How pronounced is KOA’s earnings improvement?

  • KOA, whose main business is resistors, reported sales of 22.7 billion yen for the second quarter of the fiscal year ending in March 2027, up 9.0% quarter on quarter and 27.9% year on year. Operating profit was 2.9 billion yen, approximately 2.4 times the previous quarter’s level and 2.6 times the year-earlier level, with profit growing markedly faster than revenue.
  • The company raised its full-year sales guidance from 87.3 billion yen to 91.5 billion yen and its operating profit guidance from 5.4 billion yen to 8.3 billion yen. This was the second increase since the first-quarter results were announced. The exchange-rate assumption for the second half is 159 yen to 1 US dollar.
  • Growth came from a broad range of sources: the year-on-year increase in the first half was driven mainly by Chinese automotive customers, distributors in Europe, the US and China, AI applications in Asia, and industrial machinery in Japan. AI-related sales in the full-year guidance are estimated at 5.6 billion yen, compared with 3.6 billion yen in the previous fiscal year; second-quarter sales were 1.4 billion yen, slightly above the first quarter’s 1.3 billion yen.

Why did profit outpace revenue, and how much did costs offset?

  • First-half operating profit increased by 2.43 billion yen year on year. Of this, the contribution from incremental profit on sales growth was 4.16 billion yen, the weaker yen contributed 1.03 billion yen, and improvements in capacity utilization and product mix contributed 740 million yen. The earnings recovery was driven by sales volumes and also benefited from exchange rates and an improved operating mix.
  • At the same time, higher material costs reduced profit by 2.82 billion yen; an increase in fixed costs reduced it by another 350 million yen, while factors including the elimination of unrealized profit reduced it by 320 million yen. Material price increases alone offset a substantial part of the gains from sales growth, so progress in passing on costs directly affects subsequent profit realization.
  • Price adjustments for loss-making products had a positive impact of 270 million yen in the first half. Progress in passing on material costs has been made mainly with Japanese distributor customers, and the second-half guidance already incorporates an effect of several hundred million yen; overseas customers mostly use annual contracts, and the company is seeking to reach agreements before year-end.

Do stronger orders mean end demand is accelerating at the same time?

  • KOA’s book-to-bill ratio rose from 1.18 in the first quarter to 1.26 in the second, indicating that orders strengthened further relative to shipments. But management said most of the increase in orders came from early ordering, including by Chinese automotive customers and Japanese hybrid integrated circuit customers.
  • The improvement in the order indicator therefore also reflects purchases being brought forward and cannot be attributed entirely to an acceleration in current end demand. Management described actual demand as remaining solid and said it currently sees no signs of a slowdown.

How does Goldman Sachs extrapolate one company’s results to the whole industry?

  • Goldman Sachs compared quarterly sales trends over the past decade and found a high correlation between KOA’s overall sales and passive-component sales at Murata, Taiyo Yuden and TDK. This provides a basis for using KOA as a reference for industry conditions; the direct comparison covers the relevant businesses of these three companies.
  • Goldman Sachs further expects sales growth, higher capacity utilization, and improved incremental profit from a stabilizing product mix and prices to appear together in the passive-component companies’ earnings reports concentrated this week. The key to the industry outlook is whether these earnings drivers can have the same effect across companies.
  • On this basis, Goldman Sachs maintains buy ratings on Murata, Taiyo Yuden, TDK, Kyocera and Nichicon, with Murata remaining on its Asia-Pacific Conviction List. KOA shares rose 11% on 26 October, while the TOPIX was flat over the same period, reflecting a positive reaction to the earnings improvement.