Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Equity Bottom-Up

Management's efforts to rationalize the consolidated operations of Hitachi Ltd. have generally been effective: gross profit has risen while total assets have declined, operating profit is up and exceeds Japan Analytics' estimate of annual required return (6% on net operating assets), and the company's estimated no-growth valuation is well above its current market capitalization. So why has Hitachi's share price lagged?Answers may be found in the company's recent performance and its new 2021 Mid-term Management Plan, in the slow and very long-term nature of its restructuring plan, and in the uncertain outlook for the global economic environment upon which its future growth depends. Instead of reaching new highs as management hopes, profits may peak out due to trade friction, general economic weakness, and the company's exposure to China and the auto industry, each of which accounts for about 11% of consolidated sales.Management's plans are sensible and include both significant changes to the business portfolio and substantial investments in new technologies, but compared with what is going on in the wider world of Big Data, the Internet of Things, Artificial Intelligence and robotics, they do not strike us as unusually innovative. And there is the risk inherent in large-scale M&amp;A (see <a href="https://www.smartkarma.com/insights/hitachi-6501-jp-a-bold-but-risky-acquisition-of-abb-s-power-grids" target="_blank" data-smartkarma-citation="insights:26792">Hitachi (6501 JP): A Bold but Risky Acquisition of ABB’s Power Grids</a> by Arun George).That having been said, following the write-off of the Horizon nuclear power project last fiscal year, management is guiding for a near-doubling of net profit in FY Mar-20 and is targeting an additional 30% profit growth in the following two years. That, in our estimation, is an ambitious but not unrealistic target.At ¥3,622 (Friday, May 24, closing price), Hitachi is selling at 8x management's EPS guidance for FY Mar-20, which is near the bottom of its 6-year P/E range (5.9x - 24.1x). Assuming no major write-downs and a normal tax rate, the achievement of management's mid-term targets could bring the P/E down to 6x. Our conclusion is that Hitachi's restructuring efforts are not sufficiently appreciated and that, from a long-term perspective, its shares are under-valued.

Management's efforts to rationalize the consolidated operations of Hitachi Ltd. have generally been effective: gross profit has risen while total assets have declined, operating profit is up and exceeds Japan Analytics' estimate of annual required return (6% on net operating assets), and the company's estimated no-growth valuation is well above its current market capitalization. So why has Hitachi's share price lagged?Answers may be found in the company's recent performance and its new 2021 Mid-term Management Plan, in the slow and very long-term nature of its restructuring plan, and in the uncertain outlook for the global economic environment upon which its future growth depends. Instead of reaching new highs as management hopes, profits may peak out due to trade friction, general economic weakness, and the company's exposure to China and the auto industry, each of which accounts for about 11% of consolidated sales.Management's plans are sensible and include both significant changes to the business portfolio and substantial investments in new technologies, but compared with what is going on in the wider world of Big Data, the Internet of Things, Artificial Intelligence and robotics, they do not strike us as unusually innovative. And there is the risk inherent in large-scale M&amp;A (see Hitachi (6501 JP): A Bold but Risky Acquisition of ABB’s Power Grids by Arun George).That having been said, following the write-off of the Horizon nuclear power project last fiscal year, management is guiding for a near-doubling of net profit in FY Mar-20 and is targeting an additional 30% profit growth in the following two years. That, in our estimation, is an ambitious but not unrealistic target.At ¥3,622 (Friday, May 24, closing price), Hitachi is selling at 8x management's EPS guidance for FY Mar-20, which is near the bottom of its 6-year P/E range (5.9x - 24.1x). Assuming no major write-downs and a normal tax rate, the achievement of management's mid-term targets could bring the P/E down to 6x. Our conclusion is that Hitachi's restructuring efforts are not sufficiently appreciated and that, from a long-term perspective, its shares are under-valued.

Hitachi Ltd. (6501 JP): New Mid-Term Plan

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.

The <a href="https://asia.nikkei.com/Business/Business-deals/Exclusive-LNG-plant-engineer-Chiyoda-to-gain-1.4bn-lifeline" target="_blank">Nikkei reported</a> this morning that <a href="https://www.smartkarma.com/entities/6232" target="_blank" data-smartkarma-citation="entities:6232:1">Chiyoda Corp (6366 JP)</a> would receive a total of over ¥150bn in financial support from <a href="https://www.smartkarma.com/entities/20668" target="_blank" data-smartkarma-citation="entities:20668:1">Mitsubishi Corp (8058 JP)</a> and <a href="https://www.smartkarma.com/entities/8619" target="_blank" data-smartkarma-citation="entities:8619:1">Mitsubishi Ufj Financial Group Inc (Adr) (MTU US)</a>. This amount is larger than we expected and coincides with greater expected losses for the fiscal year. With that said, this move goes a long way towards addressing the uncertainty surrounding the company's balance sheet and should reassure both investors and clients.

