Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Hitachi Construction Machinery / Event-Driven

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. The main points:<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>The stock fell like a rock - down 15% or more in high volume. Hitachi Metals fell 6%. <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></section>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 <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.  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.

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.

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 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.

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.

In May 2016, <a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener">Hitachi Ltd (6501 JP)</a>  <a href="https://www.hitachi.com/New/cnews/month/2016/05/f_160513a.pdf" target="_blank" rel="noopener">announced</a> a transaction whereby they sold a stake in <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> to <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-lease-finance" target="_blank" data-smartkarma-citation="entities:1467:1" rel="noopener">Mitsubishi UFJ Lease &amp; Finance (8593 JP)</a> to de-consolidate their holding, but would retain a 'negative control' stake of 33.4%. The result was a business and capital alliance designed to achieve more scale for the leasing companies and to improve the capital efficiency of Hitachi itself. The moves by Hitachi to improve its capital efficiency have come fast and furious the last few years with sales of <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>, <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>, a 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>, and a selldown to de-consolidate <a href="https://www.smartkarma.com/entities/hitachi-transport-system-ltd" target="_blank" data-smartkarma-citation="entities:2395:1" rel="noopener">Hitachi Transport System (9086 JP)</a> in 2016, and now more recently there is media speculation about the eventual disposition of <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>.When earnings were presented in May this year, there was a small section in the presentation deck on the bottom half of p15 of the Update on the Mid-Term Management Plan <a href="http://www.hitachi.com/New/cnews/month/2020/05/200529a/f_200529apre.pdf" target="_blank" rel="noopener">presentation </a>(the <a href="http://www.hitachi.co.jp/New/cnews/month/2020/05/0529a/f_0529apre.pdf" target="_blank" rel="noopener">Japanese</a> version has an extra word which helps clarify) talking about sales of property and assets and this got people excited. I went through it in some detail 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> and that indicated there was time for the remaining subs.<h2>The NEW News</h2>Today during business hours, there was a news story out on Diamond Online followed by a quick story on Bloomberg saying that <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 <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-lease-finance" target="_blank" data-smartkarma-citation="entities:1467:1" rel="noopener">Mitsubishi UFJ Lease &amp; Finance (8593 JP)</a> had decided to merge, and <a href="https://www.smartkarma.com/entities/mitsubishi-corp" target="_blank" data-smartkarma-citation="entities:20668:1" rel="noopener">Mitsubishi Corp (8058 JP)</a> and <a href="https://www.smartkarma.com/entities/mitsubishi-ufj-financial-group" target="_blank" data-smartkarma-citation="entities:218:1" rel="noopener">Mitsubishi UFJ Financial (MUFG) (8306 JP)</a> would each own 20% of the new merged company. The <a href="https://www.hitachi-capital.co.jp/hcc/english/newsrelease/2020/20200924e.pdf" target="_blank" rel="noopener">announcement</a> came after the close. The two companies would merge at a share exchange ratio of 1.0:5.1, with the effective date of the Merger on 1 April 2021, and shareholder meetings for each company to approve the deal in late February 2021, but it does not discuss the idea of Mitsubishi Corp owning 20% of the combined company (it already owns 20% of MUFJ Lease but its stake would be diluted in the merger.As always, more below the fold.

In May 2016, Hitachi Ltd (6501 JP)  announced a transaction whereby they sold a stake in Hitachi Capital (8586 JP) to Mitsubishi UFJ Financial (MUFG) (8306 JP) and Mitsubishi UFJ Lease &amp; Finance (8593 JP) to de-consolidate their holding, but would retain a 'negative control' stake of 33.4%. The result was a business and capital alliance designed to achieve more scale for the leasing companies and to improve the capital efficiency of Hitachi itself. The moves by Hitachi to improve its capital efficiency have come fast and furious the last few years with sales of Hitachi Kokusai Electric (6756 JP), Hitachi Koki (6581 JP), Hitachi Chemical (4217 JP), a buy-in of Hitachi High-Tech (8036 JP), and a selldown to de-consolidate Hitachi Transport System (9086 JP) in 2016, and now more recently there is media speculation about the eventual disposition of Hitachi Metals (5486 JP) and Hitachi Construction Machinery (6305 JP).When earnings were presented in May this year, there was a small section in the presentation deck on the bottom half of p15 of the Update on the Mid-Term Management Plan presentation (the Japanese version has an extra word which helps clarify) talking about sales of property and assets and this got people excited. I went through it in some detail in Hitachi's Capital Case - Liquidating Land &amp; Policy Holdings? What About the Subs? and that indicated there was time for the remaining subs.The NEW NewsToday during business hours, there was a news story out on Diamond Online followed by a quick story on Bloomberg saying that Hitachi Capital (8586 JP) and Mitsubishi UFJ Lease &amp; Finance (8593 JP) had decided to merge, and Mitsubishi Corp (8058 JP) and Mitsubishi UFJ Financial (MUFG) (8306 JP) would each own 20% of the new merged company. The announcement came after the close. The two companies would merge at a share exchange ratio of 1.0:5.1, with the effective date of the Merger on 1 April 2021, and shareholder meetings for each company to approve the deal in late February 2021, but it does not discuss the idea of Mitsubishi Corp owning 20% of the combined company (it already owns 20% of MUFJ Lease but its stake would be diluted in the merger.As always, more below the fold.

