Independent Insight Provider, Japanese equities, LightStream Research

Scott Foster

Independent Insight Provider, Japanese equities

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

Restructuring remains positive for Hitachi Ltd.FY Mar-21 results were above guidance, and management is guiding for operating and net profit growth in FY Mar-22.If the company's stake in Hitachi Metals is sold this year as planned, operating profit would probably be reduced by a low single-digit percentage. But this could be offset by the acquisition of GlobalLogic. Hitachi ABB Power Grids and the Railway Systems business are doing well. The cost of train repairs in the UK looks immaterial to earnings.Despite concerns over the cost of acquisitions, Hitachi Ltd.'s financial position is sound. At the end of March, the company had more than ¥1.8 trillion in cash and other financial assets, net financial liabilities amounted to 18% of equity, and free cash flow was positive. At ¥5,406 (Wednesday, May 19, closing price), the shares are selling at 9.5x FY Mar-22 earnings guidance. 39% potential upside to our ¥7,500 share price target.

Restructuring remains positive for Hitachi Ltd.FY Mar-21 results were above guidance, and management is guiding for operating and net profit growth in FY Mar-22.If the company's stake in Hitachi Metals is sold this year as planned, operating profit would probably be reduced by a low single-digit percentage. But this could be offset by the acquisition of GlobalLogic. Hitachi ABB Power Grids and the Railway Systems business are doing well. The cost of train repairs in the UK looks immaterial to earnings.Despite concerns over the cost of acquisitions, Hitachi Ltd.'s financial position is sound. At the end of March, the company had more than ¥1.8 trillion in cash and other financial assets, net financial liabilities amounted to 18% of equity, and free cash flow was positive. At ¥5,406 (Wednesday, May 19, closing price), the shares are selling at 9.5x FY Mar-22 earnings guidance. 39% potential upside to our ¥7,500 share price target.

Hitachi Ltd. (6501 JP): Results Above Guidance, Growth Ahead

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener">Hitachi Ltd (6501 JP)</a> has, for over a decade, been restructuring itself by selling subsidiaries here and buying them in there. There are two remaining after the somewhat recent sale of <a href="https://www.smartkarma.com/entities/hitachi-chemical-co-ltd" target="_blank" data-smartkarma-citation="entities:14457:1" rel="noopener">Hitachi Chemical (4217 JP)</a>, de-consolidation of <a href="https://www.smartkarma.com/entities/hitachi-capital-corp" target="_blank" data-smartkarma-citation="entities:14410:1" rel="noopener">Hitachi Capital (8586 JP)</a>, and buy-in of <a href="https://www.smartkarma.com/entities/hitachi-high-tech-corporation" target="_blank" data-smartkarma-citation="entities:7046:1" rel="noopener">Hitachi High-Tech (8036 JP)</a> (after a flurry of other deals to sell out stakes in <a href="https://www.smartkarma.com/entities/hitachi-kokusai-electric-inc" target="_blank" data-smartkarma-citation="entities:2523:1" rel="noopener">Hitachi Kokusai Electric (6756 JP)</a>, <a href="https://www.smartkarma.com/entities/hitachi-koki-co-ltd" target="_blank" data-smartkarma-citation="entities:18359:1" rel="noopener">Hitachi Koki (6581 JP)</a>, Hitachi Maxell and Clarion in the previous few years).
In October last year, I addressed the issue of the selldown of the last two <a href="https://www.smartkarma.com/entities/hitachi-metals-ltd" target="_blank" data-smartkarma-citation="entities:8561:1" rel="noopener">Hitachi Metals (5486 JP)</a> and <a href="https://www.smartkarma.com/entities/hitachi-construction-machinery" target="_blank" data-smartkarma-citation="entities:19433:1" rel="noopener">Hitachi Construction Machinery (6305 JP)</a> in <a href="https://www.smartkarma.com/insights/the-right-trade-may-be-hitachi" target="_blank" data-smartkarma-citation="insights:44551" rel="noopener">The Right Trade May Be Hitachi</a>, which argued that Hitachi itself was probably the better deal than the subs. Since then, Hitachi is up 39.3%, <a href="https://www.smartkarma.com/entities/hitachi-construction-machinery" target="_blank" data-smartkarma-citation="entities:19433:1" rel="noopener">Hitachi Construction Machinery (6305 JP)</a> is up 3.6%, and <a href="https://www.smartkarma.com/entities/hitachi-metals-ltd" target="_blank" data-smartkarma-citation="entities:8561:1" rel="noopener">Hitachi Metals (5486 JP)</a> is up 23%. 
<a href="https://www.smartkarma.com/profiles/mio-kato" target="_blank" data-smartkarma-citation="accounts:713" rel="noopener">Mio Kato</a> has written a few times about Hitachi Metals and about how one might not be able to expect a very high takeout price through the sale process that Hitachi was running. I wholly agreed with Mio, because I think it is not an easy asset to sell later, but I couldn't come up with a reason to sell the stock because I expect funding is available, costs can be cut, Hitachi might keep 20% and sell a call option to help with funding, and if a company needs a lot of work to restructure, I am sure that Bain Consulting could be prevailed upon to provide their consulting services for a price (one of the dirty little secrets of private equity is that GPs get management and incentive fees on assets and sales, but profits in the interim come with costs, and some of those costs can be allocated to the GP as well).
Hitachi took in bids earlier this spring after running an auction process and three weeks ago an <a href="https://www.ft.com/content/659a5857-9369-4f9b-8595-06bb89888772" target="_blank" rel="noopener">article</a> in the FT hit the tape saying "Bain nears $8bn deal to buy Hitachi Metals." That was around current market price give or take net debt so people were thinking there might not be a premium.
<div class="content-highlight">
Today, we got a deal announcement. Indeed, Bain is paying near US$8bn, but it is structured in such a way that Bain pays ¥1675/share to Hitachi and ¥2181/share to minorities, which produces a combined price just over ¥1900/share.
This approximates a decent result for everyone involved.  
</div>
More below the fold.

