Nisshinbo spins into the hydrogen economy

Nisshinbo spins into the hydrogen economy

Nisshinbo Holdings is a Japanese company founded in 1907 as the Nisshin Cotton Spinning Company – a mass producer of cotton yarn. Today, it comprises a diverse group of businesses including TMD Friction, the leading producer of friction materials for the global automotive brake market, as well as a key supplier into the burgeoning hydrogen fuel cell market.

The word Nisshin originates from the Sino-Japanese era of the early 1900s where it was widely used in reference to maintaining friendly relations and mutual prosperity through trade (‘ni’ referring to Japan and ‘shin’ to China).

Nisshinbo has reinvented itself several times over its 114-year history, all the while aiming to uphold the core objective of creating a sustainable future for the planet and its people. It has grown into a ¥142 trillion ($1.3 billion) market capitalisation business through the harnessing of organic growth opportunities as well as carefully planned acquisitions in the automotive and telecommunications sectors. Despite experiencing substantial economic upheaval over the years (Japan’s devastating economic collapse in the late 1980s), Nisshinbo is one of the few Japanese companies that has not ever reported an operating loss.

Transitioning from textiles to automotive brakes
Nisshinbo has focused on diversifying the business since the 1940s, when it became apparent that the cotton spinning industry was set to decline. Most of the company’s businesses were started organically, with the automotive sector becoming a key growth area for the group. Together with the selling off of non-core businesses, the most notable transactions of the last decade have included the acquisition of TMD Friction in 2011 and investments into the Japan Radio Company (JRC) between 2016 and 2017. The left chart below indicates the current contributions to revenue from its seven business segments.

Key segments include the wireless and communications, micro devices, chemicals (all of which are expected to show robust revenue and earnings growth due to continued product innovation and strong underlying demand) and automobile brakes businesses (expected to recover from the 2020 decline in global vehicle production as the world emerges from Covid-19 constraints).

JRC is a major subsidiary in the wireless and communications segment. Founded in 1915, it has been a leading developer of wireless communication products and technology for worldwide satellite broadcasting communications, maritime radar and automotive information management systems among others. It released the world’s first GPS receiver for passenger vehicle navigation in 1990. Nisshinbo bought the 38% minority shareholders’ interest in JRC in September 2017 for ¥17.9 billion ($157 million).

After World War II, Nisshinbo began producing friction materials for automobile brakes as an alternative use for its textile spinning technology. Before the war, Japan relied mainly on asbestos imports from Canada for braking plates, which was used in all types of machinery. However, geopolitical tensions and a deterioration in international relations with the West forced Japan to look into processing its own asbestos. Nisshinbo entered the brake business by using textile spinning technology to process the domestic supply of asbestos1 – albeit of a poorer quality.

Nisshinbo’s acquisition of the Luxembourg-based TMD Friction Group resulted in the company becoming the world’s leading supplier of friction materials for automotive braking systems, with an estimated 20% global market share. Nisshinbo friction materials are fitted to an average of 18 million new cars annually including the Bugatti Veyron – the world’s fastest sports car. The brakes business also supplies brake pads to original equipment manufacturers (OEMs) such as Toyota and Volkswagen, and automotive parts retailers.

The Continental Automotive Corporation is a joint venture established by Nisshinbo (with 35% shareholding) and Continental AG – to develop, design, manufacture and sell automobile braking systems in Japan and China.

Nisshinbo has also pioneered a copper-free friction material for brake pads, which is expected to gain significant sales volumes as laws limiting copper content in brake pads come into effect from 2025. The friction materials market size was $11 billion in 2019 and is projected to reach $15 billion by 20262. While the growth in hybrid and battery powered electric vehicles (EVs) is expected to result in a loss of market share by traditional petrol and diesel passenger vehicles, the demand for automotive brakes should continue to grow as annual vehicle production increases (right chart above).

The micro devices segment comprises New Japan Radio (NJR) and Ricoh – acquired by Nisshinbo in 2018 for a combined price tag of ¥23.9 billion ($219 million).

