WAVELOCK HOLDINGS (7940) FY2026 Q3 Earnings Report

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Executive Summary

The cumulative results for Q3 of the fiscal year ending March 2026 represented a “declining revenue, rising profit” outcome, reflecting progress in profitability improvement despite lower revenue. Revenue was ¥18.81B (down 1.5% YoY, or ¥0.29B), Operating Income was ¥0.56B (up 59.1% YoY, or ¥0.21B), Ordinary Income was ¥0.68B (up 57.1% YoY, or ¥0.25B), and Net Income was ¥0.32B (compared with ¥0.28B in the same period of the previous year). Strong performance in agricultural heat-shielding and light-blocking products within the core Material Solutions Business, cost management, and a decline in unrealized gains associated with inventory liquidation drove the increase in Operating Income. Meanwhile, the Advanced Technology Business struggled due to weak automotive demand in North America and China.

Factors Affecting Performance

【Revenue】Revenue was ¥18.81B, down 1.5% YoY. The Material Solutions Business generated ¥14.69B in revenue, representing 78.1% of total revenue, and posted higher revenue due to strong agricultural heat-shielding and light-blocking products and expanding overseas demand for matcha. However, the Advanced Technology Business generated ¥4.15B in revenue and declined by double digits YoY, affected by the end of EV subsidies in North America and inventory adjustments for EVs in China. As a result, total revenue declined.

【Profit and Loss】Operating Income increased to ¥0.56B (up 59.1% YoY), while Ordinary Income increased to ¥0.68B (up 57.1% YoY). The primary factors behind the profit increases were an improvement in the gross margin to 24.3% from the previous year and the containment of selling, general and administrative expenses at approximately the previous-year level. Equity-method investment income of ¥0.21B lifted Ordinary Income, while foreign exchange losses of ¥0.07B increased non-operating expenses. As extraordinary losses of ¥0.17B (temporary factors, including tender offer-related expenses) were recorded, Net Income was ¥0.32B, representing only a 13.3% YoY increase compared with the 57.1% increase at the Ordinary Income level, resulting in a substantial divergence. In conclusion, the results represent declining revenue but rising profit.

Segment Analysis

The Material Solutions Business is the core business, with revenue of ¥14.69B and Operating Income of ¥0.94B (profit margin of 6.4%), accounting for 78.1% of total revenue. Expanding demand for agricultural heat-shielding and light-blocking products drove Operating Income and made a significant contribution to the overall increase in Operating Income. The Advanced Technology Business generated revenue of ¥4.15B and Operating Income of ¥0.09B (profit margin of 2.2%), with profit declining due to weak automotive markets in North America and China. The profit margins of the two businesses differed by 4.2pt, resulting in a structure in which the high profitability of the core business supports company-wide performance.

Key Financial Indicators

Profitability: ROE of 2.5% (annualized), Operating Income margin of 3.0% (improved from 1.9% in the previous year)
Financial soundness: Equity Ratio of 57.5%, current ratio of 249.3%
Per-share indicators: EPS of ¥36.49 (¥32.23 in the previous year, +13.2%)

Cash Flow Analysis

Actual figures for Operating CF, investing CF, and financing CF were not provided in the available data. In terms of working capital, inventories totaled ¥5.45B, accounting for 18.8% of total assets, and progress in liquidating finished-goods inventories reportedly contributed to the improvement in Operating Income. Cash and deposits totaled ¥3.15B, securing sufficient liquidity relative to short-term borrowings of ¥0.70B.

Earnings Quality

Net Income was ¥0.32B compared with Ordinary Income of ¥0.68B, representing a substantial divergence. The primary factor was the recognition of extraordinary losses of ¥0.17B, consisting of temporary factors including tender offer-related expenses. Equity-method investment income of ¥0.21B accounted for approximately 31% of Ordinary Income out of non-operating income of ¥0.26B, contributing as a source of income separate from the operating profits of the consolidated businesses. The effective tax rate was high at approximately 39.5%, suppressing the conversion of pretax profit into Net Income.