The Nikkei reported this morning that Chiyoda Corp (6366 JP) would receive a total of over ¥150bn in financial support from Mitsubishi Corp (8058 JP) and Mitsubishi Ufj Financial Group Inc (Adr) (MTU US). This amount is larger than we expected and coincides with greater expected losses for the fiscal year. With that said, this move goes a long way towards addressing the uncertainty surrounding the company's balance sheet and should reassure both investors and clients.

Chiyoda: Financing Bigger Than Expected on Larger Losses

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

The results are in. <a href="https://www.smartkarma.com/entities/7797" target="_blank" data-smartkarma-citation="entities:7797:1">Hitachi Ltd (6501 JP)</a>'s Taiwanese elevator subsidiary "successfully" completed the Tender Offer. The Tender Offer reached its threshold of unconditionality on the 17th of April as discussed in <a href="https://www.smartkarma.com/insights/hitachi-deal-for-yungtay-meets-all-conditions" target="_blank" data-smartkarma-citation="insights:29271">Hitachi Deal for Yungtay Meets All Conditions.</a> The next day an EGM elected a new slate of directors whereby the Hitachi/Yungtay side got three directors, the "Market Faction" led by the The Baojia Group (寶佳集團) and dissident cousin to the former chairman (Hsu Tso-Li) Hsu Tso-Ming (who is now General Manager of Yungtay China) and including the representative entities of <a href="https://www.smartkarma.com/entities/25024" target="_blank" data-smartkarma-citation="entities:25024:1">Schindler Holding Ag (SCHN SW)</a> and <a href="https://www.smartkarma.com/entities/12750" target="_blank" data-smartkarma-citation="entities:12750:1">United Technologies (UTX US)</a>'s Otis Elevators business - which combined have 11+% between them - obtained three seats, and then three independent director slots were filled with one coming from the management slate, and two coming from the Market Faction. The "opposition" had in some way "won" management rights just 4 days before the end of the Tender Offer which was supposed to lead to Hitachi control of its long-time partner in Taiwan and China.This EGM result did not block the Tender Offer because under the <a href="http://twse-regulation.twse.com.tw/ENG/EN/law/DAT0201.aspx?FLCODE=FL007245" target="_blank">Regulations Governing Public Tender Offers for Securities of Public Companies</a> of Taiwan, Article 19 Paragraph 2 SubPara 2, if an Offeror has announced that "the conditions of the public tender offer have been achieved" (as the Offeror did on the 17th), shareholders who have tendered may no longer withdraw their tendered shares.So it came down to what the results of the Tender were. If Hitachi got over 50%, they could win back control. If they got 34%, they would have negative control but not much else. The initial result as of the close of the 17th was that Hitachi had achieved - when combining tendered shares with its own holdings - negative control with greater than one-third of the shares. <h2>The New News</h2>The end result is out and 114,409,932 shares were tendered against the minimum of 88,504,328 required to make the tender a success. Proceeds will be paid to tendering former shareholders seven business days after the 22nd of April. But that leaves Hitachi with ~39.7% of shares out. That is not enough to guarantee a win in the next proxy fight which would normally come up in June this year. In speaking to local reporters after the vote on Thursday last week, "market faction" leaders went out of their way to say that they would work with management and Hitachi. It is not as if they have a great deal of choice but it is not clear what their endgame would be. They have been the proverbial dog chasing the car down the street. Now they have caught it. What do they do?Previous insights about the structure and positioning of the "opposition" in this situation are <a href="https://www.smartkarma.com/insights/going-up-hitachi-tender-for-yungtay-engineering-1507-tt" target="_blank" data-smartkarma-citation="insights:25395">Going Up! Hitachi Tender for Yungtay Engineering (1507 TT)</a> and <a href="https://www.smartkarma.com/insights/yungtay-noises-haven-t-produced-a-result-yet" target="_blank" data-smartkarma-citation="insights:28239">Yungtay Noises Haven't Produced a Result Yet</a>. Since both of those, the Baojia Group have raised their stake to 15+%, and those friendly/supporting of the Baojia Group being the leader of the 'opposition' here probably control close to a third of the shares or more as well. The turnout at the EGM was close to 90% and Hitachi's total shareholding is well below 50% indicating that unless there is some game-playing about layering and stacking votes the next time there is an EGM to elect directors, Hitachi may have to suffer in silence for a while. Which raises the question... what should Yungtay shareholders do?

