HOKUSHIN (7897) FY2026 Q3 Earnings Report

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Executive Summary

Despite higher revenue, the operating loss widened, making the decline in cost absorption capacity the most important point in the current results. Revenue was ¥77.4B (+0.9% year on year), while the operating loss widened to ¥-0.9B from ¥-0.3B in the previous year. Ordinary income was also ¥-0.9B, and net income was ¥-0.6B (previous year: ¥-0.0B), with losses widening in both cases. The decline in gross margin and increase in SG&A expenses were the primary causes of the expanded operating loss.

Factors Affecting Performance

【Revenue】Revenue was ¥77.4B, representing a modest 0.9% year-on-year increase. Cost of sales increased to ¥67.5B, expanding at a faster pace than revenue growth, causing gross profit to decline to ¥10.0B (previous year: ¥10.5B). The gross margin was 12.9%, down 0.7pt from 13.6% in the previous year, indicating that rising costs or an unfavorable product mix offset the benefit of higher revenue.

【Profit and Loss】SG&A expenses increased to ¥10.9B (previous year: ¥10.8B, +1.4%), growing faster than revenue. The combination of the lower gross margin and higher SG&A ratio caused the operating loss to widen to ¥-0.9B (previous year: ¥-0.3B). Non-operating income and expenses were approximately balanced, resulting in ordinary income of ¥-0.9B. Net income was ¥-0.6B (previous year: ¥-0.0B), with the loss narrower than the pretax loss of ¥-0.9B because income taxes and other taxes were recorded as a ¥0.3B gain. The results reflect higher revenue but lower earnings, with deteriorating profitability offsetting the benefit of revenue growth.

Key Financial Indicators

【Profitability】The operating margin was -1.2% (previous year: -0.4%), while the net profit margin was -0.8% (previous year: -0.1%); both deteriorated from the previous year. The gross margin declined to 12.9% (previous year: 13.6%), highlighting the weakness of the profitability structure in absorbing the benefit of higher revenue.【Cash Flow Quality】The Company incurred an interest expense burden of ¥0.3B while operating at a loss, and operating income was insufficient to cover financial expenses.【Investment Efficiency】ROE (annualized) was -1.4%, with the shift to a net loss being the primary factor depressing capital efficiency.【Financial Soundness】The equity ratio remained high at 41.4% (previous year: 42.4%); however, current liabilities were ¥58.5B against current assets of ¥77.6B, and a certain level of short-term interest-bearing debt existed against cash and deposits of ¥16.6B, increasing the importance of liquidity management.

Cash Flow Analysis

As disclosed figures from the cash flow statement could not be confirmed, cash trends are analyzed based on balance sheet movements. Cash and deposits were ¥16.6B, nearly unchanged from ¥16.8B in the previous year. Meanwhile, accounts receivable increased to ¥17.1B (previous year: ¥14.0B), and accounts payable also increased to ¥25.8B (previous year: ¥22.1B). Long-term borrowings increased to ¥21.9B (previous year: ¥19.9B), suggesting that funding needs under operating losses may have been supplemented through borrowing. Investment securities increased to ¥7.1B (previous year: ¥5.7B), indicating that a portion of funds was allocated to investments. Overall, deteriorating operating results and increasing borrowings are progressing in parallel, making it useful to monitor liquidity trends.

Quality of Earnings

Current-period net income of ¥-0.6B reflects a narrowing of the loss from the pretax loss of ¥-0.9B because income taxes and other taxes were recorded as a ¥0.3B gain. In the same period of the previous year, a one-time extraordinary gain of ¥0.3B was recorded from the sale of investment securities, whereas the current period included a loss on disposal of fixed assets of ¥0.005B, representing a reversal in the composition of one-time items. Even excluding the impact of these one-time items, the operating loss widened to ¥0.9B from ¥0.3B in the previous year, indicating that the core of the deficit lies in deteriorating profitability at the operating level. Non-operating income of ¥0.4B and non-operating expenses of ¥0.4B (including ¥0.3B in interest expense) were largely offset, limiting their impact on ordinary income. If the structural factors of a declining gross margin and rising SG&A expenses persist, the quality of earnings is unlikely to improve sustainably without an improvement in core operating profitability.

