The Chugoku Electric Power Company (9504) FY2026 Q3

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Executive Summary

The current period saw a decline in revenue but an increase in operating income, with cost improvements lifting the profitability of the core business. Revenue was ¥1 trillion 560.2B (-3.7% YoY), operating income was ¥993.4B (+10.4% YoY), ordinary income was ¥896.6B (-4.8% YoY), and net income was ¥700.2B (¥784.6B in the previous year). While the operating margin improved to 9.4%, higher interest expenses increased non-operating expenses, becoming a factor behind declines in ordinary income and net income.

Factors Affecting Performance

【Revenue】Revenue was ¥1 trillion 560.2B, representing a -3.7% YoY decline. The disclosed Telecommunication Business generated revenue of ¥253.6B, operating income of ¥30.6B, and a margin of 12.1%, contributing a portion of consolidated results. The decline in revenue may have been attributable to fuel cost adjustments and changes in the sales mix, among other factors; however, additional segment information is required for a detailed breakdown of the drivers.

【Profit and Loss】Operating income was ¥993.4B, up +10.4% YoY, and the operating margin expanded to 9.4%. The increase in operating income despite declining revenue indicates positive operating leverage from cost improvements. Meanwhile, ordinary income declined -4.8% YoY to ¥896.6B. The primary reason was an increase in non-operating expenses to ¥338.7B, including interest expenses of ¥201.3B, which nearly doubled from ¥100.5B in the previous year. Net income declined to ¥700.2B from ¥784.6B in the previous year, while pretax income of ¥960.6B included extraordinary income of ¥64.0B. In summary, the results reflect a decline in revenue but an increase in operating income; however, higher interest costs resulted in declines at the ordinary income and net income levels.

Segment Analysis

The disclosed Telecommunication Business generated revenue of ¥253.6B, operating income of ¥30.6B, and a margin of 12.1%. Its share of consolidated revenue of ¥1 trillion 560.2B was approximately 2.4%, indicating that it is relatively small and its impact on consolidated results is likely limited. As other segments have not been disclosed, it is not possible to identify the drivers of changes in consolidated performance by major business.

Key Financial Metrics

【Profitability】The operating margin was 9.4%, improving from the previous year, while the net profit margin remained at approximately 6.6%. Annualized ROE was 12.3%, a favorable level from a profitability perspective, although it should be noted that it is affected by the financial structure represented by an equity ratio of 16.6%.【Cash Quality】Cash and deposits increased significantly to ¥4,532.5B from ¥2,867.3B in the previous year, indicating improved liquidity.【Investment Efficiency】Because pretax income of ¥960.6B includes extraordinary income of ¥64.0B, this temporary factor should be excluded when assessing recurring earnings power.【Financial Soundness】The equity ratio was 16.6%, representing a slight improvement from 16.2% in the previous year. However, fixed liabilities were substantial at ¥3 trillion 1,641.3B against total assets of ¥4 trillion 5,656.0B; long-term borrowings amounted to ¥1 trillion 7,694.3B and bonds to ¥1 trillion 2,316.9B. The capital structure is asset-intensive and reliant on long-term liabilities.

Cash Flow Analysis

As detailed information from the statement of cash flows is not included in the disclosed data, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥4,532.5B, an increase of ¥1,665.2B, or 58.1%, from ¥2,867.3B in the previous year, indicating a significant expansion in the funding buffer. Meanwhile, long-term borrowings increased by ¥1,556.98B to ¥1 trillion 7,694.3B from ¥1 trillion 6,137.3B in the previous year, indicating continued reliance on long-term financing. Retained earnings were ¥5,088.6B, an increase of ¥586.8B from ¥4,501.8B in the previous year, indicating that retained net income is reinforcing capital. Taken together, the company appears to have accumulated liquidity through both financing and retained earnings while continuing to invest in fixed assets during the current period.

