NGK Insulators Q2 FY2027: AI demand drives 43.5% rise in operating profit

NGK Insulators reported revenue of ¥371.3 billion, operating profit of ¥69.8 billion and net income attributable to owners of the parent of ¥60.8 billion for the first half of FY2027. These were increases of 13.8%, 43.5% and 154.7%, respectively, from a year earlier. Company materials said revenue and all profit measures reached record highs for an interim period.

• AI and semiconductor demand: Demand grew for products used in semiconductor manufacturing equipment and for HiCeram carriers, driving growth in the Digital Society business.
• Foreign-exchange tailwind: Yen depreciation added ¥17.8 billion to revenue and ¥7.9 billion to operating profit.
• Factors behind net income growth: Gains from the sale of investment securities increased, while tax expenses declined following a reorganization of the Electronic Devices business and the completion of the liquidation of an overseas subsidiary.
• Comparison with the prior year: The previous interim period included restructuring costs and impairment losses. The absence of those one-off expenses also contributed to the growth rate in net income this period.

Higher demand for semiconductor-related products and yen depreciation supported the rise in operating profit. The much larger increase in net income also reflected changes in tax expenses and extraordinary items, so investors should distinguish operating growth from temporary factors.

Operating profit increased year on year in all three businesses. Digital Society, which benefited from AI-related demand, was the main growth driver, while Energy & Industry returned to profitability despite lower revenue.

Environment: Revenue rose 8.0% year on year and operating profit increased 25.3%. Although auto market conditions remained weak, particularly in China, demand for the company's products held firm. Yen depreciation, the timing of expenses and platinum prices for sensors also lifted profit.

Digital Society: Revenue increased 32.8% year on year and operating profit rose 45.7%. Semiconductor demand grew substantially as AI adoption advanced, boosting shipments of products for semiconductor manufacturing equipment and HiCeram carriers. The ramp-up of mass-production equipment and firm demand for piezoelectric components used in HDDs also supported performance.

Energy & Industry: Revenue fell 7.8% year on year, but the business swung to an operating profit of ¥4.2 billion from a loss of ¥1.3 billion a year earlier. Revenue declined following the decision to end NAS battery production and sales, while demand for power infrastructure, driven by data center investment in the U.S., supported sales and profit for insulators.

Following a change in segment classification, low-level radioactive waste processing equipment moved from Environment to Energy & Industry. Prior-year figures have also been restated on the revised basis, which should be kept in mind when comparing the businesses.

Total assets stood at ¥1,237.4 billion at the end of the interim period, down ¥5.8 billion from the previous fiscal year-end. The equity ratio rose to 66.3% from 65.0%, supported by lower liabilities and higher retained earnings.

NGK Insulators raised its interim dividend by ¥10 from its April forecast and increased its full-year dividend forecast by ¥20. The company acquired shares under a board resolution and canceled the shares it bought back. Cash and deposits totaled ¥194.7 billion at the interim period-end. The earnings release did not provide operating, investing or financing cash-flow figures, so changes in cash should be checked separately against the cash-flow statement.

NGK Insulators raised its FY2027 full-year forecasts to revenue of ¥770 billion, operating profit of ¥130 billion and net income attributable to owners of the parent of ¥100 billion. Compared with its previous forecasts, revenue was raised 8.5%, operating profit 21.5% and net income 22.0%.

The company expects AI-related semiconductor demand to continue and sees strong demand for products used in semiconductor manufacturing equipment. The weaker yen in the first half also contributed to the forecast upgrade. For the second half, however, its assumptions are ¥150 to the dollar and ¥175 to the euro, both stronger-yen levels than in the first half. NGK expects auto-related demand to remain firm, but anticipates weakness in China and a pullback from temporary factors that boosted profit in the first half.

NGK Insulators is focusing growth investment on Digital Society, positioning the business to capture demand for semiconductors used in AI applications. The company expects demand for products used in semiconductor manufacturing equipment to remain strong and plans to pursue growth through the full-scale operation of mass-production equipment and product development.

• HiCeram carriers: Mass-production equipment ramped up smoothly, increasing shipments in the interim period. NGK expects sales to grow further as operations reach full scale over the full year.
• Next-generation products: The company is developing panel-type products and products for memory applications, aiming to capture a broader range of semiconductor-related demand.
• Business portfolio changes: NGK has decided to end NAS battery production and sales. It expects related revenue in Energy & Industry to shrink, while seeking growth in power infrastructure products such as insulators.

Investment in semiconductor-related capacity offers an opportunity to meet demand, but the pace of mass-production ramp-up and changes in the market remain important. How well management advances growth investment while winding down businesses slated for closure will shape the company's future earnings mix.

AI-related demand and yen depreciation contributed to the full-year forecast upgrade, but uncertainty remains around the global economy, foreign exchange and market conditions in individual businesses. The company also cautions that actual results may differ from its forecasts for a range of reasons.

• Weakness in auto markets: Conditions are soft in some regions, including China. A further drop in demand could affect sales of products such as emissions-control components.
• Foreign-exchange movements: Yen depreciation boosted first-half results. If exchange rates differ from the company's second-half assumptions, revenue and operating profit could diverge from its forecast.
• Changes in semiconductor demand: AI-related demand is a growth tailwind, but a slowdown in capital investment or semiconductor demand could affect sales plans for manufacturing equipment products and new products.
• Changes in the business mix: The end of NAS battery production and sales is expected to reduce revenue in Energy & Industry. The challenge is how much growth in other products, including insulators, can offset that decline.
• Raw materials and temporary factors: Raw material and platinum prices, as well as the timing of expenses, can affect profit. Investors should also watch for a reversal of temporary factors that supported first-half earnings.