Hitachi Ltd (6501 JP) has, for over a decade, been restructuring itself by selling subsidiaries here and buying them in there. There are two remaining after the somewhat recent sale of Hitachi Chemical (4217 JP), de-consolidation of Hitachi Capital (8586 JP), and buy-in of Hitachi High-Tech (8036 JP) (after a flurry of other deals to sell out stakes in Hitachi Kokusai Electric (6756 JP), Hitachi Koki (6581 JP), Hitachi Maxell and Clarion in the previous few years).
In October last year, I addressed the issue of the selldown of the last two Hitachi Metals (5486 JP) and Hitachi Construction Machinery (6305 JP) in The Right Trade May Be Hitachi, which argued that Hitachi itself was probably the better deal than the subs. Since then, Hitachi is up 39.3%, Hitachi Construction Machinery (6305 JP) is up 3.6%, and Hitachi Metals (5486 JP) is up 23%. 
Mio Kato has written a few times about Hitachi Metals and about how one might not be able to expect a very high takeout price through the sale process that Hitachi was running. I wholly agreed with Mio, because I think it is not an easy asset to sell later, but I couldn't come up with a reason to sell the stock because I expect funding is available, costs can be cut, Hitachi might keep 20% and sell a call option to help with funding, and if a company needs a lot of work to restructure, I am sure that Bain Consulting could be prevailed upon to provide their consulting services for a price (one of the dirty little secrets of private equity is that GPs get management and incentive fees on assets and sales, but profits in the interim come with costs, and some of those costs can be allocated to the GP as well).
Hitachi took in bids earlier this spring after running an auction process and three weeks ago an article in the FT hit the tape saying "Bain nears $8bn deal to buy Hitachi Metals." That was around current market price give or take net debt so people were thinking there might not be a premium.

Today, we got a deal announcement. Indeed, Bain is paying near US$8bn, but it is structured in such a way that Bain pays ¥1675/share to Hitachi and ¥2181/share to minorities, which produces a combined price just over ¥1900/share.
This approximates a decent result for everyone involved.  

More below the fold. 

