NIHON FLUSH CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

The expansion of losses in the China Business weighed on consolidated earnings, and the Company fell into an operating loss during the current quarter. Revenue was ¥3.61B (-11.6% YoY), Operating Income was ¥-0.14B (deteriorating from ¥-0.00B in the same period last year), Ordinary Income was ¥-0.02B (¥0.08B in the same period last year, -130.4%), and Net Income attributable to owners of the parent was ¥-0.18B (turning from ¥0.02B in the same period last year to a loss). In addition to the decline in revenue, SG&A expenses exceeded gross profit, creating a structure in which the profit generated in Japan alone cannot absorb the losses.

Factors Affecting Earnings

【Revenue】Revenue was ¥3.61B, down -11.6% YoY. By segment, Japan was ¥2.09B (-7.7% YoY, 57.8% of total), while China was ¥1.54B (-16.5% YoY, 42.2% of total). Revenue declined in both regions, with the decline in China being more pronounced.

【Profit and Loss】The SG&A expense ratio of 24.7% exceeded the gross profit margin of 20.8%, preventing gross profit from absorbing fixed costs and resulting in an Operating Loss of ¥0.14B. Segment profit was ¥0.21B in Japan (10.2% profit margin) versus ¥-0.36B in China (-23.1% profit margin), making the China Business the primary cause of the consolidated loss. Non-operating income of ¥0.19B (including dividend income of ¥0.08B, among other items) supported Ordinary Income, reducing the Ordinary Loss to ¥-0.02B. However, the addition of extraordinary losses of ¥0.10B, including an impairment loss of ¥0.03B, and income taxes of ¥0.09B expanded Net Income to ¥-0.22B (¥-0.18B attributable to owners of the parent). The results are classified as lower revenue and lower earnings.

Segment Analysis

The Japan segment maintained profitability, with Revenue of ¥2.09B (-7.7% YoY), Operating Income of ¥0.21B (-23.5% YoY), and a profit margin of 10.2%; however, its profit margin is also trending downward alongside the decline in revenue. The China segment recorded an Operating Loss of ¥0.36B, expanded from ¥-0.28B in the same period last year, against Revenue of ¥1.54B (-16.5% YoY), resulting in a profit margin of -23.1%. The segment’s loss exceeded the consolidated Operating Loss of ¥0.14B. Weak demand and lower capacity utilization in China are the primary causes of the decline in consolidated performance, and improving the profitability of this business will be key to improving consolidated earnings.

Key Financial Indicators

【Profitability】The Operating Margin turned negative at -3.9% (approximately 0% in the same period last year), while the Net Profit Margin was -6.0% (-4.9% based on Net Income attributable to owners of the parent). The SG&A expense ratio of 24.7% exceeded the gross profit margin of 20.8%, highlighting negative operating leverage. ROE was -0.7% and the EBIT margin was also -3.9%, indicating that deterioration in the profitability of the core business is weighing on capital efficiency.【Cash Quality】Cash and deposits were ¥10.62B, accounting for 24.9% of total assets. Accounts receivable of ¥11.70B exceeded cash and deposits, suggesting that working capital is tying up funds. Inventories were ¥0.85B, with work in process of ¥0.79B, finished goods of ¥0.85B, and raw materials of ¥0.73B recorded in relatively balanced proportions.【Investment Efficiency】Property, plant and equipment and other fixed assets, including investment securities of ¥2.68B, totaled ¥20.20B, accounting for 47.5% of total assets, with tangible fixed assets of ¥6.59B forming the core. ROIC and capital efficiency deteriorated during the current period due to the operating loss.【Financial Soundness】The Equity Ratio remained high at 76.9%, while net assets of ¥32.71B were nearly flat, increasing +0.5% YoY. Interest-bearing debt was ¥2.11B, a small amount relative to total assets, and current assets of ¥22.36B substantially exceeded current liabilities of ¥8.96B, indicating high short-term financial resilience.

Cash Flow Analysis

Although detailed disclosure of the cash flow statement is not available, changes in the balance sheet provide insight into fund flows. Cash and deposits were ¥10.62B, nearly unchanged from ¥10.63B in the same period last year, while net assets also increased slightly from ¥32.54B to ¥32.71B. Meanwhile, accounts receivable and notes receivable of ¥11.70B accounted for 27.5% of total assets, a level at which the accumulation of trade receivables amid an operating loss could affect working capital efficiency. Compared with accounts payable and notes payable of ¥3.93B, the collection cycle for operating receivables is likely longer than the payment cycle, making it necessary to assess whether a recovery in profitability will directly lead to improved cash generation. Cash and deposits were more than five times interest-bearing debt of ¥2.11B, limiting concerns regarding near-term liquidity.

