NIHON FLUSH (7820) FY2026 Q3 Earnings Report

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Executive Summary

A substantial increase in profit despite lower revenue was the defining feature of this earnings announcement, clearly demonstrating an improvement in the earnings structure. Revenue declined to ¥1.747B (-2.1% YoY), while Operating Income rose substantially to ¥0.138B (+71.2%), Ordinary Income to ¥0.161B (+44.2%), and Net Income to ¥0.118B (+62.9%). The primary factors were higher revenue and profit in the core Japan segment and improved profitability in the China segment despite lower revenue.

Factors Affecting Results

【Revenue】Consolidated revenue was ¥1.747B, down 2.1% YoY. Revenue in the Japan segment, which accounted for 42.4% of the total, increased 3.9% to ¥0.741B, while revenue in the China segment, which accounted for 57.6%, decreased 6.0% to ¥1.010B. The increase in Japan was insufficient to fully offset the decline in China.

【Profit and Loss】Operating Income increased 71.2% YoY to ¥0.138B, and the Operating Margin improved substantially to 7.9% from approximately 4.5% in the same period of the previous year. The Japan segment profit margin improved to 13.8% (+approximately 4.0pt YoY), while China also improved to 3.6% (+approximately 2.6pt YoY), indicating improved profitability in both regions. In particular, the expansion of profit in Japan drove the increase in consolidated profit. Ordinary Income increased 44.2% YoY to ¥0.161B, partly supported by non-operating income, including interest and dividend income and foreign exchange gains. Extraordinary income of ¥0.008B and extraordinary losses of ¥0.011B, including an impairment loss of ¥0.001B in China, were recorded. Although the net extraordinary loss reduced Profit Before Tax, Net Income still increased 62.9% YoY to ¥0.118B. In conclusion, the Company achieved higher profit despite lower revenue.

Segment Analysis

The Japan segment generated revenue of ¥0.741B (+3.9% YoY) and segment profit of ¥0.102B (+46.3% YoY), with a profit margin of 13.8% (+approximately 4.0pt YoY). It achieved both higher revenue and profit, as well as an improved profit margin, making it the core business driving consolidated earnings. The China segment experienced a 6.0% decline in revenue to ¥1.010B, but segment profit increased 231.8% YoY to ¥0.036B, and its profit margin improved substantially to 3.6% (+approximately 2.6pt YoY). However, China’s profit margin was 10.2pt below Japan’s, and the profitability gap between the regions remains significant. An impairment loss on fixed assets of ¥0.001B was recorded in China, making asset utilization an area that requires continued monitoring.

Key Financial Indicators

【Profitability】The Operating Margin was 7.9%, improving from approximately 4.5% in the same period of the previous year, while the Net Profit Margin was 6.9%, also improving from approximately 4.7%. Profit margins expanded through the operating level despite the decline in revenue. 【Cash Quality】Cash and deposits amounted to ¥1.021B, and Current Assets of ¥2.515B substantially exceeded Current Liabilities of ¥1.100B. Meanwhile, accounts receivable and notes receivable totaled ¥1.462B, accounting for 34.1% of total assets, indicating that a considerable portion of funds remains tied up in trade receivables. 【Investment Efficiency】ROE was 3.8%. Compared with the improvement in the Net Profit Margin, the low total asset turnover ratio restrained return on capital. 【Financial Soundness】The Equity Ratio was 71.7%, broadly unchanged from 71.4% in the previous year. Interest-bearing debt, including both short-term and long-term debt, remained limited at ¥0.262B, and the interest expense burden was also minor, indicating a conservative and sound financial foundation.

