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.

Thematic (Sector/Industry)

The LDP secured a majority in Sunday's Lower House election despite losing seats while its partner New Komeito had small gains. There was some slight concern surrounding the solidity of the LDP's position so the market has reacted positively to the removal of uncertainty, rising over 2%. Current Secretary General Akira Amari lost his seat and although he is expected to remain in parliament through proportional representation votes, has announced his intention to resign creating a slight conundrum for Prime Minister Kishida.

The LDP secured a majority in Sunday's Lower House election despite losing seats while its partner New Komeito had small gains. There was some slight concern surrounding the solidity of the LDP's position so the market has reacted positively to the removal of uncertainty, rising over 2%. Current Secretary General Akira Amari lost his seat and although he is expected to remain in parliament through proportional representation votes, has announced his intention to resign creating a slight conundrum for Prime Minister Kishida.

LDP Independent Majority Secured but Amari to Step Down?

Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

Sky Perfect JSAT operates Japan’s only direct-to-home (DTH) video service and is Asia’s largest satellite operator. As a well-known consumer-facing service, the former is better known and has often driven sentiment but the key to unlock value may be in the latter as the space industry expands. An increase in space industry investment brings new opportunities but also heightened competition from low-earth satellite fleets albeit at less intensity than its global peers. On balance, we think the changes are positive and we initiate coverage at Buy with a ¥640 FY21-end target price.

Sky Perfect JSAT operates Japan’s only direct-to-home (DTH) video service and is Asia’s largest satellite operator. As a well-known consumer-facing service, the former is better known and has often driven sentiment but the key to unlock value may be in the latter as the space industry expands. An increase in space industry investment brings new opportunities but also heightened competition from low-earth satellite fleets albeit at less intensity than its global peers. On balance, we think the changes are positive and we initiate coverage at Buy with a ¥640 FY21-end target price.

Sky Perfect JSAT - Upside Potential in Space Business (Initiation of Coverage)

<h2>Summary and Conclusion</h2>
What's Original?
This insight is an in-depth look into the Asian wind energy industry, covering the value chain and related companies at each key stage of the value chain. Our research includes the following:
Industry Background: This includes an in-depth analysis on the wind energy sector with an overview of wind energy, including the growth of global installed capacity wind energy and analysis of the Asian wind energy market.
We examine both global onshore and offshore wind energy and differences in installation costs, annual investments, levelised cost of electricity (LCoE) and the declining trend in installation costs.
The potential capacity level of offshore wind energy is higher than onshore, though installation costs, O&amp;M and transportation costs are currently higher for offshore which is clearly reflected in the LCoE of the two categories.
When comparing total global wind capacity against the Asian market alone, over the last decade the Asian market’s growth rate was higher than the global rate and 51% of global new capacity additions were made in the Asian region.
The majority of Asian new capacity installed in Asian market was in APAC and China remained the world’s largest onshore market accounting for 37% of total onshore installations in 2019 while in the offshore market China accounted for a slightly more modest 23% of installations, trailing the UK and Germany.
The total installed capacity of onshore wind is expected to grow at a CAGR of 9.2% and to reach 1,787 GW globally in 2030 and then 5,044 GW by 2050. Furthermore, Asia (mostly China) should continue to dominate the onshore wind power industry, with more than 50% of global installations by 2050. Offshore wind energy in Asia should grow at a CAGR of 28% during 2018-30 and reach 613 GW while the Asian onshore market is expected to grow at a 13% CAGR and reach 2,646 GW. We examine the leading Asian countries (India, Japan and China) in the sector and their growth potential.
We believe that, over the next decade, the Asian market will outperform in wind energy growth compared to Europe and the US. Further, the trend towards offshore wind energy development in the Asian region will start to gather steam. The growth will be still mainly driven by China, India and Japan, however, apart from those countries South Korea, Taiwan and Vietnam also demonstrate some potential to develop wind energy.
Value Chain Analysis: We detail the value chain for wind energy highlighting the critical stages of the value chain (raw material supply, design and development services, component supply, wind turbine manufacturers, construction &amp; installation services and wind farm developers) and the leading players in those stages.
Wind Farm Owners - By the end of 2019, the top 15 wind farm owner-operators held over 1/3 of the total 650 GW of onshore and offshore assets globally.  Chinese utilities continue to dominate the top 15 ranking of wind asset owners as China is the leader in the market. We believe that this situation will continue as wind energy installation in China is expected to grow at higher rate than other leading countries in the world.
Original Equipment Manufacturing - OEMs usually manufacture some of the critical components such as the nacelle in-house, and blades and towers are produced either by the OEM or fabricated to the OEM's specifications by a supplier. The tower, gearbox, shafts, bearings, blades, generator, power converter and control systems accounted more than 80% of total costs.
Although most Asian suppliers have historically relied on turbine technologies licensed from Europe to enter the wind industry, the Asia Pacific has now become the world’s largest wind turbine manufacturing hub after a decade of development. In 2019, some 33 wind turbine manufacturers installed an estimated 22,893 wind turbines globally with a combined capacity of 63,076 MW. Of the 33 suppliers, 20 are from APAC.
Further, we have noticed that Chinese and Indian players have maintained their leading market position in the Asian region while international players like Siemens Gamesa and GE were able to obtain market share in the region.
Rotors - Turbine rotor diameters have been getting larger as a result of greater pressure for turbine OEMs to reduce the LCOE by launching new turbines with larger rotors that allow for better capacity factors and an improvement in AEP (Annual Energy Production). China is the key driver behind the trend of larger wind turbine rotors as out of the 6,691 units of 2.0 MW wind turbines installed globally in 2018, nearly 80% are located in China, of which more than half the turbines installed are equipped with rotors that are 120m or larger. We see the trend of building larger and light weight rotors continuing, especially with Asian market started to develop more offshore wind projects.
Blades - Blade core material balsa shortages have prompted turbine OEMs and blade manufacturers to switch to PET and hybrid designs with Balsa and PET. Wood Mackenzie forecasts the share of PET to increase from 20% in 2018 to more than 55% by 2023.
Gearboxes - GWEC predicted that annual global wind gearbox demand is likely to reach 56.4 GW in 2019 and then peak in 2020 at 59.1GW driven by the installation rush in China and the US. Regionally, around 40-48% of total demand is likely to be produced in South East Asia between 2019-2023. Furthermore, around 75 GW of gearbox manufacturing capacity is available globally, thus GWEC does not expect any major bottleneck. Around 70% of the global market share is represented by three main players, Winergy, NGC and ZF. Winergy and NGC have maintained similar levels of wind turbine gear box market share over a decade while ZF was increase its market share by acquiring other leading companies around the globe.
Towers - The tower has low technical requirements compared to other components and is thus usually sourced locally. A considerable percentage of Asian tower manufacturers ship their wind towers to North American and European countries, as production costs are lower in Asian countries and they are able to offer towers at competitive prices. Some players like Suzlon have invented lower cost hybrid tower structures which can be built at much lower cost than traditional designs.
Services &amp; Support Opportunities – Broadly speaking, the services opportunities can be categorised into: Project development Geotechnical services Logistics support for wind farm Construction opportunities Operations and maintenance. These service providing companies generate higher margins compared to OEMs and wind turbine manufactures and as with solar power, we see a trend for OEM and component manufactures to expand services segments by introducing new technological innovation.