Quality of Earnings

Pretax income of ¥960.6B includes extraordinary income of ¥64.0B, indicating that a portion of current-period net income of ¥700.2B was supported by non-recurring items. Non-operating income was ¥241.9B, primarily consisting of dividend income of ¥13.9B and other non-operating income of ¥145.7B. Meanwhile, non-operating expenses reached ¥338.7B, with interest expenses doubling to ¥201.3B from ¥100.5B in the previous year. This was the primary factor offsetting the improvement in operating income at the ordinary income level. Comprehensive income was ¥629.1B, below net income of ¥700.2B, indicating that other comprehensive income items made a negative contribution, including foreign currency translation adjustments of -¥40.2B and adjustments related to retirement benefits of -¥26.4B. Accordingly, the quality of earnings was positive in terms of the improvement in operating income, but recurring earnings power must be assessed in light of higher financial costs and the presence of non-recurring income.

Earnings Forecast and Guidance

The company’s full-year forecast is revenue of ¥1 trillion 4,000.0B (-8.4% YoY), operating income of ¥1,150.0B (-11.0% YoY), and ordinary income of ¥1,000.0B (-22.2% YoY). The Q3 year-to-date achievement rates are 75.4% for revenue, 86.4% for operating income, and 89.7% for ordinary income, with the profit-related metrics significantly exceeding the standard achievement rate of 75%. This pace suggests that the full-year forecast may be a conservative plan premised on lower profit margins in the second half. The forecast full-year operating margin is approximately 8.2%, below the Q3 year-to-date actual margin of 9.4%.

Shareholder Returns

The company forecasts an annual dividend of ¥27.0 per share, comprising an interim dividend of ¥10.0 per share and a year-end dividend of ¥17.0 per share. Based on forecast full-year net income of ¥810.0B, the payout ratio is approximately 12%. As data on share repurchases is not included in the disclosed information, this report addresses only the payout ratio and does not discuss the total return ratio. Q3 year-to-date net income of ¥700.2B has reached 86.5% of the full-year forecast, providing a reasonable level of earnings coverage for the current dividend forecast.

Risk Factors

1. Increase in interest burden: Interest expenses increased approximately twofold to ¥201.3B from ¥100.5B in the previous year. If the expansion in financial costs continues, the improvement in operating income may become structurally offset at the ordinary income and net income levels.

2. High financial leverage: The equity ratio remains at 16.6%, with a substantial liability structure consisting of fixed liabilities of ¥3 trillion 1,641.3B, long-term borrowings of ¥1 trillion 7,694.3B, and bonds of ¥1 trillion 2,316.9B. Although this is characteristic of an asset-intensive business, sensitivity to changes in the interest rate environment is relatively high.

3. Sustainability of revenue decline: Revenue declined -3.7% YoY, and the full-year forecast also anticipates a -8.4% decline. If the revenue decline continues, the sustainability of margin improvement reliant on cost reductions will become a concern.

Industry Benchmark (For Reference; Based on Our Research)

Industry Benchmark (utilities)

Profitability and Returns

Because comparative data within the industry is limited, it is difficult to clearly position the company in terms of absolute levels.

Growth and Capital Efficiency

Revenue growth was negative YoY; more comprehensive relative comparison data within the industry would enable a more precise assessment of the company’s positioning.

※Source: Based on our research

Key Points from the Results

1. While revenue declined -3.7% YoY, operating income increased +10.4%, and the operating margin improved. This increase in operating income was driven by cost improvements, with margin expansion rather than top-line growth driving performance.

2. Ordinary income and net income declined YoY. The primary reason was an approximately ¥100.8B increase in interest expenses, with the improvement at the operating level being offset downstream by higher financial costs.

3. The Q3 year-to-date achievement rates against the full-year forecast were 86.4% for operating income and 89.7% for ordinary income, exceeding the standard achievement rate of 75%. The full-year plan is structured on the assumption of lower profit margins in the second half, making the extent to which Q4 results converge with the plan a key point to monitor.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,199–¥2,333 at cost of equity ±1%; ¥2,260–¥2,270 at ω±0.1.

Notes:

• Because net income progress against the full-year forecast (87%) exceeds the standard level (75%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with progress ahead of plan tend to outperform forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• Because 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 / 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 predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by our company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting a professional as necessary.

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