Cash Flow Analysis

As the Company did not disclose a cash flow statement in this earnings release, its funding position is analyzed based on balance sheet trends. Cash and deposits were ¥1.021B, broadly unchanged from ¥1.045B in the same period of the previous year, indicating that on-hand liquidity has been maintained. Accounts receivable and notes receivable amounted to ¥1.462B, down slightly from ¥1.580B in the previous year, but remained a significant asset item accounting for 34.1% of total assets. The collection period relative to revenue remains extended. Inventories were ¥0.077B and limited relative to total assets; the primary working capital issue is the collection cycle for trade receivables rather than inventory. Current Assets of ¥2.515B were 2.3 times Current Liabilities of ¥1.100B, providing substantial short-term financial flexibility. However, the length of time required to convert profit growth into cash remains an area requiring continued attention.

Quality of Earnings

Recurring earnings power was primarily driven by the improvement in Operating Income to ¥0.138B. Of non-operating income of ¥0.038B, dividend income of ¥0.010B, foreign exchange gains of ¥0.007B, and total interest and dividend income, including interest income, of ¥0.022B supported Ordinary Income. Non-operating income accounted for only 2.2% of revenue, confirming that the increase in Ordinary Income to ¥0.161B was primarily attributable to improved profitability in the core business. Extraordinary income of ¥0.008B compared with extraordinary losses of ¥0.011B resulted in a net loss of ¥0.003B, meaning that one-time gains did not contribute to the increase in Net Income. Rather, a non-recurring impairment loss of ¥0.001B was recorded in the China segment; excluding this item, the improvement in core-business earnings would be even clearer. The high level of trade receivables and the resulting structure in which increased profit is not fully reflected in Operating Cash Flow are factors to consider when assessing earnings quality.

Earnings Forecasts and Guidance

Progress against the Full-Year forecast was 67.2% for Revenue, 77.6% for Operating Income, 83.4% for Ordinary Income, and 96.8% for Net Income. Revenue was slightly below the standard progress benchmark of approximately 75% after the first nine months, while all profit measures exceeded the benchmark. In particular, Net Income had progressed to a level at which only a relatively small amount was required in the remaining quarter against the Full-Year forecast of ¥0.124B. The forecast Operating Margin for the Full Year was 6.8% (versus the forecast), compared with an actual Operating Margin of 7.9% for the cumulative Q3 period. If the current profitability level is maintained, there is potential for earnings to exceed the forecast. There were no revisions to either the earnings forecast or the dividend forecast during the quarter.

Shareholder Returns

The Q2 dividend was ¥18.00 per share, and the Company’s Full-Year dividend forecast was ¥36.00 per share, assuming ¥18.00 per share for both the interim and year-end dividends. Based on forecast Full-Year Net Income of ¥0.124B and average shares outstanding during the period of 22.757 million shares, the estimated annual dividend total was approximately ¥0.082B, resulting in a Payout Ratio of approximately 66.1%. This level is slightly above the 60% sustainability benchmark based solely on dividends, but below 100%. The high 96.8% progress against forecast Net Income also provides support in terms of dividend funding. The Company held treasury shares valued at ¥2.09B, but no additional purchases during the period could be confirmed from the disclosed data. Accordingly, this section evaluates dividends only.

Risk Factors

1. Declining China business and profitability gap: Revenue in the China segment declined 6.0% YoY, weighing on consolidated revenue, of which it accounted for 57.6%. Although the profit margin improved to 3.6%, it remained 10.2pt below Japan’s 13.8%, making the sustainability of profitability improvements a key focus.

2. Funds tied up in trade receivables: Accounts receivable and notes receivable of ¥1.462B accounted for 34.1% of total assets. Including electronic receivables of ¥0.054B, collection-related assets are even larger. The length of the collection cycle is an issue in managing capital efficiency and liquidity.

3. Concentration in short-term liabilities and maturity management: Of total liabilities of ¥1.212B, Current Liabilities were ¥1.100B, accounting for 93.3%. Cash and deposits of ¥1.021B were approximately 4.2 times short-term borrowings of ¥0.245B, providing substantial liquidity. However, the concentration of maturities requires ongoing monitoring.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Return

The Operating Margin was slightly below the industry median, while the Net Profit Margin exceeded the median. Final earnings power, including non-operating and extraordinary gains and losses, was therefore relatively favorable within the industry.