The results are in. Hitachi Ltd (6501 JP)'s Taiwanese elevator subsidiary "successfully" completed the Tender Offer. The Tender Offer reached its threshold of unconditionality on the 17th of April as discussed in Hitachi Deal for Yungtay Meets All Conditions. The next day an EGM elected a new slate of directors whereby the Hitachi/Yungtay side got three directors, the "Market Faction" led by the The Baojia Group (寶佳集團) and dissident cousin to the former chairman (Hsu Tso-Li) Hsu Tso-Ming (who is now General Manager of Yungtay China) and including the representative entities of Schindler Holding Ag (SCHN SW) and United Technologies (UTX US)'s Otis Elevators business - which combined have 11+% between them - obtained three seats, and then three independent director slots were filled with one coming from the management slate, and two coming from the Market Faction. The "opposition" had in some way "won" management rights just 4 days before the end of the Tender Offer which was supposed to lead to Hitachi control of its long-time partner in Taiwan and China.This EGM result did not block the Tender Offer because under the Regulations Governing Public Tender Offers for Securities of Public Companies of Taiwan, Article 19 Paragraph 2 SubPara 2, if an Offeror has announced that "the conditions of the public tender offer have been achieved" (as the Offeror did on the 17th), shareholders who have tendered may no longer withdraw their tendered shares.So it came down to what the results of the Tender were. If Hitachi got over 50%, they could win back control. If they got 34%, they would have negative control but not much else. The initial result as of the close of the 17th was that Hitachi had achieved - when combining tendered shares with its own holdings - negative control with greater than one-third of the shares. The New NewsThe end result is out and 114,409,932 shares were tendered against the minimum of 88,504,328 required to make the tender a success. Proceeds will be paid to tendering former shareholders seven business days after the 22nd of April. But that leaves Hitachi with ~39.7% of shares out. That is not enough to guarantee a win in the next proxy fight which would normally come up in June this year. In speaking to local reporters after the vote on Thursday last week, "market faction" leaders went out of their way to say that they would work with management and Hitachi. It is not as if they have a great deal of choice but it is not clear what their endgame would be. They have been the proverbial dog chasing the car down the street. Now they have caught it. What do they do?Previous insights about the structure and positioning of the "opposition" in this situation are Going Up! Hitachi Tender for Yungtay Engineering (1507 TT) and Yungtay Noises Haven't Produced a Result Yet. Since both of those, the Baojia Group have raised their stake to 15+%, and those friendly/supporting of the Baojia Group being the leader of the 'opposition' here probably control close to a third of the shares or more as well. The turnout at the EGM was close to 90% and Hitachi's total shareholding is well below 50% indicating that unless there is some game-playing about layering and stacking votes the next time there is an EGM to elect directors, Hitachi may have to suffer in silence for a while. Which raises the question... what should Yungtay shareholders do?

Hitachi Deal for Yungtay Completes But Control Is Elusive

After Taiwan's Ministry of Economic Affairs approved <a href="https://www.smartkarma.com/entities/7797" target="_blank" data-smartkarma-citation="entities:7797:1">Hitachi Ltd (6501 JP)</a>'s takeover of <a href="https://www.smartkarma.com/entities/14121" target="_blank" data-smartkarma-citation="entities:14121:1">Yungtay Engineering (1507 TT)</a> on Friday the 12th, yesterday on 17 April Taiwan's Fair Trade Commission approved the deal (approval in Chinese <a href="https://www.ftc.gov.tw/internet/main/doc/docDetail.aspx?uid=126&amp;docid=15856" target="_blank">here</a>), saying that while there would be an overall increase in "market power" between the two companies, given the presence of strong market competition, it saw little ability for the company to unilaterally take action to disadvantage customers or the market, and the TFTC sees little overall restriction on competition in the market due to the deal.That meant that all regulatory conditions had been met. Yesterday, the company also announced that 89,002,841 shares had tendered against a minimum threshold of 88,504,328 shares.That means that this deal is, for all intents and purposes, done.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/085/262/original/Screenshot%202019-04-18%20at%2010.07.26%20AM.png?1555553269" class="editor-image img-responsive" data-smartkarma-image-id="85262"></figure><div class="content-caption">excerpted from MOPs announcement <a href="http://mops.twse.com.tw/mops/web/t146sb05" target="_blank">page</a> (click search button at right, see note on 17-April)</div>There is an EGM today where the shareholders could potentially vote out existing management, but the this deal is effectively done and dusted. Fireworks may however await.

