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.



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

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Equity Bottom-Up

E-commerce package deliveries at <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> grew 13% in April as people stayed at home, but the leading couriers continue to struggle with this growth in demand. New models, new ideas and a rebalancing of the load are needed to help move the service forward in the short-term.

E-commerce package deliveries at Yamato Holdings (9064 JP) grew 13% in April as people stayed at home, but the leading couriers continue to struggle with this growth in demand. New models, new ideas and a rebalancing of the load are needed to help move the service forward in the short-term.

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. 

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

Senior Bank Analyst - Japanese Banks, Windamee Research

J. Brian Waterhouse

Senior Bank Analyst - Japanese Banks

Windamee Research

Japanese Banks

Full details are finally starting to emerge of the extent of the destruction to once-proud <a href="https://www.smartkarma.com/entities/suruga-bank-ltd" target="_blank" data-smartkarma-citation="entities:6267:1">Suruga Bank Ltd (8358 JP)</a>‘s balance-sheet and reputation caused by its catastrophic involvement in the fraudulent ‘share house’ debacle and other property investment lending disasters.  FY3/2019 consolidated net losses exceeded ¥97.1 billion (US$892.6 million).  Roughly 60% of the bank’s entire ¥1.7 trillion investment loan portfolio is deemed to have been “inappropriate”, but not necessarily irrecoverable. The bank is cautiously guiding for consolidated net profits in FY3/2020 of ¥10.5 billion, but the dividend remains suspended indefinitely and much uncertainty remains.Heads continue to roll: at least 117 staff have been disciplined, according to media reports.  At the Board level, 5 senior Board members (including then-chairman Mitsuyoshi Okano and then-president Akihiro Yoneyama) resigned on 7 September 2018.  After the upcoming AGM at the end of June, only incumbent president Michio Arikuni is likely to remain of the current management team: all others are expected to step down, including four external directors, as the bank seeks to put even further distance between it and any lingering perception of influence from the Okano Family.Suruga Bank’s share price is currently drifting in the mid-¥400 range.  It is down over 65% YoY.  There is perhaps some comfort to any remaining loyal shareholders in the knowledge that the stock is down a ‘mere’ 19% in the last three months.  That said, potential ‘white knights’, including <a href="https://www.smartkarma.com/entities/shinsei-bank-ltd" target="_blank" data-smartkarma-citation="entities:16897:1">Shinsei Bank (8303 JP)</a>, are biding their time and not rushing to invest, suggesting they, too, expect the stock price to go lower still.  Caveat emptor (May the buyer beware!)

Full details are finally starting to emerge of the extent of the destruction to once-proud Suruga Bank Ltd (8358 JP)‘s balance-sheet and reputation caused by its catastrophic involvement in the fraudulent ‘share house’ debacle and other property investment lending disasters.  FY3/2019 consolidated net losses exceeded ¥97.1 billion (US$892.6 million).  Roughly 60% of the bank’s entire ¥1.7 trillion investment loan portfolio is deemed to have been “inappropriate”, but not necessarily irrecoverable. The bank is cautiously guiding for consolidated net profits in FY3/2020 of ¥10.5 billion, but the dividend remains suspended indefinitely and much uncertainty remains.Heads continue to roll: at least 117 staff have been disciplined, according to media reports.  At the Board level, 5 senior Board members (including then-chairman Mitsuyoshi Okano and then-president Akihiro Yoneyama) resigned on 7 September 2018.  After the upcoming AGM at the end of June, only incumbent president Michio Arikuni is likely to remain of the current management team: all others are expected to step down, including four external directors, as the bank seeks to put even further distance between it and any lingering perception of influence from the Okano Family.Suruga Bank’s share price is currently drifting in the mid-¥400 range.  It is down over 65% YoY.  There is perhaps some comfort to any remaining loyal shareholders in the knowledge that the stock is down a ‘mere’ 19% in the last three months.  That said, potential ‘white knights’, including Shinsei Bank (8303 JP), are biding their time and not rushing to invest, suggesting they, too, expect the stock price to go lower still.  Caveat emptor (May the buyer beware!)

Suruga Bank (8358 JP):  Purging the Augean Stables 2019: Part 7 - Executive Executions

Japan

SG Holdings Co., Ltd. offers courier services. The Company provides goods delivery, cargo logistics, goods pickup, and other services. SG Holdings also operates real estate development, human resources management, and other businesses.

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SG Holdings (9143 JP)

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

Hitachi Transport & SG Holdings: Consciously Uncoupling

In May of 2016

Travis Lundy

Yamato Struggling with Rising Demand

E-commerce package deliveries at Yamato Holdings (9064 JP) grew 13% in April as people stayed at home, but the leading couriers continue to...

Michael Causton

Hitachi Transport System (9086 JP): Uptrend Should Resume

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...

Scott Foster

Suruga Bank (8358 JP): Purging the Augean Stables 2019: Part 7 - Executive Executions

Full details are finally starting to emerge of the extent of the destruction to once-proud Suruga Bank Ltd (8358 JP)‘s balance-sheet and reputation...

J. Brian Waterhouse

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