Tokyo, January 18, 2021 -- Moody's Japan K.K. has affirmed Hitachi, Ltd.'s
A3 senior unsecured rating and P-2 commercial paper rating.
The outlook remains stable.
A full list of affected ratings, which include that for Hitachi's
supported subsidiary, is provided at the end of this press release.
"The affirmation of Hitachi's rating reflects its leading
position as one of the largest manufacturing companies in Japan,
with a strong core franchise in IT services and a diversified portfolio
that provides a measure of resilience to economic cycles,"
says Motoki Yanase, a Moody's Vice President and Senior Credit
Officer.
"Hitachi also maintains conservative financial policy that restrains
leverage," adds Yanase.
RATINGS RATIONALE
Hitachi's solid business profile is supported by its diverse portfolio
of capital goods and manufacturing businesses. Its diversification
and scale, as one of the ten largest manufacturing companies in
Japan by revenues, have helped to stabilize its margins under economic
cycles and the coronavirus outbreak. The company has been restructuring
its portfolio by large divestments and investments to derive synergies
around its core IT services business and to improve its profitability.
Margins for IT (information and telecommunication systems), Industry
(industry and distribution systems, and water and environment systems)
and Mobility (railway systems, elevators and escalators) have remained
stable through the pandemic and supported overall profitability.
The pandemic did affect some other segments, such as Smart Life
(especially automotive parts), so that Hitachi's EBITA margin
fell to 6.9% for the 12 months ended September 2020 from
8.4% in the fiscal year that ended in March 2020 (fiscal
2019). However, Moody's expects margin will be restored
to 8% by fiscal 2022, assuming that recovery will continue
during the second half of fiscal 2020.
Even when margin return to expected levels, Hitachi's profitability
will remain lower than that of Hitachi's international peers,
including Siemens Aktiengesellschaft (A1 negative) and ABB Ltd (A3 stable),
with EBITA margins between 10%-15%. Despite
several years of restructuring, Hitachi has yet to demonstrate an
improvement in its EBITA margin, which has remained in the single-digit
percentage for more than a decade.
Hitachi's credit quality is also supported by a conservative financial
policy that has restrained leverage at 3.3x for the 12 months to
September 2020 from 1.9x in March 2020, despite acquiring
80.1% stake of ABB's power grids business for JPY722 billion
in July 2020 and a profit decline due to the coronavirus outbreak.
Hitachi has de-leveraged through asset sales, for example,
partly financing the ABB acquisition with JPY412.5 billion in proceeds
from the sale of Hitachi Chemical Co., Ltd. (currently
Showa Denko Materials Co., Ltd.) in April 2020.
Given the expected recovery in its businesses, Moody's expects
Hitachi will improve its leverage to below 3.0x over the next 12-18
months. The company continues to restructure, which could
entail additional acquisitions. However, Hitachi retains
the ability to manage its leverage if it divests stakes in its remaining
listed subsidiaries, Hitachi Construction Machinery and Hitachi
Metals, over the next two to three years.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable rating outlook reflects Moody's expectation that Hitachi's
profitability will recover from the effects of the coronavirus outbreak
through the fiscal 2021 and fiscal 2022. The outlook also incorporates
Moody's view that Hitachi will manage its debt levels as it restructures
its business portfolio and maintain moderate leverage.
The flux in its portfolio and organizational structure from Hitachi's
ongoing restructuring limits prospects for a rating upgrade. An
upgrade would require Hitachi to establish a sustained positive trend
in its profitability with proven success in integrating its ABB acquisition
and a steady recovery in its credit metrics, such as EBITA margin
above 10% and debt/EBITDA below 2.0x.
On the other hand, Moody's could downgrade the rating if Hitachi's
earnings weaken because of a significant decline in its market position,
with its EBITA margin sustained below 6%, debt/EBITDA above
3.0x and sustained negative free cash flow. The change to
a more aggressive financial policy, such as debt-financed
acquisitions, would also exert downward pressure on the rating.
The principal methodology used in these ratings was Manufacturing Methodology
(Japanese) published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216244.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Tokyo, Hitachi, Ltd. is the largest
diversified manufacturing company in Japan.
RATINGS AFFECTED:
Affirmation:
..Issuer: Hitachi, Ltd.
....Senior Unsecured Regular Bond/Debenture,
Affirmed A3
....Commercial Paper, Affirmed P-2
....Outlook, Remains Stable
..Issuer: Hitachi International Treasury Ltd.
....Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)A3
....Outlook, Remains Stable
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
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available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Motoki Yanase
VP - Senior Credit Officer
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100