Hakudo (7637) FY2026 Q3 Earnings Report

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Executive Summary

The cumulative results for Q3 FY2026 showed declines in both revenue and earnings, with the deterioration in profitability primarily attributable to the decline in gross margin, which could not be offset by reductions in SG&A expenses. Revenue was ¥496.8B (down -0.9% YoY), Operating Income was ¥19.5B (down -11.7%), Ordinary Income was ¥21.5B (down -7.8%), and Net Income was ¥14.4B (down -7.7%). Gross margin declined by 0.4pt to 15.1%, while SG&A expenses decreased by only 0.6%, resulting in a 0.5pt contraction in the Operating Income margin to 3.9%. Progress toward the full-year forecast was 73.1% for Revenue and 72.5% for Operating Income, slightly below the standard 75% progress level.

Factors Affecting Financial Performance

【Revenue】Revenue was ¥496.8B, down 0.9% YoY. While the core Japan segment declined 1.4% and China declined 2.3%, North America was the only region to record revenue growth, increasing 4.7%. As Japan accounts for 86.6% of the revenue mix, the gradual decline in domestic demand is determining consolidated Revenue.

【Profit and Loss】Operating Income was ¥19.5B (down -11.7%), primarily due to the 0.4pt decline in gross margin to 15.1%. SG&A expenses were ¥55.7B, down only 0.6%, and could not absorb the 3.8% decline in gross profit. Ordinary Income was ¥21.5B (down -7.8%), supported by ¥2.6B in non-operating income, including ¥1.4B in dividend income. Net Income was ¥14.4B (down -7.7%). Since the decline in earnings was greater than the decline in revenue, the results can be characterized as declines in both revenue and earnings.

Segment Analysis

The Japan segment reported Revenue of ¥430.1B (down -1.4%) and segment profit of ¥21.2B (down -9.6%). Its margin declined to 4.9% from 5.4% in the same period of the previous year, indicating deteriorating profitability despite the segment remaining the core of consolidated earnings. North America achieved growth, with Revenue of ¥40.6B (up +4.7%), while its segment loss narrowed to ¥1.0B from ¥1.6B in the previous year, although it has not yet reached profitability. China reported Revenue of ¥13.6B (down -2.3%) and segment profit of ¥0.15B (down -41.6%), with its margin declining to 1.1%. The Other segment had relatively high profitability, with Revenue of ¥12.5B and a margin of 9.9%. Profit margins ranked as follows: “Other > Japan > China > North America,” indicating widening profitability differences among regions.

Key Financial Indicators

【Profitability】The Operating Income margin of 3.9% (4.4% in the same period of the previous year) and Net Income margin of 2.9% (3.1% in the same period of the previous year) both declined year over year, originating from the decline in gross margin to 15.1% (15.6% in the previous year). 【Cash Quality】Comprehensive Income of ¥16.2B exceeded Net Income of ¥14.4B by ¥1.8B, with a ¥0.9B valuation difference on securities and a ¥0.9B foreign currency translation adjustment added as other comprehensive income. 【Investment Efficiency】Annualized ROE was 7.9%. Although supported by total asset turnover and financial leverage, the low Net Income margin remains a constraint. 【Financial Soundness】The Equity Ratio improved to 54.9% from 53.1% in the previous year. Current assets of ¥343.7B exceeded current liabilities of ¥199.0B by ¥144.7B, indicating that short-term funding capacity remains intact.

Cash Flow Analysis

As individual data from the statement of cash flows has not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥56.9B, an increase of ¥2.2B from ¥54.7B in the same period of the previous year, while net assets were ¥243.9B, an increase of ¥6.4B year over year. Inventories were ¥115.2B, down ¥7.8B from ¥124.9B in the same period of the previous year, indicating progress in improving capital efficiency through inventory reduction. Meanwhile, investment securities increased by ¥2.9B to ¥15.4B, and other investments and other assets also increased by ¥3.5B, indicating expanded allocation of funds to investment assets. Property, plant and equipment was ¥62.9B, down ¥1.2B year over year, suggesting that large-scale capital investment was limited.

