Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

At the end of March 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.smartkarma.com/entities/hitachi-transport-system-ltd" target="_blank" data-smartkarma-citation="entities:2395:1" rel="noopener">Hitachi Transport System (9086 JP)</a>, and as-yet unlisted <a href="https://www.smartkarma.com/entities/sg-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:26070:1" rel="noopener">SG Holdings (9143 JP)</a><a href="https://www.hitachi.com/New/cnews/month/2016/03/f_160330a.pdf" target="_blank" rel="noopener">announced</a> that Hitachi Transport and SG subsidiary, and well-known door-to-door delivery unit Sagawa Express would form a capital and business tie-up and would look to merge "within three years" (i.e. merger by 1 April 2019). The deal was that Hitachi Transport was going to spend ¥66.3bn to buy a 20% stake in the unlisted delivery subsidiary of then still-unlisted SG Holdings, 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> was going to sell a 29% stake (out of the 59% they owned) in Hitachi Transport for ¥87.5 billion. They were both going to expand strongly outside of Asia.  HTS was known at the time for its 3PL and "Smart Logistics" capabilities to make customer supply chains more efficient, etc, whereas Sagawa was known as a top last-mile delivery business. The combined entity was set to overtake <a href="https://www.smartkarma.com/entities/yamato-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:2:1" rel="noopener">Yamato Holdings (9064 JP)</a> in terms of revenue and get closer to industry top dog <a href="https://www.smartkarma.com/entities/nippon-express-co-ltd" target="_blank" data-smartkarma-citation="entities:18582:1" rel="noopener">Nippon Express (9062 JP)</a>. It was supposed to help SG improve margins by doing more in B2B. SG IPOed in late 2017. Three years came and went. Nothing happened. There were collaborative projects started such as a "Japan-China integrated service" and "mutual utilisation of logistics facilities" such as e-commerce delivery hubs, but it was slow-going.Some signs of discord have been clear for a while. If one reads between the lines one could have wondered what the point was even in 2016, but I expect there was hope that the two sides could get along. In late May 2019 after the earnings presentation which marked the three year anniversary/deadline of a deal, and a new <a href="https://www.hitachi-transportsystem.com/en/ir/library/presentations/pdf/midtermmanagementplan_190524enR.pdf" target="_blank" rel="noopener">Mid-Term Management Plan</a> "Logisteed 2021" in which the forward-looking part had basically no mention of SG or Sagawa, the Nikkei carried an interview with HTS President Nakatani who said, when asked about the integration, "I am aware that we are moving toward integration. I would like to harmonize future directions." [Nikkei: He showed a positive attitude...] "We have decided to discuss and consider the possibility of business integration, but we have not made any decisions, including any start to discussions."Three years on and there had obviously been discussions about discussions, but the two sides hadn't made any commitment to starting discussions officially. <h2>The NEW News</h2>Today mid-day, Diamond Online released a scoop saying the capital and business tie-up between the two was going to be scrapped. The first reaction was to send Hitachi Transport shares down 10+%. Hitachi Transport's first release to the exchange said that the article wasn't based on information they announced and that it was not going to be a dissolution of the capital tie-up, just a re-arranging of the deckchairs and a board meeting was going on and there would be an announcement within the day. HTS shares - which at that point were down 7% on the day - bounced sharply. After the close it became clear there was a difference of opinion on what the "review of the level equity affiliation" actually meant. The headline of the Hitachi Transport release says "Announcement of Partial Modification of the Strategic Capital and Business Alliance with SG Holdings and SAGAWA EXPRESS". It talks at some length about what has been accomplished in four and a half years of working together and then it notes the "modification of the capital tie-up."<ol>
<li>HTS will sell the 20% of Sagawa Express that it owns for ¥87.5bn. That trade will be executed on 29 Sep 2020. </li>
<li>HTS will buy back "a portion" of the shares that SG owns in a <a href="https://www.hitachi-transportsystem.com/jp/news/pdf/20200924_jikokabusikinoshutokukaituke.pdf" target="_blank" rel="noopener">ToSTNeT-3 transaction</a> the morning of 25 September. Reminder that SG owns 32.35mm shares of HTS or 29.00% of shares out. Tomorrow morning, HTS will buy back 27.675mm shares at the closing price on the 24 September of ¥3,570. That is up to 24.8% of shares out. </li>
</ol> That is a very big unwind in a very big hurry. This creates some interesting side effects and they are well-worth thinking about. More below the fold.

