Asahi Diamond Industrial Co., Ltd.

Income statement

Notes. EBITDA is operating income plus depreciation and goodwill amortisation (Envalith; consistent with the cash flow statements for FY2023 to FY2025). Diluted EPS is not presented because there are no dilutive securities. Revenue CAGR from FY2021 to FY2025 is 3.1% (analyst calculation). Sources: Securities Report FY2025 five-year summary; Tanshin; Envalith.

Commentary.

Revenue: FY2021 was a sharp recovery (+23%) from the pandemic trough of JPY 30.1 billion. Growth then slowed to low single digits. The FY2023 dip came from destocking in machinery and softer Japan, Taiwan and China demand. FY2024 and FY2025 were led by AI-related advanced semiconductor tools and memory recovery, offset by stagnant SiC power-device demand.

Gross margin: The low was 25.9% in FY2023. The rise to 28.2% in FY2025 reflects price increases implemented in stages over three years and productivity gains. The company's FY2026 forecast implies a gross margin of 31.9% (investor business report), and management referred to a 35% gross margin goal at the May 2026 briefing.

Operating income: Operating margin has stayed between 3.9% and 7.6%, well short of the 10% targeted by both the 2025 and 2030 plans. FY2025 profit growth was held back by higher retirement benefit cost, personnel cost and depreciation (results briefing, 26 May 2026).

Pension accounting effect: The company expenses actuarial differences in a single year, the year after they arise. Defined-benefit cost swung from a credit of JPY 14 million in FY2024 to a charge of JPY 513 million in FY2025. An unrecognised actuarial gain of JPY 1,402 million at March 2026 will be recognised in FY2026. This is an analyst reading of the pension notes: roughly JPY 1.6 billion of the forecast FY2026 operating profit improvement is attributable to this swing rather than to trading. Management itself said FY2028 operating profit will be below FY2026 because of temporary retirement benefit effects.

Below operating income: Ordinary income is consistently higher than operating income because of equity-method income (JPY 199 million in FY2025, mainly Shinhan Diamond), dividends, interest and foreign exchange gains (JPY 464 million in FY2025).

Extraordinary items: Gains on sales of cross-held shares were booked every year (JPY 850 million, 730 million and 1,304 million in FY2023 to FY2025). FY2025 also included a JPY 620 million gain on the sale of a former European factory and an impairment loss of JPY 1,920 million, of which JPY 1,801 million related to Asahi Diamond Industrial Europe SAS.

Tax: The effective rate rose to 38.8% in FY2025 because valuation allowances were raised against the European losses (+15.7 points), partly offset by research and development tax credits (-8.6 points).

Balance sheet

Notes. Debt figures follow the investor business report (lease obligations excluded). Working capital is current assets less current liabilities. Goodwill is small and is not separately shown on the balance sheet: JPY 191 million arose on the India acquisition and is amortised over seven years at about JPY 27 million a year. Intangibles rose in FY2025 because of capitalised ERP investment.

Commentary. The balance sheet is dominated by equity. Management now treats this as a problem to be corrected: the 2030 plan aims to lower the equity ratio from about 80% to about 75% through borrowing and returns. Long-term borrowing was introduced for the first time in years in FY2024 (JPY 2.0 billion) and raised to JPY 4.5 billion in FY2025 at an average rate of 1.54%. Inventories have risen every year and now equal 113 days of cost of sales. PP&E fell in FY2025 because of the European impairment and lower capex after two heavy years. Investment securities of JPY 13.3 billion include JPY 7.6 billion of equity-method holdings and JPY 5.6 billion of listed cross-shareholdings.

Cash flow

Notes. Separately from capex, ERP investment was JPY 766 million in FY2025 and is planned at JPY 1,660 million in FY2026 (Q1 FY2026 Tanshin).

Commentary. Operating cash flow has averaged about JPY 5 billion. FY2023 was the exception, when inventory build and lower profit cut it to JPY 2.8 billion. FY2023 and FY2024 capex of about JPY 5 billion a year went into semiconductor tool capacity and reorganisation of domestic production. The business report puts investment over FY2023 to FY2025 at about JPY 15 billion. Capex fell back to JPY 2.7 billion in FY2025 and is planned at JPY 3.0 billion in FY2026. Shareholder returns in FY2025 (dividends declared of about JPY 1.47 billion plus JPY 2.49 billion of buybacks) were about 197% of net income (analyst calculation).

Ratios

Notes. ROE is company-disclosed. ROA is company-disclosed for FY2022 to FY2025 and calculated for FY2021. ROIC is an analyst calculation: operating income after a 30.3% statutory tax rate, divided by year-end net assets plus interest-bearing debt. Interest coverage is company-disclosed for FY2021 to FY2024 and calculated for FY2025. Working-capital days use year-end balances.

Commentary. ROE has fallen from 5.7% to 3.2%, far below any reasonable cost of equity and below the 6% targeted by the previous plan. The two causes are thin margins and a low-turnover, over-capitalised balance sheet (asset turnover about 0.54). The cash conversion cycle is long at about 186 days and lengthening, driven by inventory. Management has named cash-conversion-cycle improvement as an ROE lever in the 2030 plan. Leverage and liquidity are not constraints. The group had JPY 8.9 billion of undrawn overdraft and commitment lines at March 2026.