Earnings Quality

Ordinary Income of ¥21.5B exceeded Operating Income of ¥19.5B by ¥2.0B, because non-operating income of ¥2.6B, including ¥1.4B in dividend income, exceeded non-operating expenses of ¥0.6B, including ¥0.4B in foreign exchange losses. Non-operating income was approximately 0.5% of Revenue and was not at a level that would materially distort the recurring earnings base. Comprehensive Income of ¥16.2B exceeded Net Income of ¥14.4B by ¥1.8B, with non-cash items such as valuation differences on securities and foreign currency translation adjustments contributing to the increase in net assets. No extraordinary gains or losses or temporary factors were disclosed, and the changes in earnings for the current period are understood to have been primarily attributable to the recurring factor of lower gross margin in the core business.

Earnings Forecast and Guidance

The full-year forecast is Revenue of ¥680.0B (up +2.4% YoY), Operating Income of ¥26.9B (down -9.8%), Ordinary Income of ¥30.0B (down -6.7%), and Net Income of ¥19.6B. Progress in the cumulative Q3 results was 73.1% for Revenue, 72.5% for Operating Income, 71.8% for Ordinary Income, and 73.3% for Net Income, all 1.7–3.2pt below the standard 75% progress level. The company’s plan itself incorporates year-over-year declines in Operating Income and Ordinary Income, requiring Revenue of ¥183.2B and Operating Income of ¥7.4B in Q4. It should be noted that the earnings forecast was revised during the current quarter.

Shareholder Returns

The Q2 dividend was ¥28.00 per share, and the full-year dividend forecast is ¥80.00. The forecast Payout Ratio against forecast full-year Net Income of ¥19.6B is approximately 46.3%, calculated using dividends alone as the numerator. There has been no revision to the dividend forecast, and the dividend level is being maintained despite forecasts for declines in full-year Operating Income and Ordinary Income. Accumulated retained earnings of ¥218.4B and net assets of ¥243.9B provide a foundation for the continuation of dividends.

Risk Factors

1. Declining gross margin and contraction in the Operating Income margin: Gross margin was 15.1%, down 0.4pt from 15.6% in the same period of the previous year, and remained below 20%. The reduction in SG&A expenses (down -0.6%) failed to keep pace with the decline in gross profit (down -3.8%), causing the Operating Income margin to contract to 3.9%.

2. Deteriorating profitability in the Japan segment: The margin of the Japan segment, which accounts for 86.6% of consolidated Revenue, declined to 4.9% from 5.4% in the same period of the previous year. Changes in domestic demand and product mix have a significant impact on consolidated earnings.

3. Working capital efficiency: Both inventory days of 75 days and DSO of 64 days exceed 60 days, while inventories account for 25.9% of total assets. Although short-term funding capacity remains intact, with a current ratio of 172.7% and a quick ratio of 114.8%, collection and inventory management require ongoing monitoring.

Industry Benchmark (For Reference; Compiled by the Company)

Key Takeaways from the Financial Results

1. Operating Income declined 11.7% against a 0.9% decline in Revenue, indicating that the decline in margins, rather than the decline in revenue, is determining performance. The starting point was a 44bp decline in gross margin, amplified by the high fixed-cost ratio in the cost structure.

2. Revenue in the North America segment increased 4.7% year over year, while its segment loss narrowed from ¥1.6B to ¥1.0B. It was the only region to record revenue growth, and whether the reduction in losses will continue is a point to monitor.

3. The Equity Ratio improved to 54.9%, while the current ratio was 172.7% and the debt-to-equity ratio was 0.82x, indicating a stable financial foundation. A key characteristic is that financial resilience has remained relatively intact despite profitability challenges.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,009–¥2,124 at ±1% in the Cost of Equity, and ¥2,062–¥2,067 at ±0.1 in ω.

Notes:

• As 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 (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated at a somewhat higher level.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest Rate Reference Month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this 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 release data. It does not recommend investment in any specific security. 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, consulting with a professional advisor as necessary.

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