At the end of March 2016, Hitachi Ltd (6501 JP),  Hitachi Transport System (9086 JP), and as-yet unlisted SG Holdings (9143 JP)announced that Hitachi Transport and SG subsidiary, and well-known door-to-door delivery unit Sagawa Express would form a capital and business tie-up and would look to merge "within three years" (i.e. merger by 1 April 2019). The deal was that Hitachi Transport was going to spend ¥66.3bn to buy a 20% stake in the unlisted delivery subsidiary of then still-unlisted SG Holdings, and Hitachi Ltd (6501 JP) was going to sell a 29% stake (out of the 59% they owned) in Hitachi Transport for ¥87.5 billion. They were both going to expand strongly outside of Asia.  HTS was known at the time for its 3PL and "Smart Logistics" capabilities to make customer supply chains more efficient, etc, whereas Sagawa was known as a top last-mile delivery business. The combined entity was set to overtake Yamato Holdings (9064 JP) in terms of revenue and get closer to industry top dog Nippon Express (9062 JP). It was supposed to help SG improve margins by doing more in B2B. SG IPOed in late 2017. Three years came and went. Nothing happened. There were collaborative projects started such as a "Japan-China integrated service" and "mutual utilisation of logistics facilities" such as e-commerce delivery hubs, but it was slow-going.Some signs of discord have been clear for a while. If one reads between the lines one could have wondered what the point was even in 2016, but I expect there was hope that the two sides could get along. In late May 2019 after the earnings presentation which marked the three year anniversary/deadline of a deal, and a new Mid-Term Management Plan "Logisteed 2021" in which the forward-looking part had basically no mention of SG or Sagawa, the Nikkei carried an interview with HTS President Nakatani who said, when asked about the integration, "I am aware that we are moving toward integration. I would like to harmonize future directions." [Nikkei: He showed a positive attitude...] "We have decided to discuss and consider the possibility of business integration, but we have not made any decisions, including any start to discussions."Three years on and there had obviously been discussions about discussions, but the two sides hadn't made any commitment to starting discussions officially. The NEW NewsToday mid-day, Diamond Online released a scoop saying the capital and business tie-up between the two was going to be scrapped. The first reaction was to send Hitachi Transport shares down 10+%. Hitachi Transport's first release to the exchange said that the article wasn't based on information they announced and that it was not going to be a dissolution of the capital tie-up, just a re-arranging of the deckchairs and a board meeting was going on and there would be an announcement within the day. HTS shares - which at that point were down 7% on the day - bounced sharply. After the close it became clear there was a difference of opinion on what the "review of the level equity affiliation" actually meant. The headline of the Hitachi Transport release says "Announcement of Partial Modification of the Strategic Capital and Business Alliance with SG Holdings and SAGAWA EXPRESS". It talks at some length about what has been accomplished in four and a half years of working together and then it notes the "modification of the capital tie-up."
HTS will sell the 20% of Sagawa Express that it owns for ¥87.5bn. That trade will be executed on 29 Sep 2020. 
HTS will buy back "a portion" of the shares that SG owns in a ToSTNeT-3 transaction the morning of 25 September. Reminder that SG owns 32.35mm shares of HTS or 29.00% of shares out. Tomorrow morning, HTS will buy back 27.675mm shares at the closing price on the 24 September of ¥3,570. That is up to 24.8% of shares out. 
 That is a very big unwind in a very big hurry. This creates some interesting side effects and they are well-worth thinking about. More below the fold.

