HANWA CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥1.28T
• Operating Income: ¥27.72B
• Net Income: ¥16.10B
• EPS: ¥417.90

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

FY2026 Q2 was a mixed quarter for Hanwa (8078): solid topline growth but visible margin compression and weaker ordinary/net profit. Revenue rose 1.6% YoY to 12,791.4, while operating income slipped 4.0% YoY to 277.2, ordinary income fell 15.2% to 238.6, and net income declined 17.2% to 167.3. Gross profit was 675.3 with a gross margin of 5.3%, but operating margin contracted to 2.17%. Ordinary margin fell to 1.87% and net margin to 1.31%, reflecting a heavier non-operating drag (interest expense 37.7 vs interest income 19.3). On a margin basis, operating margin compressed by roughly 12 bps YoY (2.29% → 2.17%), ordinary margin by about 36 bps (2.23% → 1.87%), and net margin by about 30 bps (1.61% → 1.31%). EBITDA came in at 322.6, implying an EBITDA margin of 2.5%. Earnings quality was solid: OCF of 390.9 exceeded net income by 2.34x, indicating strong cash conversion, likely aided by working capital discipline. Liquidity is robust with a current ratio of 207% and a quick ratio of 146%, providing ample buffer against near-term obligations. Leverage is manageable but not low: D/E at 1.85x and Debt/EBITDA indicated at 9.2x suggest balance-sheet reliance typical of trading houses but on the higher side on an EBITDA basis. Ordinary income underperformance versus operating income signals pressure from financing and other non-operating items, which weighed more heavily this quarter. Non-operating income (43.5) was outweighed by non-operating expenses (82.1), with interest costs the key driver, compressing ordinary and net profits. ROE calculated at 4.2% (Net Margin 1.3% × Asset Turnover 1.133 × Leverage 2.85x) remains below cost-of-equity norms; ROIC at 3.0% is well under the 7–8% trading company target, highlighting capital efficiency challenges. While commodity-linked and steel spread-sensitive revenue held up, profitability remains vulnerable to financing costs and spread volatility. Cash generation provides flexibility for capex (21.9) and buybacks (41.6) even with dividends unreported, but sustaining distributions will depend on maintaining working capital efficiency. Looking ahead, improving ordinary income requires either margin recovery in steel/metal trading, tighter funding costs, or a lift from investment income; otherwise ROIC likely stays sub-target.

Profitability Analysis

ROE of 4.2% decomposes into Net Profit Margin 1.31% × Asset Turnover 1.133 × Financial Leverage 2.85x. The most pronounced adverse change appears in margin components: operating margin compressed by ~12 bps YoY (to 2.17%), ordinary margin by ~36 bps (to 1.87%), and net margin by ~30 bps (to 1.31%), while revenue still grew 1.6%. The business driver of this compression is higher non-operating drag, chiefly interest expense (37.7) outpacing interest income (19.3), coupled with modest operating leverage given SG&A at 398.2 against a gross profit base of 675.3. This mix reduced the pass-through from gross profit to ordinary and net income, despite stable topline. Sustainability: the interest burden is recurring unless funding costs decline or debt is reduced; thus the ordinary and net margin pressure is partially structural near term. Flagged trends: ordinary income (-15.2% YoY) and net income (-17.2% YoY) decreased faster than revenue (+1.6% YoY), indicating negative operating leverage post-SG&A and higher non-operating costs; non-operating expenses exceeded non-operating income, further compressing profitability.

Growth Assessment

Topline growth of 1.6% YoY indicates resilient volumes/pricing in core metals trading, but profit growth was negative due to margin compression. Operating income declined 4.0% YoY, ordinary income fell 15.2%, and net income dropped 17.2%, underscoring sensitivity to funding costs and weaker non-operating contributions. Current operating margin of 2.17% and net margin of 1.31% are thin; small spread shifts can materially affect profits. Non-operating income ratio of 26% (vs operating) suggests ancillary earnings matter, but with non-operating expenses larger, the net effect is a drag. With ROIC at 3.0% (below 5% warning threshold), incremental growth without margin improvement risks destroying value. Near-term outlook hinges on steel price spreads, inventory valuation gains/losses, and interest rate/FX dynamics; any recovery in spreads or reduction in interest burden would disproportionately lift ordinary income. Given strong OCF, growth investments can be funded selectively; however, disciplined capital allocation is needed to lift ROIC toward trading house targets.

