KOKUSAI (7722) FY2026 Q3 Earnings Report

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Executive Summary

Cumulative results for 2026 Fiscal Year Q3 showed a profit growth rate exceeding revenue growth, with the emergence of operating leverage being the defining feature. Revenue was ¥103.8B (+9.9% YoY), Operating Income was ¥15.0B (+53.1%), Ordinary Income was ¥17.2B (+41.8%), and Net Income was ¥12.0B (+41.1%). In addition to increased revenue from the core balancing machine product and fixed-cost absorption, a foreign exchange gain of ¥1.4B included in non-operating income lifted Ordinary Income.

Factors Affecting Performance

【Revenue】Revenue increased 9.9% YoY to ¥103.8B. By region, Japan showed the largest increase at ¥78.7B (+10.7%), while Other Regions (+195.1%) and Tohshin Kogyo (+109.0%) also recorded substantial growth. In contrast, South Korea (-4.9%) and the United States (-10.0%) reported lower revenue. By product, balancing machines appear to have been the core business driving overall growth.

【Profit and Loss】The cost of sales ratio was 59.2%, resulting in a gross profit margin of 40.8%. Together with an SG&A ratio of 26.4%, the Operating Income margin reached 14.4%. While Revenue increased 9.9%, Operating Income increased 53.1%, clearly indicating the emergence of operating leverage through fixed-cost absorption. Non-operating income of ¥2.5B included a foreign exchange gain of ¥1.4B, which lifted Ordinary Income. Against Pretax Income of ¥17.2B, corporate income taxes and other taxes were ¥5.3B, resulting in an effective tax rate of approximately 30.6% and Net Income of ¥12.0B (+41.1% YoY). The company achieved both revenue and profit growth.

Segment Analysis

By regional segment, based on Ordinary Income, Japan (Kokusai Keisoku) was the largest earnings contributor, with revenue of ¥78.7B and profit of ¥15.0B, representing a profit margin of 19.1%. South Korea maintained high profitability, with revenue of ¥9.1B, profit of ¥3.6B, and a profit margin of 39.3%. In contrast, the United States posted an Ordinary Loss of ¥1.9B against revenue of ¥8.1B, representing a significant deterioration from the prior-year loss and indicating continued challenges in the profitability of overseas operations. Tohshin Kogyo recorded revenue of ¥3.4B and profit of ¥0.5B, with a profit margin of 13.5%, representing substantial profit growth from the prior year. China achieved significant revenue growth to ¥3.0B, but its profit margin remained at 4.8%. Overall, the company has a structure with a high degree of profit dependence on the Japan segment.

Key Financial Metrics

【Profitability】The Operating Income margin of 14.4% and Net Income margin of 11.1% both improved from the prior-year period. The profit growth rate exceeding the revenue growth rate of 9.9% indicates the emergence of operating leverage. The gross profit margin of 40.8% remained solid and, combined with an SG&A ratio of 26.4%, contributed to improved profitability.【Cash Flow Quality】DSO (days sales outstanding) was approximately 68 days, inventory days were approximately 218 days, and the CCC was approximately 215 days, all of which are lengthy. In particular, work-in-process inventory of ¥34.5B accounted for 70.6% of inventories, raising concerns about delayed cash recovery.【Investment Efficiency】Annualized ROE was 12.7%, a favorable level supported by the Net Income margin and financial leverage (total assets/equity of 1.70x). Meanwhile, R&D expenses were limited to ¥0.4B, or 0.4% of Revenue.【Financial Soundness】With an Equity Ratio of 58.7%, cash and deposits of ¥84.4B, and total interest-bearing debt of approximately ¥21.8B, net cash is estimated at approximately ¥63B, indicating a conservative and strong financial base.

Cash Flow Analysis

As figures from the statement of cash flows have not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits increased to ¥84.4B from ¥79.0B in the prior year, confirming cash accumulation consistent with profit growth. Meanwhile, work-in-process inventory increased substantially to ¥34.5B from ¥28.98B in the prior year, suggesting that the expansion of working capital accompanying revenue growth is affecting capital efficiency. Accounts receivable declined to ¥26.0B from ¥31.9B in the prior year, indicating that collections may have progressed to a certain extent. Interest-bearing debt, comprising the total of short-term borrowings, current portion of long-term borrowings, and long-term borrowings, has been trending downward, suggesting that debt reduction and cash accumulation are progressing simultaneously against the backdrop of profit growth.