Hitachi Transport & SG Holdings:  Consciously Uncoupling

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

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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)

FROM OPERATING TO FINANCING CASH FLOWS -  Having examined Operating Cash Flow in our previous <a href="https://www.smartkarma.com/insights/japan-stress-tests-part-2-operating-cash-flow-accruals" target="_blank" data-smartkarma-citation="insights:40321" rel="noopener">Insight</a>, we shall look into the 'stressors' between Operating Cash Flow and Financing Cash Flow. In our reformulated Cash Flow Statements, cash flows relating to operating activities are divided into Operating Cash Flows and Investing Cash Flows, which comprise Fixed Asset and Inventory Cash Flows.  Free Cash Flow is the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow. Inventories are not included in Operating Cash Flow as they are considered discretionary, are often related to Fixed asset Cash Flows, and can be highly seasonal.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/141/225/original/2020-06-21_08-34-07.png?1592698079" class="editor-image img-responsive" data-smartkarma-image-id="141225"></figure><div class="content-caption">Source: Japan Analytics</div>JAPAN WAS FCF POSITIVE IN Q4.. - Despite the decline in Operating Cash Flow in the last quarter (the final quarter of the Fiscal Year for most Japanese companies), Investing Cash Flow was more positive than in any quarter since FY2016-Q4, which also coincided with the last business cycle low. As a result, the aggregate Free Cash Flow for the 3,639 listed non-financial companies (excluding<a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener"> Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-post-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:359:1" rel="noopener">Japan Post (6178 JP)</a>, <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> and <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>) was an impressive ¥8.4 trillion or an annualised yield of 6.4%.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/141/223/original/2020-06-21_08-51-12.png?1592697088" class="editor-image img-responsive" data-smartkarma-image-id="141223"></figure><div class="content-caption">Source: Japan Analytics</div>..AS CAPEX WAS PUT ON HOLD - Seasonally Japanese companies capital expenditures are higher in the second half of the fiscal year- in FY2019, ¥21trillion was added to Operating Assets. In contrast, FY2020 saw a 79% decline in capex to ¥4.4 trillion, all of which was spent in the third quarter. This decline is the most substantial second-half quarter-on-quarter contraction in fixed asset outflows since 2009.   In the DETAIL below, we shall highlight those 'outlier' large-cap companies which are either end of the capex, inventory and Free Cash Flow tables, and focus on those with the greatest intimations of business 'stress'. We have excluded the Real Estate Sector from this analysis due to the inherent volatility of fixed assets and inventory cash flows fo these companies.

FROM OPERATING TO FINANCING CASH FLOWS -  Having examined Operating Cash Flow in our previous Insight, we shall look into the 'stressors' between Operating Cash Flow and Financing Cash Flow. In our reformulated Cash Flow Statements, cash flows relating to operating activities are divided into Operating Cash Flows and Investing Cash Flows, which comprise Fixed Asset and Inventory Cash Flows.  Free Cash Flow is the sum of Operating Cash Flow, Fixed Asset Cash Flow and Inventory Cash Flow. Inventories are not included in Operating Cash Flow as they are considered discretionary, are often related to Fixed asset Cash Flows, and can be highly seasonal.Source: Japan AnalyticsJAPAN WAS FCF POSITIVE IN Q4.. - Despite the decline in Operating Cash Flow in the last quarter (the final quarter of the Fiscal Year for most Japanese companies), Investing Cash Flow was more positive than in any quarter since FY2016-Q4, which also coincided with the last business cycle low. As a result, the aggregate Free Cash Flow for the 3,639 listed non-financial companies (excluding Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)) was an impressive ¥8.4 trillion or an annualised yield of 6.4%.Source: Japan Analytics..AS CAPEX WAS PUT ON HOLD - Seasonally Japanese companies capital expenditures are higher in the second half of the fiscal year- in FY2019, ¥21trillion was added to Operating Assets. In contrast, FY2020 saw a 79% decline in capex to ¥4.4 trillion, all of which was spent in the third quarter. This decline is the most substantial second-half quarter-on-quarter contraction in fixed asset outflows since 2009.   In the DETAIL below, we shall highlight those 'outlier' large-cap companies which are either end of the capex, inventory and Free Cash Flow tables, and focus on those with the greatest intimations of business 'stress'. We have excluded the Real Estate Sector from this analysis due to the inherent volatility of fixed assets and inventory cash flows fo these companies.

