PSA Chemicals: Hitachi Chemical (4217) FY17 H1 Comment – Unfortunate Downward Revision Likely Seen as a One-Off
Hitachi Chemical (4217) FY17 H1 Comment – Unfortunate Downward Revision Likely Seen as a One-Off
Key Points
- In an earnings season where upward revisions have prevailed, Hitachi Chemical’s downward revision comes as a negative surprise. The reason for the ¥7.0bil revision to OP guidance (IFRS accounting) is provisioning of approximately ¥10bil for pricing cartel activities in auto condensers by Hitachi Automotive Systems. The possibility of this write-down has been around since 2013, so it is not a complete surprise and will likely be viewed as a one-time event.
- Management appears pleased that FY16 sales will exceed ¥600bil – a level achieved a decade ago which then proved unsustainable. About half of FY17 top-line growth, however, is being achieved through M&A activities in the areas of batteries and healthcare, and the OP contribution is, unfortunately, not as rosy. Battery operations continue to suffer from high lead prices, and while healthcare may prove to be a good strategy in the long run, for now life science businesses are adding to development costs.
- The company revised up Functional Materials OP guidance by ¥6.0bil to ¥49.0bil. Electronics in general is strong, although as was apparent from FY17 Q1, die-bonding materials are down 10% YoY after a strong FY16. Chemical mechanical planarization slurries continue to benefit from 3D NAND demand. LiB materials sales grew 44% in H1, despite management’s explanation that it has been operating at full capacity. The company’s intention is to pass on rising raw material costs from needle cokes.
- The shares may react negatively to the downward revision, but underlying fundamentals imply that the shares will subsequently recover.
Hitachi Chemical and its affiliates are mainly engaged in the manufacture, process, and sale of functional materials and advanced components and systems. Co.'s principal products include electronics materials, such as semiconductor epoxy molding compounds and die bonding paste and insulating varnishes; inorganic materials, such as lithium-ion batteries materials and carbon products; functional resin and adhesive film for display; photographic sensitive films; automotive products, such as molded plastics, friction materials and powder metal products; automotive batteries, industrial batteries and capacitor; electrical equipment, such as printed wiring boards; and diagnostics equipment.
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