Quality of Earnings

The difference between Ordinary Income of ¥17.2B and Net Income of ¥12.0B was primarily attributable to corporate income taxes and other taxes of ¥5.3B, resulting in an effective tax rate of approximately 30.6% with no particular anomalies observed. A foreign exchange gain of ¥1.4B represented a significant component of non-operating income of ¥2.5B and should be noted as a non-operating, temporary factor equivalent to approximately 7.9% of Ordinary Income. Comprehensive Income was ¥14.1B, exceeding Net Income of ¥12.0B, with foreign currency translation adjustments of ¥1.6B and valuation differences on securities of ¥0.5B serving as additional contributing factors. From a working capital perspective, the accumulation of work-in-process inventory may create a timing gap between profit growth and cash generation. Accordingly, the quality of earnings should be monitored from an accruals perspective.

Earnings Forecast and Guidance

Cumulative Q3 progress against the Full-Year earnings forecast was 71.6% for Revenue, 88.0% for Operating Income, 95.8% for Ordinary Income, and 96.1% for Net Income. Compared with the standard progress pace of 75%, the profit-related indicators were substantially ahead, suggesting a high probability of achieving the Full-Year Operating Income forecast of ¥17.0B (+40.4% YoY) and Ordinary Income forecast of ¥18.0B (+27.5% YoY). The earnings forecast was revised during the current quarter, apparently reflecting the strength of progress.

Shareholder Returns

The Q2 dividend was ¥10.00 per share, while the Full-Year dividend forecast is ¥35.00 (no revision to the dividend forecast). Based on forecast EPS of ¥89.05 for the Full Year, the forecast Payout Ratio is approximately 39.3%. Given cash and deposits of ¥84.4B and conservative financial leverage, the company is considered to have relatively substantial financial capacity to maintain dividend payments.

Risk Factors

1. Deterioration in working capital efficiency: Work-in-process inventory of ¥34.5B accounts for 70.6% of inventories, while DIO is approximately 218 days and CCC is approximately 215 days, indicating prolonged working capital cycles. There is a risk that funds tied up in working capital will increase as sales expand.

2. Variation in the profitability of overseas operations: The United States segment recorded an Ordinary Loss of ¥1.9B, deteriorating from the prior-year loss, indicating an imbalance in the regional earnings structure. China, meanwhile, achieved revenue growth but its profit margin remained at 4.8%.

3. Limited R&D investment: R&D expenses were ¥0.4B, equivalent to only 0.4% of Revenue. The trend in investment levels will require monitoring from the perspective of maintaining product competitiveness over the medium to long term.

Industry Benchmark (For Reference; Company Research)

Profitability and Returns

Both the Operating Income margin and Net Income margin are substantially above the manufacturing industry median, placing the company among the industry leaders.

Growth and Capital Efficiency

The Revenue growth rate also exceeds the industry median, indicating that the revenue growth trend is relatively strong within the industry.

※Source: Company research

Key Takeaways from the Results

1. The company has demonstrated operating leverage, with Operating Income growth substantially exceeding Revenue growth due to increased revenue from the core business and fixed-cost absorption. Profit progress against the Full-Year forecast is also at a high level, and the forecast revision as of Q3 appears to reflect this progress.

2. The accumulation of work-in-process inventory and the lengthening of the CCC are structural factors that may create a timing gap between profit growth and cash generation. Future trends in the conversion of inventory and accounts receivable into cash will be key points for assessing earnings quality.

3. By region, Japan and South Korea are maintaining high profit margins, while losses in the United States are expanding. Variation in profitability among segments remains an area requiring ongoing monitoring.

Theoretical Share Price (Reference Value)

Sensitivity: ¥901–¥952 at ±1% in the cost of equity, and ¥926–¥926 at ±0.1 in ω.

Notes:

• Because Net Income progress against the Full-Year forecast (96%) exceeds the standard level (75%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies ahead of schedule tend to outperform their forecasts. In businesses with strong seasonality, the adjustment may be excessive).
• 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 on the high side.

(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; this 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. You should make investment decisions at your own responsibility and consult a professional as necessary.

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