Hiroshima Electric Railway (9033) FY2026 Q3 Earnings Report

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Executive Summary

The most important point in the current-period results is that losses narrowed at all three levels—operating, ordinary, and net income—indicating an earnings improvement phase, although the Company continues to record an operating loss. Revenue was ¥247.1B (+1.0% YoY), Operating Income was ¥▲3.5B (improving from ¥▲8.8B in the prior year), Ordinary Income was ¥▲1.2B (improving from ¥▲6.7B in the prior year), and Net Income was ¥0.5B (turning profitable from ¥▲3.8B in the prior year). The primary drivers of improvement were an 11.4% increase in operating revenue in the Transportation Business and a narrowing of its loss, supplemented by higher profits in the Real Estate Business and Construction Business.

Factors Affecting Performance

【Revenue】Revenue was ¥247.1B, an increase of +1.0% YoY. The Transportation Business grew to ¥172.8B (+11.4% YoY) and led overall performance, while the Construction Business declined significantly to ¥35.5B (▲29.9% YoY). The Real Estate Business generated ¥22.8B (▲2.3%), the Distribution Business (Logistics) generated ¥9.4B (+2.6% approximately), and the Leisure and Services Business generated ¥6.7B, remaining broadly flat.

【Profit and Loss】Operating Income was ¥▲3.5B, improving by ¥5.3B from ¥▲8.8B in the prior year, while the operating margin improved by 220bp to ▲1.4% (▲3.6% in the prior year). The largest factor was the narrowing of the Transportation Business loss from ¥▲18.6B to ¥▲13.9B. Segment profit in the Real Estate Business was ¥8.1B (+5.1% YoY), while the Construction Business generated ¥1.8B (+5.9%), securing higher profits despite lower revenue and supplementing the Transportation Business’s deficit. Ordinary Income improved to ¥▲1.2B due to ¥4.7B in non-operating income, including ¥3.2B in dividend income. The difference between extraordinary income of ¥34.0B and extraordinary losses of ¥32.1B was ¥1.9B, enabling the Company to secure Profit Before Tax of ¥0.7B and Net Income of ¥0.5B. Extraordinary gains and losses exceeded Net Income in scale, indicating a high degree of dependence on non-recurring factors. In conclusion, the results reflect increased revenue and narrowed losses, with the core business still in the process of improvement.

Segment Analysis

The Transportation Business generated operating revenue of ¥172.8B (+11.4% YoY) and a segment loss of ¥13.9B (improving from ¥▲18.6B in the prior year). Although the loss narrowed alongside higher revenue, the business remains the largest factor weighing on profitability. Even including operating subsidies of ¥4.4B (+¥0.3B YoY), a loss remained. The Real Estate Business generated operating revenue of ¥22.8B (▲2.3%) and segment profit of ¥8.1B (+5.1%), achieving higher profit on lower revenue and improving its profit margin to 34.5%; it is the primary contributor to consolidated profit. The Construction Business experienced a significant decline in operating revenue to ¥35.5B (▲29.9%) but secured segment profit of ¥1.8B (+5.9%), suggesting an improvement in project mix. The Distribution Business (Logistics) generated operating revenue of ¥9.4B and profit of ¥0.2B, improving its profit margin to 2.2%, while the Leisure and Services Business generated operating revenue of ¥6.7B and was approximately break-even.

Key Financial Indicators

【Profitability】The operating margin improved by 220bp to ▲1.4% (▲3.6% in the prior year) but remained negative, while the net profit margin was only 0.2%. Annualized ROE was 0.2% and annualized ROIC was ▲0.5%, neither reaching a level at which the cost of capital can be considered adequately covered.【Cash Flow Quality】The formation of Profit Before Tax of ¥0.7B depended substantially on the ¥1.9B difference between extraordinary income of ¥34.0B and extraordinary losses of ¥32.1B. Of Comprehensive Income of ¥11.4B, ¥11.3B consisted of valuation differences on securities, which should be distinguished from operating cash generation.【Investment Efficiency】The Company has a capital-intensive structure, with fixed assets accounting for 88.3% of total assets. As the Transportation Business continues to incur losses against tangible fixed assets of ¥719.4B, improving asset efficiency remains a challenge.【Financial Soundness】The Equity Ratio improved to 44.4% (from the 40.1% range in the prior year) and is relatively stable. However, current assets of ¥115.0B versus current liabilities of ¥252.9B resulted in a current ratio of approximately 45%, indicating a high degree of dependence on the refinancing of short-term borrowings of ¥151.8B.

Cash Flow Analysis

Although detailed disclosure of the cash flow statement is unavailable, an examination of funding trends based on changes in the balance sheet shows that cash and deposits were ¥30.4B, down ¥10.1B from ¥40.5B in the prior year. Current assets declined significantly to ¥115.0B from ¥164.4B in the prior year. Meanwhile, other accounts payable and similar liabilities decreased by ¥72.5B, while short-term borrowings increased from ¥140.4B to ¥151.8B, indicating greater dependence on short-term financing. Accounts payable increased by 45.1% from ¥12.8B in the prior year to ¥18.5B, suggesting that adjustments to payment terms or increased construction-related expenditures may be placing pressure on working capital. Construction in progress declined significantly from ¥45.8B to ¥2.6B, indicating progress in the completion and transfer of assets related to large-scale investment projects. Overall, the Company continues capital-intensive investment while its dependence on short-term funding is increasing.