Hitachi's Hitachi Capital Capital Case - A Merger With MUFG Lease

The Nikkei reported on the 20th that Hitachi was looking to sell Hitachi Metals and had contacted foreign investment banks to do so. This is an interesting scenario as Bloomberg had previously reported that Hitachi Metals was itself looking to sell its Waupaca unit which is one of the businesses which is struggling the most at the moment. We discuss the possibilities below.

The Nikkei reported on the 20th that Hitachi was looking to sell Hitachi Metals and had contacted foreign investment banks to do so. This is an interesting scenario as Bloomberg had previously reported that Hitachi Metals was itself looking to sell its Waupaca unit which is one of the businesses which is struggling the most at the moment. We discuss the possibilities below.

After the close on Friday, <a href="https://www.smartkarma.com/entities/hitachi-ltd" target="_blank" data-smartkarma-citation="entities:7797:1" rel="noopener">Hitachi Ltd (6501 JP)</a> released its <a href="http://www.hitachi.com/New/cnews/month/2020/05/200529.html" target="_blank" rel="noopener">full-year earnings</a> (with a <a href="http://www.hitachi.com/New/cnews/month/2020/05/200529/2019_An.pdf" target="_blank" rel="noopener">news release</a>, <a href="http://www.hitachi.com/New/cnews/month/2020/05/200529/2019_Anpre.pdf" target="_blank" rel="noopener">presentation</a>, and <a href="http://www.hitachi.com/New/cnews/month/2020/05/200529/2019_Ansup.pdf" target="_blank" rel="noopener">supplemental materials</a>). It also released an 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>.An all-caps headline on the 'berg proclaimed<div class="content-highlight">        *HITACHI MULLS CUTTING CROSS SHAREHOLDINGS, SELLING PROPERTIES</div>I got several questions within the hour. There was a small section on the bottom half of p15 of the Update on the Mid-Term Management Plan <a href="http://www.hitachi.com/New/cnews/month/2020/05/200529a/f_200529apre.pdf" target="_blank" rel="noopener">presentation</a> (<a href="http://www.hitachi.co.jp/New/cnews/month/2020/05/0529a/f_0529apre.pdf" target="_blank" rel="noopener">Japanese</a> version has an extra word which helps clarify).So a little more digging was in order. There was plenty of discussion of cash management, and in the Q&amp;A there were questions about the ongoing structural reorganisation, including talk of the listed subsidiaries. The contents surprised even me.I did not expect to be so underwhelmed.

After the close on Friday, Hitachi Ltd (6501 JP) released its full-year earnings (with a news release, presentation, and supplemental materials). It also released an update on Progress of the Mid-Term Management Plan, with a webcast and a presentation deck.An all-caps headline on the 'berg proclaimed        *HITACHI MULLS CUTTING CROSS SHAREHOLDINGS, SELLING PROPERTIESI got several questions within the hour. There was a small section on the bottom half of p15 of the Update on the Mid-Term Management Plan presentation (Japanese version has an extra word which helps clarify).So a little more digging was in order. There was plenty of discussion of cash management, and in the Q&amp;A there were questions about the ongoing structural reorganisation, including talk of the listed subsidiaries. The contents surprised even me.I did not expect to be so underwhelmed.

Hitachi's Capital Case - Liquidating Land & Policy Holdings? What About the Subs?

Japan

Hitachi Metals Ltd. manufactures a wide range of specialty steel and metal products, including industrial machinery, magnetic and electronic materials and parts, and aluminium castings and wheels.  The Company's products are marketed to a variety of users including the automobile, aerospace, nuclear, and computer industries worldwide.  The Company is a subsidiary of Hitachi, Ltd.

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Hitachi Metals (5486 JP)

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In May 2016, Hitachi

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After the close on Friday, Hitachi Ltd (6501 JP) released its full-year earnings (with a news release, presentation, and supplemental materials)....

Travis Lundy

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