Latest / Investor Exchange / Why Maruwa's Q3 FY2025 Profit Dropped Despite AI Boom

Transcript

Why Maruwa's Q3 FY2025 Profit Dropped Despite AI Boom · Investor Exchange

0:02
Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
0:08
Welcome back to another Deep Dive. Today, we're looking at a company that feels
0:13
like it's sitting right at the intersection of everything futuristic.
0:16
We're talking AI, electric vehicles, 5G. Right.
0:20
Yet if you walk past their headquarters, you probably wouldn't even look twice.
0:23
We are talking about Marua Co., LTD. Marua was one of my favorite types of case
0:30
studies. They're what I call a hidden giant.
0:32
I mean, they are absolute titans in the world of high-tech ceramics.
0:37
Which sounds incredibly niche.
0:38
It does, until you realize those ceramics are basically the backbone of the modern world.
0:43
Without the stuff Marua makes, your data centers would overheat,
0:47
and your electric car wouldn't even make it down the driveway.
0:50
That's a bold claim, the backbone of the modern world. But looking at the research
0:55
you sent over, I'm starting to see why.
0:57
So we have a specific mission for this deep dive. We do.
1:00
We're not just doing a biography. We're looking at their consolidated financial
1:03
results for the third quarter of fiscal year 2025.
1:06
Right. And just to orient everyone, because fiscal years can be tricky,
1:09
this report covers the period from April 1st, 2025 to December 31st, 2025.
1:15
OK, so the last nine months of performance. And our goal today is to strip away the accounting jargon.
1:21
We want to look at this purely from an investor's perspective,
1:24
because when I first glanced at the headline numbers, I have to be honest,
1:28
I winced a little. You did. I did. It looked like a sea of red.
1:32
So the question we need to answer today is, is this a company in trouble or
1:37
is it, you know, a coiled spring ready to bounce back? That is the perfect framing.
1:41
So let's just rip the bandaid off. You saw the red ink. What jumped out at you?
1:45
Well, the top line numbers for a start. Net sales came in at 52,225 million yen.
1:51
That's down 1.7% compared to the same time last year.
1:56
Okay. Not great, but not catastrophic. No, but the number that really made me nervous was the profit.
2:01
Operating profit was 17,124 million yen, which is down 13.2%. Right.
2:07
A double-digit drop in operating profit. That's the one that gets your attention.
2:11
Exactly. If I'm an investor, just assuming the headlines, I see profit down
2:14
13%. I'm thinking, okay, sell. Something is wrong. The business model must be broken.
2:18
Competitors are eating their lunch. Something like that. Yes.
2:22
So why shouldn't I think that? Because context is everything.
2:27
To understand the why, you have to look at the global backdrop.
2:31
I mean, this report is actually very explicit about the environment they were
2:35
operating in during 2025.
2:37
It wasn't exactly smooth sailing for anyone in manufacturing.
2:40
No, 2025 has been a bit of a roller coaster. The report mentions geopolitical
2:45
risks specifically, doesn't it? It does.
2:47
They cite persistent issues in the Middle East and Ukraine, which always disrupts supply chains.
2:54
Perhaps more relevant to their bottom line, they highlight the heightened attention
2:58
on monetary policies and, crucially, tariff policies involving the United States.
3:03
CAREFs, the word that makes every global manufacturer sweat. Exactly.
3:07
When you're moving high-tech components across borders, CAREFs and exchange
3:11
rates are the weather you have to sail through.
3:13
And if the weather is bad, it slows you down no matter how good your ship is.
3:17
Okay, so the macro environment was tough, but let's talk about the tech sector
3:20
specifically, because 2025 was supposed to be the year of AI, right? Oh, absolutely.
3:24
Everyone was building a data center. If Marua is so critical to this tech,
3:29
shouldn't they be printing money right now? Why are sales down?
3:31
That is the million-dollar question, or I guess the billion-yen question.
3:35
And what we saw in this report was a classic tale of two halves.
3:39
A tale of two halves. Yes.
3:41
The report notes that, yes, there were rapid advancements and active investment in generative AI.
3:47
That sector was absolutely booming.
3:50
If Marua only did AI, their numbers would probably be through the roof.
3:54
Okay, so what was the anchor dragging them down? The other parts of the tech
3:57
world, specifically automobiles and general semiconductors.