Earnings Forecast and Guidance

Progress against the Full-Year forecast was 72.3% for revenue (2.7pt below the standard progress rate of 75%), 102.4% for Operating Income, and 124.0% for Ordinary Income. At the Operating Income and Ordinary Income levels, the company has already exceeded its Full-Year plan. For Q4, the company anticipates a challenging environment, considering seasonal factors as well as sluggish sales of insect screens and weak sales to the automotive industry. Full-Year Ordinary Income is forecast to decline 21.1% YoY, making the consistency between the high Q3 cumulative progress rate and the Full-Year forecast a key focus going forward.

Shareholder Returns

The Q2 dividend was ¥0 per share, and the forecast annual dividend for the Full Year is also ¥0, resulting in a Payout Ratio of 0%. The continuation of the zero-dividend policy is attributed to the company’s ongoing exploration of options to maximize corporate value even after the tender offer failed. The amount of share repurchases has not been disclosed, and the Total Return Ratio has not been calculated.

Catalysts

【Short term】Trends in automotive sales during Q4, including the end of EV subsidies and tariff impacts in North America and the duration of EV inventory adjustments in China, as well as demand trends for insect screen sales. 【Long term】Progress in considering options to maximize corporate value, including the possibility of going private, optimization of the global production structure, and progress toward the full-scale operation of the India site.

Industry Benchmark (Reference; Prepared by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The company is substantially below the industry median, with profitability positioned at the lower end of the manufacturing industry.

Growth and Capital Efficiency

The revenue growth rate is also below the industry median, and top-line growth is lagging that of peers.

※Source: Prepared by the Company

Risk Factors

1. Demand volatility risk in the automotive business: Revenue in the Advanced Technology Business declined 13.6% YoY and was affected by the end of EV subsidies and tariffs in North America, as well as EV inventory adjustments in China. A delayed recovery could further depress the business’s 2.2% profit margin.

2. Inferior profitability relative to the industry: The Operating Income margin of 3.0% is 5.6pt below the industry median of 8.6%, indicating relatively low resilience to fluctuations in raw-material and logistics costs and selling prices.

3. Compression of Net Income due to extraordinary losses and tax burden: Extraordinary losses of ¥0.17B (temporary factors) and an effective tax rate of approximately 39.5% reduced the Net Income growth rate to 13.3%, compared with a 57.1% increase in Ordinary Income.

Key Takeaways from the Earnings Results

1. The increase in profit despite declining revenue reflects an improvement in the earnings structure driven by expanding demand for agricultural products and cost and inventory management. The extent to which the containment of cost of sales and SG&A expenses represents a sustainable structural change can be confirmed through gross margin trends from the next fiscal period onward.

2. While progress toward Full-Year Ordinary Income is high at 124.0%, the company’s Full-Year forecast itself assumes a 21.1% YoY decline, indicating that conservative assumptions have been applied to the business environment in Q4.

3. The dividend remains at ¥0, and the capital allocation policy following the failed tender offer—including whether to resume dividends or conduct share repurchases—will be a key area of focus for future shareholder return policy.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,444–¥1,528 for a ±1% change in the cost of equity, and ¥1,470–¥1,496 for a ±0.1 change in ω.

Notes:

• As Net Income progress against the Full-Year forecast (154%) exceeds the standard level (75%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies progressing ahead of plan tend to exceed their forecasts. The adjustment may be excessive for businesses with strong seasonality).
• Net Income is substantially compressed relative to Operating Income due to the tax burden, acquisition-related expenses, and non-controlling interests (Net Income ÷ Operating Income: 36%). This value reflects that compression as reported; if the factors are temporary, underlying earnings power may be higher.
• As 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 (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 using only publicly disclosed 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 through an integrated analysis of XBRL earnings summary data and PDF earnings presentation materials. 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 professionals as necessary.

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