Summary and Conclusion
What's Original?
This insight is an in-depth look into the Asian wind energy industry, covering the value chain and related companies at each key stage of the value chain. Our research includes the following:
Industry Background: This includes an in-depth analysis on the wind energy sector with an overview of wind energy, including the growth of global installed capacity wind energy and analysis of the Asian wind energy market.
We examine both global onshore and offshore wind energy and differences in installation costs, annual investments, levelised cost of electricity (LCoE) and the declining trend in installation costs.
The potential capacity level of offshore wind energy is higher than onshore, though installation costs, O&amp;M and transportation costs are currently higher for offshore which is clearly reflected in the LCoE of the two categories.
When comparing total global wind capacity against the Asian market alone, over the last decade the Asian market’s growth rate was higher than the global rate and 51% of global new capacity additions were made in the Asian region.
The majority of Asian new capacity installed in Asian market was in APAC and China remained the world’s largest onshore market accounting for 37% of total onshore installations in 2019 while in the offshore market China accounted for a slightly more modest 23% of installations, trailing the UK and Germany.
The total installed capacity of onshore wind is expected to grow at a CAGR of 9.2% and to reach 1,787 GW globally in 2030 and then 5,044 GW by 2050. Furthermore, Asia (mostly China) should continue to dominate the onshore wind power industry, with more than 50% of global installations by 2050. Offshore wind energy in Asia should grow at a CAGR of 28% during 2018-30 and reach 613 GW while the Asian onshore market is expected to grow at a 13% CAGR and reach 2,646 GW. We examine the leading Asian countries (India, Japan and China) in the sector and their growth potential.
We believe that, over the next decade, the Asian market will outperform in wind energy growth compared to Europe and the US. Further, the trend towards offshore wind energy development in the Asian region will start to gather steam. The growth will be still mainly driven by China, India and Japan, however, apart from those countries South Korea, Taiwan and Vietnam also demonstrate some potential to develop wind energy.
Value Chain Analysis: We detail the value chain for wind energy highlighting the critical stages of the value chain (raw material supply, design and development services, component supply, wind turbine manufacturers, construction &amp; installation services and wind farm developers) and the leading players in those stages.
Wind Farm Owners - By the end of 2019, the top 15 wind farm owner-operators held over 1/3 of the total 650 GW of onshore and offshore assets globally.  Chinese utilities continue to dominate the top 15 ranking of wind asset owners as China is the leader in the market. We believe that this situation will continue as wind energy installation in China is expected to grow at higher rate than other leading countries in the world.
Original Equipment Manufacturing - OEMs usually manufacture some of the critical components such as the nacelle in-house, and blades and towers are produced either by the OEM or fabricated to the OEM's specifications by a supplier. The tower, gearbox, shafts, bearings, blades, generator, power converter and control systems accounted more than 80% of total costs.
Although most Asian suppliers have historically relied on turbine technologies licensed from Europe to enter the wind industry, the Asia Pacific has now become the world’s largest wind turbine manufacturing hub after a decade of development. In 2019, some 33 wind turbine manufacturers installed an estimated 22,893 wind turbines globally with a combined capacity of 63,076 MW. Of the 33 suppliers, 20 are from APAC.
Further, we have noticed that Chinese and Indian players have maintained their leading market position in the Asian region while international players like Siemens Gamesa and GE were able to obtain market share in the region.
Rotors - Turbine rotor diameters have been getting larger as a result of greater pressure for turbine OEMs to reduce the LCOE by launching new turbines with larger rotors that allow for better capacity factors and an improvement in AEP (Annual Energy Production). China is the key driver behind the trend of larger wind turbine rotors as out of the 6,691 units of 2.0 MW wind turbines installed globally in 2018, nearly 80% are located in China, of which more than half the turbines installed are equipped with rotors that are 120m or larger. We see the trend of building larger and light weight rotors continuing, especially with Asian market started to develop more offshore wind projects.
Blades - Blade core material balsa shortages have prompted turbine OEMs and blade manufacturers to switch to PET and hybrid designs with Balsa and PET. Wood Mackenzie forecasts the share of PET to increase from 20% in 2018 to more than 55% by 2023.
Gearboxes - GWEC predicted that annual global wind gearbox demand is likely to reach 56.4 GW in 2019 and then peak in 2020 at 59.1GW driven by the installation rush in China and the US. Regionally, around 40-48% of total demand is likely to be produced in South East Asia between 2019-2023. Furthermore, around 75 GW of gearbox manufacturing capacity is available globally, thus GWEC does not expect any major bottleneck. Around 70% of the global market share is represented by three main players, Winergy, NGC and ZF. Winergy and NGC have maintained similar levels of wind turbine gear box market share over a decade while ZF was increase its market share by acquiring other leading companies around the globe.
Towers - The tower has low technical requirements compared to other components and is thus usually sourced locally. A considerable percentage of Asian tower manufacturers ship their wind towers to North American and European countries, as production costs are lower in Asian countries and they are able to offer towers at competitive prices. Some players like Suzlon have invented lower cost hybrid tower structures which can be built at much lower cost than traditional designs.
Services &amp; Support Opportunities – Broadly speaking, the services opportunities can be categorised into: Project development Geotechnical services Logistics support for wind farm Construction opportunities Operations and maintenance. These service providing companies generate higher margins compared to OEMs and wind turbine manufactures and as with solar power, we see a trend for OEM and component manufactures to expand services segments by introducing new technological innovation.

