Hitachi A Quiet Achiever In Grid Transformation (OTCMKTS:HTHIF)

Hitachi, Ltd (OTCPK:HTHIY) is a big Japanese company (not on the S&P 500) that has managed to achieve a (relatively) consistent share price increase of 46.5% over the past year. Hence it has substantially outperformed the S&P 500’s 23% rise over the same period. This is even more remarkable when one considers that the “Magnificent 7” (Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Nvidia (NVDA), Meta Platforms (META) and Tesla (TSLA)) are responsible for most of the S&P 500 outperformance in 2023. In fact, 72% of S&P 500 stocks underperformed the index in 2023. There is another S&P 500 company, General Electric (GE), with a Hitachi-like performance over the past year. In fact GE was up 66% over the past year, its best performance since 1963.

12 month performance of Hitachi, GE and S&P 500. Source Seeking Alpha

If one takes a 5-year view, the picture for Hitachi is even better as it outperforms GE and the GE share price has been more volatile. Over five years Hitachi is up 140%, GE up 119%, while the S&P 500 is up 82% over the same 5-year time period.

5 year performance of Hitachi, GE and S&P 500. Source Seeking Alpha

Here I explore why giant corporation Hitachi achieved what very few stocks did in 2023 and my take is that this involves positioning the company in a growing area which makes its success part of a long term trend. For conservative long term investors, Hitachi is worth a look. I’ve considered a little of the background of Hitachi elsewhere. Note that Hitachi celebrated the 150^th anniversary of the birth of its founder Namihei Odaira in January 2024.

Hitachi has four business segments

These are :

i) Digital Systems and Services: This segment covers a huge area from IT & digital systems of financial institutions, public offices, municipalities and social infrastructure; it also covers IT Services including solutions and services; and finally it covers Services and Platforms including digital engineering, data analytics, cloud services and IT products

ii) Green Energy and Mobility: Energy solutions (power grids, nuclear, renewables and distributed power); all aspects of railway systems

iii) Connective Industries: This is a huge mix of products and services, including building services, healthcare, robotics, water, sewage, industrial equipment. A big aspect of this is digitalisation

iv) Automotive Systems Businesses: This includes powertrains, chassis, advanced driver assistance and motorcycle systems.

Hitachi and grids of the future

A complete overview of Hitachi is beyond the scope of a single article. Here I’ll give a flavour of two areas of Hitachi Energy that are key to the grid transformations happening as carbon-based power is replaced by renewable energy (and possibly nuclear power). This itself is a huge area so I’ll just give a flavour of the issues and how Hitachi is a leader in the transition. This may not be to everyone’s liking as Hitachi’s Digital Systems and Services business is itself huge.

Two recent articles from Hitachi Energy provide insight into how the company views where energy systems are going and how its products contribute to this picture.

The first talks about flexible supply in a time when intermittent power provision (solar PV and wind power) increasingly dominates power generation. To give an example of this, the German energy system has moved from installed solar PV capacity being 6.1 GW in 2008, to 67.5 GW in 2022, to a predicted 215 GW in 2030. These numbers reflect dramatic elements that are changing residual power needs in a 24h cycle from a “duck” to a “canyon” curve. The diagram below gives Hitachi’s view of four key dimensions involved with managing variability in a renewable energy power system.

The four dimensions of flexibility with digital technology at the core. Source Hitachi Energy

The above picture might be news to readers familiar with the coal and oil & gas industries view that “base load” power is essential for a stable grid. “Base load” is an outmoded concept. The issue is energy stability and flexibility is key to a stable system. In the past, grids were configured to cope with maximum load (even if such load occurred only for a few hours each year). This led to the overbuilding of base-load power delivery. As grids get decarbonized and power generation is moving to be dominated by renewable power generation, this has led to changes to put more emphasis on dynamic grid issues. This involves a focus on supply and demand, with demand management (paying not to consume) and time-shifting of power use becoming important tools for stabilising grids in times of excessive demand. With massive expansion of grid-scale batteries, this allows very fast response to changes in the power system.

