THE ROYAL HOTEL,LIMITED FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥13.72B
• Operating Income: ¥500M
• Net Income: ¥412M
• EPS: ¥26.06

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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

Verdict: Top line surged but margins compressed, and net profit plunged due to the absence of prior-year one-offs, resulting in a mixed FY2026 Q2 for Royal Hotel. Revenue rose 36.2% YoY to 137.2, underscoring strong demand recovery. Gross profit reached 118.63 with a high gross margin of 86.5%, consistent with an asset-heavy hotel/banquet mix and low cost-of-sales line. Operating income was 5.00 (-1.4% YoY), implying operating margin of 3.64%. Ordinary income improved 13.0% YoY to 5.30, supported by modest non-operating gains (net +0.30). Net income was 3.98 (-65.5% YoY), with net margin at 2.9%. Operating margin compressed by approximately 139 bps YoY (from ~5.03% to 3.64%) as SG&A intensity remained elevated. Ordinary income margin also compressed by about 80 bps (from ~4.66% to 3.86%) despite YoY growth in ordinary income, reflecting revenue growth outpacing ordinary profit expansion. Net margin contracted sharply by roughly 855 bps (from ~11.45% to 2.9%), pointing to a tough comparison versus last year’s extraordinary gains. The gap between ordinary income (+13%) and net income (-65.5%) implies last year contained sizable below-ordinary, one-time positives that did not recur. Interest expense remains negligible (0.04) with strong interest coverage of 125x, minimizing financing drag. Liquidity is ample (current ratio 367.8%, cash 112.27 versus current liabilities 41.15), mitigating near-term risk. ROE stands at a subdued 1.7% on DuPont (NPM 2.9% × AT 0.356 × leverage 1.65x), reflecting weak capital efficiency. ROIC at 3.3% is below the 5% warning threshold, highlighting structural return challenges. With OCF unreported, we cannot verify earnings quality via cash conversion this quarter. Forward-looking, sustained demand recovery must translate into operating leverage (lower SG&A ratio) and better asset turnover to lift ROE/ROIC. Absent extraordinary gains, improving recurring margins and cash generation is key to underpinning dividends and reinvestment.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin 2.9% × Asset Turnover 0.356 × Financial Leverage 1.65x = ROE 1.7%. The largest drag is low asset turnover (0.356), typical for an asset-heavy hotel operator, followed by a thin net margin of 2.9%. Operating margin sits at 3.64%, down ~139 bps YoY (prior ~5.03%), indicating weaker operating leverage as SG&A intensity remained high (SG&A 113.62, 82.8% of revenue). Business drivers: strong revenue recovery likely from domestic leisure and inbound tourism did not fully translate to operating profit due to wage inflation, utility costs, and service mix (banquets/food & beverage) consuming gross profit. Ordinary profit benefited from small non-operating gains (net +0.30), but this was insufficient to offset operating compression. The YoY net profit decline (-65.5%) appears driven by prior-year extraordinary items rather than deterioration in core operations, as ordinary income actually rose 13%. Sustainability: demand recovery is likely sustainable near term, but margin expansion requires tighter SG&A control and pricing (ADR) discipline; non-operating support is not a dependable lever. Flags: SG&A as a percent of revenue is high at 82.8%; with revenue up 36.2% while operating income fell, operating leverage is negative this quarter—this is a concern unless cost normalization is underway.

Growth Assessment

Revenue growth of 36.2% YoY to 137.2 suggests strong recovery in lodging, banquets, and F&B, likely aided by inbound travel. Operating income slipped 1.4% YoY to 5.00, indicating that growth was not profitable at the operating level due to cost pressures. Ordinary income rose 13.0% YoY to 5.30, supported by non-operating items (net +0.30), but the improvement is modest relative to revenue expansion. Net income declined 65.5% YoY to 3.98, driven by the absence of last year’s non-recurring gains, not by core deterioration. Margin trends are unfavorable: operating margin down to 3.64% and net margin to 2.9%. Efficiency remains weak with asset turnover at 0.356. Outlook hinges on converting volume into profit via ADR optimization, mix improvement, and SG&A discipline; absent that, ROE/ROIC will remain sub-par. Given strong liquidity, the company has runway to execute cost measures and refurbishments, but investors should watch whether seasonal peaks lift margins in 2H.

