Power Hustle: The Remarkable Journey of Hitachi Energy
By Marty Fritz, Tokyo
Artificial Intelligence growth is igniting Hitachi's advancements
Back in the day, they said fortune favors the gutsy. Hitachi knows this all too well. Four years ago, the Japanese octopus snatched the power division of ABB for a staggering $10.8 billion. The main goal? Embrace clean energy sources and digitize the energy sector. The marriage of ABB's brag-worthy tech with Hitachi's digital Lumada platform was expected to unveil fresh fields for growth, particularly in the stadium of decentralized power and eco-friendly energy solutions.
Booming AI Data Centers
Fast forward, this power grid game, which has been running as "Hitachi Energy" since 2021, has become the corporation's main power player. Not just 'cause the calculation panned out big time - the influx of renewables offered the expected boost, as promised. But Hitachi didn't anticipate a bonanza in AI creation. The construction of smarminess data centers has skyrocketed the demand for power grid equipment and has transformed into a mighty growth engine for Hitachi.
According to the International Energy Agency (IEA), the worldwide power crunch for AI data centers will surge 2.3 times by 2026, reaching 1,050 terawatt-hours compared to 2022. Adding fuel to the fire, the growth in emerging markets and the expansion of renewables demand the creation of 80 million kilometers of distribution networks. In this scenario, Hitachi Energy foresees its sales doubling by 2030 to $30 billion compared to the current fiscal year. This division currently generates 23% of the company's income, trailing only the tentpole performers.
The Rare "Supercycle"
In the first half of the fiscal year, which spans April to September, Hitachi Energy jacked up its adjusted Ebitda revenue by around 90% year-on-year to 121.9 billion yen ($760 million). In the second quarter, this division contributed 56.7 billion yen ($354 million) to this revenue line, constituting 22% of adjusted Ebitda. These businesses delivered an operating margin of 10.1%.
Andreas Schierenbeck, the German honcho of Hitachi Energy headquartered in Zurich, tagged the present increase in demand for power distribution and transformers as a "supercycle lasting 10 to 20 years." Hitachi Energy secured new orders worth 2 trillion yen ($12.5 billion) just in the first half of the year. "The boost in capacity is not a walk in the park and will probably not happen at hyper-speed," Schierenbeck explained to the Financial Times. Power projects would be delayed, and existing infrastructure would need to continue serving. "The juice is heavy, and everyone is feeling the squeeze," Schierenbeck said, echoing the sentiments of the former CEO of Uniper. This sentiment is particularly prevalent in the transformer market.
Stock Doubling in 2024
Hitachi's stock has been burning up the charts in Japan due to a successful rejig, a focus on power grids, railways, and digital services, and strategic sale of other businesses. Over the last twelve months, the stock has almost doubled due to anticipated growth, particularly in the power grid sector. Currently, Hitachi's market capitalization ranks fourth in Japan at a whopping 18.6 trillion yen (116 billion euros), trailing only Toyota, MUFG, and Sony. However, its price-to-earnings ratio has soared to a robust 28, and its price-to-book ratio of 3.4 and price-to-sales ratio of 2 are fairly pricey for a Japanese stock, while its return on equity of 5.5% and dividend yield of 1% are slightly below average.
Hitachi brushes off these concerns, having transformed into an investment goods and technology company, and it looks up to Siemens and Schneider Electric as benchmarks for its market capitalization. President Keiji Kojima has announced plans to reach a similar price-to-earnings ratio to digital companies by fortifying the digital platform Lumada.
Many analysts remain bullish. Stefan Rheinwald, the big cheese of equity analysis at Waverton Investment, foresees burgeoning profit potential in power distribution, rail transport, and digital technologies. Comgest, a portfolio manager, upped its Hitachi stake as a 'geographical diversification away from buying U.S. tech stocks,' according to Richard Kaye. "The stock is still undervalued as investors have yet to fully grasp its growth potential," Nikkei quoted the analyst.
Hitachi's financials also gained from the struggling yen, as the company generated 62% of its revenue overseas last year. Both thePower Grid Business and the Rail Division have a robust presence in Europe. On the flip side, 'the system development is primarily based in Japan and therefore stable,' emphasized Tomonobu Sekiguchi from Japanese asset manager Asset Management One. Furthermore, overseas power infrastructure projects are less sensitive to short-term macroeconomic factors.
- Hitachi Energy, formerly a division of Hitachi, has become the company's primary source of growth, thanks to its success in the power grid sector and the unexpected boom in AI data center construction.
- According to the International Energy Agency, the demand for power for AI data centers will increase 2.3 times by 2026, presenting a substantial growth opportunity for companies like Hitachi Energy.
- Other than the power division, Hitachi also has significant interests in the real-estate and technology sectors, particularly in areas like artificial intelligence and digital services.
- Analysts like Stefan Rheinwald and Richard Kaye see promising profit potential in Hitachi's power distribution, rail transport, and digital technologies, suggesting that the stock is still undervalued.
- The global power crunch for AI data centers, coupled with the expansion of renewables and growth in emerging markets, promises to double Hitachi Energy's sales to $30 billion by 2030, according to Hitachi Energy's forecasts.
- In the macroeconomic field, Hitachi's financials benefit from the struggling yen, as the company generates a significant portion of its revenue overseas, and its power infrastructure projects are less sensitive to short-term fluctuations.