Earnings Forecast and Guidance

The Company forecasts full-year revenue of ¥110.0B (+7.6% year on year), operating income of ¥0.6B, ordinary income of ¥0.3B, and net income of ¥0.2B. Cumulative revenue of ¥77.4B represents 70.4% progress toward the full-year forecast, slightly below the standard progress rate of 75% as of Q3. Meanwhile, cumulative operating results were a loss of ¥-0.9B, meaning that operating income of approximately ¥1.5B in Q4 alone would be required to achieve the full-year operating income forecast of ¥0.6B. This assumes a substantial improvement from the cumulative operating margin of -1.2%, making the extent to which profitability improves in Q4 a key point for future monitoring.

Shareholder Returns

The Q2 dividend was ¥0 per share, while the Company’s full-year dividend forecast is ¥2.0 per share. Based on the average number of shares outstanding during the period of 28.35M shares, the annual total dividend is estimated at approximately ¥0.57B, resulting in an estimated payout ratio of approximately 284% against the full-year net income forecast of ¥0.2B. Given the current cumulative net loss of ¥0.6B, the forecast dividend is not supported by current-period earnings generation alone and is dependent on retained earnings (¥32.3B), liquidity, and the extent of earnings improvement in Q4.

Risk Factors

1. Profitability Deterioration Risk: The gross margin declined to 12.9% (previous year: 13.6%), while the operating loss widened to ¥0.9B despite higher revenue. If raw material costs or an unfavorable product mix continue to deteriorate, earnings improvement may be delayed further.

2. Interest Burden and Financing Risk: Operating income remains insufficient to cover interest expense of ¥0.3B, while long-term borrowings increased to ¥21.9B (previous year: ¥19.9B). The burden of financial expenses while operating losses continue is a point requiring attention from a financial perspective.

3. Full-Year Plan Achievement Risk: Against the full-year operating income forecast of ¥0.6B, cumulative results were an operating loss of ¥-0.9B, requiring a substantial improvement in profitability in Q4. If the target is not achieved, the timing of the recovery in earnings power may be pushed back.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s profitability is substantially below the industry median and is at a level positioned toward the lower end even within the manufacturing industry.

Growth and Capital Efficiency

The revenue growth rate was also slightly below the industry median, placing the Company below the midpoint in terms of growth.

※Source: Compiled by the Company

Key Points in the Results

1. Although revenue increased 0.9% year on year, the operating loss widened from ¥0.3B to ¥0.9B due to the lower gross margin and higher SG&A expenses. The fact that higher revenue did not translate into improved profitability is a defining feature of these results.

2. A substantial improvement in profitability in Q4 is required to achieve the full-year Company forecast of ¥0.6B in operating income. Progress and margin trends in Q4 will therefore be key areas for future monitoring.

3. The forecast payout ratio is approximately 284%, substantially exceeding the full-year net income forecast. The realization of the dividend is therefore dependent on a recovery in earnings generation and the liquidity position.

Theoretical Share Price (Reference Value)

Sensitivity: ¥147–¥155 at a ±1% change in the cost of equity, and ¥150–¥152 at a ±0.1 change in ω.

Notes:

• Net income is substantially compressed relative to operating income due to tax burdens, acquisition-related expenses, and non-controlling interests, among other factors (net income ÷ operating income: 33%). This value reflects that compression at face value; if the factors are temporary, normalized earnings power may be higher.
• 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, resulting in a timing difference relative to 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 / 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 forecast or guarantee the future share price.)

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This report is an earnings analysis document automatically generated by AI through analysis of 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, with consultation with professionals as necessary.

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