The above image helps point to different aspects of emerging grids supporting a large proportion of renewable power. One area that is often neglected is inter-connectiveness between distant grids. The Texas grid is currently isolated from both eastern and western US grids. It has been argued that had there been connectivity (through HVDC cables) either east or west, the huge Texas power outages of three years ago would have been less impactful because the weather problem was focused on Texas.

The second article from Hitachi addresses the four key technology segments and how they interrelate to provide a stable and flexible power system. The four elements are: i) supply-side flexibility; ii) demand-side flexibility; iii) energy storage and iv) dynamically controllable grids. Hitachi identifies that advanced digital technologies can unlock the potential and complementarity of these four components to deliver optimal and coordinated grid responses.

A key issue about renewable energy is that, once the capture devices are built, there is no need for continued discovery and exploitation of energy reserves. Supply issues based on political issues (eg Russian invasion of Ukraine) or international mandates (eg COVID restrictions) become less important in a renewable-based grid. A key issue about solar PV and wind power is that while it is intermittent, it is predictable, based on weather forecasting. This is different from a big centralised power plant, which while mostly reliable, is subject to sudden and unexpected outages (eg equipment breakdown, freezing of power supplies in cold weather etc).

The means of power delivery isn’t the only feature changing in a renewables based power system. Electrification of everything (including wheeled transport and low temperature heating) means that demand fluctuates more so than in the past, where transport and heating were less involved with grid-demand. Hitachi argues that only with new digital tools can modern grids be managed effectively for issues like grid congestion.

Big new changes in supply come from growing rooftop solar PV and coming offshore wind, while the emergence of electric vehicles and heat pumps for low temperature heating make for new large and flexible demands. As electric vehicles begin to offer bidirectional charging and heat pumps time resolved energy delivery, these are likely to be new elements needing to be managed.

Digital tools enable management to address these contrasting supply and demand issues, but they on their own are not adequate. The missing link is energy storage, which offers flexibility for both short-term (seconds-hours) and long-term (days-weeks) solutions. Batteries are effective and fast short term modulators, while pumped hydro offers large scale and longer term flexibility.

Interconnectivity allows power imbalances to be smoothed out. The European Union electricity market requires that by 2030 member states have cross border interconnectors amounting to at least 15% of power generating capacity and by 2025 EU grid operators must allow at least 70% of their cross border capacities for daily power trading.

Grids need to be balanced and Hitachi has an important role in this process. Within the above Hitachi discussion lies core aspects of Hitachi’s business. It is also notable that Hitachi brings a global perspective with different solutions for countries with isolated grids (eg South Korea, Japan) having different needs to European countries which operate in an interconnected environment. This global view allows Hitachi to provide solutions and to foreshadow changes that many companies (and countries?) are yet to come to grips with. For example, whereas today electricity carries ~25% of energy, this will rise to 66% of energy in coming decades through growth of electric cars, heat pumps etc.

Being such a huge company it is difficult to get a sense of key developments, but recent press releases give a clue of new directions. These include Hitachi Energy’s acquisition of Italian company COET which strengthens Hitachi’s role in high-power electric vehicle charging infrastructure and power electronics, Hitachi Digital Services work with OneThird on reducing food waste in supply chains, and Hitachi Energy’s new SAM600 process interface unit to accelerate upgrading of conventional substations to digital substations making energy systems more sustainable, flexible, and secure.

There are 575 companies cited as consolidated subsidiaries as of December 2023.

Some key discussion points in the above articles include:

Hitachi and grid stabilisation

Hitachi sees grid stabilisation as a key issue. Interconnectivity is a big deal that is only now being seriously addressed. Hitachi Energy operates in 140 countries and it integrates more than 150 GW of HVDC links into power systems, but this is just the start.