Growth and Capital Efficiency

The Revenue Growth Rate was substantially below the industry median and was positioned at the lower bound of the IQR, indicating a relatively weak position within the industry in terms of top-line growth.

※Source: Compiled by the Company

Key Takeaways from the Earnings Release

1. Despite lower revenue, the Operating Margin improved by approximately 338bp YoY. The correction of profitability in both the Japan and China segments led to a qualitative improvement in the consolidated earnings structure, making this a key takeaway from the earnings release.

2. Progress against the Full-Year forecast was high for profit indicators, with Net Income at 96.8%, while Revenue progress remained at 67.2%. Revenue trends in Q4 will therefore be the key determinant of the Full-Year outcome.

3. Trade receivables accounted for more than 30% of total assets, and the long collection cycle represents a structural factor restraining capital efficiency. The potential for improvement in ROE of 3.8% will depend on trends in total asset turnover.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,127–¥1,190 at Cost of Equity ±1%; ¥1,152–¥1,162 at ω ±0.1.

Notes:

• Because Net Income progress against the Full-Year forecast is 97%, exceeding the standard 75%, forecast EPS has been adjusted upward within a maximum range of +10% (because companies ahead of forecast progress tend to exceed forecasts; the adjustment may be excessive for businesses with strong seasonality).
• 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 have been 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 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 available 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 responsibility, and you should consult a professional as necessary before making such decisions.

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AI Financial Analysis

Executive Summary

FY2026 Q3 results were characterized by a strong profit recovery despite modest top-line contraction. Revenue declined 2.1% year on year to ¥17.47bn. Operating income rose 71.2% to ¥1.38bn. Ordinary income increased 44.2% to ¥1.61bn. Profit attributable to owners of parent increased 60.1% to ¥1.20bn. The operating margin expanded by 340bp year on year to 7.9% from 4.5%. Gross margin improved by 100bp to 25.1% from 23.8%, indicating that the earnings recovery was supported by improved production or sales profitability rather than revenue growth. SG&A expense fell 12.6% year on year to ¥3.01bn, substantially outperforming the 2.1% revenue decline and providing the principal source of operating leverage. Japan was the core business, contributing ¥1.02bn of segment profit, or roughly 74% of consolidated operating income. China remained profitable and delivered a substantial earnings recovery, although its revenue declined. Net margin improved to 6.9% from approximately 4.2% in the prior-year period. Non-operating income of ¥376m, including ¥122m of interest income, ¥100m of dividend income and ¥67m of foreign-exchange gains, supported ordinary income above operating income. Below ordinary income, net extraordinary losses were limited to ¥30m, including a ¥14m impairment loss in China, so the period's profit improvement was predominantly operational rather than driven by extraordinary gains. However, comprehensive income fell 69.6% to ¥458m because foreign-currency translation adjustment losses offset reported earnings at the comprehensive-income level. The annualized ROE of 5.2% remains below the 8% level generally viewed as a minimum adequate return threshold, despite the substantial earnings rebound. Liquidity is strong, with a 228.6% current ratio and cash equal to 4.17x short-term debt. The main balance-sheet consideration is not aggregate leverage but the concentration of borrowings in short-term maturities, which represent 93.3% of interest-bearing debt. Working-capital efficiency also requires attention, as annualized receivable days of 229 days and an annualized cash conversion cycle of 179 days are elevated. Full-year guidance implies that Q3 cumulative operating income has already reached 77.6% of the annual target and profit attributable has reached 96.8%, whereas sales progress is only 67.2%. This profile indicates that achieving the full-year earnings plan depends less on a sharp fourth-quarter revenue recovery than on sustaining the improved margin and cost base, while the low remaining profit headroom makes execution and foreign-exchange movements important.

