Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

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.

Event-Driven

Hitachi Construction Machinery / Event-Driven

<p>HCM reported 2Q results today with revenue of ¥191bn undershooting consensus by 2.2% but higher than expected margins resulting in OP of ¥8.00bn significantly overshooting consensus’ ¥5.50bn. The company’s setsumeikai involved some interesting discussion regarding the Nikkei report that parent Hitachi would halve its stake in the company. We discuss the details below.</p>

HCM reported 2Q results today with revenue of ¥191bn undershooting consensus by 2.2% but higher than expected margins resulting in OP of ¥8.00bn significantly overshooting consensus’ ¥5.50bn. The company’s setsumeikai involved some interesting discussion regarding the Nikkei report that parent Hitachi would halve its stake in the company. We discuss the details below.

HCM – Profit Beat and Discussion of Hitachi Stake

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

<p><a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener"><strong>Hitachi Ltd (6501 JP)</strong></a> has, for over a decade, been restructuring itself - selling subsidiaries here and buying them in there. There are two remaining after the recent sale of <strong><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></strong>, de-consolidation of <strong><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></strong>, and buy-in of <strong><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></strong>. </p><p>The earnings call in May occasioned another presentation - that of the <span>update on </span><a href="http://www.hitachi.com/New/cnews/month/2020/05/200529a.html" target="_blank" rel="noopener">Progress of the Mid-Term Management Plan</a><span> (with a webcast and a </span><a href="http://www.hitachi.com/New/cnews/month/2020/05/200529a/f_200529apre.pdf" target="_blank" rel="noopener">presentation deck</a><span>), where the CEO responded to a question thusly:</span></p><div><blockquote>
<p><strong>QUESTION: </strong> Next question is regarding the, against the backdrop of COVID-19, is this going to have an impact on the reorganisation of the listed subsidiaries?</p>
<p><strong>ANSWER BY CEO HIGASHIHARA:  </strong>Regarding the listed subsidiary answer. <strong>Hitachi Construction Machinery</strong> and <strong>Hitachi Metals</strong> remain. And what we are telling the top management is that, in the time frame of fiscal year 2021 to 2024, we have to make sure these companies are able to compete globally. They are now evaluating this. It is not just a matter of COVID-19. Mid- to long-term growth strategy will be emphasised so the reorganisation strategy for the listed subsidiaries will not be impacted by COVID-19.</p>
</blockquote></div><div>
<p>FY 2021 to FY 2024 is a three year window starting next April, with FY2021 ending in March 2022 and FY2024 ending in March 2025.</p>
<div>
<p>That was May 29, less than five months ago and the situation was discussed in <a href="https://www.smartkarma.com/insights/hitachi-s-capital-case-liquidating-land-policy-holdings-what-about-the-subs" target="_blank" data-smartkarma-citation="insights:39920" rel="noopener">Hitachi's Capital Case - Liquidating Land &amp; Policy Holdings? What About the Subs?</a>.</p>
<p>Friday saw an article out of the Nikkei suggesting <strong>Hitachi</strong> might sell half its stake in <strong><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></strong> ("HCM") to a third party, at a discount, and that it might start a sale process on <a href="https://www.smartkarma.com/entities/hitachi-metals-ltd" target="_blank" data-smartkarma-citation="entities:8561:1" rel="noopener"><strong>Hitachi Metals (5486 JP</strong>)</a> "this month."</p>
</div>
<div>
<p>It strikes me as unlikely <strong>Hitachi</strong> would <em>themselves</em> be throwing in the towel 5 months later before the start of the time frame in which top management of the two subsidiaries are supposed to be able to compete globally. All of this is likely getting done with the will and direction of the subsidiaries themselves. This strikes me as some kind of agreement with management of <strong>HCM</strong> that they would not be averse to receiving expert help from outside while remaining listed. </p>
<p>This changes things.</p>
<p><strong>Hitachi</strong> becomes a different animal. It becomes a <em>non-stub trade</em> (parent vs significant value of listed short-able subs) for the first time in a very long time. And the optics change quite a bit.</p>
</div>
</div>