Quality of Earnings

At the Ordinary Income level, non-operating income of ¥0.19B (dividend income of ¥0.08B, foreign exchange gains of ¥0.03B, and interest income of ¥0.04B) supported the Operating Loss of ¥0.14B, reducing the Ordinary Loss to ¥-0.02B. This improvement in Ordinary Income was attributable not to a recovery in the core business but to reliance on non-operating income. Extraordinary losses of ¥0.10B included an impairment loss of ¥0.03B, expanding the loss before income taxes to ¥-0.13B as a temporary factor. The addition of income taxes of ¥0.09B further widened the gap between the loss before income taxes and the net loss. Comprehensive income was ¥0.58B, substantially exceeding the net loss, but the primary factor was foreign currency translation adjustments of +¥0.83B; this should not be viewed as profit generated from business operations. Accordingly, earnings for the current period were supported by non-recurring items, namely non-operating income and foreign exchange valuation gains, and the quality of earnings has declined on a core-business basis.

Earnings Forecast and Guidance

The full-year forecast calls for Revenue of ¥21.00B (-10.5% YoY), Operating Income of ¥1.40B (-19.8% YoY), and Ordinary Income of ¥1.45B (-28.8% YoY), indicating that the Company’s plan itself incorporates lower revenue and lower earnings. The Q1 progress rate was 17.2% for Revenue, below the standard progress rate of 25%, while Operating Income was negative and therefore below the target level in terms of progress. There were no revisions to either the earnings forecast or the dividend forecast, and the plan appears to assume improved earnings in the China Business and maintenance of the profit margin in the Japan Business during the second half of the fiscal year.

Shareholder Returns

The annual dividend forecast is ¥36.0 (details of the interim and year-end breakdown are not provided in this report), representing an increase from the prior-year dividend of ¥18. The estimated total dividend based on the average number of shares outstanding during the period of 22,757 thousand shares is approximately ¥0.82B, resulting in an estimated Payout Ratio of approximately 91% against the full-year Net Income forecast of ¥0.90B. The Company recorded a net loss attributable to owners of the parent of ¥0.18B in Q1, making a substantial recovery in earnings during the second half of the fiscal year a prerequisite for maintaining the dividend. Cash and deposits of ¥10.62B and an Equity Ratio of 76.9% support the Company’s financial capacity to fund dividends; however, a 91% Payout Ratio is above the generally accepted guideline for sustainability.

Risk Factors

1. Expansion of losses in the China Business: Against Revenue of ¥1.54B (-16.5% YoY), the segment recorded a loss of ¥0.36B, expanded from ¥-0.28B in the same period last year, with a profit margin of -23.1%. The loss exceeds the consolidated Operating Loss of ¥0.14B, creating a significant impact on consolidated performance.

2. Declining revenue and changes in the profit margin of the Japan Business: Revenue was ¥2.09B (-7.7% YoY), and segment profit was ¥0.21B (-23.5% YoY). Although the profit margin was maintained at 10.2%, continued revenue declines could reduce the business’s ability to absorb fixed costs.

3. Recognition of impairment losses: Impairment losses of ¥0.03B were included in extraordinary losses of ¥0.10B. If operating losses continue, it will be necessary to monitor the possibility of additional impairment losses arising from deterioration in asset profitability.

Industry Benchmark (For Reference; Based on Company Research)

Profitability and Returns

The Company’s profitability is substantially below the industry median, with both the Operating Margin and Net Profit Margin in negative territory.

Growth and Capital Efficiency

The Revenue Growth Rate is also substantially below the industry median, and the declining revenue trend stands out within the industry.

※Source: Company research

Key Takeaways from the Financial Results

1. The China Business is at the center of the consolidated loss, and the expansion of its loss compared with the same period last year is determining consolidated performance. The profit generated by the Japan Business alone is insufficient to absorb the losses in China.

2. The improvement in Ordinary Income is attributable to reliance on non-operating income, including dividend income and foreign exchange gains, while the increase in Comprehensive Income is also primarily attributable to foreign currency translation adjustments. Profitability on a core-business basis has declined, with an Operating Margin of -3.9%.

3. Although the full-year forecast assumes lower revenue and lower earnings, Q1 progress rates for both Revenue and earnings were below the standard progress rate. Improving the profitability of the China Business and maintaining the profit margin of the Japan Business during the second half of the fiscal year will be the focus for achieving the plan.

