain risk: connector production is exposed to semiconductor availability, specialty-material costs, energy costs, quality requirements, and foreign-exchange movements across global production and sales networks., Technology and competition risk: the company must sustain product performance and design-win momentum in high-reliability and high-frequency connector applications as customers’ device architectures and component specifications evolve..

Financial risks include Tax risk: the effective tax rate rose to 49.3%, reducing tax burden to 0.507 and limiting net-income growth to 1.4% despite 35.6% operating-income growth; continued elevated taxation would pressure full-year earnings conversion., Working-capital risk: receivables and inventories absorbed ¥10.0bn of cash in Q1, only partly offset by a ¥3.8bn increase in payables., Financial-asset valuation and currency risk: other financial assets totaled ¥122.2bn and OCI contributed ¥2.4bn, including ¥1.4bn of foreign-operation translation differences and ¥1.0bn of equity fair-value OCI, creating equity-value sensitivity to markets and exchange rates..

Key concerns include Highest priority: normalize the tax rate and verify that Q1’s 49.3% effective rate is not persistent, since it is the main reason net income materially lagged operating profit., High priority: reduce or stabilize DSO and DIO; the implied annualized cash-conversion cycle of approximately 117 days is elevated for a manufacturing business., Moderate priority: preserve the strong 21.5% consolidated operating margin while restoring margin momentum in coaxial connectors., Mitigant: liquidity and solvency risks are low, given the 6.18x current ratio, ¥110.3bn cash balance, 86.4% equity ratio, and 0.16x debt-to-equity ratio..

Investment Implications

Key takeaways include Q1 demonstrated strong revenue momentum and positive operating leverage: sales rose 26.8%, operating income rose 35.6%, and operating margin expanded to 21.5%., Multipolar connectors are the principal earnings engine, contributing 86% of consolidated operating income and improving segment margin to 21.3%., Net-income performance understated operating strength because of the 49.3% effective tax rate., Operating cash conversion is robust, but the elevated 84-day DSO and 85-day DIO are important balance-sheet efficiency watchpoints., The company’s net-cash-rich, low-leverage capital structure provides substantial resilience and supports the ¥520 per-share full-year dividend forecast..

Metrics to watch include Effective tax rate and the resulting gap between profit before tax and net income, Multipolar and coaxial connector segment revenue growth and operating margins, China revenue growth and regional demand trends, Annualized DSO, DIO, DPO, and cash-conversion cycle, Receivable and inventory balances relative to revenue growth, Progress toward full-year guidance: 24.8% sales, 26.7% operating-income, and 20.9% net-income completion after Q1, Operating cash flow after capex relative to dividends.

Regarding relative positioning, Hirose Electric combines an excellent 21.5% operating margin, high 41.9% gross margin, and exceptionally conservative 86.4% equity ratio with a return profile constrained by low leverage, a large financial-asset base, and Q1’s unusually high tax burden. Its earnings profile is operationally strong for an electronics-component manufacturer, while working-capital discipline and tax normalization are the principal determinants of whether operating momentum translates into stronger shareholder earnings.