5563.T

• Business Overview: Shin Nihon Denko operates 5 business segments split across two core pillars: Materials (Alloy Iron, Functional Materials) and Environment (Incineration Ash Recycling, Aqua Solution, Power).
  • Balance Sheet and Cash Flow: Total assets contracted slightly from just over 100 billion yen to just over 90 billion yen, driven by active inventory compression that freed up cash. Operating cash flow improved significantly to 14.6 billion yen, and the company used this cash to fund a 4 billion yen share repurchase in 2025.
  • Growth Strategy - Incineration Ash Recycling: In November 2025, management approved a 12 billion yen investment to build a fifth melting furnace, adding to the existing four operating furnaces. The project received Japanese government subsidies covering one-third of a 10 billion yen eligible investment portion. A new Kyushu regional sales office will open in April 2026 to expand collection outside the current Kanto/Greater Tokyo core. The business delivers perfect recycling: it extracts precious metals from incineration ash using the company's existing high-temperature melting expertise from alloy iron production, then converts residual ash into construction materials, addressing growing shortages of landfill capacity for incineration ash in Japan.
  • Growth Strategy - Aqua Solution: The business is developing new offerings targeting social issues: it currently provides PFAS removal equipment and plans to leverage the company's melting technology for in-house processing of collected PFAS in the future. The company also invested 200 million yen in startup Garderia to develop palladium adsorption technology for recovering precious metals from plating wastewater as part of a circular economy urban mining initiative.
  • Financial Strategy for ROE Improvement: Management targets ROE improvement by expanding overall balance sheet size, compressing current assets (achieved via inventory compression), increasing income-generating fixed assets (including the 12 billion yen incineration ash investment and DX investments), and reducing net equity via share repurchases. The company expects total balance sheet size to expand by approximately 10% by 2027.
  • ESG and Strategic Investment Progress: The company is on track to meet its target of 45%+ CO2 emissions reduction by 2030 compared to 2015 levels, and recently approved a 1.7 billion yen investment for the first gas engine power generation facility to further cut emissions, with plans for additional facilities if the first unit is successful. DX initiatives are progressing on schedule per the 2023 roadmap, with ongoing investment in core business infrastructure.
  • Human Capital Management: New initiatives include a scholarship repayment assistance program for new graduates, naming rights partnerships with local academic institutions near major plants to improve brand awareness, continued wage increases supported by government subsidies, and employee share plan promotion that has increased participation to 75% as of 2025.
  • Shareholder Return (2025): The company completed a 4 billion yen share repurchase between August and October 2025. Full year 2025 dividends were set at 12 yen per share (5 yen interim, 7 yen final), including a 1 yen 100th anniversary commemorative dividend on top of an 11 yen ordinary dividend.

• Full year 2026 consolidated actual core ordinary profit is guided at 6.0 billion yen, an increase of 700 million yen from 2025's 5.3 billion yen core profit. The guidance assumes minimal inventory impact, as 2025 saw little volatility in raw material prices that would create carryover inventory impacts in 2026.
  • The largest driver of the 700 million yen profit increase is a planned ~20% increase in incineration ash collection volume, with incremental improvements from ongoing cost minimization in the Alloy Iron Business offsetting weakness in battery materials within the Functional Materials Business. The company expects 2026 reported ordinary profit to reach 6.0 billion yen, more than doubling 2025's reported 2.7 billion yen.
  • For the 9th Mid-Term Management Plan (2024-2027), the 2030 long-term targets are: net sales of 110 billion yen+, actual core ordinary profit of 13 billion yen+, and ROE of 10%+. The intermediate 2027 target is 10 billion yen in actual core ordinary profit. Management expects hitting the 2026 6.0 billion yen target will keep the plan on track overall, as non-alloy iron businesses (especially incineration ash recycling) are growing faster than planned.
  • 2026 shareholder return guidance: Based on a 6.0 billion yen core ordinary profit, effective net income is calculated as 70% of core profit (after corporate tax) = 4.2 billion yen. With a 40% payout ratio, the full year 2006 dividend is guided at 13 yen per share. Following the 10% reduction in outstanding shares from share repurchases, the minimum annual dividend is raised from 10 yen to 11 yen per share.