There was 1,350 GW of renewable energy generation capacity waiting in 2022 to connect to US power grid(s). This problem arose because early renewable projects didn’t necessarily have grid connections sorted out when they began to get built. These days there is more focus on renewable projects being integrated and this is one reason why there is interest in delivering power from, for example, an offshore wind project to the site of a coal power plant that is being closed down. More than 100 countries have signed up to treble renewable energy by 2030. This is going to transform grids globally.

Hitachi and nuclear power

Hitachi is in partnership with GE and both companies have a high profile interest in advancing SMR (Small Modular Reactor) technology.

Given the above, I wonder where nuclear power fits.

I’ve reviewed nuclear and SMR (Small Modular Reactor) business developments recently and here is another excellent link about SMR (including GE-Hitachi technology). The thing about nuclear power is that it has struggled outside of China because of massive cost overruns and late delivery for major nuclear power projects in Europe and the US. SMR technology is raised as a new direction where cost can be managed by offsite construction of the core reactors with just assembly on site. SMRs vary in size from ~100 MWe through 470 MWe, with the GE-Hitachi BWRX-300 in the middle at 300 MWe. The problem is that apart from China, no SMR technology has actually been built and it is clear that single SMR facilities are prohibitively costly. So all proponents, including GE-Hitachi are promoting facilities with several SMR reactors on a single site. This blurs the boundary as to whether SMR means small as the projects seem to border on a normal large Gen III reactor size. SMRs are promoted as being much cheaper as the reactor is factory assembled, but the costs of installation on site may not be a lot cheaper than a conventional plant. And approval costs may be similar.

It is hard to get a fix on the cost to Hitachi for the GE-Hitachi nuclear adventure, but it must be significant. This is a risk to Hitachi that might need to be addressed relatively soon if the BWRX-300 fails to gain traction.

What the market thinks

Seeking Alpha authors and Wall Street have limited coverage in the past 90 days, with Seeking Alpha just one “buy” and Wall Street one “buy” and one “strong buy”. Seeking Alpha’s Quant rating is a “hold”. The Quant grades are a bit schizophrenic about Hitachi, with poor assessments for Valuation “C-” and Growth “D”, but on the other hand excellent ratings for Profitability “A+”, Momentum “A” and Revisions “A-“. I’m not sure how a “D” for Growth and an “A” for Momentum live together, but readers can draw their own conclusions. **Editor’s Note: Seeking Alpha’s Growth Quant grade is based on the company’s revenue and earnings growth while the momentum grade is based on the stock’s performance.

Conclusion

When I started researching this article, I expected to see a huge and hard-to-move company that would not be very interesting to me. I looked at GE back in 2020 with a focus on how its excursion into offshore wind might move the company. The GE renewables business is still struggling but with interesting prospects. Today Dhierin Bechai sees the aerospace side of the company as the growth engine, but the prospects for the renewables business remain. With big changes, it can be hard to get the timing right, but the important thing for big companies is to position themselves to benefit from courageous decisions taken about where to go.

Hitachi has made a strategic decision to focus on grid buildout, grid stability and grid management. I think that this “quiet achiever” approach is a key aspect of the exit from fossil fuels, which is perhaps the biggest challenge humanity has faced for more than a century. The approach by Hitachi to focus on “flexibility” suggests a modern view of how grids will operate in the future. They plan to be part of how it is made to happen.

The numbers for both Hitachi and GE speak for themselves. The performance of both companies over the past five years is hard to fault. Hitachi’s share price over the past 12 months has shown a very stable and progressive increase. My take is that grid issues will become more prominent in the coming years, which positions Hitachi well for growth. Of course, there are many other levers to the Hitachi business and I’ll leave it for you and your financial advisor to sort out timing issues, but Hitachi is certainly worth having on your watch list.

I am not a financial advisor but I follow closely the massive and accelerating changes as the world begins to exit fossil fuels. Hitachi is a major player in one aspect of the transition. I hope that my perspective is helpful to you and your financial advisor as you explore investment opportunities in the change.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.