Asian Wind Energy: Efficiency and Cost Reduction in Focus as Players Eye a Post FiT Future

<a href="https://asia.nikkei.com/Business/Energy/Japan-taps-Australia-and-Brunei-for-hydrogen-import-goal" target="_blank" rel="noopener">Momentum is building within East Asia to propel the Hydrogen economy forward</a> as Japan, Korea and China have demonstrated interest in investing heavily in the technology, a call that is being answered by a variety of players through the supply chain. We examine below the key investment opportunities and timelines for these players.

Momentum is building within East Asia to propel the Hydrogen economy forward as Japan, Korea and China have demonstrated interest in investing heavily in the technology, a call that is being answered by a variety of players through the supply chain. We examine below the key investment opportunities and timelines for these players.

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 - selling subsidiaries here and buying them in there. There are two remaining after the 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>. The earnings call in May occasioned another presentation - that of the update on <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> (with a webcast and a <a href="http://www.hitachi.com/New/cnews/month/2020/05/200529a/f_200529apre.pdf" target="_blank" rel="noopener">presentation deck</a>), where the CEO responded to a question thusly:<div><blockquote>
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.
</blockquote></div><div>
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.
<div>
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>.
Friday saw an article out of the Nikkei suggesting Hitachi might sell half its 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> ("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">Hitachi Metals (5486 JP)</a> "this month."
</div>
<div>
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.
</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.



Japan

Mitsubishi Heavy Industries, Ltd. is a comprehensive heavy machinery maker. The Company manufactures machinery, ships, turbines and engines, prime movers, aircrafts, and machine parts for military and commercial use.  Mitsubishi Heavy Industries also researches and develops nuclear power plants.

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Mitsubishi Heavy Industries (7011 JP)

LDP Independent Majority Secured but Amari to Step Down?

The LDP secured a majority in Sunday's Lower House election and the market has reacted positively to the removal of uncertainty, rising over 2% but...

Mio Kato

Sky Perfect JSAT - Upside Potential in Space Business (Initiation of Coverage)

Sky Perfect JSAT is better known for its direct broadcast satellite (DBS) video business but the space business represents more value and has been...

Kirk Boodry

Asian Wind Energy: Efficiency and Cost Reduction in Focus as Players Eye a Post FiT Future

This Smartkarma Original is an in-depth look into the Asian wind energy industry, covering the value chain and related companies at each key stage...

Mio Kato

Asia’s Hydrogen Economy

China's increasing favour towards hydrogen is starting to generate investor interest in potential hydrogen economy and FCV plays. We examine...

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

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