After Taiwan's Ministry of Economic Affairs approved Hitachi Ltd (6501 JP)'s takeover of Yungtay Engineering (1507 TT) on Friday the 12th, yesterday on 17 April Taiwan's Fair Trade Commission approved the deal (approval in Chinese here), saying that while there would be an overall increase in "market power" between the two companies, given the presence of strong market competition, it saw little ability for the company to unilaterally take action to disadvantage customers or the market, and the TFTC sees little overall restriction on competition in the market due to the deal.That meant that all regulatory conditions had been met. Yesterday, the company also announced that 89,002,841 shares had tendered against a minimum threshold of 88,504,328 shares.That means that this deal is, for all intents and purposes, done.excerpted from MOPs announcement page (click search button at right, see note on 17-April)There is an EGM today where the shareholders could potentially vote out existing management, but the this deal is effectively done and dusted. Fireworks may however await.

Hitachi Deal for Yungtay Meets All Conditions

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

Quantitative Analysis

- MARKET COMPOSITE -<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/082/944/original/2019-03-24_06-29-24.png?1553376576" class="editor-image img-responsive" data-smartkarma-image-id="82944"></figure><div class="content-caption">Source: Japan Analytics</div>FIVE-MONTH HIGH - This bear market rally is now ending. The market composite rose by 15% from the Christmas Day low, peaking on 26th February at ¥659t. The market-value-based percentage above moving averages reached a five-month on Friday. However, the three-month change in that percentage is suggesting that a new bear phase will now commence.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/082/945/original/2019-03-24_06-37-53.png?1553377087" class="editor-image img-responsive" data-smartkarma-image-id="82945"></figure><div class="content-caption">Source: Japan Analytics</div>SELL SIGNAL - The three-month change in the market-value-based percentage above moving averages reached 38 on Friday. Although this indicator is not always reliable as a long-term indicator, it has been helpful over shorter periods and has called the most recent peak in October and December's trough.  We now expect at least a decline in the market composite to below ¥600t and, if economic conditions continue to weaken, a re-test of the December low. <hr>- SECTORS - <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/082/947/original/2019-03-24_07-15-15.png?1553379324" class="editor-image img-responsive" data-smartkarma-image-id="82947"></figure><div style="text-align: left;" class="content-caption">
NB: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.</div>SECTOR BREAKDOWN - The top six sectors remain mostly domestic and defensive. REITs,Restaurants, Healthcare, Transportation, and Utilities continue from our previous review with Other Commercial Products replacing Information Technology. Equally predictable is the bottom half-dozen - Banks, Non-Bank Finance, Autos, Retail, and Metals remain from two weeks ago, with Energy replacing Construction. With the Yen having broken the ¥110 level against the US dollar on Friday, we would expect the Autos, Machinery, Electrical Equipment, Technology Hardware, and Chemicals sectors to weaken further as indicated by their Negative Crossover percentages. <hr>- COMPANIES -COMPANY MOVING AVERAGE OUTLIERS - As with the Market Composite and Sectors, the Moving Average Outlier indicator uses a weighted sum of each company's share price relative to its 5-day, 20-day, 60-day, 120-day and 240-day moving averages. 'Extreme' values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. <div class="content-highlight">
In the DETAIL section below, we highlight the current top and bottom twenty-five large capitalisation outliers, as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
Our most extreme positive outlier two weeks ago, <a href="https://www.smartkarma.com/entities/2709" target="_blank" data-smartkarma-citation="entities:2709:1">AnGes (4563 JP)</a> is still the most extreme large cap positive outlier and gained a further 8% over the fortnight. We recommend taking short-term profits.
In the same sector <a href="https://www.smartkarma.com/entities/21001" target="_blank" data-smartkarma-citation="entities:21001:1">Eisai (4523 JP)</a> is the most extreme negative outlier after falling by 16.6% on Friday on the discontinuation of the clinical phase 3 trials of Biogen's Alzheimer's treatment Aducanumab as the primary endpoint is unlikely to be reached. Now at an eight-month Relative Price Score low, a short-term recovery to above ¥8,000 is likely.