4:01
Those sectors were lagging significantly, especially in the first half of the fiscal year.
4:06
So AI was stepping on the gas, but the car industry and standard chips were slamming on the brakes.
4:12
Precisely. And Marua is exposed to both.
4:15
So the weak market conditions in auto and semi-con during the first six months
4:18
just dragged down the overall numbers, masking the strength in the AI sector.
4:22
I want to drill down into this because this seems to be the core tension in the report.
4:26
Let's look at their biggest moneymaker, the ceramic components business.
4:30
This is their identity. This segment is where you really see that drag we just discussed.
4:36
Sales for ceramic components were 45,023 million yen, down 3.4%.
4:42
But the profit, segment profit was down 15.5% to 16,906 million yen. Okay, hold on.
4:50
Before we get into the why of the drop, can we take a step back?
4:53
We keep saying ceramic components.
4:54
I think most people hear ceramics and they think of a coffee mug.
4:57
Fair point. Or bathroom tiles. Right.
4:59
Why are we putting pottery inside a supercomputer? What is Marua actually making
5:03
here? That is a great question.
5:05
So think about a high-end AI chip, like the ones writing the big language models.
5:10
When that chip is working hard, it generates an immense amount of heat. Okay.
5:14
If you don't get that heat away instantly, the chip fries. It literally melts.
5:18
Now, metal conducts electricity, so you can't just slap a piece of copper on
5:22
it. You need something that's an electrical insulator. So it doesn't short out the chip.
5:25
But a thermal conductor, so it pulls the heat away. And that's what these ceramics do. Exactly.
5:30
Maruwa makes these incredibly advanced ceramic substrates. They're harder than
5:34
steel. They don't conduct electricity, but they suck heat away from the processor like a vacuum.
5:40
They're essentially the heat shield for the internet. Okay, that makes a lot of sense.
5:43
So they're making the heat shields for AI, and that part is going well.
5:47
The report says demand for generative AI remains strong.
5:51
Right, and next-generation high-speed communications, think 5G and beyond,
5:56
also remained at a high level.
5:58
I also noticed they dropped a specific acronym in the report.
6:01
SITE or silicon carbide? What is that, and why does it matter?
6:05
Oh, SITE is the new darling of the power electronics world.
6:09
It's a material that's replacing standard silicon in high-voltage applications. Like what?
6:14
Like electric vehicles. When you're charging an EV quickly or when the battery
6:18
is dumping power into the motor, you're dealing with massive voltage.
6:22
Standard silicon gets inefficient and hot.
6:25
Silicon carbide or cyclask handles that stress much, much better.
6:29
So let me get this straight.
6:30
They have the AI heat shields working. They have the 5G stuff working.
6:34
They have the fancy EV materials expanding.
6:37
Why on earth did profit drop 15% in this segment?
6:41
It goes back to the boring stuff, the legacy volume drivers,
6:45
specifically standard automobile components and general semiconductors.
6:50
The stuff that isn't cutting edge. Correct.
6:53
And the culprit here is something called inventory adjustment.
6:56
I feel like I hear that phrase in every earnings call. It sounds like a polite
6:59
way of saying nobody bought our stuff. It kind of is, but it's more nuanced.
7:05
Think of it like a grocery store. In 2024, the car makers, the grocery store
7:09
in this analogy, were worried about running out of chips, so they bought way
7:12
too much. Their shelves were overflowing.
7:15
So when 2025 started, even though they were still building cars,
7:18
they didn't need to buy new parts from Marua.
7:21
They just used the stuff sitting on the shelf. That's the adjustment.
7:24
So Marua is sitting there ready to go, but the phone isn't ringing because the
7:28
customers are working through their hoard. Exactly.
7:30
That crushed the first half of the year.
7:33
But, and this is arguably the most important sentence in the entire document for an investor,
7:38
That phase is over. Okay, lay it on me. Regarding the automobile business,
7:42
they state, inventory adjustments related to new energy vehicles are complete.
7:47
Complete. Not getting better, not almost there. Complete. That is a very definitive word.
7:52
They explicitly say the business has entered a recovery phase.
7:56
The shelves are empty. The store has to start ordering again.
7:59
That is a huge signal. So if you're looking at the year-on-year drop,
8:02
you're looking at the past.
8:03
But if you look at that sentence, you're looking at a clear runway ahead.
8:06
That's the bullish argument.