Profitability Analysis

The reported annualized DuPont ROE is 5.2%, decomposed into a 6.9% net profit margin, 0.544x asset turnover and 1.39x financial leverage. The strongest moving component evident from the income statement is margin: operating margin expanded 340bp to 7.9%, while net margin improved by roughly 270bp year on year. This was achieved through a 100bp increase in gross margin and a ¥432m reduction in SG&A expenses, even as revenue declined by ¥366m. SG&A declined 12.6%, materially faster than revenue, demonstrating favorable operating leverage and cost discipline. The 7.9% EBIT margin is below the 8-15% “good” benchmark range by a narrow margin, but represents a marked recovery from the prior period's approximately 4.5%. Japan generated ¥7.41bn of external revenue, up 3.9% year on year, and ¥1.02bn of segment profit, up 46.3%; its segment margin improved to 13.8% from 9.8%. China generated ¥10.06bn of external revenue, down 6.0%, but segment profit increased to ¥360m from ¥108m; its margin improved to 3.6% from 1.0%. The wide Japan-China margin differential identifies Japan as the core earnings engine, while China offers recovery potential but remains the lower-margin and more execution-sensitive operation. Ordinary income exceeded operating income by ¥229m, aided by investment-related income and FX gains; this is a meaningful supplement but does not alter the conclusion that the principal earnings improvement was operating in nature. The tax burden was normal at 0.759, equivalent to a 25.6% effective tax rate. The interest burden of 1.145x reflects net non-operating income exceeding financing costs, while interest coverage of 43.5x indicates that interest expense of ¥32m is readily serviceable. Financial leverage is conservative, so the path to a higher ROE depends primarily on maintaining margins and improving asset utilization rather than increasing debt.

Growth Assessment

Revenue growth remains mixed. Consolidated sales declined 2.1% because the 6.0% decline in China more than offset 3.9% growth in Japan. Japan's profit growth materially exceeded its sales growth, supporting the view that its recovery is driven by improved mix, gross profitability and/or cost absorption. China also delivered substantial margin recovery, but the simultaneous sales decline means that the durability of the turnaround should be assessed against subsequent order and demand trends. Consolidated gross profit increased 3.4% to ¥4.39bn despite lower sales. Operating profit grew faster than gross profit because of the substantial SG&A reduction. Full-year sales guidance of ¥26.00bn requires fourth-quarter revenue of ¥8.53bn, above the average quarterly sales pace achieved during the first nine months. Q3 cumulative sales progress is 67.2%, 7.8 percentage points below the standard 75% run-rate. In contrast, operating-income progress is 77.6%, 2.6 percentage points above the standard run-rate, and ordinary-income progress is 83.4%, 8.4 percentage points above it. Profit attributable progress is 96.8%, 21.8 percentage points above the standard Q3 run-rate, leaving only ¥40m of forecast profit to be earned in Q4. Accordingly, the outlook is principally exposed to whether sales volume can recover sufficiently to meet the revenue plan and whether the current margin structure can be retained. The forecast was not revised, so management is maintaining its stated full-year assumptions despite the uneven revenue trajectory.

Financial Health

Liquidity is robust. Current assets of ¥25.15bn exceed current liabilities of ¥11.00bn, producing working capital of ¥14.15bn and a current ratio of 228.6%. The quick ratio is similarly strong at 221.6%, reflecting substantial liquid assets rather than dependence on inventories. Cash and deposits were ¥10.21bn, equal to 4.17x short-term debt of ¥2.45bn. Interest-bearing debt totaled ¥2.62bn, while debt/capital was only 7.9%, indicating low balance-sheet leverage. The reported debt-to-equity ratio was 0.39x, below the 1.0x conservative benchmark. There is therefore no current-ratio or D/E threshold breach. The material refinancing-risk alert arises from maturity concentration: 93.3% of interest-bearing debt is classified as short-term. Short-term loans increased ¥624m, or 34.2% year on year, to ¥2.45bn. Although cash coverage substantially mitigates near-term refinancing pressure, continued dependence on short-term facilities could raise funding sensitivity if banking conditions tighten or operating cash is absorbed by working capital. Trade receivables were ¥14.62bn, representing 34.1% of total assets and exceeding cash, making collections a central balance-sheet variable. Contract liabilities increased to ¥490m from ¥179m, which provides some customer-funded working-capital support. Deferred tax liabilities were ¥544m, principally a non-cash liability. Equity remained substantial at ¥30.71bn, but declined ¥328m year on year despite the period's profit, as foreign-currency translation effects reduced accumulated other comprehensive income. No material off-balance-sheet obligations were identified in the provided information.