Hitachi Ltd (6501 JP) has, for over a decade, been restructuring itself - selling subsidiaries here and buying them in there. There are two remaining after the recent sale of Hitachi Chemical (4217 JP), de-consolidation of Hitachi Capital (8586 JP), and buy-in of Hitachi High-Tech (8036 JP). The earnings call in May occasioned another presentation - that of the update on Progress of the Mid-Term Management Plan (with a webcast and a presentation deck), where the CEO responded to a question thusly:
QUESTION:  Next question is regarding the, against the backdrop of COVID-19, is this going to have an impact on the reorganisation of the listed subsidiaries?
ANSWER BY CEO HIGASHIHARA:  Regarding the listed subsidiary answer. Hitachi Construction Machinery and Hitachi Metals remain. And what we are telling the top management is that, in the time frame of fiscal year 2021 to 2024, we have to make sure these companies are able to compete globally. They are now evaluating this. It is not just a matter of COVID-19. Mid- to long-term growth strategy will be emphasised so the reorganisation strategy for the listed subsidiaries will not be impacted by COVID-19.

FY 2021 to FY 2024 is a three year window starting next April, with FY2021 ending in March 2022 and FY2024 ending in March 2025.

That was May 29, less than five months ago and the situation was discussed in Hitachi's Capital Case - Liquidating Land &amp; Policy Holdings? What About the Subs?.
Friday saw an article out of the Nikkei suggesting Hitachi might sell half its stake in Hitachi Construction Machinery (6305 JP) ("HCM") to a third party, at a discount, and that it might start a sale process on Hitachi Metals (5486 JP) "this month."


It strikes me as unlikely Hitachi would themselves be throwing in the towel 5 months later before the start of the time frame in which top management of the two subsidiaries are supposed to be able to compete globally. All of this is likely getting done with the will and direction of the subsidiaries themselves. This strikes me as some kind of agreement with management of HCM that they would not be averse to receiving expert help from outside while remaining listed. 
This changes things.
Hitachi becomes a different animal. It becomes a non-stub trade (parent vs significant value of listed short-able subs) for the first time in a very long time. And the optics change quite a bit.



<p>Just as the lunch session started, the Nikkei came out with an <a href="https://www.nikkei.com/article/DGXMZO65359160T21C20A0MM0000/" target="_blank" rel="noopener">article</a> and the English language <a href="https://asia.nikkei.com/Business/Engineering-Construction/Hitachi-to-divest-some-of-its-Hitachi-Construction-shares" target="_blank" rel="noopener">version</a> came a half hour later. </p><p>The main points:</p><ul>
<li>Hitachi "will sell" a part (up to half) its 51% stake in <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>.</li>
<li>The Innovation Network Corporation of Japan and others are looking at buying a stake.</li>
<li>The sale may be done at a discount.</li>
<li>There is passing mention of the effort to sell <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> as well. </li>
</ul><p>The stock fell like a rock - down 15% or more in high volume. Hitachi Metals fell 6%. </p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/167/032/original/Screenshot%202020-10-23%20at%209.10.21%20PM.png?1603458637" class="editor-image img-responsive" data-smartkarma-image-id="167032"></figure><p></p></section><p>A denial from the JIC (the parent of the INCJ) <strong>*JIC: NOT CONSIDERING INVESTING IN HITACHI CONSTRUCTION</strong> did not lead to a bounce in HCM shares. </p><p>That is the key. The buyer doesn't matter. How the seller sells matters. This is interesting "news" and the reaction is telling. However, this headline comes just days before H1 earnings are due to be reported by HCM (27th October) and <a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener">Hitachi Ltd (6501 JP)</a> (28th). The last time we got a headline like that was *HITACHI MULLS CUTTING CROSS SHAREHOLDINGS, SELLING PROPERTIES on 29 May. That Bloomberg headline turned out to be an unsubtle read of something in the small print of a large presentation deck shown later that day as part of the earnings call (discussed in <a href="https://www.smartkarma.com/insights/hitachi-s-capital-case-liquidating-land-policy-holdings-what-about-the-subs" target="_blank" data-smartkarma-citation="insights:39920" rel="noopener">Hitachi's Capital Case - Liquidating Land &amp; Policy Holdings? What About the Subs?</a>). I expect the subject of this article to come up in the earnings discussion next week.  </p><p>There are a couple ways to look at this and it is not clear that the takeaway is that one should be bullish HCM. But it is worthwhile thinking about the permutations.</p><p>Discussion ensues.</p>