Theoretical Share Price (Reference Value)

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

Notes:

• 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 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; it 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 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 responsibility, after consulting with a professional as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 performance was weak, with lower sales and a material deterioration in operating profitability, although the balance sheet remains conservatively funded. Revenue declined 11.6% year on year to JPY3.61bn. Gross profit fell 21.2% to JPY0.75bn, outpacing the sales decline. The gross margin contracted by 253bp to 20.8% from 23.3% in the prior-year quarter. SG&A expenses decreased 6.6% to JPY0.89bn, but this reduction was insufficient to offset the decline in gross profit. The SG&A-to-sales ratio rose by 134bp to 24.7%, indicating negative operating leverage on the lower sales base. Consequently, operating income deteriorated from a JPY0.03bn loss to a JPY1.42bn loss. The operating margin compressed by approximately 386bp to negative 3.9%. Ordinary income was a smaller JPY0.24bn loss because JPY0.19bn of non-operating income, equivalent to 5.2% of revenue, partly offset the operating loss. Dividend income of JPY0.08bn, interest income of JPY0.04bn and FX gains of JPY0.03bn were important supports to ordinary earnings, but do not resolve the underlying operating deficit. Profit attributable to owners of the parent was a JPY0.18bn loss, versus a JPY0.03bn profit a year earlier. Net income was additionally affected by JPY0.10bn of extraordinary losses, including JPY0.03bn of impairment loss. Total comprehensive income was positive at JPY0.58bn, primarily reflecting foreign-currency translation gains in OCI rather than operating earnings. Japan remained profitable, while the China segment's operating loss deepened and was the principal consolidated earnings drag. The company retains high liquidity, with JPY10.62bn of cash against JPY2.11bn of short-term borrowings. Full-year guidance calls for JPY21.0bn of revenue and JPY1.40bn of operating income, making a substantial recovery in the remaining nine months necessary. Q1 revenue progress was 17.2% of the full-year target, below the standard 25% pace by 7.8 percentage points, while the operating result was a loss against a full-year profit target. The investment debate is therefore centered on the timing and credibility of a recovery in China, restoration of gross margin, and conversion of the strong liquidity position into sustainable returns.

Profitability Analysis

Annualized DuPont ROE was negative 2.2%, comprising a negative 4.9% net profit margin, 0.339x asset turnover and 1.30x financial leverage. The primary adverse factor is profitability rather than balance-sheet leverage: the company has modest leverage, but loss-making operations drove the negative return. The gross margin declined 253bp year on year to 20.8%, showing that cost of sales did not adjust proportionally to the 11.6% revenue contraction. SG&A fell 6.6%, materially less than revenue, causing the SG&A ratio to rise to 24.7% from 23.4%. This unfavorable cost absorption was the largest driver of the swing in operating income to a JPY1.42bn loss. Annualized asset turnover of 0.339x is also low, consistent with a revenue base that is small relative to JPY42.56bn of assets and JPY11.70bn of trade receivables. Financial leverage of 1.30x is conservative and does not amplify solvency risk materially. EBIT margin was negative 3.9%, triggering the low-operating-efficiency quality alert and remaining far below the 5% minimum benchmark. Interest coverage was negative 9.07x because EBIT was negative; the root cause is operating loss rather than a high absolute interest burden, as interest expense was only JPY0.16bn. Nevertheless, negative EBIT means recurring operations currently do not cover financing costs, which is adverse for earnings resilience. The tax burden ratio of 1.423 and effective tax rate of negative 74.4% reflect tax expense of JPY0.93bn despite a JPY1.25bn pre-tax loss, widening the loss after tax. This tax outcome reduced earnings quality in the quarter and contributed to the gap between ordinary income and attributable profit. Non-operating income partly cushioned the operating loss, but its reliance on investment income, interest income and FX gains means it should not be viewed as a substitute for operating-margin recovery. The reported ROIC of negative 2.3% triggers the capital-efficiency alert, indicating that the current operating result is not generating an adequate return on the capital deployed.