Bain Bids Up BIG For Hitachi Metals (5486) - Now We Wait

Hitachi Ltd.'s restructuring continues with the acquisition of Kyoto Robotics and the planned sale of Hitachi Metals. We regard both developments as positive. <ul><li>On April 8, the Nikkei reported that Hitachi Ltd. had given preferential negotiating rights for the sale of its 53.6% stake in Hitachi Metals metals to a consortium led by Bain Capital. The price was estimated at ¥800 billion (¥7.3 billion) or more, which could pay for most of Hitachi Ltd.'s recently announced purchase of GlobalLogic for $9.6 billion.</li></ul><ul><li>Also on April 8, Hitachi Ltd. announced that it had purchased 96% of Kyoto Robotics, a designer and producer of three-dimensional machine vision and AI control systems for handling robots. This gives Hitachi advanced robotics technology and expertise, enhancing its ability to provide integrated systems for logistics and factory automation.</li></ul>The removal of Hitachi Metals (5486 JP) from Hitachi Ltd.'s consolidated accounts would reduce total revenues by 9% compared with FY Mar-21 guidance but have a small but positive short-term impact on operating profit.

Hitachi Ltd.'s restructuring continues with the acquisition of Kyoto Robotics and the planned sale of Hitachi Metals. We regard both developments as positive. On April 8, the Nikkei reported that Hitachi Ltd. had given preferential negotiating rights for the sale of its 53.6% stake in Hitachi Metals metals to a consortium led by Bain Capital. The price was estimated at ¥800 billion (¥7.3 billion) or more, which could pay for most of Hitachi Ltd.'s recently announced purchase of GlobalLogic for $9.6 billion.Also on April 8, Hitachi Ltd. announced that it had purchased 96% of Kyoto Robotics, a designer and producer of three-dimensional machine vision and AI control systems for handling robots. This gives Hitachi advanced robotics technology and expertise, enhancing its ability to provide integrated systems for logistics and factory automation.The removal of Hitachi Metals (5486 JP) from Hitachi Ltd.'s consolidated accounts would reduce total revenues by 9% compared with FY Mar-21 guidance but have a small but positive short-term impact on operating profit.

Hitachi Ltd. (6501 JP): Buys Kyoto Robotics, Plans to Sell Hitachi Metals

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

The Nikkei reported today that Bain Capital’s bidding consortium has received preferential negotiating rights from Hitachi. The rumoured valuation is above ¥800bn which would put the premium at just 3.2% above the last close. As we said previously, the potential for a large hike to those terms seems limited and better returns may be on offer in trying to identify other potential buyout targets.

The Nikkei reported today that Bain Capital’s bidding consortium has received preferential negotiating rights from Hitachi. The rumoured valuation is above ¥800bn which would put the premium at just 3.2% above the last close. As we said previously, the potential for a large hike to those terms seems limited and better returns may be on offer in trying to identify other potential buyout targets.

Hitachi Metals – Limited Upside Despite Bain Capital News But Let’s Find the Offshoot Ideas

Hitachi Ltd. dropped 7.3% yesterday, the market taking a dim view of the price management plans to pay for GlobalLogic: 8x revenues and more than 35x EBITDA on what looks like an optimistic forecast for FY Mar-22.But while the price is high, the acquisition should increase Hitachi's profits and profit margins, accelerate the digital transformation of its infrastructure and other businesses, and greatly expand its staff of IT professionals and global client base.The impact on Hitachi's balance sheet is manageable, in our estimation. We recommend buying into the sell-off.

Hitachi Ltd. dropped 7.3% yesterday, the market taking a dim view of the price management plans to pay for GlobalLogic: 8x revenues and more than 35x EBITDA on what looks like an optimistic forecast for FY Mar-22.But while the price is high, the acquisition should increase Hitachi's profits and profit margins, accelerate the digital transformation of its infrastructure and other businesses, and greatly expand its staff of IT professionals and global client base.The impact on Hitachi's balance sheet is manageable, in our estimation. We recommend buying into the sell-off. 

Hitachi Ltd. (6501): GlobalLogic Acquisition Expensive but Accretive

Japan

Hitachi, Ltd. manufactures communications and electronic equipment, heavy electrical and industrial machinery, and consumer electronics.  The Company's diverse product line ranges from nuclear power systems to kitchen appliances. Hitachi also operates subsidiaries in the wire and cable, metal, and chemical industries.

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Hitachi Ltd (6501 JP)