The Chugoku Electric Power Company (9504) FY2027 Q1

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Executive Summary

Despite higher revenue, the Company reported a return to an operating loss in Q1, indicating deterioration in the profitability of its core business. Revenue increased to ¥343.94B (+4.4% YoY), while Operating Income declined from a profit of ¥39.59B in the same period of the prior year to a loss of ¥5.39B. Ordinary Income likewise declined from a profit of ¥33.93B to a loss of ¥3.29B. Net Income deteriorated from a profit of ¥26.75B in the prior year to a loss of ¥3.81B, and EPS declined from ¥74.54 to ¥-10.49. The primary factors were deteriorating profitability in the Integrated Energy Business and the Transmission and Distribution Business, which more than offset the benefit of higher revenue.

Factors Driving Earnings Changes

【Revenue】Revenue increased to ¥343.94B (+4.4% YoY). By segment, the two core businesses led the increase in revenue, with the Transmission and Distribution Business generating ¥45.88B (+11.6%) and the Integrated Energy Business generating ¥287.62B (+3.5%). Meanwhile, the Information and Communications Business generated ¥8.21B (-1.0%), and Other Businesses generated ¥2.24B (-1.4%), both posting modest revenue declines.

【Profit and Loss】Operating Income deteriorated by ¥44.98B, declining from a profit of ¥39.59B in the prior year to a loss of ¥5.39B, while the Operating Margin fell by 1,358bp from 12.0% to negative 1.6%. Segment profit in the Integrated Energy Business declined from a profit of ¥35.76B to a loss of ¥5.00B, representing the largest factor behind the Company-wide earnings decline. The Transmission and Distribution Business likewise fell from a profit of ¥3.58B to a loss of ¥0.39B. Non-operating income of ¥11.97B amounted to only 3.5% of revenue and was insufficient to offset the operating loss, resulting in an Ordinary Loss of ¥3.29B. Interest expense of ¥7.88B (+23.8% YoY) placed further pressure on Ordinary Income, resulting in a Net Loss of ¥3.81B. The Company’s earnings structure was characterized by higher revenue but lower profit, with declining cost-recovery capacity in the core business at the center of the deterioration.

Segment Analysis

The Integrated Energy Business generated external-customer revenue of ¥287.62B (+3.5% YoY), while segment profit declined from a profit of ¥35.76B to a loss of ¥5.00B, causing its margin to fall from 12.9% to negative 1.7%. It is the segment with the greatest impact on consolidated earnings. The Transmission and Distribution Business generated revenue of ¥45.88B (+11.6%), while segment earnings declined from a profit of ¥3.58B to a loss of ¥0.39B, causing its margin to fall from 8.7% to negative 0.9%. The Information and Communications Business generated revenue of ¥8.21B (-1.0%) and segment profit of ¥0.60B (-31.6% YoY). Although it remained profitable, its margin declined from 10.7% to 7.4%, and its profit was insufficient to offset losses in the other businesses.

Key Financial Indicators

【Profitability】The Operating Margin deteriorated significantly to negative 1.6% (12.0% in the prior year), while the Net Profit Margin declined to negative 1.1% (8.1% in the prior year). Annualized ROE was negative 2.0% and annualized ROIC was negative 0.9%, indicating that the Company has not secured returns from invested capital.【Cash Quality】Cash and deposits amounted to ¥298.38B, down 29.5% from ¥423.36B in the same period of the prior year, while short-term borrowings increased significantly to ¥79.89B. Cash was 3.73 times short-term borrowings, indicating that near-term liquidity remains secured.【Investment Efficiency】Fixed assets accounted for 83.9% of total assets, reflecting a capital-intensive asset structure with a significant investment burden in transmission, distribution, and power-generation infrastructure.【Financial Soundness】The Equity Ratio was 17.0% (almost unchanged from 16.8% in the prior year), while total assets were ¥4,555.89B and net assets were ¥772.98B. Within a highly leveraged structure, the loss for the quarter has had a meaningful impact on shareholders’ equity.

Cash Flow Analysis

Although detailed data from the cash flow statement has not been disclosed, an analysis of funding trends based on changes in the balance sheet indicates that cash and deposits declined by ¥124.98B (29.5%), from ¥423.36B in the same period of the prior year to ¥298.38B. Correspondingly, short-term borrowings increased by ¥72.89B (1,041.4%), from ¥7.00B to ¥79.89B. The simultaneous drawdown of cash and increase in short-term financing suggests a change in funding management. Cash was 3.73 times short-term borrowings, providing a short-term buffer, but the increased reliance on short-term funding warrants attention from the perspective of future funding costs.

