NIHON FLUSH CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

The first quarter resulted in a decline in revenue accompanied by an expansion of the operating loss from the core business, leaving concerns regarding both the quality and sustainability of earnings. Revenue was ¥3.61B (¥4.09B in the same period of the previous year, YoY -11.6%), while Operating Income deteriorated to a loss of ¥-0.14B (¥-0.00B in the previous year). Ordinary Income was ¥-0.02B (¥0.08B in the previous year, YoY -130.4%), and consolidated Net Income, including income attributable to non-controlling interests, was ¥-0.22B (¥-0.02B in the previous year). Both the Japan and China segments reported revenue declines, with the expansion of losses in the China Business particularly weighing on company-wide earnings.

Factors Affecting Earnings

【Revenue】Revenue was ¥3.61B, representing a YoY decline of -11.6%. By segment, Japan declined to ¥2.09B (composition ratio 57.8%, YoY -7.7%), while China declined to ¥1.54B (composition ratio 42.6%, YoY -16.5%), with both regions posting decreases and China showing the more significant decline. In addition to softer demand, headwinds in terms of pricing and product mix appear to have emerged amid an inventory buildup (+26.0%).

【Profit and Loss】The gross profit margin declined to 20.8% from 23.3% in the previous year. Although SG&A expenses decreased in absolute terms, the reduction was insufficient to offset the contraction in revenue, and Operating Income deteriorated to a loss of ¥-0.14B (¥-0.00B in the previous year). China posted a substantial Operating Loss of ¥0.36B (margin -23.1%), weighing on company-wide results. Japan secured Operating Income of ¥0.21B (margin 10.2%), but this represented a YoY decline in profit of -23.5%. Non-operating income of ¥0.19B (including dividend income of ¥0.08B and foreign exchange gains of ¥0.03B, among others) supported earnings at the ordinary-income level, limiting the Ordinary Loss to ¥-0.02B. However, the recognition of extraordinary losses of ¥0.10B (including impairment losses of ¥0.03B) and income taxes and other taxes of ¥0.09B caused Net Income to deteriorate to ¥-0.22B. The results were characterized by both declining revenue and earnings.

Segment Analysis

The difference in segment profitability was pronounced. Japan generated stable earnings, with Operating Income of ¥0.21B (revenue of ¥2.09B, margin 10.2%, YoY profit -23.5%), while China continued to experience insufficient fixed-cost absorption, reporting revenue of ¥1.54B (YoY -16.5%) against an Operating Loss of ¥0.36B (margin -23.1%, YoY -26.3%). China’s loss exceeded the company-wide Operating Loss of ¥0.14B, making earnings improvement in the China Business the key inflection point for company-wide performance.

Key Financial Indicators

【Profitability】The Operating Margin was -3.9% (previous year -0.1%), and the Net Profit Margin was -6.0% (based on consolidated Net Income); both deteriorated substantially from the previous year. The gross profit margin also declined to 20.8% from 23.3% in the previous year. 【Cash Flow Quality】Non-operating income accounted for 5.2% of revenue and supported Ordinary Income. However, as this is a factor separate from the profitability of the core business, recovery of the core business remains an issue in terms of earnings quality. 【Investment Efficiency】ROE was -0.7% (based on Net Income attributable to owners of the parent). The total asset turnover ratio remained at a low level, while elevated inventory and accounts receivable continued to pressure capital efficiency. 【Financial Soundness】The Equity Ratio remained high at 76.9% (71.7% in the previous year). With current assets of ¥22.36B versus current liabilities of ¥8.96B, liquidity remains ample and the financial position is conservative.

Cash Flow Analysis

Although the standalone disclosure of the cash flow statement is limited, fund movements can be assessed from trends in the balance sheet. Cash and deposits were ¥10.62B, slightly down from ¥11.63B in the previous year, but remained substantially above current liabilities of ¥8.96B. Inventories increased by +26.0% YoY to ¥0.85B, and the buildup of inventories amid slowing demand is placing some pressure on capital efficiency. Meanwhile, short-term borrowings were ¥2.11B, indicating limited interest-bearing debt. Cash covered short-term liabilities by approximately five times, suggesting limited concern regarding short-term liquidity.