Financial Health

Liquidity is strong: current ratio 367.8% and quick ratio 367.8% (cash 112.27 vs current liabilities 41.15), no warning flags. Debt-to-equity is 0.65x, a moderate and generally conservative level for the sector. Interest coverage is robust at 125x (operating income 5.00 vs interest expense 0.04), indicating minimal interest burden. Maturity mismatch risk is low: current assets 151.34 far exceed current liabilities 41.15; short-term loans are only 0.81. Noncurrent liabilities total 110.88, while reported long-term loans are 3.12, implying other long-term obligations (e.g., lease liabilities) dominate; refinancing risk appears manageable given cash on hand. No explicit off-balance sheet commitments were disclosed in the data provided. Equity is 233.05 with owners’ equity 217.31, underpinning solvency.

Cash Flow Quality

Operating cash flow, investing cash flow, and free cash flow were unreported, so OCF/Net Income and FCF coverage cannot be assessed this quarter. Given net income of 3.98 and modest interest expense, cash conversion would typically be supported by lodging prepayments and deposits, but the high SG&A ratio and potential working capital seasonality (receivables 20.90) introduce uncertainty. Without OCF, we cannot validate earnings quality; no signs of working capital manipulation can be inferred from the limited balance sheet data. Capex is unreported; thus medium-term FCF sustainability cannot be gauged.

Dividend Sustainability

Dividend data (DPS, total dividends, FCF coverage) are unreported. The calculated payout ratio is 19.2%, which appears conservative relative to net income of 3.98, suggesting theoretical capacity to maintain dividends if cash flows are supportive. However, absent OCF and capex data, sustainability cannot be confirmed. Policy outlook likely hinges on stabilizing recurring profit (operating and ordinary) rather than relying on one-offs; a cautious stance is implied until margin recovery is demonstrated.

Risk Assessment

Business Risks:

• Demand volatility tied to inbound tourism, domestic consumption, and seasonality affecting occupancy and ADR.
• Cost inflation in wages and utilities elevating SG&A and compressing operating margins.
• Mix risk from banquets/F&B with lower incremental margins versus rooms.
• Exposure to natural disasters and public health events impacting travel and hotel demand.

Financial Risks:

• Low ROIC at 3.3% (<5% warning) signaling weak capital efficiency and potential value dilution if not improved.
• Dependence on maintaining high liquidity to navigate cost pressures; OCF unreported creates visibility risk.
• Potential lease/liability structure within noncurrent liabilities (110.88) implies fixed commitments through cycles.

Key Concerns:

• Operating margin compression (~139 bps YoY) despite 36.2% revenue growth.
• Net income down 65.5% YoY due to lack of extraordinary gains; bottom-line volatility if one-offs recur.
• Asset turnover at 0.356 limiting ROE (1.7%) despite modest leverage (1.65x).
• Data gaps (OCF, capex, dividends) limit assessment of cash-based sustainability.

Investment Implications

Key Takeaways:

• Revenue recovery is strong, but operating leverage is negative this quarter.
• Core profitability (ordinary income +13%) improved modestly, but bottom line suffered without prior-year one-offs.
• Liquidity and interest coverage are very strong, reducing near-term financial risk.
• Capital efficiency is weak (ROE 1.7%, ROIC 3.3%), requiring margin and turnover improvements.

Metrics to Watch:

• Operating margin and SG&A ratio trajectory, especially through peak seasons.
• ADR/RevPAR and occupancy to gauge pricing power and demand quality.
• OCF and FCF once disclosed to validate earnings quality and dividend capacity.
• Energy and labor cost trends impacting unit economics.
• Extraordinary gains/losses below ordinary income to assess earnings volatility.
• ROIC and asset turnover improvements from portfolio optimization and productivity initiatives.

Relative Positioning: Versus domestic hotel peers, Royal Hotel exhibits strong liquidity and low financing burden but lags on capital efficiency (ROE/ROIC). The company’s topline rebound is competitive, yet its margin profile appears weaker, indicating greater sensitivity to cost inflation and a need for tighter cost control to close the profitability gap.

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