China Business Turns Loss-making, Weakening Overseas Improvement and Raising Difficulty of Achieving Full-year Target

Overview

The report believes TS Tech showed clear regional divergence in 1Q: the Japan and Americas businesses improved more than expected, but the China business, long a source of profit, deteriorated rapidly and posted its first loss. Although 1Q operating profit exceeded J.P. Morgan's cautious forecast and the company maintained full-year guidance, weak production and sales by Chinese customers and low plant utilization, changes in the profit contribution structure in 2H, and potential impairment and restructuring charges create significant uncertainty for achieving the full-year target.

Core views

First, the improvement in overseas businesses is positive, with Japan driven by Honda's new models and the Americas supported by Honda's recovery in production and sales; second, the China business margin fell to -8.5%, making it the main current drag on earnings and tail risk; third, in prior years, the 2H profit skew relied mainly on production increases in China, but this seasonal support may weaken this year; fourth, expanding customers outside the Honda system and optimizing the equity ratio remain medium-term investment themes, but the near-term operating environment is insufficient to support a positive rating.

Analysis framework

The report compares actual 1Q operating profit and margin with consensus expectations and J.P. Morgan forecasts, and breaks down regional profitability by Japan, the Americas, and China; it then assesses the impact of regional trends, potential impairment and restructuring charges, and the 2H profit cadence on full-year guidance, and finally derives the target price based on the FY2026 book value per share forecast and a target P/B ratio of about 0.6x.

Methodology notes

• Earnings analysisActual versus expectations comparison

  Compare actual operating profit and margin with both consensus expectations and analyst forecasts.

  1Q operating profit of ¥1.7bn was slightly below consensus expectations of ¥1.9bn, but significantly above J.P. Morgan's more cautious forecast of ¥0.7bn, so the overall assessment is neutral rather than fully negative.

• Operating analysisRegional profitability breakdown

  Identify sources of earnings and risks through operating margins and operating drivers in Japan, the Americas, and China.

  Improvements in Japan and the Americas cannot fully offset the China business turning loss-making and its potential impairment and restructuring impacts. Regional divergence is the core basis for the report's assessment of full-year guidance risk.

• Valuation methodsP/B valuation method

  The target price equals the FY2026 book value per share forecast multiplied by a target P/B ratio of about 0.6x.

  Considering operating risks such as impairments in a difficult market, the report uses a target P/B ratio below the past five-year average of about 0.7x, deriving a December 2026 target price of ¥1,500.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• TS Tech (7313.T)

  Core research subject

  Strengths

  The Japan business benefits from new Honda models, and the Americas business is improving as Honda production and sales recover; expanding customers outside the Honda system, such as MSIL, Changan, and Volkswagen, can reduce customer concentration.

  Weaknesses

  The China business posted its first loss and its margin fell to -8.5%; global auto demand and changes in production and sales by major customers have a significant impact on earnings.

  Comparison

  1Q operating profit was above J.P. Morgan's forecast but below consensus expectations; the target P/B ratio of about 0.6x is below the past five-year average of about 0.7x.

  Risks

  Impairment and restructuring charges in the China business, prolonged weakness in global auto demand, U.S. tariffs leading to de-contenting of seats and interiors, and entry by other suppliers causing a decline in TS Tech's market share in Honda business.

• Honda

  Major customer and earnings driver

  Strengths

  Launches of new models in Japan and recovery in production and sales in the Americas supported TS Tech's 1Q profitability.

  Weaknesses

  TS Tech has a high dependence on Honda business.

  Comparison

  Business within the Honda system remains the main near-term earnings driver, while expansion of customers outside the system is a medium-term growth theme.

  Risks

  Entry by other suppliers may lead to a decline in TS Tech's market share in Honda business.

Key data

• 1Q operating profit¥1.7bnOperating margin of 1.5%; slightly below consensus expectations of ¥1.9bn and 1.8%.
• J.P. Morgan 1Q forecast¥0.7bnCorresponding operating margin of 0.7%; the actual result was significantly above this cautious forecast.
• Japan business operating margin8.9%Launches of new Honda models supported profitability.
• Americas business operating margin1.4%Strong Honda production and sales and volume recovery drove profitability improvement.
• China business operating margin-8.5%The business posted its first loss, with performance clearly weaker than expected.
• Full-year operating profit guidance¥13.0bnOperating margin guidance is 3.0%; the report believes it will be difficult to achieve.
• Target price¥1,500Through December 2026, using an FY2026E P/B ratio of about 0.6x.
• Reference share price¥1,822As of August 7, 2026, the target price implies about 17.7% downside.

Impact & implications

The near-term investment view remains cautious. Improvements in Japan and the Americas demonstrate that operational measures and the new model cycle can bring earnings leverage, but deterioration in the China business may depress full-year profit through multiple channels, including operating losses, asset impairments, and restructuring charges. If Chinese customer production and sales do not recover significantly, the full-year operating profit target of ¥13.0bn and the traditional 2H-weighted profit realization pattern may both fail. The target price is below the current price and the valuation multiple is below the historical average, reflecting the report's relatively high operating risk discount for the company.

Risks

• Persistently low utilization at Chinese customer plants, leading to further expansion of operating losses.
• Potential recognition of impairment losses and restructuring charges related to the China business in FY2026.
• Prolonged weakness in global auto demand, affecting orders, production volume, and margins.
• U.S. tariffs prompting automakers to de-content seats and interiors.
• Entry by other suppliers into Honda's supply system, leading to a decline in TS Tech's market share.
• Full-year profit may fail to follow the previous realization path of being 2H-weighted due to reliance on production increases in China.
• If price discount competition in the new car market does not ease, it will continue to pressure industry profitability.

What to watch

• Whether Chinese customer production, sales, and plant utilization recover significantly.
• Whether the China business records impairment losses or initiates restructuring, and the scale of related expenses.
• The sustained contribution of new Honda models in Japan to orders and profitability.
• Whether volume recovery and operating margin improvement in the Americas can continue.
• Progress toward achieving full-year guidance of ¥13.0bn operating profit and a 3.0% margin.
• Whether 2H profit contribution can meet expectations without support from production increases in China.
• Sales growth from customers outside the Honda system, such as MSIL, Changan, and Volkswagen.
• Management's progress in optimizing the equity ratio.