This note is briefer than my typical institutional reports. While HSK remains a bit small for many clients, I wanted to flag it now because I see meaningful room for growth.

To gain exposure to Japan’s defense, shipping, and nuclear sectors, Mitsubishi Heavy Industries (MHI) is the natural first thought. It’s the industry heavyweight, and for many investors, it’s the only name that comes to mind. While I usually lean toward more valuation-sensitive plays, MHI’s current metrics—a P/B of 5.8x, FY3/27 P/E of roughly 53x, and EV/EBITDA 17.6x —aren’t as prohibitive as they might first appear.

The Long-Term Valuation Logic

The case for MHI rests on the multi-year trajectory of Japan’s rearmament. Looking ahead 3 to 4 years, consistent double-digit earnings growth is expected to drive that P/E ratio steadily lower. By the fifth year, the multiple should compress into the 20x range.

Given that Japan’s defense build-up is a structural shift unlikely to peak in just five years, we could see valuations hit the 10x range within a decade as earnings catch up to the current stock price. With decades of growth potential locked in by government policy, the immediate 50x P/E looks less like an “overvaluation” and more like a “pre-payment” for a long-term uptrend.

This logic applies across the sector. Recent pullbacks—likely driven by short-term profit-taking or minor technical overheating—can be viewed as temporary corrections. MHI’s current slight dip could represent a strategic entry point for those looking at the 10-year horizon.

Finding the “Hidden” Play: HSK

While everyone knows MHI, my focus is on identifying the high-potential names that haven’t hit the mainstream radar yet. Enters Hoden Seimitsu Kako Kenkyusho (HSK).

With a market cap of only ¥32 billion, HSK is frequently overlooked by institutional funds. Foreign ownership currently sits at just 6%.

However, HSK is popular among Japanese retail investors who seek a niche entry into the same aerospace and energy tailwinds supporting MHI, but at a much earlier stage of discovery.

HSK is not cheap. Its valuation is below MHI but still demanding at FY2/27 PE 46x, PB 3.6x, EV/EBITDA 17.6x. So why the retail interest?

This interest is primarily driven by MHI’s 35.1% ownership stake and the high degree of operational alignment between the two companies. HSK is Japan’s leading specialist in electrical discharge machining (EDM), with capabilities spanning gas turbine component machining, surface treatment, and aircraft engine processing—areas that sit at the core of MHI’s business.

The relationship was formalized in January 2024 through a capital and business alliance. HSK issued new shares to MHI, raising approximately ¥2 billion to fund gas turbine–related capital expenditure. This transaction positioned MHI as the company’s largest shareholder.

HSK share price move:

HSK’s share price has been highly responsive to these developments. The stock rose from around ¥600 before the MHI stake increase to approximately ¥2,600 by early March 2024, and later reached ~¥6,000 in early 2026. The latter move was supported by geopolitical tensions in the Middle East and increased confidence in Japan’s defense spending trajectory following the February 2026 landslide victory of LDP/Ms. Takaichi. Japan’s FY2025 security-related budget stands at ¥9.9 trillion (1.8% of GDP), and a move toward 2% would imply an additional ¥1–2 trillion in spending, providing a supportive backdrop for the defense sector.

Despite these tailwinds, the stock has since retraced to ~¥2,916, even after delivering strong FY2/26 results. Revenue increased 11% y/y to ¥14.3 billion and operating profit rose 63% to ¥1.1 billion (announced April 7, 2026, following an upward revision on April 3). The equity ratio also improved to 45.7% from 41.9% in FY2/25.

The post-earnings weakness likely reflects a combination of factors: profit-taking after the sharp rally, the partial deferral of expenses into FY2/27 (which boosted FY2/26 profitability), and a perception that FY2/27 guidance was conservative relative to elevated expectations.

Disappointing FY2/27 guidance (although the numbers were better than MTP 2027’s):

For FY2/27, HSK guides for continued double-digit revenue growth, supported by strength in EDM and surface treatment. However, operating profit growth is expected to moderate to around 7%, reflecting higher variable costs associated with increased production and upfront investments in labor and R&D. Net income is projected to decline by 14%, primarily due to normalization of the effective tax rate following prior benefits from loss carryforwards and wage-related tax incentives.

Importantly, the company has already exceeded its Mid-Term Plan 2027 targets ahead of schedule. The FY2/27 operating profit target of ¥890 million has been achieved one year early. Updated guidance now calls for revenue of ¥16 billion (vs. ¥14.7 billion in the original plan), operating profit of ¥1.2 billion (vs. ¥890 million), and an operating margin of 7.5% (vs. 6.1%).

For FY2/27, HSK guides for continued double-digit revenue growth, supported by strength in EDM and surface treatment. However, operating profit growth is expected to moderate to around 7%, reflecting higher variable costs associated with increased production and upfront investments in labor and R&D. Net income is projected to decline by 14%, primarily due to normalization of the effective tax rate following prior benefits from loss carryforwards and wage-related tax incentives.

At the FY2/26 results briefing (Mar 2025–Feb 2026), President Murata shared the company’s plans to continue investing aggressively in FY2/27.

My client note outlines HSK’s business strengths in greater detail.  Please try out my service for free!

#Hoden #HSK, #MHI #Defense #Nuclear #Shipping #Japanesestocks