For full year 2025, consolidated net sales were 77.3 billion yen, a decrease of 1 billion yen from the prior fiscal year. Reported ordinary profit was 2.7 billion yen, down 2.2 billion yen year-over-year, while actual core ordinary profit (excluding inventory impact) was 5.3 billion yen. Segment performance on an actual core basis:

1. Alloy Iron Business: Total core profit decreased 900 million yen year-over-year. Domestic alloy iron operations posted 1.2 billion yen in profit, down 500 million yen from 1.7 billion yen the prior year, with the majority of the decline driven by lower utilization from large-scale periodic maintenance. Overseas alloy iron operations (Malaysia) widened its net loss from 600 million yen to 1 billion yen, primarily due to historically low ferrosilicon market prices.
2. Functional Materials Business: Core profit increased from 2 billion yen to 2.2 billion yen year-over-year. The business offset cost inflation through targeted price improvement efforts and achieved net growth.
3. Incineration Ash Recycling Business: Core profit increased sharply from 1.4 billion yen to 2.1 billion yen, a 700 million yen year-over-year gain. The growth was driven by higher incineration ash collection volumes, increased processing unit prices, and a strong tailwind from sharply rising gold prices that boosted returns from precious metal extraction.

• Alloy Iron Business exposure: The segment is closely tied to global steel demand, which is expected to weaken in 2026. While EU safeguard measures on low-cost imports have slightly improved market prices, overall weak demand keeps the near-term outlook uncertain. Ferrosilicon prices are currently at historic lows, which has driven widened losses at the company's Malaysian overseas alloy iron operations.
  • Functional Materials Business risk: The slowdown in EV adoption has created a severe operating environment for the company's battery materials segment, leading to contract terminations for some battery consignment business. Market conditions for battery materials could shift abruptly, requiring ongoing close monitoring.
  • Geopolitical risk: Rising geopolitical tensions and China-related issues create ongoing supply chain uncertainty for rare metal raw material imports.
  • Incineration Ash Recycling risk: A large portion of segment profit comes from molten metal (precious metal-bearing product) sales, which are tied to global precious metal prices. While rising volumes will offset moderate price declines, a sharp collapse in gold/silver prices would lead to meaningful profit reduction for the segment.
  • Manganese ore market risk: While the most recent Australian cyclone has not impacted manganese ore prices to date, future large cyclones disrupting Australian production could lead to raw material price spikes, though the company notes that other producing regions (South Africa, Gabon) have historically increased supply to offset outages.

Q: What is the 2026 segment-by-segment profit outlook, specifically for alloy iron market assumptions, and is there a different outlook for H1 vs H2 2026?

A: The 6.0 billion yen total 2026 core profit growth is primarily driven by increased incineration ash collection volumes, with incremental contributions from company-wide cost reduction efforts. The majority of the profit increase comes from the incineration ash recycling business.

Q: Will valuable metal recovery volumes increase in 2026, and will the ratio of valuable metals change?

A: Approximately 4% of processed incineration ash becomes molten metal, which contains gold, silver, copper and platinum, and the ratio of these metals does not change. Processing volumes are planned to increase by nearly 20% year-over-year, so valuable metal recovery volumes will increase proportionally with no expected change to the recovery ratio.

Q: Where is the 2.6 billion yen negative inventory impact recorded on the income statement, and what does equity method investment loss represent? Is the overseas business decline entirely driven by Malaysian ferrosilicon market conditions?

A: The negative inventory impact is included in cost of goods sold on the income statement. Equity method investment losses are almost entirely driven by losses from the company's overseas businesses, and yes, the weakness in overseas results is fully attributable to low ferrosilicon prices at the Malaysian alloy iron operations.

Q: Does the 70% calculation for net income after ordinary profit refer to after corporate tax, in line with the dividend policy?

A: That is correct. The company's dividend policy sets a baseline of 70% of actual core ordinary profit (after corporate tax) as estimated net income, and targets a payout ratio of approximately 40% of this estimated net income.

Q: What is the impact of the recent Australian cyclone on iron ore and manganese ore market prices?

A: Iron ore and manganese ore are produced in different regions of Australia, so the impact of a cyclone depends on which region it hits. While large cyclones have disrupted Australian manganese production in the past, other producing regions (South Africa, Gabon) have historically stepped up supply to offset outages, so it is unclear if a future outage would cause the same level of price spikes seen previously. The most recent late-2025 cyclone has had no impact on manganese ore prices to date.

Q: What is the role of molten metal in the incineration ash recycling business' revenue and profit structure? Is molten metal the end product from Shin Nihon Denko, does it have a market price, is it the main driver of current profit growth, and is slag also profitable? If precious metal prices stop rising, is there a risk of large profit declines?

A: Shin Nihon Denko does not extract gold, silver and platinum from molten metal directly; instead, molten metal is the company's end product, which is sold to specialized non-ferrous smelting companies that perform the final precious metal extraction. Molten metal sales are priced based on prevailing market prices for gold and silver at the time of sale, and molten metal was the major contributor to 2025 profit growth in the segment. Slag is sold as a replacement for natural crushed stone, so it has very limited price volatility and contributes far less to profit than molten metal. While a massive crash in precious metal prices would create downside risk to profit, increasing processing volumes will offset moderate price declines, so a sharp abrupt drop in overall profit is not considered a likely outcome even if prices correct.