8:08
And for general purpose memory, the standard chips, they say recovery is steadily happening.
8:14
So, the ceramics business had a rough start but is poised for a comeback.
8:18
Now, I want to pivot. Because while the high-tech ceramics business was dealing
8:22
with all that, there was another segment that quietly had an incredible quarter. Ah, yes.
8:28
The lighting equipment segment. I have to admit, when I saw lighting equipment,
8:32
I almost skipped it. A high-tech chip company selling light bulbs.
8:36
Sounds quaint. That's what everyone thinks. But look at the numbers.
8:39
The numbers are startling. Sales were up 9.8%.
8:43
But the profit, segment profit, jumped a massive 61.9%. A 62% jump in profit.
8:50
In a quarter where the main business was down, that's a huge buffer.
8:54
What on earth is driving that? Is everyone just suddenly redecorating? In a way, yes.
8:59
But it's not just you and me changing a bulb in the hallway.
9:02
It's a mix of high-end real estate and a massive government policy shift.
9:06
Go on. First, on the real estate side, they're seeing strong demand in high-end new condominiums.
9:12
Luxury developers are putting in premium fixtures, and Marua is supplying them.
9:16
Okay, so rich people buying fancy apartments, that helps.
9:19
But that can't explain a 62% jump on its own. No.
9:22
The real kicker is the regulatory catalyst. The report explicitly mentions Japan's
9:27
policy to phase out fluorescent land production by 2027.
9:30
2027, that's basically tomorrow in corporate planning terms.
9:33
Exactly. Think about every office building, every school, every factory built before 2015.
9:39
What's on the ceiling? Those... Buzzing, flickering, fluorescent tubes. Millions of them.
9:45
And the government has effectively said, by 2027, you cannot make these anymore.
9:51
It is a forced upgrade cycle for the entire country. It's not a suggestion.
9:55
It's a mandate. It's a mandate.
9:57
And Maru is capitalizing on it perfectly. It's a great example of how a company
10:01
can benefit from these changes.
10:03
While the high-tech ceramic side is volatile, this lighting business is providing
10:07
a very stable, rapidly growing cushion. It's fascinating.
10:12
The boring lighting business is saving the quarter while the exciting AI business
10:16
ramps up. It really is. It balances the risk.
10:18
Speaking of risk, we need to look at the balance sheet. Because if I'm an investor,
10:22
I want to know, can this company survive if the downturn lasts longer than expected?
10:26
If you're an investor worried about safety, this section is going to be your
10:29
favorite part of the deep dive. I was looking at their assets.
10:32
Total assets increased to over 152 billion yen.
10:36
Where did that growth come from? A lot of it is construction and progress.
10:40
That's up significantly from about 5.5 billion to 13.5 billion yen.
10:44
So they're building things, new factories.
10:47
Yes, investing in facilities. That signals management confidence.
10:50
You don't spend 8 billion yen on new capacity if you think demand is going to dry up.
10:54
But the number that really stopped me in my tracks, and I had to double check
10:58
this because it seems impossibly high, is the equity to asset ratio.
11:02
Ah, the Fortress balance sheet metric. Their equity to asset ratio stands at
11:06
92.2%. 92.2%. It was 89.9%, which is already absurdly high, and it went up.
11:12
Can we just pause on that? 92.2%. That means for every dollar of assets they
11:17
have, 92 cents is funded by their own equity.
11:21
They have almost zero reliance on debt. Correct.
11:24
In modern corporate finance, that is almost unheard of. Most tech companies
11:28
run with an equity ratio in the 40s or 50s.
11:31
Marua doesn't. Why does that matter to me as an investor? It means they are bulletproof.
11:35
In a world of high interest rates, they aren't paying huge chunks of their profit
11:39
to the bank. And get this, they are holding over 67 billion yen in cash and deposits.
11:46
67 billion yen in cash.
11:49
They could weather a pretty massive storm with that. They could survive a hurricane.
11:53
And their liabilities decreased significantly down to just 11.8 billion yen.
11:58
And the main reason they went down, they pay their income taxes.
12:01
So they are debt-free, flush with cash, and funding their own expansion with their own money.
12:06
It's an incredibly conservative position. It is.
12:09
Some investors might call it a lazy balance sheet. But right now,
12:13
with all the instability, lazy looks a lot like safe.