Latest quarter and current-year forecast

First-half FY2026 forecast (revised): revenue JPY 22,400 million, operating income JPY 2,500 million, ordinary income JPY 2,700 million, net income JPY 1,900 million. Sources: Q1 FY2026 Tanshin; Kabutan.

Management guidance. For FY2026 the company forecasts revenue of JPY 45.5 billion (+8.4%), operating income of JPY 5.0 billion (+108%, an 11.0% margin), ordinary income of JPY 5.3 billion, net income of JPY 3.7 billion (EPS JPY 76.87) and a dividend of JPY 34. It plans capex of JPY 3.0 billion, depreciation of JPY 3.5 billion, R&D of JPY 2.7 billion and ERP investment of JPY 1.66 billion. Q1 delivered 29% of full-year operating income. The 2030 plan targets revenue of JPY 53.0 billion, operating income of JPY 5.3 billion and ROE of 8% or more by the year to March 2031. Management has warned that operating income in the year to March 2029 will be below FY2026 on retirement benefit effects.

Consensus. The limited consensus available moved from JPY 4.0 billion to about JPY 5.5 billion of ordinary income for FY2026 after the August revision, slightly above company guidance.

Bull case.

1. Operating leverage on semiconductor demand is visible. Q1 FY2026 gross margin was 34.1% (JPY 3,793 million on JPY 11,125 million) against 28.5% a year earlier, close to management's 35% ambition. Japan sales rose 16%, and electronics and semiconductor sales rose 12.7%.

2. Self-help is credible and measurable. Three products exited and ten under review, European plant consolidation done and assets written down, price increases accepted. The 10% margin target is reached in FY2026 on guidance, four years early, albeit with pension help.

3. Capital returns and valuation. At 0.84 times book and 14.5 times forecast earnings, with net cash equal to about one-fifth of market capitalisation, a 3% yield with a progressive floor, a 100% total-return commitment and JPY 5.6 billion of cross-holdings still to sell, the downside is cushioned. The hub blade venture is an unpriced option.

Bear case.

1. FY2026 profit is flattered. Roughly JPY 1.6 billion of the operating income increase reflects the swing in actuarial-difference recognition, by analyst estimate. Management's own plan shows lower operating income two years later, and FY2030's JPY 5.3 billion target is barely above FY2026 guidance.

2. The record on plans is poor and the cycle is not benign. The 2025 plan missed sales by 14% and operating income by 51%. The semiconductor category fell 29% in the year to March 2019. The company's previous growth product, solar wire, was eliminated by Chinese competition, and its main raw material is now subject to Chinese export controls.

3. Structural return gap. Even on FY2026 guidance, ROE is only about 6% (JPY 3.7 billion on about JPY 63 billion of equity, analyst calculation). The cash conversion cycle is lengthening. The hub blade venture faces an entrenched, far larger incumbent and yields no mass-production revenue before late FY2027. Succession for a 74-year-old President is unresolved.

Catalysts and monitorables for the next 12 months.

Analyst verdict. Asahi Diamond Industrial is a well-capitalised, technically capable consumables maker that has spent a decade earning less than its cost of capital. The loss of its solar wire business after 2016 removed roughly a quarter of revenue, and the 2025 plan's bet on SiC power devices arrived just as EV demand slowed. What has changed in 2026 is the combination of a favourable demand mix (AI-related advanced logic and memory, plus ceramics and substrate tools for semiconductor equipment) with a management that is finally addressing the cost base, the product tail, Europe and the balance sheet at the same time. The first quarter of FY2026 showed what the business can earn when volume, price and mix align: a 13% operating margin.

The caution is that guidance for FY2026 overstates sustainable profit. A large pension actuarial gain is being recognised in a single year, and the company's own medium-term path shows operating income dipping afterwards and reaching only JPY 5.3 billion by March 2031. On that trajectory ROE approaches, but does not comfortably exceed, 8%. The competitive position is respectable rather than dominant: in dicing and wafer grinding the company faces a rival with ten times its sales, and in CMP conditioners it faces well-entrenched American, Taiwanese and Korean suppliers.

The shares at 0.84 times book, with a 3% progressive dividend and a commitment to return all earnings over five years, price in little of the improvement. The balance of evidence supports a constructive but conditional view: the stock is inexpensive protection with optionality on semiconductor consumables and hub blades. A re-rating above book value requires proof, in the two or three quarters after the pension effect fades, that gross margin can hold above 30% and that the portfolio exits are actually executed.

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Data caveats and source discrepancies

1. Founding location. The Securities Report states Ota-ku, Tokyo; the website history states Shinagawa-ku, with the Yukigaya plant in Ota-ku built in 1938.

2. Fiscal-year labels. Some secondary sources label the year ended March 2026 as "FY2026", others as "FY2025".

3. Electronics and semiconductor share for FY2024. The company's own supplementary table shows 40.7%; arithmetic from disclosed amounts gives 40.6%. The company figure is used.

4. Net income for the years to March 2020 and 2021. The investor business report shows losses of JPY 340 million and JPY 331 million; one aggregator (Finboard) shows JPY 287 million and JPY 307 million, which appear to be figures before non-controlling interests. Company figures are used.

5. Shares outstanding. Some market-data sites still show about 55.5 million shares. The correct figure after cancellations is 48,430,000.