Growth Assessment

Revenue declined 11.6% year on year to JPY3.61bn, indicating a weak start to the fiscal year. Japan sales declined 7.7% to JPY2.09bn, while China sales declined 16.5% to JPY1.53bn. Japan generated segment profit of JPY0.21bn, down 23.5% year on year, with its segment margin declining to 10.2% from 12.3%. China recorded a segment loss of JPY0.36bn, compared with a JPY0.28bn loss in the prior-year quarter, and its segment margin deteriorated to negative 23.3% from negative 15.3%. Japan is therefore the core business by operating-income contribution and provides the only positive segment-level earnings contribution. The widening China loss is the most material impediment to consolidated earnings recovery. The full-year forecast assumes revenue of JPY21.0bn, down 10.5% year on year, operating income of JPY1.40bn and ordinary income of JPY1.45bn. Q1 revenue represented 17.2% of the annual revenue target, 7.8 percentage points below the conventional 25% Q1 run rate. Q1 operating income represented negative 10.1% of the full-year operating-profit target, versus the normal 25% progress benchmark. Q1 attributable profit was negative JPY0.18bn against a full-year target of JPY0.90bn, equal to negative 19.8% progress. The forecast consequently requires a pronounced sequential improvement in margins and earnings during the remainder of the year. A recovery in gross margin and a narrowing of the China segment loss are the key operational conditions for attaining guidance. No forecast revision was announced, so management is maintaining its recovery assumptions despite the weak first-quarter result.

Financial Health

Liquidity is strong on reported balance-sheet measures. The current ratio was 249.7% and the quick ratio was 240.2%, both comfortably above standard liquidity benchmarks. Current assets of JPY22.36bn exceeded current liabilities of JPY8.96bn by JPY13.41bn. Cash and deposits of JPY10.62bn alone were 5.02x short-term borrowings of JPY2.11bn. Debt-to-equity was a conservative 0.30x, while debt-to-capital was only 6.1%. Total liabilities represented 23.1% of total assets, and owners' equity was JPY31.99bn. The maturity profile is concentrated in the short term, as 100% of interest-bearing debt is classified as short-term. This triggers the refinancing-risk alert because the short-term debt ratio is well above the 40% warning level. However, the practical maturity-mismatch risk is contained by cash exceeding short-term debt by JPY8.50bn and by the substantial current-asset surplus. The principal risk is therefore not near-term liquidity, but whether operating losses persist and reduce internally generated capital over time. Trade receivables were JPY11.70bn, equal to 27.5% of assets and slightly greater than cash, making collection discipline important. Inventory increased 26.0% year on year to JPY0.85bn, a notable movement despite its limited 2.0% share of total assets. Raw materials increased 11.7% to JPY0.73bn, finished goods increased 26.0% to JPY0.85bn, and work in process declined 2.6% to JPY0.79bn. The rise in finished goods alongside lower sales warrants monitoring for demand softness, production planning pressure, or potential inventory valuation risk. Intangible assets were only 2.0% of total assets, limiting balance-sheet exposure to intangible-asset amortization or impairment. No segment goodwill was reported.

Notable B/S Changes

Inventories: +JPY0.17bn (+26.0%) to JPY0.85bn - finished-goods accumulation occurred despite an 11.6% sales decline; monitor demand alignment, production discipline and inventory valuation risk. Finished goods: +JPY0.17bn (+26.0%) to JPY0.85bn - the increase raises working-capital absorption risk and warrants monitoring against future sales recovery. Foreign currency translation adjustment: +JPY0.81bn to JPY8.52bn - favorable currency translation was the principal contributor to positive comprehensive income and increased equity, but remains non-operating and potentially reversible with exchange-rate movements.

Cash Flow Quality

The quarter's cash-flow quality assessment is constrained to balance-sheet and earnings indicators. Operating earnings were negative, while the company reported a JPY0.18bn loss attributable to owners of the parent. The loss was partly moderated before tax by non-operating income, notably dividend income, interest income and FX gains, rather than by core operations. Extraordinary losses of JPY0.10bn, including JPY0.03bn of impairment loss, further reduced reported earnings. The JPY0.93bn tax expense despite a pre-tax loss also materially widened the bottom-line loss. Receivable days were 296 days on an annualized basis, triggering the high-receivable-days alert and far exceeding the 60-day warning benchmark. The root cause is a large receivables balance of JPY11.70bn relative to the annualized Q1 revenue run rate. This may partly reflect the company's billing and settlement structure, but it leaves a substantial portion of capital tied up in customer balances. The impact is lower cash conversion efficiency and heightened sensitivity to collection timing, customer credit quality and sales volatility. The annualized cash conversion cycle was 246 days, triggering the long-CCC alert and materially exceeding the 120-day warning level. This extended cycle is principally driven by slow receivable conversion and raises the amount of working capital needed to support operations. The increase in finished-goods inventory reinforces the need to monitor whether working capital is being absorbed as revenue declines. Cash of JPY10.62bn provides a significant near-term buffer against this working-capital risk, but sustained negative operating profitability would weaken that protection over time.