Just as the lunch session started, the Nikkei came out with an article and the English language version came a half hour later. The main points:
Hitachi "will sell" a part (up to half) its 51% stake in Hitachi Construction Machinery (6305 JP).
The Innovation Network Corporation of Japan and others are looking at buying a stake.
The sale may be done at a discount.
There is passing mention of the effort to sell Hitachi Metals (5486 JP) as well. 
The stock fell like a rock - down 15% or more in high volume. Hitachi Metals fell 6%. A denial from the JIC (the parent of the INCJ) *JIC: NOT CONSIDERING INVESTING IN HITACHI CONSTRUCTION did not lead to a bounce in HCM shares. That is the key. The buyer doesn't matter. How the seller sells matters. This is interesting "news" and the reaction is telling. However, this headline comes just days before H1 earnings are due to be reported by HCM (27th October) and Hitachi Ltd (6501 JP) (28th). The last time we got a headline like that was *HITACHI MULLS CUTTING CROSS SHAREHOLDINGS, SELLING PROPERTIES on 29 May. That Bloomberg headline turned out to be an unsubtle read of something in the small print of a large presentation deck shown later that day as part of the earnings call (discussed in Hitachi's Capital Case - Liquidating Land &amp; Policy Holdings? What About the Subs?). I expect the subject of this article to come up in the earnings discussion next week.  There are a couple ways to look at this and it is not clear that the takeaway is that one should be bullish HCM. But it is worthwhile thinking about the permutations.Discussion ensues.

<p>The Nikkei reported today that Hitachi would sell about half of its stake in Hitachi Construction Machinery, surprising the market and us. We had expected HCM to be bought out and clearly the market had too as the stock was down 16.8%. We examine the implications below.</p>

The Nikkei reported today that Hitachi would sell about half of its stake in Hitachi Construction Machinery, surprising the market and us. We had expected HCM to be bought out and clearly the market had too as the stock was down 16.8%. We examine the implications below.

<p>Today after the close, <a href="https://www.smartkarma.com/entities/honda-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:154:1" rel="noopener">Honda Motor (7267 JP)</a> announced the successful completion of the three tender offers for subsidiary/affiliates <a href="https://www.smartkarma.com/entities/keihin-corp" target="_blank" data-smartkarma-citation="entities:15395:1" rel="noopener">Keihin Corp (7251 JP)</a>, <a href="https://www.smartkarma.com/entities/showa-corp" target="_blank" data-smartkarma-citation="entities:15079:1" rel="noopener">Showa Corp (7274 JP)</a>, and <a href="https://www.smartkarma.com/entities/nissin-kogyo-co-ltd" target="_blank" data-smartkarma-citation="entities:20362:1" rel="noopener">Nissin Kogyo (7230 JP)</a>.</p>
<p>The resulting ownership changes are as follows:</p>
<table class="table table-striped">
<tbody>
<tr>
<td colspan="7" style="width: 641.714px;">
<h2>The State of the Honda Sub Residuals</h2>
</td>
<td style="width: 58.8571px;"></td>
</tr>
<tr>
<td style="width: 118.286px;"><strong>Stock</strong></td>
<td style="text-align: center; width: 96px;">
<strong>Announcement <br></strong>(click on the ogre to read the doc)</td>
<td style="text-align: center; width: 61.7143px;"><strong>Tender Doc</strong></td>
<td style="text-align: right; width: 56px;"><strong>TOB Price</strong></td>
<td style="text-align: right; width: 65.7143px;">
<strong>Pre-Tender</strong><br><strong>Ownership</strong>
</td>
<td style="text-align: right; width: 68.5714px;">
<strong>Post-Tender</strong><br><strong>Ownership</strong>
</td>
<td style="text-align: right; width: 52px;"><strong>Fast-Track<br>Delisting</strong></td>
<td style="text-align: right; width: 58.8571px;"><strong>Residual</strong></td>
</tr>
<tr>
<td style="width: 118.286px;">Keihin (7251)</td>
<td style="text-align: center; width: 96px;">
<h3><a href="https://global.honda/content/dam/site/global/investors/cq_img/library/filings/CY2020_20201016_TSEfiling_e_1.pdf" target="_blank" rel="noopener">👹</a></h3>
</td>
<td style="text-align: center; width: 61.7143px;">
<h3><a href="https://www.keihin-corp.co.jp/en/ir/pdf/annualreport/annualreport2018.pdf" target="_blank" rel="noopener">👹</a></h3>
</td>
<td style="text-align: right; width: 56px;">¥2600/shr</td>
<td style="text-align: right; width: 65.7143px;">25.30%</td>
<td style="text-align: right; width: 68.5714px;">93.57%</td>
<td style="text-align: right; width: 52px;">
<p>Yes</p>
</td>
<td style="text-align: right; width: 58.8571px;">¥12.36bn</td>
</tr>
<tr>
<td style="width: 118.286px;">Showa Corp (7274)</td>
<td style="text-align: center; width: 96px;">
<h3><a href="https://global.honda/content/dam/site/global/investors/cq_img/library/filings/CY2020_20201016_TSEfiling_e_2.pdf" target="_blank" rel="noopener">👹</a></h3>
</td>
<td style="text-align: center; width: 61.7143px;">
<h3><a href="https://global.honda/content/dam/site/global/investors/cq_img/library/filings/CY2020_20200901_TSEfiling_e_2.pdf" target="_blank" rel="noopener">👹</a></h3>
</td>
<td style="text-align: right; width: 56px;">¥2300/shr</td>
<td style="text-align: right; width: 65.7143px;">33.14%</td>
<td style="text-align: right; width: 68.5714px;">92.13%</td>
<td style="text-align: right; width: 52px;">Yes</td>
<td style="text-align: right; width: 58.8571px;">¥13.75bn</td>
</tr>
<tr>
<td style="width: 118.286px;">Nissin Kogyo (7230)</td>
<td style="text-align: center; width: 96px;">
<h3><a href="https://global.honda/content/dam/site/global/investors/cq_img/library/filings/CY2020_20201016_TSEfiling_e_3.pdf" target="_blank" rel="noopener">👹</a></h3>
</td>
<td style="text-align: center; width: 61.7143px;">
<h3><a href="https://global.honda/content/dam/site/global/investors/cq_img/library/filings/CY2020_20200901_TSEfiling_e_3.pdf" target="_blank" rel="noopener">👹</a></h3>
</td>
<td style="text-align: right; width: 56px;">¥2250/shr</td>
<td style="text-align: right; width: 65.7143px;">31.61%</td>
<td style="text-align: right; width: 68.5714px;">92.44%</td>
<td style="text-align: right; width: 52px;">Yes</td>
<td style="text-align: right; width: 58.8571px;">¥11.07bn</td>
</tr>
</tbody>
</table>
<p>The results are a little surprising in that all the names managed to get to 92+%. This indicates that some of the passive-tracking TOPIX holders sold into the tender, or their shares were tendered by being borrowed. </p>
<p>This leaves a setup trade.</p>