Notable B/S Changes

Short-term loans: +¥624m (+34.2%) to ¥2.45bn — borrowing maturity is concentrated in short-term facilities; cash coverage remains strong but refinancing exposure should be monitored. Investment securities: +¥553m (+23.0%) to ¥2.76bn — the portfolio increased and represents 6.4% of total assets, adding exposure to market-value movements reflected partly through OCI. Construction in progress: +¥295m (+97.9%) to ¥597m — indicates an expanded investment pipeline; completion timing and eventual returns on invested capital are relevant. Work in process: +¥319m (+77.9%) to ¥728m — increased production capital tied up in process inventories warrants monitoring against demand and production schedules. Accumulated other comprehensive income: -¥688m (-8.5%) to ¥7.38bn — adverse foreign-currency translation movements reduced equity despite higher reported earnings.

Cash Flow Quality

Cash-flow figures were not provided, so operating cash flow, free cash flow, OCF/net-income conversion and dividend cash coverage cannot be assessed directly. Earnings quality should therefore be evaluated primarily through accrual and working-capital indicators. The annualized DSO of 229 days is materially above the 60-day warning threshold and is explicitly flagged as high. This indicates a large amount of capital tied up in customer balances and creates sensitivity to collection timing, credit quality and revenue-recognition cut-off. The annualized cash conversion cycle of 179 days also exceeds the 120-day warning threshold. The long cycle increases the likelihood that reported earnings may not convert into near-term cash at the same pace, even though receivables declined 7.5% year on year to ¥14.62bn. Accounts payable declined 2.0% to ¥4.63bn, while electronically recorded obligations were broadly stable at ¥1.70bn, offering limited evidence of a material extension of supplier financing. Inventories reported on the balance sheet were ¥768m, modest relative to revenue and total assets; separately disclosed raw materials and work in process increased, with work in process rising from ¥410m to ¥728m. Construction in progress nearly doubled to ¥597m, which may reflect an active investment project and should be monitored for completion timing and cash requirements. Operating earnings were not materially flattered by extraordinary income: extraordinary income was ¥84m, while extraordinary losses were ¥114m. The China impairment loss of ¥14m was small relative to ¥1.20bn of profit attributable, but confirms that asset recoverability in that segment remains a continuing monitoring item.

Dividend Sustainability

The stated interim dividend is ¥18 per share. Full-year guidance indicates a ¥36 per share dividend, implying a remaining year-end payment of ¥18 per share if implemented as guided. Based on forecast EPS of ¥54.49, the implied full-year dividend payout ratio is approximately 66.1%. This is above the 60% sustainability benchmark but remains below 100%, so it is supportable on accounting earnings provided profitability is maintained. The interim ¥18 dividend represented a calculated payout ratio of 37.6% using the disclosed methodology. Q3 cumulative EPS of ¥52.74 is already close to full-year forecast EPS, which provides accounting-profit support for the planned full-year dividend. The balance sheet also provides a substantial liquidity buffer, with ¥10.21bn of cash and deposits. However, free-cash-flow coverage cannot be assessed because cash-flow and capital-expenditure figures were not provided. The elevated receivable days and long cash conversion cycle are the principal constraints on evaluating the practical cash sustainability of shareholder distributions. No share buyback amount was provided; accordingly, the analysis is limited to the dividend payout ratio rather than a total return ratio.

