HANWA (8078) FY2026 FY Earnings Report

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Executive Summary

Despite higher revenue, earnings declined due to lower profit margins, highlighting that top-line expansion has not translated into improved profitability. Revenue reached ¥2,662.67B (up +4.2% year on year), a record high, while Operating Income declined to ¥58.44B (down -5.0%), Ordinary Income to ¥52.26B (down -12.5%), and Net Income to ¥37.41B (down -13.3%). The primary drivers of revenue growth were increased transaction volumes in nonferrous metals and overseas sales subsidiaries. However, in addition to the gross margin declining from 5.5% to 5.3%, deterioration in non-operating income and expenses—including wider foreign exchange losses and lower non-operating income—amplified the decline in Ordinary Income.

Factors Affecting Performance

【Revenue】Revenue reached ¥2,662.67B (up +4.2% year on year), a record high. By segment, overseas sales subsidiaries, Primary Metals, and Recycled Metals grew significantly by +16.1%, +31.7%, and +28.6%, respectively, while the core Steel Business declined by -7.1%. By region, overseas sales grew, led by Asia (+16.0%), while domestic sales declined slightly, making overseas operations the main driver of revenue growth.

【Profit and Loss】Operating Income declined to ¥58.44B (down -5.0%), Ordinary Income to ¥52.26B (down -12.5%), and Net Income to ¥37.41B (down -13.3%). As the increase in cost of sales exceeded revenue growth, the gross margin declined to 5.3%. Although the SG&A ratio was flat, the company was unable to fully absorb the impact, resulting in lower Operating Income. At the Ordinary Income level, non-operating income declined from ¥12.38B to ¥8.69B, while foreign exchange losses widened to ¥3.15B, providing additional downward pressure. In extraordinary gains and losses, gains on the sale of investment securities recognized in the previous year decreased from ¥5.20B to ¥1.40B, widening the decline in Net Income. Overall, the company reported higher revenue but lower earnings.

Segment Analysis

The Steel Business posted revenue of ¥1,034.01B (down -7.1% year on year), but segment profit increased to ¥38.71B (up +16.7%), with a profit margin of 3.7%. It was the only segment to post higher earnings and remained the core contributor to company-wide profits. Overseas sales subsidiaries recorded strong revenue growth of +16.1% to ¥465.11B, but profit declined to ¥5.53B (down -33.0%), leaving the profit margin at only 1.2%. Primary Metals recorded revenue of ¥224.28B (up +31.7%) but swung to a loss of ¥0.15B, indicating that higher revenue has not translated into improved profitability. The Food Business was one of the few segments to achieve both higher revenue and higher earnings, with revenue of ¥148.79B (up +7.7%) and profit of ¥3.04B (up +31.9%). Energy and Living Materials (profit -18.1%) and Recycled Metals (profit -58.0%) also reported lower earnings. Declining profitability outside the Steel Business led to the company-wide decline in Operating Income.

Key Financial Indicators

【Profitability】The Operating Margin declined to 2.2% (2.4% in the previous year), while the Net Profit Margin declined to 1.4% (1.8% in the previous year), and ROE was 8.6%. The gross margin was 5.3% (5.5% in the previous year), indicating that in the low-margin, high-volume trading-company business model, even minor changes in procurement and sales terms can have a significant impact on profitability.【Cash Quality】Operating Cash Flow (OCF) was ¥74.33B, approximately 2.0 times Net Income, indicating strong cash conversion. However, this was partly supported by temporary improvements in working capital, including a ¥18.39B decrease in accounts receivable and a ¥15.64B increase in trade payables.【Investment Efficiency】Capital expenditures of ¥3.86B were approximately 0.42 times depreciation and amortization of ¥9.25B. Even considering the asset-light nature of the trading-company business, this represents a relatively low level of renewal investment.【Financial Soundness】The Equity Ratio improved to 35.7% (32.9% in the previous year), while net assets increased to ¥432.95B (up ¥43.48B year on year). Interest-bearing debt was substantial at approximately ¥306.88B, and remained high relative to EBITDA; however, the current ratio was approximately 198.8%, securing sufficient short-term payment capacity.

Cash Flow Analysis

Operating Cash Flow was ¥74.33B, a significant increase from ¥10.13B in the previous year, and approximately 2.0 times Net Income of ¥37.41B. The primary driver of the increase was an improvement in working capital: the ¥18.39B decrease in accounts receivable and ¥15.64B increase in trade payables boosted cash generation, while inventory increased by ¥5.16B and absorbed funds. Investing Cash Flow was an outflow of ¥10.84B, with the principal uses of funds being capital expenditures of ¥3.86B and purchases of investment securities. Financing Cash Flow was an outflow of ¥47.64B, including ¥10.02B in share repurchases, dividend payments, and a net decrease due to repayments of long-term borrowings. Free Cash Flow after netting was a substantial ¥63.49B, confirming that shareholder returns and investment can be financed through internal funds. However, the strength of OCF in the current period was partly dependent on period-end fluctuations in receivables and payables, requiring close attention to working capital trends from the next fiscal year onward.