Earnings Quality

The formation of Net Income of ¥0.5B was significantly affected by extraordinary income of ¥34.0B, including amounts received as construction contributions, and extraordinary losses of ¥32.1B, including impairment losses of ¥1.1B and losses on disposal of fixed assets. The resulting extraordinary gain of ¥1.9B effectively supported Profit Before Tax of ¥0.7B. Dividend income accounted for ¥3.2B, or approximately 70%, of non-operating income of ¥4.7B. Although this represents stable dividend income from investee companies, it should be distinguished from improvement in the profitability of the core Transportation Business. Against an operating loss of ¥▲3.5B, interest expenses of ¥2.3B were recorded, resulting in negative interest coverage at the operating level. Comprehensive Income of ¥11.4B was primarily boosted by valuation differences on securities of ¥11.3B and therefore contains a substantial market-price-driven component; it does not indicate an improvement in recurring earnings power. Overall, current-period profit has a high degree of dependence on accruals (non-recurring items and valuation gains), and earnings quality is at a level requiring careful assessment of progress in improving the core business.

Earnings Forecast and Guidance

The full-year Company forecast calls for Revenue of ¥357.0B, an Operating Loss of ¥4.5B, an Ordinary Loss of ¥3.0B, and Net Income attributable to owners of the parent of ¥13.5B. The Q3 cumulative revenue progress rate was 69.2%, below the standard 75%. The cumulative Operating Loss of ¥3.5B has already reached 77.3% of the full-year forecast loss of ¥4.5B, leaving an allowable loss of only approximately ¥1.0B in Q4. To achieve the full-year Net Income forecast of ¥13.5B, the Company would need to record profit of approximately ¥14.2B in Q4 after a cumulative loss attributable to owners of the parent of ¥0.65B, indicating a high degree of dependence on seasonal factors, including extraordinary gains and losses.

Shareholder Returns

The Q2 dividend was ¥0 per share, while the full-year Company forecast calls for an annual dividend of ¥8.0 per share. Based on the number of issued shares after deducting treasury shares, the annual total dividend is estimated at ¥2.4B, resulting in a forecast Payout Ratio of approximately 18.0% against forecast full-year Net Income of ¥13.5B. However, the Q3 cumulative result was a loss attributable to owners of the parent of ¥0.65B, and assessment of the source of dividend funding depends on the realization of a profit turnaround in Q4. With cash and deposits standing at only ¥30.4B, dividend sustainability should be assessed together with the progress of improvement in the core business.

Risk Factors

1. Continued operating losses in the Transportation Business: The Transportation Business expanded its operating revenue to ¥172.8B (+11.4% YoY) but recorded a segment loss of ¥13.9B. Fluctuations in passenger demand, fare revisions, operating costs, and public subsidies (operating subsidies of ¥4.4B) will determine the timing of a return to profitability.

2. Tight short-term liquidity: Current assets of ¥115.0B compared with current liabilities of ¥252.9B resulted in a current ratio of approximately 45%. Short-term borrowings of ¥151.8B are approximately five times cash and deposits of ¥30.4B, indicating a high degree of dependence on refinancing.

3. Interest burden and capital-intensive structure: The Company is unable to cover interest expenses of ¥2.3B while reporting an operating loss, resulting in negative interest coverage. In the capital-intensive railway and tramway business, which holds tangible fixed assets of ¥719.4B, the ongoing burden of capital investment may constrain improvements in profitability.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (transport)

Profitability and Return

The Company’s profitability is significantly below the industry median and is positioned as being in the process of improvement within the transportation sector.

Growth and Capital Efficiency

Revenue growth is also below the industry median, and the pace of top-line expansion is relatively slow within the industry.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The Operating Loss narrowed from ¥▲8.8B in the same period last year to ¥▲3.5B, led by a reduction in the Transportation Business loss. The structure in which Real Estate Business segment profit of ¥8.1B (+5.1% YoY) supplements the Transportation Business deficit remains in place.

2. The turnaround to Net Income of ¥0.5B was significantly supported by the ¥1.9B difference between extraordinary income of ¥34.0B and extraordinary losses of ¥32.1B, indicating a high degree of dependence on non-recurring factors. The core business operating margin remained at ▲1.4%, and the continued earnings structure’s inability to cover interest expenses is a structural issue that warrants monitoring.

3. Achieving the full-year forecast of Net Income of ¥13.5B requires substantial profit recognition in Q4. Based on progress rates (69.2% of revenue and 77.3% of the forecast Operating Loss already incurred), confirmation of improvement in the core business and the scale of any extraordinary gains and losses will be key areas of focus.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,118–¥1,182 at cost of equity ±1%, and ¥1,140–¥1,155 at ω±0.1.

Notes:

• 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 are used (there is a timing difference relative to 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 solely from publicly available data; this is not a forecast of the market share price or a recommendation of any specific investment action, nor does it predict or guarantee future share prices.)

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

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