NJR is a leading supplier of analogue semiconductors for audio, automotive and industrial equipment along with devices that enable wireless communications and the Internet of Things3. NJR’s integrated circuit products are used in car infotainment, sensors that enable autonomous driving and battery management systems.

Similar to NJR, Ricoh specialises in imaging and electronic devices including small, energy-efficient analogue semiconductors. Bluetooth-enabled headphones and hand-held gaming devices would be key end markets for the micro devices segment. Ricoh’s product overlap with NJR prompted Nisshinbo to merge the two businesses in January 2021, which should result in substantial cost savings for the group.

1The company no longer uses asbestos due to the environmental concerns related to this product.
2According to global market insights.
3Describes the network of physical objects that are embedded with sensors, software and other technologies for the purposes of connecting and exchanging data with other systems and devices over the internet.

Nisshinbo’s hidden assets
Nisshinbo’s policy is to buy and hold stakes in companies with which it has existing relationships to strengthen corporate relations. Consequently, the company has amassed a formidable portfolio of listed equity holdings in key customer and supplier businesses such as Toyota Motor Corporation and Hino Motors. The value of this portfolio (excluding subsidiaries and joint ventures) represents approximately 53% of Nisshinbo’s market value. The left table below highlights some of Nisshinbo’s prominent holdings.

Hydrogen fuel cells lead the next phase of growth
While the chemicals segment currently generates the smallest revenue for Nisshinbo, it is potentially the most exciting in terms of growth opportunities. Nisshinbo Chemical is developing products with Ballard Power Systems, the world’s leading developer and supplier of hydrogen fuel cells for industrial and automotive applications. In 2015, Nisshinbo acquired a 2.5% stake in Ballard for around $6 million. Currently, annual sales for the fuel cell business are at ¥3 billion ($30 million), comprising mainly the Japanese domestic market.

Fuel cells generate electricity through a chemical reaction between hydrogen and oxygen in the air. Nisshinbo develops and manufactures carbon bipolar plates that are one of the main components of proton exchange membrane fuel cells (PEMs) – supplying them to Ballard and OEMs for over 20 years. The growth of these products is linked to the progress of the fuel cell vehicle market, with large vehicle applications (proton exchange membrane fuel cells for buses and trucks) looking especially promising.

A sizable market opportunity
Although the hydrogen fuel cell market is still small, it is expected to grow significantly over the next decade as the world endeavours to reduce carbon emissions. The biggest advantage that fuel cells have over combustion engines, coal plants and nuclear plants is that they do not produce harmful by-products (provided the hydrogen is produced without carbon emissions). Heavy duty trucks and buses are large emitters of carbon, yet standard battery EV solutions are cumbersome and impractical for these vehicles. Hydrogen fuel cells are highly feasible for long-haul routes due to resultant lower electricity costs and higher energy density.

The European Union adopted the ‘Green Deal’ in 2020 that set a goal of climate neutrality by 2050, with the approval of a 750 billion euro Green Recovery Plan. As indicated above right, this includes an ambitious target of 2 250 terawatt hours (TWh) of hydrogen, representing an estimated 24% of total energy demand in Europe by 2050. Additionally, the chart includes 70 TWh of hydrogen fuel cell demand from the transportation industry by 2030, implying the deployment of approximately 45 000 fuel cell powered trucks and buses in Europe over the next nine years.

Ballard’s dominant global market share in fuel cell technology and established base of fuel cell powered trucks and buses is a key competitive advantage for this partnership, positioning Ballard and Nisshinbo to benefit from the expected growth in the fuel cell market.

From opacity to outperformance
Nisshinbo is an under-researched company with little broker analyst coverage in Japan. However, an impressive track record of innovation and product development is apparent on inspection. The company’s well-established research and development expertise coupled with their strategic relationships with leading global industrial companies should begin to pique investors’ interest and underpins why we are invested.

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