Earnings Quality

OCF of ¥74.33B exceeded Net Income of ¥37.41B, indicating strong cash-generating capacity supporting reported earnings. Nevertheless, the factors boosting OCF—such as decreases in accounts receivable and increases in trade payables—were temporary working-capital movements and should be evaluated separately from improvements in recurring earning power. Regarding extraordinary gains and losses, the gain on the sale of investment securities recorded in the previous year declined from ¥5.20B to ¥1.40B in the current period, constituting a temporary factor that widened the decline in Net Income. Non-operating income and expenses included recurring income such as dividend income of ¥3.00B, but also foreign exchange losses of ¥3.15B, meaning that factors outside the core business exerted downward pressure on Ordinary Income. Comprehensive Income was ¥62.15B, exceeding Net Income, primarily due to a ¥17.46B increase in valuation differences on available-for-sale securities. This divergence resulted from changes in the market value of holdings and should be considered separately from the earning power of business operations themselves.

Earnings Forecast and Guidance

The company’s plan for the fiscal year ending March 2027 calls for Revenue of ¥3,000.0B (up +12.7% year on year), Operating Income of ¥62.50B (up +6.9%), and Ordinary Income of ¥57.00B (up +9.1%), anticipating a recovery to higher earnings from the current-period results. Revenue growth is projected to exceed profit growth, with the planned Operating Margin of approximately 2.1% assuming a further decline from 2.2% in the current period. Meeting the plan will require not only expanded transaction volumes but also improved profitability in segments that reported lower earnings or losses in the current period, including overseas sales subsidiaries and Primary Metals.

Shareholder Returns

The Payout Ratio was 30.0%, and the annual dividend, including the year-end dividend, increased from the previous year. Dividend payments totaled ¥9.81B, and including ¥10.02B in share repurchases, total shareholder returns amounted to ¥19.83B. The Total Return Ratio relative to Net Income of ¥37.41B was approximately 53%. Dividend coverage relative to Free Cash Flow of ¥63.49B was approximately 6.5 times, indicating ample capacity for shareholder returns based on current-period cash generation. The projected dividend per share of ¥66 for the fiscal year ending March 2027 is based on the number of shares outstanding after the 1-for-5 stock split in April 2026 and is therefore not directly comparable with the current-period dividend per share of ¥290.

Risk Factors

1. Commodity Market and Inventory Valuation Risk: Because cost of sales accounts for 94.7% of revenue, the low-margin structure means that fluctuations in steel, nonferrous metal, and energy prices can directly affect the gross margin, which was 5.3% in the current period.

2. Deterioration in Profitability of Overseas and Nonferrous Metals Businesses: Overseas sales subsidiaries recorded revenue growth of +16.1% but profit declined by -33.0%, while Primary Metals recorded revenue growth of +31.7% but swung to a loss of ¥0.15B, indicating a divergence between revenue growth and profitability improvement. Equity-method investment gains and losses also deteriorated from +¥2.60B in the previous year to -¥1.67B.

3. Interest-Bearing Debt and Interest Rate/Foreign Exchange Sensitivity: Interest-bearing debt amounted to approximately ¥306.88B, while the company recorded foreign exchange losses of ¥3.15B and interest expense of ¥7.57B in the current period. Debt relative to EBITDA is comparatively high, and rising interest rates could place pressure on Ordinary Income through higher non-operating expenses.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Profitability is below the industry median, highlighting the company’s relatively low-margin structure.

Growth and Capital Efficiency

Revenue growth also slightly trailed the industry median, positioning the company below average in both growth and profitability relative to the scale of its revenue increase.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Despite higher revenue, the Operating Margin and Net Profit Margin declined from the previous year, making improvement in transaction profitability, rather than expansion in scale, the key focus going forward. While the Steel Business increased profit by 16.7% despite lower revenue, overseas sales subsidiaries and Primary Metals reported deteriorating profits despite higher revenue, widening the profitability gap among segments.

2. OCF was ¥74.33B and Free Cash Flow was ¥63.49B, providing sufficient internal funding to cover total dividends and share repurchases of ¥19.83B. However, the increase in OCF was partly supported by temporary fluctuations in accounts receivable and trade payables and should be distinguished from recurring earning power.

3. The company plan assumes Revenue growth of +12.7% versus Operating Income growth of +6.9%, meaning that revenue growth will exceed profit growth and that a further decline in profit margins is incorporated into the plan. The fact that capital expenditures remain at 0.42 times depreciation and amortization is also noteworthy in terms of long-term investment in the business foundation.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,140–¥2,265 at ±1% for the Cost of Equity, and ¥2,201–¥2,202 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥2.9 per share is added back to earnings (to account for the non-cash expense and comparability with IFRS companies).

(Calculation model: Residual Income Model (Ohlson-type model with an explicit 5-year fade-out) / 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 automatically generated earnings analysis document prepared by AI based on XBRL earnings report 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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