Earnings Quality

The Company’s earnings for the quarter began with an Operating Loss of ¥5.39B, which flowed through to an Ordinary Loss of ¥3.29B and a Net Loss of ¥3.81B. Non-operating income of ¥11.97B, including dividend income of ¥1.92B, amounted to approximately 3.5% of revenue and was insufficient to offset the operating loss. Of non-operating expenses of ¥9.87B, interest expense of ¥7.88B increased 23.8% YoY, with higher financial costs placing further pressure on Ordinary Income. Extraordinary income and loss items have not been disclosed, and the loss for the quarter is considered to contain a substantial structural element attributable to deteriorating business profitability rather than temporary factors. Comprehensive income was positive at ¥2.81B, creating a divergence from the Net Loss of ¥3.81B. This was attributable to valuation factors including the ¥6.49B share of OCI of equity-method affiliates, and it should be understood separately from actual business earnings.

Earnings Forecast and Guidance

The Q1 progress rate against the full-year revenue forecast of ¥1,490.0B was 23.1%, 1.9pt below the standard 25%. Against the Operating Income forecast of ¥52.0B (-42.4% YoY), Q1 recorded a loss of ¥5.39B. Against the Ordinary Income forecast of ¥40.0B (-50.1% YoY), Q1 recorded a loss of ¥3.29B. For both measures, achieving the full-year plan will require a substantial recovery in earnings from Q2 onward. The Company has not revised its earnings forecast or dividend forecast.

Shareholder Returns

The full-year dividend forecast is ¥30.0 per share, unchanged from the previous forecast. Based on the weighted-average number of shares outstanding during the period of 359.57 million shares, the annual total dividend is estimated at approximately ¥10.79B, resulting in an expected Payout Ratio of approximately 34.8% against the forecast full-year Net Income attributable to owners of the parent of ¥31.0B. This level is below the general sustainability benchmark of 60%; however, the Company recorded a Net Loss of ¥3.77B in Q1, and the feasibility of the dividend depends on an earnings recovery in line with the full-year plan. Cash and deposits of ¥298.38B support the Company’s short-term dividend payment capacity.

Risk Factors

1. Deteriorating profitability in the energy and transmission and distribution businesses: The Integrated Energy Business moved from a profit of ¥35.76B to a loss of ¥5.00B, while the Transmission and Distribution Business also declined from a profit of ¥3.58B to a loss of ¥0.39B. The time lag between fuel and wholesale electricity prices and the fuel-cost adjustment mechanism will determine cost recovery.

2. Financial leverage and interest burden: The D/E Ratio remains high, while the Equity Ratio is only 17.0%. Interest expense increased to ¥7.88B (+23.8% YoY), and Q1 EBIT was insufficient to absorb the interest burden.

3. Reliance on short-term financing: Short-term borrowings increased 1,041.4% YoY to ¥79.89B, while cash and deposits declined 29.5%. Cash was 3.73 times short-term borrowings, providing a buffer, but the degree of reliance on short-term refinancing and trends in funding costs warrant close attention.

Industry Benchmarks (For Reference; Compiled by the Company)

Profitability and Returns

Both the Company’s Operating Margin and Net Profit Margin were significantly below the industry median, placing them at low levels within the industry.

Growth and Capital Efficiency

Although revenue growth was slightly below the industry median, it remained within the IQR.

※Source: Compiled by the Company

Key Takeaways from the Results

1. Despite higher revenue, the substantial deterioration of the Operating Margin into negative territory indicates a reversal in operating leverage, with cost increases exceeding revenue growth. Going forward, the cost-recovery status of the Integrated Energy Business will be the key to earnings recovery.

2. The full-year plan assumes a substantial recovery in profit during the second half, while the Q1 progress rate for revenue was 23.1%, slightly below the standard level. Quarterly progress from Q2 onward will be an important factor in assessing whether the plan can be achieved.

3. The change in the funding structure, characterized by a sharp increase in short-term borrowings and a decline in cash, warrants attention from a funding-management perspective, and future disclosures should be monitored.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,810–¥1,916 at ±1% for the Cost of Equity, and ¥1,852–¥1,868 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the end of the quarter are used (there is a timing difference from 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 the future share price.)

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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. Industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting professionals as necessary.

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