NIPPON CHEMI-CON (6997) FY2026 Q3 Earnings Report

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Executive Summary

The Company reported higher revenue but lower operating income for the period, with the most important point being the deterioration in the profitability of its core business despite revenue growth. Revenue was ¥100.14B (+10.3% YoY), while operating income was ¥1.93B (-15.6% YoY). Revenue growth was primarily driven by the expansion of the Capacitor Business in China and other regions; however, cost of sales increased at a faster pace than revenue, causing the gross margin to decline to 17.5%, which was the primary cause of the decline in operating income. Ordinary income of ¥2.07B (+74.0% YoY) and net income of ¥1.27B, representing a significant increase, reflect a recovery resulting from the recognition of foreign exchange gains and the absence of the extraordinary loss recorded in the previous year. These factors should be evaluated separately from any improvement in core earnings power.

Factors Affecting Financial Results

【Revenue】Revenue increased 10.3% YoY to ¥100.14B. By segment, the Capacitor Business led overall growth with revenue of ¥96.56B (+10.5% YoY), accounting for 93.9% of the contribution to operating income. By region, revenue expanded in China to ¥33.53B (+17.9% YoY) and in other regions to ¥26.46B (+19.6% YoY), while Japan, at ¥19.48B (-1.8% YoY), and the Americas, at ¥10.21B (-2.7% YoY), declined. Growth was therefore concentrated in China and emerging regions.

【Profit and Loss】Operating income declined 15.6% YoY to ¥1.93B. Cost of sales increased 13.2% YoY to ¥82.64B, exceeding revenue growth of +10.3%, causing the gross margin to decline by 215bp from 19.6% to 17.5%. The SG&A ratio improved by 156bp from 17.1% to 15.6%, but this was insufficient to offset the deterioration in the gross margin, and the operating margin declined from 2.5% to 1.9%. Ordinary income increased 74.0% YoY to ¥2.07B, primarily due to the change to a foreign exchange gain of ¥0.43B from a foreign exchange loss in the previous year. Net income of ¥1.27B includes the reversal effect of the ¥0.99B extraordinary loss recorded in the previous year and the impact of income taxes and other taxes, and was compressed by 40.5% from ordinary income. In conclusion, the current period resulted in higher revenue but lower profit.

Segment Analysis

The Capacitor Business reported revenue of ¥96.56B (+10.5% YoY) and segment income of ¥1.81B (-11.2% YoY), with its margin declining by 46bp from 2.34% to 1.88%. The business is the Company’s core operation, accounting for 93.9% of consolidated operating income, and fluctuations in its profitability have a direct impact on consolidated results. Other Businesses, including CMOS camera modules and inductors, generated revenue of ¥3.58B (+4.1% YoY), while segment income declined significantly by 52.0% YoY to ¥0.12B, and the margin fell by 382bp from 7.09% to 3.27%. Margins declined in both businesses, making the recovery of the Capacitor Business’s gross margin the key to improving overall results.

Key Financial Metrics

【Profitability】The operating margin of 1.9% (2.5% in the previous year) and the net margin of 1.3% both declined from the previous year. Annualized ROE was 2.9% and annualized ROIC was 1.5%, levels that do not sufficiently exceed the cost of capital. 【Cash Flow Quality】Net income attributable to owners of the parent was 40.5% below ordinary income, while the effective tax rate of 38.1% reduced the conversion efficiency. Extraordinary losses were limited to ¥0.01B, indicating that earnings quality for the period was primarily constrained by the heavy tax burden. 【Investment Efficiency】Annualized total asset turnover was 0.815x, while property, plant and equipment accounted for 29.6% of total assets. The Company faces a challenge in generating returns on invested capital within its capital-intensive business structure. 【Financial Soundness】The equity ratio improved slightly to 35.5% from 34.5% in the previous year. However, interest-bearing debt was ¥71.83B, with short-term borrowings accounting for more than half, and interest coverage of 1.73x indicates limited financial headroom for debt repayment.

Cash Flow Analysis

Although detailed disclosure of the cash flow statement is unavailable, analysis of funding trends based on changes in the balance sheet indicates that cash and deposits declined by ¥3.65B, from ¥23.87B in the same period of the previous year to ¥20.22B. Inventories increased from ¥12.81B to ¥13.35B, and DIO remained above 110 days, indicating continued inventory-related capital absorption. Short-term borrowings increased slightly from ¥36.74B to ¥36.98B, while long-term borrowings declined from ¥38.10B to ¥34.85B, indicating a shift toward greater reliance on short-term debt for financing. Cash and deposits were only 0.55x short-term borrowings, suggesting a structure in which the expansion of working capital and refinancing of interest-bearing debt depend on external funding.

