Hitachi: Spotlight On Strategy Briefings And Capital Allocation (OTCMKTS:HTHIY)

Elevator Pitch

I have a Buy investment rating assigned to Hitachi, Ltd.’s (OTCPK:HTHIY) [6501:JP] shares.

I shared my thoughts about Hitachi’s automotive systems and digital services businesses with my prior September 22, 2022 article.

My view of Hitachi turns positive, following an analysis of the company’s research & development (R&D) and intellectual property or IP strategies, and its recent capital allocation moves. This leads me to raise my rating for Hitachi from a Hold to a Buy.

Note that Hitachi’s Over-the-Counter or OTC shares have reasonably good liquidity, but investors can also trade in the company’s Tokyo-listed shares which are even more liquid. Based on data drawn from S&P Capital IQ, the three-month average daily trading values for Hitachi’s shares listed on the OTC market and the Tokyo Stock Exchange were around $5 million and $140 million, respectively. Stock brokerages such as Interactive Brokers allow their clients to trade in foreign shares, including those listed in Japan.

R&D And IP Strategies

Hitachi offered updates on the company’s IP and R&D strategies in briefings held this Monday on December 5, 2022.

With respect to the company’s IP strategy, it is relevant to highlight that Hitachi has recently established a new business division devoted to managing the company’s intellectual property, which is led by Chief Intellectual Property Officer, Stephen Manetta.

According to his LinkedIn profile, Stephen Manetta has only stepped into his new role at Hitachi in May of this year. Manetta has law and engineering degrees. Also he has had relevant experience in the intellectual property field working at GE (GE) Oil & Gas, law firm Chadbourne & Parke LLP, and Schneider Electric (OTCPK:SBGSF) (OTCPK:SBGSY) in the past. Both GE and Schneider Electric are industrial conglomerates similar to Hitachi, so Manetta’s prior working experience in these two firms might help to ease his transition to the new role with Hitachi.

There are two specific areas of Manetta’s IP strategy briefing that warrant attention. Firstly, Manetta wants Hitachi’s IP strategy to enable “company driven investments in consideration of value.” Secondly, Manetta aims to make sure that intellectual property is regarded as a “business asset” at Hitachi with an eye on opportunities to push ahead with the “commercialization of innovation.”

In my view, it is possible that the new Chief Intellectual Property Officer, Stephen Manetta is in a position to implement positive changes to the company’s IP strategy. As per his December 5, 2022 presentation, Hitachi should be more conscious of the risk-reward and value creation potential associated with new investments, and the company must unlock the value of hidden assets like the untapped potential of some of its existing IPs.

Separately, takeaways from Hitachi’s R&D strategy presentation on the same day are also equally positive.

Hitachi emphasized at the company’s recent R&D strategy presentation that it will continue to work closely with its clients in relation to future R&D investments and efforts, a process which it refers to as “customer co-creation”. Also, the focus of Hitachi’s R&D is on emerging trends such as digitalization and decarbonization, as evidenced by the company’s mention of DX or digital transformation and GC or green transformation in its December 5, 2022 R&D presentation.

The results speak for themselves. Hitachi has allocated roughly 7.2% of its top line to R&D investments in the prior fiscal year (YE March 31) and has guided that its current fiscal year R&D-to-sales metric will be similar to that of the previous year. Also, Hitachi disclosed that it has generated twice as much as earnings as the amount of money it spent on R&D costs in the last three years, which it deems to be indicative of good “R&D” efficiency.

In a nutshell, I am impressed by Hitachi’s R&D and IP strategies following a review of the company’s recent investor briefings this week.

All Eyes On Recent Capital Allocation Moves

Hitachi has engaged in a couple of new capital allocation initiatives, which I view as value-accretive.

On November 2, 2022, Hitachi revealed that the company has spent close to JPY182 billion buying back 27.4 million of its shares between May and October this year. The company’s current share buyback program allows for Hitachi to repurchase as much as 50 million of its shares till end-March 2023, so Hitachi has room for additional share buybacks in the next four months.

Japanese companies in general are perceived to have a preference for hoarding cash and being less keen on shareholder capital return. As such, Hitachi’s active share repurchases send a positive message to investors about the company’s shareholder friendliness.

Hitachi also announced previously on November 21, 2022 that its digital services subsidiary GlobalLogic “signed a definitive agreement to acquire Fortech, a leading software engineering services company based in Romania.”

In my prior late-September 2022 article, I referred to GlobalLogic as a “new growth engine” for Hitachi, which “is well-positioned to meet growing demand for digital transformation services.” From a capital allocation perspective, I have hoped that Hitachi will allocate more excess capital to support the future growth of GlobalLogic. As such, I am pleased that GlobalLogic has executed on a new acquisition recently as part of its inorganic growth strategy.

In summary, I am satisfied with Hitachi’s capital allocation decisions in the past month or two.

Concluding Thoughts

I have become more optimistic about Hitachi’s future prospects. A review of the company’s IP and R&D strategies and capital allocation approach leaves me more confident in Hitachi’s outlook. This explains my Buy rating for Hitachi.