🇯🇵 JAPAN - Stress Tests Part 3 - Inventory, Fixed Asset & Free Cash Flows

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?

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

Hitachi Transport System / Equity Bottom-Up

The shares of Hitachi Transport System have had a good run, more than doubling over three years to an all-time high of ¥3,545 on July 2, 2019 before dropping back 11% to close at ¥3,165 on September 27. At this price, they are selling at 16x management's EPS guidance for FY Mar-20 and 1.6x book value as of the end of June. These valuations are near the top of their 5-year ranges, but calculations by Japan Analytics indicate 10% potential upside to a forecast-based no-growth valuation (see charts below). The rise in the share price has been driven by efficiency gains in the company's domestic and global logistics businesses. In the four fiscal years to Mar-19, revenues increased 4.5% to ¥708.8 billion, operating profit increased 45.3% to ¥31.2 billion, the operating margin rose from 3.2% to 4.4%, and ROE rose from 7.6% to 10.2%. In the three months to June, operating profit increased 7.0% year-on-year on a 2.9% decline in revenues. Revenues declined due to a change in the scope of consolidation, declining volumes in the auto parts business and the appreciation of the yen. For FY Mar-20 as a whole, management is guiding for a 1.0% increase in operating profit to ¥31.5 billion on a 1.2% decline in revenues to ¥700 billion, resulting in an operating margin of 4.5%. By FY Mar-22, management expects operating profit to reach ¥36.0 billion on revenues of ¥720 billion, the operating margin rising to 5.0% due to a combination of growth and further improvements in the cost structure.  M&amp;A could lift revenues to ¥800 billion, although the timing of acquisitions and their profitability are uncertain.1Q results suggest that full-year guidance is conservative, while further outsourcing of global supply chain management - perhaps accelerated by the changes forced on supply chains by the trade war - should support management's longer-term plans. The biggest risks to those plans and to investors appear to be recession and yen appreciation.

The shares of Hitachi Transport System have had a good run, more than doubling over three years to an all-time high of ¥3,545 on July 2, 2019 before dropping back 11% to close at ¥3,165 on September 27. At this price, they are selling at 16x management's EPS guidance for FY Mar-20 and 1.6x book value as of the end of June. These valuations are near the top of their 5-year ranges, but calculations by Japan Analytics indicate 10% potential upside to a forecast-based no-growth valuation (see charts below). The rise in the share price has been driven by efficiency gains in the company's domestic and global logistics businesses. In the four fiscal years to Mar-19, revenues increased 4.5% to ¥708.8 billion, operating profit increased 45.3% to ¥31.2 billion, the operating margin rose from 3.2% to 4.4%, and ROE rose from 7.6% to 10.2%. In the three months to June, operating profit increased 7.0% year-on-year on a 2.9% decline in revenues. Revenues declined due to a change in the scope of consolidation, declining volumes in the auto parts business and the appreciation of the yen. For FY Mar-20 as a whole, management is guiding for a 1.0% increase in operating profit to ¥31.5 billion on a 1.2% decline in revenues to ¥700 billion, resulting in an operating margin of 4.5%. By FY Mar-22, management expects operating profit to reach ¥36.0 billion on revenues of ¥720 billion, the operating margin rising to 5.0% due to a combination of growth and further improvements in the cost structure.  M&amp;A could lift revenues to ¥800 billion, although the timing of acquisitions and their profitability are uncertain.1Q results suggest that full-year guidance is conservative, while further outsourcing of global supply chain management - perhaps accelerated by the changes forced on supply chains by the trade war - should support management's longer-term plans. The biggest risks to those plans and to investors appear to be recession and yen appreciation.

Hitachi Transport System (9086 JP): Uptrend Should Resume

Japan

Hitachi Transport System, Ltd. provides freight truck, port harbor, and marine transportation, logistics, cargo handling, warehousing, and customs clearing services.  The Company mainly transports Hitachi Ltd's freight such as industrial machinery and precision equipment.

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