Risk Assessment

Business risks include China demand and execution risk: China revenue declined 6.0% year on year to ¥10.06bn. Segment profit recovered to ¥360m, but its 3.6% margin remains well below Japan's 13.8%, leaving earnings sensitive to any reversal in cost or demand conditions., Manufacturing margin risk: the profit recovery depends on a 100bp gross-margin expansion and a 12.6% reduction in SG&A. Raw-material, energy, labor, logistics and competitive-pricing pressures could challenge the sustainability of these gains., China asset-recoverability risk: the China segment recorded a ¥14m impairment loss, up from ¥8m in the prior-year period. The amount is currently small, but it signals continued monitoring of plant and other fixed-asset returns., Foreign-exchange risk: FX gains of ¥67m contributed to non-operating income, while foreign-currency translation effects reduced comprehensive income. Earnings and equity remain exposed to currency movements associated with overseas operations..

Financial risks include Refinancing risk: 93.3% of debt is short-term, above the 40% alert threshold. The risk is mitigated by cash equal to 4.17x short-term debt and low debt/capital of 7.9%, but maturity concentration remains material., Receivables and liquidity-conversion risk: annualized DSO of 229 days exceeds the 60-day alert threshold. Receivables are ¥14.62bn, or 34.1% of total assets, making collection performance critical., Working-capital risk: the annualized 179-day cash conversion cycle exceeds the 120-day alert threshold. This may delay cash realization of reported earnings and can increase reliance on short-term funding during volume growth., OCI/equity volatility: total comprehensive income was only ¥458m versus ¥1.51bn in the prior period, reflecting adverse translation movements despite stronger net income..

Key concerns include Priority 1 — collection discipline and cash conversion: the combination of 229-day DSO and a 179-day cash conversion cycle is the most important earnings-quality and liquidity monitoring item., Priority 2 — China revenue stabilization: China profit improved sharply, but revenue contraction and recurring impairment charges make the durability of the recovery uncertain., Priority 3 — short-term funding concentration: the debt amount is manageable, but the 93.3% short-term maturity mix should be monitored alongside working-capital movements., Priority 4 — Q4 execution: sales progress is below the standard Q3 run-rate, while profit attributable is already near the annual target; a revenue shortfall or margin normalization could affect the shape of fourth-quarter results..

Investment Implications

Key takeaways include Operating income increased 71.2% to ¥1.38bn despite a 2.1% sales decline, driven by gross-margin improvement and sharply lower SG&A., Japan is the core profit contributor, generating approximately 74% of consolidated segment profit with a 13.8% segment margin., China's segment margin recovered from 1.0% to 3.6%, but revenue declined 6.0% and a ¥14m impairment charge points to ongoing operating risk., The annualized 5.2% ROE remains modest, indicating that the earnings rebound has not yet translated into a return profile above conventional cost-of-equity expectations., The balance sheet is liquid and lightly leveraged, but short-term debt concentration and lengthy working-capital conversion require close attention., Forecast profit has little remaining headroom after Q3, while the sales plan requires a comparatively stronger fourth quarter..

Metrics to watch include China external revenue growth and segment margin versus Japan's 13.8% segment margin, Consolidated gross margin and SG&A-to-sales ratio, Annualized DSO of 229 days and annualized cash conversion cycle of 179 days, Short-term loans, their renewal terms and cash/short-term-debt coverage, Q4 revenue required to achieve the ¥26.00bn full-year target, China impairment charges and foreign-currency translation effects, Operating cash flow and free cash flow when disclosed.

Regarding relative positioning, The company combines a strong liquidity position and conservative aggregate leverage with a mid-single-digit annualized ROE. Its Japan operation shows a comparatively high manufacturing segment margin, while China is a lower-margin turnaround contributor. Relative financial strength is better than the cash-conversion profile suggests, but the elevated receivable days and short-term funding mix make cash realization more important than the headline debt ratios alone.