Falling Japanese Housing Starts Will Pressure Margins Despite Overseas Gains

Key Takeaways

• Shrinking domestic demand, high input costs, and slow transformation threaten LIXIL's margins and operational efficiency.
  
• Increased competition and challenging global conditions risk further erosion of pricing power and market share.
  
• Structural reforms, a strategic product mix, and focus on high-margin renovation sales and efficiency improvements have strengthened profitability, market position, and resilience against housing market volatility.

Catalysts

Through its subsidiaries, operates water technology and housing technology business in Japan and internationally.

• Persistent declines in new housing starts, particularly in Japan due to a shrinking and aging population, are expected to lead to a structurally smaller addressable market for LIXIL's core products, putting sustained pressure on both revenue growth and capacity utilization going forward.
  
• Sustained global interest rate normalization and ongoing tight credit conditions in developed economies such as the US and Europe will likely result in pronounced headwinds for housing construction and renovations, directly suppressing volumes and future revenue.
  
• Volatile commodity prices and escalating environmental compliance costs-including potential implementation of carbon pricing and stricter regulatory mandates-are set to squeeze LIXIL's gross margins over the medium term, especially if the company is unable to pass these higher input costs on to end customers.
  
• LIXIL's heavy reliance on mature domestic markets and the slow pace of operational transformation increase the risk of persistent inefficiencies and elevated SG&A, challenging longer-term net margin expansion, particularly if overseas growth initiatives underperform.
  
• Intensifying global competition, especially from low-cost manufacturers in China and Southeast Asia, continues to threaten LIXIL's pricing power and market share in key categories, likely leading to margin compression and further diluting earnings resilience over the next several years.

LIXIL Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LIXIL compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LIXIL's revenue will grow by 2.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.5% today to 1.7% in 3 years time.
• The bearish analysts expect earnings to reach ¥26.9 billion (and earnings per share of ¥93.44) by about September 2028, up from ¥6.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.7x on those 2028 earnings, down from 82.7x today. This future PE is greater than the current PE for the JP Building industry at 15.9x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.25%, as per the Simply Wall St company report.

LIXIL Future Earnings Per Share Growth

Risks

• LIXIL's recent structural reforms appear to be largely completed, which has led to significant improvements in profit margins, with the gross profit margin rising from 31.7 percent to 34.2 percent and EBITDA ratio increasing from 5.9 percent to 8.0 percent, suggesting lasting positive impacts on net margins and overall earnings stability.
  
• The company achieved better-than-expected results in the first quarter driven by higher-margin renovation sales, successful price optimization, and favorable product mix-including strong sales of high-value products (such as color variants in Europe)-which could support both revenue growth and profit expansion if these trends persist.
  
• LIXIL's overseas operations, particularly in Europe and the Middle East, have demonstrated resilience by shifting toward higher-priced products and gaining market share, with management expressing confidence in further demand recovery and enhanced profit contributions from these regions in the next fiscal year, potentially bolstering group revenues.
  
• The divestiture of unprofitable businesses such as the ceramic siding and bathing segments, along with the expectation of cost savings and operational focus, is likely to result in a more streamlined and profitable business model, thereby improving overall earnings going forward.
  
• Growing the proportion of renovation (which contributes higher profitability than new housing) and maintaining strong SG&A control-especially by leveraging efficiencies such as AI-positions LIXIL to defend and potentially enhance its profit margins even if new housing demand declines, providing resilience in underlying financials such as net income and free cash flow.

Valuation

• The assumed bearish price target for LIXIL is ¥1700.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of LIXIL's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥2400.0, and the most bearish reporting a price target of just ¥1700.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥1595.1 billion, earnings will come to ¥26.9 billion, and it would be trading on a PE ratio of 23.7x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of ¥1972.0, the bearish analyst price target of ¥1700.0 is 16.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.