Dividend Sustainability

The full-year dividend forecast is JPY36 per share, unchanged from the disclosed forecast. Against forecast EPS of JPY39.55, the implied dividend payout ratio is approximately 91.0%. This is above the 60% sustainability benchmark and leaves a limited earnings buffer if full-year profit falls short of plan. Q1 EPS was negative JPY7.82, so the dividend is not supported by first-quarter earnings. The balance sheet provides capacity to maintain shareholder distributions in the near term, with JPY10.62bn of cash, low debt and JPY31.99bn of owners' equity. However, sustaining a high payout ratio depends on delivery of the forecast recovery to JPY0.90bn in full-year profit attributable to owners. The absence of a forecast dividend revision indicates that management currently intends to preserve the planned distribution. Dividend sustainability should therefore be evaluated primarily against the pace of operational recovery, particularly China profitability and gross-margin normalization.

Risk Assessment

Business risks include China segment risk: China sales declined 16.5% year on year and the segment loss widened to JPY0.36bn from JPY0.28bn. Its negative 23.3% segment margin is the largest direct risk to achieving the full-year operating-profit target., Demand and operating-leverage risk: consolidated sales fell 11.6%, while SG&A fell only 6.6%, resulting in a sharp deterioration in operating margin. Continued volume weakness would keep fixed-cost absorption unfavorable., Working-capital risk: annualized DSO of 296 days and an annualized cash conversion cycle of 246 days indicate that a large amount of capital is tied up in receivables. Slow collections or customer-credit deterioration could pressure liquidity conversion., Inventory risk: finished goods increased 26.0% while sales declined, creating a risk of further working-capital absorption and potential valuation pressure if demand does not recover., FX risk: JPY0.03bn of FX gains supported Q1 non-operating income, while OCI included a substantial positive foreign-currency translation effect. Currency moves can therefore affect reported earnings and equity volatility..

Financial risks include Debt-service risk: interest coverage was negative 9.07x, below the 2.0x warning level, because EBIT was negative. Absolute debt is low, but persistent operating losses would erode the ability of earnings to service finance costs., Refinancing structure risk: 100% of interest-bearing debt is short-term. The immediate impact is mitigated by a 5.02x cash-to-short-term-debt ratio, but the company remains exposed to rollover conditions if losses become prolonged., Capital-efficiency risk: reported ROIC was negative 2.3% and annualized ROE was negative 2.2%. This indicates returns are currently below reasonable capital-cost expectations., Tax and below-the-line volatility: a JPY0.93bn tax expense and JPY0.10bn extraordinary loss widened the quarterly net loss despite a smaller ordinary loss..

Key concerns include Highest priority: the size and duration of China operating losses, given their direct effect on consolidated profitability and the large turnaround required to meet guidance., High priority: evidence of gross-margin recovery, as the gross margin declined 253bp and was the key driver of the operating loss., High priority: receivable collection and cash-conversion trends, given the 296-day annualized DSO and 246-day annualized cash conversion cycle., Moderate priority: inventory discipline, particularly the 26.0% increase in finished goods amid lower sales., Moderate priority: dividend coverage, as the forecast payout ratio is approximately 91.0% and depends on a substantial earnings rebound..

Investment Implications

Key takeaways include The core Japan business remained profitable, with a 10.2% segment margin, but profit declined 23.5% year on year., China's JPY0.36bn operating loss and negative 23.3% margin were the dominant consolidated earnings headwind., The company has substantial financial flexibility, supported by JPY10.62bn of cash, a 249.7% current ratio and low debt-to-capital of 6.1%., Operational quality is currently weak, as reflected in negative EBIT margin, negative ROIC, high annualized DSO and a long annualized cash conversion cycle., Attainment of FY2027 guidance requires a major improvement from the Q1 run rate, particularly in operating margin and China profitability., The forecast JPY36 DPS implies a high approximately 91.0% payout ratio relative to forecast EPS, increasing the importance of earnings delivery..

Metrics to watch include China segment sales growth, operating loss and segment margin, Japan segment margin resilience, Consolidated gross margin and SG&A-to-sales ratio, Quarterly progress toward JPY21.0bn revenue and JPY1.40bn operating-income guidance, Annualized receivable days and cash conversion cycle, Finished-goods inventory trend relative to sales, Cash balance relative to short-term borrowings, Progress toward forecast EPS of JPY39.55 and coverage of the JPY36 DPS.

Regarding relative positioning, The company is financially more defensively positioned than a highly leveraged manufacturer because liquidity is ample and debt is modest. However, its current operating and capital efficiency metrics are weak: negative EBIT margin, negative annualized ROE and ROIC, and an unusually long annualized cash conversion cycle contrast with the balance-sheet strength. Relative positioning will depend on whether the profitable Japan business can stabilize margins and whether China can move materially toward break-even.