</div><div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/082/959/original/2019-03-24_08-46-23.png?1553385811" class="editor-image img-responsive" data-smartkarma-image-id="82959"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/082/963/original/2019-03-24_10-37-51.png?1553391481" class="editor-image img-responsive" data-smartkarma-image-id="82963"></figure>Source: Japan Analytics
</div>

- MARKET COMPOSITE -Source: Japan AnalyticsFIVE-MONTH HIGH - This bear market rally is now ending. The market composite rose by 15% from the Christmas Day low, peaking on 26th February at ¥659t. The market-value-based percentage above moving averages reached a five-month on Friday. However, the three-month change in that percentage is suggesting that a new bear phase will now commence.Source: Japan AnalyticsSELL SIGNAL - The three-month change in the market-value-based percentage above moving averages reached 38 on Friday. Although this indicator is not always reliable as a long-term indicator, it has been helpful over shorter periods and has called the most recent peak in October and December's trough.  We now expect at least a decline in the market composite to below ¥600t and, if economic conditions continue to weaken, a re-test of the December low. - SECTORS - 
NB: The 'sparklines' show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the 'STDev' column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.SECTOR BREAKDOWN - The top six sectors remain mostly domestic and defensive. REITs,Restaurants, Healthcare, Transportation, and Utilities continue from our previous review with Other Commercial Products replacing Information Technology. Equally predictable is the bottom half-dozen - Banks, Non-Bank Finance, Autos, Retail, and Metals remain from two weeks ago, with Energy replacing Construction. With the Yen having broken the ¥110 level against the US dollar on Friday, we would expect the Autos, Machinery, Electrical Equipment, Technology Hardware, and Chemicals sectors to weaken further as indicated by their Negative Crossover percentages. - COMPANIES -COMPANY MOVING AVERAGE OUTLIERS - As with the Market Composite and Sectors, the Moving Average Outlier indicator uses a weighted sum of each company's share price relative to its 5-day, 20-day, 60-day, 120-day and 240-day moving averages. 'Extreme' values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen. 
In the DETAIL section below, we highlight the current top and bottom twenty-five large capitalisation outliers, as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
Our most extreme positive outlier two weeks ago, AnGes (4563 JP) is still the most extreme large cap positive outlier and gained a further 8% over the fortnight. We recommend taking short-term profits.
In the same sector Eisai (4523 JP) is the most extreme negative outlier after falling by 16.6% on Friday on the discontinuation of the clinical phase 3 trials of Biogen's Alzheimer's treatment Aducanumab as the primary endpoint is unlikely to be reached. Now at an eight-month Relative Price Score low, a short-term recovery to above ¥8,000 is likely.


Source: Japan Analytics


🇯🇵 Japan: Moving Average Outliers - Market Sell Signal Generated + 6920, 8036, 6758, 2326, 3064

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 Adr (HTHIY US)

Hitachi Ltd. (6501 JP): New Mid-Term Plan

Management's efforts to rationalize the consolidated operations of Hitachi Ltd. have generally been effective: gross profit has risen while total...

Scott Foster

Chiyoda: Financing Bigger Than Expected on Larger Losses

The Nikkei reported this morning that Chiyoda Corp (6366 JP) would receive a total of over ¥150bn in financial support from Mitsubishi Corp (8058...

Mio Kato

Hitachi Deal for Yungtay Completes But Control Is Elusive

The results are in. Hitachi Ltd (6501 JP)'s Taiwanese elevator subsidiary "successfully" completed the Tender Offer. The Tender Offer reached its...

Travis Lundy

Hitachi Deal for Yungtay Meets All Conditions

After Taiwan's Ministry of Economic Affairs approved Hitachi Ltd (6501 JP)'s takeover of Yungtay Engineering (1507 TT) on Friday the 12th,...

Travis Lundy

🇯🇵 Japan: Moving Average Outliers - Market Sell Signal Generated + 6920, 8036, 6758, 2326, 3064

- MARKET COMPOSITE -FIVE-MONTH HIGH - This bear market rally is now ending. The market composite rose by 15% from the Christmas Day low, peaking on...

Campbell Gunn

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