Financial Health

Liquidity is strong: current ratio 207% and quick ratio 146% comfortably exceed benchmarks; no warning for current ratio <1.0. Working capital stands at 4,535.7, with current assets (8,771.5) covering current liabilities (4,235.8) well. Solvency: D/E of 1.85x is above a conservative 1.5x but below the 2.0x explicit warning threshold; interest coverage at 7.35x indicates adequate capacity to service interest. On maturity mismatch, short-term loans (552.7) are modest relative to current assets and receivables (3,949.9), and AP (2,560.1) appears well-matched to inventories (2,578.8), limiting refinancing stress. Long-term loans (2,419.0) dominate the debt stack, reducing near-term rollover risk. No off-balance sheet obligations are reported in the provided data. Equity base is solid at 3,960.3, with retained earnings of 3,107.7 supporting resilience.

Cash Flow Quality

OCF/Net Income is 2.34x, indicating high earnings quality with strong cash conversion. With capex of only 21.9, underlying pre-investing free cash flow headroom appears ample, but total investing CF is unreported, so full FCF cannot be confirmed. Financing CF was -281.1, including share repurchases of 41.6, suggesting distributions and debt service were funded comfortably by OCF this period. There are no explicit signs of working capital manipulation in the provided snapshot; the strong OCF alongside stable revenue suggests likely working capital release or steady collections, but the lack of period-to-period balance data limits precision. Interest coverage of 7.35x corroborates cash earnings’ ability to absorb financing costs. Given thin margins, sustaining high OCF will require continued discipline in receivables and inventory turnover.

Dividend Sustainability

While DPS is unreported, the calculated payout ratio is 56.9%, within the <60% benchmark for sustainability. FCF coverage cannot be fully assessed due to unreported investing CF and dividends paid; however, OCF of 390.9 and light capex (21.9) imply capacity to fund ordinary dividends and modest buybacks in a normal year. The key constraint is not liquidity but earnings volatility: net margin is 1.31% and ordinary income is pressured by interest costs, so a downturn in spreads could quickly tighten coverage. Policy-wise, with ROIC at 3.0%, management may prioritize capital recycling and balance-sheet efficiency over aggressive payout escalation to improve capital efficiency.

Risk Assessment

Business Risks:

• Commodity price and steel spread volatility impacting gross margins and inventory valuation
• Demand cyclicality in construction, automotive, and machinery end-markets
• FX fluctuations (JPY) affecting import/export pricing and translation
• Supply chain disruptions affecting sourcing and delivery timing
• Customer credit risk given large receivables base (AR 3,949.9)

Financial Risks:

• Elevated Debt/EBITDA at ~9.2x increases sensitivity to EBITDA swings
• Interest cost burden (37.7) exceeding interest income (19.3) compresses ordinary profit
• D/E at 1.85x leaves less headroom if earnings weaken
• Potential inventory write-down risk if prices fall sharply
• Refinancing risk if credit conditions tighten, albeit mitigated by strong liquidity

Key Concerns:

• ROIC at 3.0% is below the 5% warning threshold, implying low capital efficiency
• Ordinary and net margin compression despite revenue growth indicates negative operating leverage
• Non-operating expenses exceeding non-operating income reduce earnings resilience
• Dependence on working capital efficiency to sustain cash flow in a low-margin model

Investment Implications

Key Takeaways:

• Topline growth (+1.6% YoY) but profit compression at ordinary (-15.2%) and net (-17.2%) levels
• Operating margin down ~12 bps; net margin down ~30 bps; non-operating drag intensified
• Strong cash conversion (OCF/NI 2.34x) and liquidity (current ratio 207%) support distributions and investment
• Leverage acceptable by coverage metrics (7.35x) but elevated on EBITDA basis (~9.2x)
• ROE 4.2% and ROIC 3.0% highlight need for margin improvement and capital discipline

Metrics to Watch:

• Ordinary income trend versus operating income (net non-operating impact)
• Net debt/EBITDA and interest coverage as rates and credit spreads evolve
• Gross and operating margins by segment (steel vs non-steel, if available)
• Working capital turns (DSO, DIO, DPO) and OCF/NI ratio sustainability
• ROIC progression and capital recycling outcomes
• Equity-method income contribution (currently unreported) and affiliate performance
• FX sensitivity and hedging effectiveness

Relative Positioning: Within Japan’s trading companies, Hanwa’s steel-centric portfolio delivers cyclical revenue resilience but thinner margins and lower ROIC versus diversified sogo shosha peers; leverage on an EBITDA basis is higher, and reliance on financing conditions makes ordinary income more sensitive to rate and spread shifts.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis