NIPPON CHEMI-CON (6997) FY2027 Q1 Earnings Report

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Executive Summary

In Q1 of fiscal 2027, the Company posted higher revenue and earnings, with a clear recovery from the low profitability recorded in the same period of the previous year, driven by improved gross margins and greater absorption of fixed costs. Revenue was ¥37.99B (+23.0% YoY), Operating Income was ¥1.67B (a significant recovery from ¥0.15B in the previous year, +998.9% YoY), Ordinary Income was ¥1.09B (turning profitable from ¥-0.18B in the previous year), and Net Income was ¥0.86B (turning profitable from ¥-0.17B in the previous year). The primary driver of earnings growth was operating leverage resulting from higher revenue in the core Capacitor Business and SG&A expense growth of +7.6%, below the revenue growth rate of +23.0%. The Operating Income margin of 4.4% remains below 5%, indicating that profitability is still in the process of improving relative to the industry median.

Factors Affecting Financial Results

【Revenue】Revenue increased 23.0% YoY to ¥37.99B. By region, China revenue in the Capacitor Business was ¥13.24B, the largest regional contribution, accounting for 34.9% of consolidated revenue, followed by ¥10.21B in other regions, ¥5.94B in Japan, ¥4.12B in Europe, and ¥3.21B in the Americas, with revenue increasing in all regions. By segment, the Capacitor Business generated ¥36.72B in revenue, representing 96.7% of the total and +22.5% YoY, while Other Businesses generated ¥1.26B, representing 3.3% and +37.7% YoY. Both segments recorded higher revenue.

【Profit and Loss】The gross margin improved to 19.1% from 17.3% in the same period of the previous year, a 1.8pt improvement, supported by cost of sales growth of +20.3%, which was below revenue growth of +23.0%. SG&A expenses were ¥5.58B (+7.6% YoY), remaining below the pace of revenue growth, and the Operating Income margin improved by 3.9pt from 0.5% to 4.4%. Below Operating Income, interest expense of ¥0.42B was equivalent to approximately 25% of Operating Income, limiting Ordinary Income to ¥1.09B. Including ¥0.10B in extraordinary income (¥0.10B gain on the sale of shares in a subsidiary), Net Income was ¥0.86B; however, the contribution from non-recurring factors was limited, and the primary source of earnings growth was improvement in core operating profitability. In conclusion, the Company achieved higher revenue and earnings.

Segment Analysis

The Capacitor Business is the core business, accounting for 92.2% of consolidated Operating Income. Revenue was ¥36.72B (+22.5% YoY), Operating Income was ¥1.54B (a significant increase from ¥0.13B in the previous year), and the Operating Income margin was 4.2%, a 3.8pt improvement from 0.4% in the previous year. Other Businesses, including CMOS camera modules and inductors, generated revenue of ¥1.26B (+37.7% YoY), Operating Income of ¥0.13B, and an Operating Income margin of 10.4%, 6.2pt above the Capacitor Business. However, these businesses accounted for only 3.3% of consolidated revenue, limiting their impact on company-wide earnings.

Key Financial Indicators

【Profitability】The Operating Income margin of 4.4% (0.5% in the previous year) and Net Income margin of 2.3% (-0.6% in the previous year) both improved significantly, although their absolute levels remain low. Annualized ROE was 5.6% and annualized ROIC was 4.4%; establishing earning power that sufficiently exceeds the cost of capital remains a challenge.【Cash Quality】Extraordinary income of ¥0.10B (¥0.099B gain on the sale of shares in a subsidiary) accounted for approximately 12% of Net Income of ¥0.86B and therefore needs to be evaluated separately from recurring earnings. Comprehensive Income was ¥1.22B, exceeding Net Income, with foreign currency translation adjustments of +¥0.35B and the share of OCI of equity-method affiliates of +¥0.24B serving as upward drivers.【Investment Efficiency】Total asset turnover was approximately 0.9x, indicating a certain level of revenue-generating capability for an asset-intensive manufacturing company.【Financial Soundness】The Equity Ratio was 35.7%, down from 37.6% in the previous year. Interest-bearing debt was approximately ¥73.9B, with short-term borrowings of ¥38.50B accounting for more than half of interest-bearing debt, indicating increased dependence on short-term financing. Cash and deposits of ¥24.05B were equivalent to only 0.62x short-term borrowings.

Cash Flow Analysis

Although detailed disclosure of the cash flow statement was not available, an analysis of funding trends based on changes in the balance sheet indicates that cash and deposits increased 13.0% YoY to ¥24.05B, while short-term borrowings increased 11.1% YoY to ¥38.50B and long-term borrowings declined to ¥35.42B, indicating a shift toward shorter-term financing. Inventories increased 15.6% YoY to ¥13.72B, while work in process expanded 15.2% YoY to ¥14.16B, which may reflect either production preparations in response to higher sales or inventory stagnation. Property, plant and equipment was approximately unchanged at ¥47.33B, and no major expansion in capital investment was observed.

Earnings Quality

Operating Income of ¥1.67B was supported by the improvement in the gross margin from 17.3% to 19.1% and the fixed-cost absorption effect resulting from SG&A expense growth of +7.6% falling below revenue growth of +23.0%, reflecting an improvement in core operating profitability. Meanwhile, Ordinary Income was limited to ¥1.09B after deducting ¥0.42B in interest expense and ¥0.75B in non-operating expenses, including ¥0.06B in foreign exchange losses, from Operating Income. The burden of financial expenses restrained the pace of earnings growth at the Ordinary Income level. Net Income of ¥0.86B included ¥0.10B in extraordinary income (¥0.099B gain on the sale of shares in a subsidiary), representing a temporary contribution equivalent to approximately 12% of Net Income, which needs to be distinguished from recurring earning power. Comprehensive Income of ¥1.22B exceeded Net Income, and the addition of valuation factors such as foreign currency translation adjustments and OCI from equity-method investments means that it differs in quality from realized earnings for the current period.

Earnings Forecast and Guidance

The full-year Company forecast is revenue of ¥160.00B (+16.9% YoY), Operating Income of ¥8.00B (+137.4% YoY), and Ordinary Income of ¥6.00B (+186.4% YoY). Q1 progress rates were 23.7% for revenue, 20.9% for Operating Income, and 18.1% for Ordinary Income; compared with a standard 25% progress rate, Operating Income was 4.1pt and Ordinary Income was 6.9pt below that level. The Q1 Operating Income margin of 4.4% was below the full-year target Operating Income margin of 5.0%, making continued improvement in the gross margin and absorption of fixed costs during the remaining period prerequisites for achieving the plan. The lowest progress rate for Ordinary Income reflects the burden of non-operating expenses, including interest expense and foreign exchange losses. Neither the earnings forecast nor the dividend forecast was revised during the quarter.

Shareholder Returns

The full-year dividend forecast is ¥25.00 per share. Based on forecast full-year Net Income of ¥4.00B and average shares outstanding during the period of 25,582 thousand shares, the estimated total dividend is approximately ¥0.64B, resulting in a Payout Ratio of approximately 16.0%, a conservative level below the generally accepted guideline for sustainability. Retained earnings recovered to ¥14.24B, a significant increase from ¥-24.33B in the same period of the previous year, improving balance-sheet capacity to fund dividends. However, given the high level of interest-bearing debt, dividend sustainability needs to be balanced with the containment of financial leverage. There was no revision to the dividend forecast during the quarter.

Risk Factors

1. Interest Burden and Refinancing Risk: Interest expense of ¥0.42B was equivalent to approximately 25% of Operating Income, and interest coverage remained at approximately 4.0x. Short-term borrowings of ¥38.50B accounted for more than half of interest-bearing debt, while cash and deposits of ¥24.05B were equivalent to only 0.62x short-term borrowings, resulting in high sensitivity to changes in the refinancing environment.

2. Inventory and Production Stagnation Risk: Work in process expanded to ¥14.16B (+15.2% YoY), while total inventories also increased to ¥13.72B (+15.6% YoY). Close monitoring is required because the impact on valuation losses and cash-generating capacity will differ depending on whether the increase reflects preparations for a recovery in demand or production stagnation.

3. Low-Margin Structure and Geographic Concentration Risk: The gross margin of 19.1% and Operating Income margin of 4.4% both improved but remained below the industry median. China revenue in the Capacitor Business accounted for 34.9% of consolidated revenue, creating a significant impact on earnings from demand fluctuations in a specific region.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Income margin were below the industry median, indicating that profitability remains relatively low within the industry.

Growth and Capital Efficiency

The revenue growth rate was well above both the industry median and the upper quartile, representing a top-tier growth pace within the industry.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The increase in revenue of +23.0%, significant recovery in Operating Income, and 3.9pt improvement in the Operating Income margin are facts indicating progress in the turnaround from the low-profitability phase of the same period of the previous year. The primary drivers were gross margin improvement and the fixed-cost absorption effect resulting from SG&A expense growth remaining below revenue growth.

2. Q1 progress against the full-year plan was 23.7% for revenue, compared with 20.9% for Operating Income and 18.1% for Ordinary Income, indicating that earnings lagged revenue. The financial expense burden, including interest expense, restrained progress at the Ordinary Income level, as can be inferred from the financial results data.

3. Net Income of ¥0.86B included ¥0.10B in extraordinary income from the sale of shares in a subsidiary, representing approximately 12% of Net Income, and can therefore be evaluated separately from recurring earning power. In addition, the rising work-in-process ratio and increased dependence on short-term borrowings are financial and working-capital changes that should be monitored alongside the earnings recovery.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,994–¥2,112 at ±1% for the cost of equity, and ¥2,045–¥2,056 at ±0.1 for ω.

Notes:

• Net Income is substantially compressed relative to Operating Income due to tax burden, acquisition-related expenses, non-controlling interests, and other factors (Net Income ÷ Operating Income 50%). This value reflects that compression at face value; if the factors are temporary, underlying earning power 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 end of the quarter are used; there is a timing difference from the full-year forecast.
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation 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 and is not a forecast of the market share price or a recommendation of any specific investment action, nor does it predict or guarantee the future share price.)

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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 a professional as necessary.

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