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On Monday, Jefferies analyst Thanh Ha Pham downgraded Tokai Carbon Co., Ltd (5301:JP) (OTC: TKCBY) stock from Buy to Hold, adjusting the price target to ¥950 from the previous ¥1,200. The stock, currently trading at $22.95, has experienced a significant 13.4% decline over the past year, according to InvestingPro data. The revision comes amid expectations of potential structural reforms and asset impairments in the current year if end-demand decreases.
Pham anticipates that management decisions regarding production capacity changes could lead to tangible asset impairments in 2025. Despite positive projections for the Carbon Black division in the United States, where operations are normalizing and tariffs are beneficial, tariffs pose a negative impact on exports from Japan and Thailand. Additionally, Tokai is relocating facilities in Thailand, which necessitates running both old and new plants simultaneously in the second half of the fiscal year 2025, likely affecting earnings. The company’s financial health score remains "GOOD" according to InvestingPro analysis, with a solid current ratio of 1.83 and manageable debt-to-equity ratio of 0.69.
The Fine Carbon business, which constitutes 60% of revenues through Tokai Carbon Korea, is expected to see a rise in NAND memory demand in the second half of 2025. However, Pham remains cautious about the Graphite Electrode division, expecting only a slight price increase in Japan and weak demand in Europe due to economic downturns. The United States could offer some respite as domestic steel production benefits from President Trump’s tariffs, but excess inventory levels are a concern that requires monitoring.
The sluggish demand for silicon carbide (SiC) due to the downturn in the electric vehicle (EV) market is also a factor in the downgrade. The analyst’s outlook reflects a mix of potentially positive and negative influences across the company’s various divisions, leading to a more conservative investment stance. With revenue of $2.2 billion in the last twelve months and a gross profit margin of 23%, the company faces profitability challenges. Subscribers to InvestingPro can access additional insights, including 5 more ProTips and detailed financial metrics to better evaluate the company’s prospects.
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