12:16
It allows them to play the long game. Speaking of the long game,
12:20
let's look at the outlook. We've had this rough Q3.
12:23
Did they panic? Did they downgrade their forecast for the full year?
12:27
They did not. They held the line. Really?
12:29
Even with the 13% profit drop so far?
12:32
They're still forecasting net sales of 75,100 million yen, a 4.5% increase for the full year.
12:39
And they're forecasting operating profit of 27,000 million yen,
12:43
which is a slight 0.3% increase. That seems incredibly ambitious.
12:47
If they're down double digits now, they need a monster Q4 to hit those targets.
12:51
They basically need a V-shaped recovery.
12:53
What makes them think they can pull that off? The report lays out three specific growth drivers.
12:58
They aren't just hoping, they have a plan. What's the plan?
13:01
First, telecom. They are planning a full-scale launch of a successor model for
13:07
next-generation high-speed communication in Q4.
13:11
A new product launch, that helps. And not just a launch. They mention a significant
13:15
production increase is planned. That's driver number one.
13:18
Number two is what we just discussed, the automobile sector.
13:21
Right, the empty shelves. Exactly.
13:23
They expect that sector to return to a growth phase now that the inventory issue
13:27
is solved. And the third?
13:29
Semiconductors. They're focusing on strengthening production capacity at a new
13:34
plant to meet the full market recovery they expect next year.
13:37
So they're betting the worst is behind them and the new capacity,
13:41
the construction in progress is coming online just as the market turns.
13:45
That's the narrative. And they have a North Star they're aiming for.
13:48
Their medium-term plan targets net sales of 100 billion yen by March, 2029.
13:54
100 billion. They're at roughly 75 now. So they need to grow about 33% in the
13:58
next three years. It's an aggressive target.
14:01
But if the AI boon continues, and if EVs continue to gain market share,
14:06
the demand for their ceramics will be there. It all comes back to the macro trends.
14:11
Betting on the world getting more electric and more connected.
14:13
And they have the cash to build the factories.
14:16
Before we wrap up, what does this mean for a shareholder right now? Do they pay us to wait?
14:20
They do. They're forecasting an annual dividend of 100 to 2 yen per share. That's a steady return.
14:26
It is. But I should mention one risk factor I noticed.
14:30
The report has a specific caution. Lay it on us. What's the catch?
14:34
While they are confident in their operating profit forecast,
14:37
they say that figures below that line are hard to predict. Why?
14:41
Exchange rates. Because they're a global company, currency fluctuations can
14:46
swing their final net profit number significantly.
14:49
They can't control the yen dollar rate. Right. If the yen gets stronger,
14:52
their overseas earnings look smaller. Exactly.
14:55
So the business operations might hit the target, But the final bottom line could
14:59
be volatile purely due to currency markets. That's a fair warning.
15:03
So if we synthesize all of this...
15:06
What's the story here? It's a story of resilience. You have a very solid company
15:11
with a fortress balance sheet that 92% equity ratio is key.
15:15
They weathered a temporary market dip in their volume businesses while their
15:19
future growth engines were revving up.
15:21
And don't forget the lighting segment providing that nice profit cushion in
15:25
the background. It feels like a transition year.
15:28
2025 was about clearing out the old inventory and prepping the new factories.
15:32
2026 is about capitalizing on the recovery. It's interesting.
15:36
You look at the headline profit down 13% and it looks bad.
15:39
You read the report and it looks like they're just clearing the runway for takeoff.
15:42
That's usually where the opportunity lies, in the gap between the headline number
15:46
and the operational reality.
15:48
Well, here's a provocative thought to leave you with. We always talk about tech as software and apps.
15:54
But with the mandatory phasing out of fluorescent lamps by 2027 and the physical
15:59
heat demands of generative AI, is Marua's boring infrastructure actually the
16:04
most exciting play in the tech space right now? It certainly raises an important question.
16:09
Sometimes the company making the ceramic heat sink is more vital than the company writing the code.
16:14
You can rewrite code overnight. You can't build a ceramics factory overnight.
16:18
That's very true. The hardware moot is real. Something to think about.
16:22
That's it for this deep dive into Marua's Q3 results.
16:26
Thanks for listening. Thank you. This content is intended to serve strictly
16:30
and only as an informational, independent, objective summary of recent events
16:34
and should in no way be interpreted,
16:36
construed, or relied upon by any party as inside information or financial advice.