Earnings Quality

While recurring business earnings from the core business, as reflected in operating results, were negative, non-operating income of ¥0.19B (including dividend income of ¥0.08B, interest income of ¥0.04B, and foreign exchange gains of ¥0.03B) provided significant support to Ordinary Income, resulting in a structure with somewhat high dependence on non-business income. Extraordinary losses of ¥0.10B (including impairment losses of ¥0.03B) were temporary factors and should be excluded when assessing recurring earnings power. The deterioration from Ordinary Loss of ¥-0.02B to Net Loss of ¥-0.22B was primarily attributable to these extraordinary losses and the recognition of income taxes and other taxes of ¥0.09B. The fact that a tax burden was incurred despite the recognition of a loss is a point to note when assessing earnings quality.

Earnings Forecast and Guidance

The Q1 progress rates against the full-year forecasts (revenue of ¥21.00B, Operating Income of ¥1.40B, and Ordinary Income of ¥1.45B) were 17.2% for Revenue, -10.1% for Operating Income, and -1.4% for Ordinary Income, each below the standard quarterly progress benchmark of approximately 25%. In particular, the progress rates for Operating Income and Ordinary Income were negative, meaning that achievement of the full-year plan presupposes a substantial improvement in profitability toward the second half of the fiscal year. As of the date of this report, no revisions had been made to the earnings forecast or dividend forecast.

Shareholder Returns

The annual dividend forecast is ¥36.00, and the Payout Ratio based on forecast EPS of ¥39.55 is approximately 91% (¥36.00 ÷ ¥39.55), a high level. Although short-term payment capacity is secured, supported by cash and deposits of ¥10.62B and an Equity Ratio of 76.9%, the current quarter recorded a loss. The sustainability of the high Payout Ratio amid weakening cash-generation capacity from the business will depend on the extent of recovery in full-year earnings.

Risk Factors

1. Continued losses in the China segment: The China Operating Loss in Q1 was ¥0.36B, with a margin of -23.1%, exceeding the company-wide Operating Loss of ¥0.14B and representing the largest factor weighing on company-wide earnings.

2. Declining gross profit margin and inventory buildup: The gross profit margin declined to 20.8% from 23.3% in the previous year, while inventories increased by +26.0% YoY to ¥0.85B. Deterioration in inventory valuation and turnover efficiency amid slowing demand could contribute to margin pressure.

3. Dependence on non-recurring income: Non-operating income, equivalent to 5.2% of revenue, supports Ordinary Income. As this includes variable factors such as dividend income and foreign exchange gains, attention should be paid to the potential for reversal in the following fiscal year and thereafter.

Industry Benchmark (For Reference; Prepared by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Growth and Capital Efficiency

Source: Prepared by the Company

Key Takeaways from the Results

1. Q1 saw a simultaneous decline in revenue and expansion of the Operating Loss. The primary causes of the deterioration in profitability were the expansion of losses in the China segment (-¥0.36B) and the decline in the gross profit margin (-247bp).

2. Progress against the full-year forecast was low, at 17.2% for Revenue and -10.1% for Operating Income. The results indicate a structure in which a sharp recovery concentrated in the second half of the fiscal year is required to achieve the plan.

3. The financial position is robust, with an Equity Ratio of 76.9% and cash of ¥10.62B, limiting short-term funding risk. However, the Payout Ratio of approximately 91% is notable for its high dependence on earnings recovery given the loss recorded in the current period.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,149–¥1,212 at Cost of Equity ±1%, and ¥1,172–¥1,185 at ω ±0.1.

Notes:

• As 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.
• As 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 / 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 the future share price.)

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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. Investment decisions should be made at your own discretion and responsibility, in consultation with a professional as necessary.

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