Quality of Earnings

Net income attributable to owners of the parent of ¥1.23B was 40.5% below ordinary income of ¥2.07B, primarily due to income taxes and other taxes of ¥0.78B and an effective tax rate of 38.1%. Extraordinary losses for the current period were limited to ¥0.01B in losses on the disposal of fixed assets, resulting in a limited impact on net income. However, because an extraordinary loss of ¥0.99B was recorded in the same period of the previous year, the significant increase in net income for the current period partly reflects a low comparison base. Of ¥1.32B in non-operating income, foreign exchange gains of ¥0.43B and equity in earnings of affiliates of ¥0.45B supplemented ordinary income, while interest expense of ¥1.11B weighed on earnings. Foreign exchange gains were equivalent to 22.1% of operating income, suggesting that ordinary income is structurally susceptible to fluctuations when foreign exchange rates reverse. Overall, the increase in profit for the current period depended on non-operating factors and the absence of temporary losses recorded in the previous year, with limited support from an improvement in core operating profitability.

Earnings Forecast and Guidance

Progress toward the full-year Company forecast through Q3 was 73.1% for revenue, 48.3% for operating income, 82.7% for ordinary income, and 82.0% for net income attributable to owners of the parent. Revenue was broadly in line with the standard progress rate of 75%, but operating income was 26.7pt below that benchmark, indicating a notable delay in progress. Ordinary income and net income exceeded the standard progress rate due to the inclusion of foreign exchange gains and the reversal effect of the extraordinary loss recorded in the previous year. To achieve the full-year operating income plan of ¥4.00B, the Company must generate ¥2.07B in operating income in Q4, equivalent to an operating margin of 5.6%. This is significantly above the cumulative margin of 1.9%, making a substantial recovery in the gross margin a prerequisite for achieving the plan.

Shareholder Returns

The Q2 dividend was ¥0, while the full-year Company forecast dividend is ¥20 per share. Based on the number of issued shares after deducting treasury shares, the forecast annual dividend payment is approximately ¥0.48B. The forecast payout ratio against the full-year forecast net income attributable to owners of the parent of ¥1.50B is approximately 32%, remaining within the guideline of less than 60%. However, retained earnings were negative at ¥25.47B, meaning that the sustainability of the dividend policy will depend on future earnings accumulation and progress in debt reduction. This payout ratio uses dividends alone as the numerator and differs from the total return ratio, which includes share repurchases.

Risk Factors

1. Structural decline in gross margin: The gross margin declined by 215bp from 19.6% in the same period of the previous year to 17.5%, while cost of sales increased by +13.2%, exceeding the revenue growth rate of +10.3%. Raw material costs, product mix, and the effectiveness of passing through price increases will determine future profitability.

2. Financial leverage and refinancing structure: Short-term borrowings accounted for ¥36.98B, or 51.5%, of total interest-bearing debt of ¥71.83B. Interest coverage was 1.73x, indicating limited headroom for debt repayment. The Company is highly sensitive to rising interest rates and changes in the refinancing environment.

3. Concentration of earnings in the Capacitor Business: 93.9% of operating income is concentrated in a single business, the Capacitor Business. As the business’s margin declines from 2.34% to 1.88%, fluctuations in its profitability have a significant impact on consolidated results.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s operating margin and net margin are both significantly below the industry median, placing its profitability relatively low within the industry.

Growth and Capital Efficiency

The revenue growth rate is significantly above the industry median, indicating that top-line growth is comparatively strong within the industry.

※Source: Company analysis

Key Takeaways from the Financial Results

1. Revenue maintained double-digit growth, led by sales to China and other regions, while operating income declined 15.6% YoY due to the increase in the cost ratio. The recovery in ordinary income and net income was substantially driven by foreign exchange gains and the reversal effect of the extraordinary loss recorded in the previous year, and should be viewed separately from a recovery in core operating margins.

2. The full-year progress rate for operating income was 48.3%, significantly below the standard progress rate. To achieve the plan, the operating margin must improve to 5.6% in Q4. The potential for improvement from the cumulative margin of 1.9% depends on the extent to which the gross margin can recover.

3. Although liquidity was secured with a current ratio of 117.2%, reliance on short-term borrowings and interest coverage of 1.73x are key financial monitoring points. The forecast payout ratio is restrained at approximately 32%, but with retained earnings in negative territory, dividend sustainability depends on future earnings recovery and progress in debt reduction.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,923–¥2,034 at ±1% in the cost of equity, and ¥1,963–¥1,987 at ±0.1 in ω.

Notes:

• Net income is significantly compressed relative to operating income due to the tax burden, acquisition-related expenses, and non-controlling interests (net income ÷ operating income 38%). This value reflects that compression at face value; if these factors are temporary, the normalized value may be higher.
• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used, resulting in a timing difference from the full-year forecast.
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Model: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest Rate Reference Month: 2026-07 / This is a 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 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 summary 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 a professional as necessary.

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