Today after the close, Honda Motor (7267 JP) announced the successful completion of the three tender offers for subsidiary/affiliates Keihin Corp (7251 JP), Showa Corp (7274 JP), and Nissin Kogyo (7230 JP).
The resulting ownership changes are as follows:




The State of the Honda Sub Residuals




Stock

Announcement  (click on the ogre to read the doc)
Tender Doc
TOB Price

Pre-Tender Ownership


Post-Tender Ownership

Fast-Track Delisting
Residual


Keihin (7251)

👹


👹

¥2600/shr
25.30%
93.57%

Yes

¥12.36bn


Showa Corp (7274)

👹


👹

¥2300/shr
33.14%
92.13%
Yes
¥13.75bn


Nissin Kogyo (7230)

👹


👹

¥2250/shr
31.61%
92.44%
Yes
¥11.07bn



The results are a little surprising in that all the names managed to get to 92+%. This indicates that some of the passive-tracking TOPIX holders sold into the tender, or their shares were tendered by being borrowed. 
This leaves a setup trade.

Honda Tenders Done - Now For The Residuals

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)

HCM – Profit Beat and Discussion of Hitachi Stake

Hitachi Construction Machinery earnings surprised to the upside at the OP level though analyst questions focused on the potential stake sale by...

Mio Kato

The Right Trade May Be Hitachi

Hitachi is getting to the end of its Core vs Non-Core restructuring campaign. Two remaining subs have newsflow, and earnings announcements shortly....

Travis Lundy

[Nikkei] Hitachi May Sell Down HCM Stake

Hitachi may rain on the Hitachi Construction Machinery Parade. This is good for Hitachi at the margins and not great for HCM minorities. But it...

Travis Lundy

HCM – Hitachi’s Stake Sale Surprises

The Nikkei's report that Hitachi would sell half of its stake in HCM rather than buying the company out drove HCM shares down 16.8%. We examine the...

Mio Kato

Honda Tenders Done - Now For The Residuals

Honda secures 92-93% of each of its parts affiliates under Tender Offer. Expect a Delisting end-November or so, and cash payment early-mid Jan2021....

Travis Lundy

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