UPDATE 2-Japan's Hitachi Q1 beats forecast, warns of China pain

Mon Jul 30, 2012 4:11pm IST

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* Hitachi Q1 op prof at Y63.6 bln vs. consensus Y59.5 bln

* Keeps annual op prof forecast at Y480 bln

* Hitachi: Construction equipment sales in China fell 40 pct

* China construction equipment orders to improve past Jan-exec

By Mari Saito

TOKYO, July 30 (Reuters) - Hitachi Ltd, Japan's largest industrial electronics maker, posted a better-than-expected quarterly profit due to strong sales in its power and automotive systems business, but warned of possible turbulence from the slowdown in China.

The sprawling conglomerate, whose products range from excavators to thermal power plants, posted an operating profit of 63.6 billion yen ($808.85 million) in the April-to-June quarter, up from 52.4 billion yen a year earlier.

The result topped the average forecast of 59.5 billion yen by four analysts polled by Thomson Reuters I/B/E/S.

An economic slowdown in China is taking a toll on a growing number of companies, with a series of profit warnings highlighting how weakness in the world's second-largest economy is hitting earnings. Construction equipment sales in China slumped more than 40 percent in the first quarter, Hitachi said.

"We think it will take until at least January for demand to recover in China's construction equipment market. This is not just the case for our Hitachi Construction Machinery, but also for Komatsu Ltd and Caterpillar," Hitachi Executive Vice President Toyoaki Nakamura told reporters after the company's earnings announcement.

Analysts estimate that China will account for 10 percent of Hitachi's overall sales this business year and Europe 8 percent.

Hitachi kept its annual forecast for a 480 billion-yen operating profit for the year ending March, below the average estimate of 500.6 billion yen in a poll of 22 analysts surveyed by Thomson Reuters I/B/E/S.

China's central bank cut its policy rates in June for the first time since the global financial crisis as data for April and May suggested growth was weakening more than previously thought. The country is due for a once-in-a-decade change in its top political leadership in late 2012.

"We were expecting some improvement beginning in the fall as the new political leadership (in China) puts in place more economic policies...but the scope of China's market has grown and what has worked before may not be the case again," Nakamura said.

NEW GROWTH AREAS

In a bid to avoid the fate of other electronics makers in Japan, Hitachi has scaled back its unprofitable consumer electronics division and shifted its focus towards growth areas such as infrastructure, including rail systems and urban planning.

Hitachi's automotive division, which makes engine and control systems for cars, has benefited from growing vehicle demand in emerging economies. The division posted an operating profit of 9.3 billion yen in the quarter, more than tripling from a year earlier.

The power systems division, which together with the auto segment made up 20 percent of overall sales, posted a profit of 2.4 billion yen compared with a loss of 3.2 billion yen a year earlier.

The company plans to stop producing its own TV sets later this year after merging its loss-making small-panel display operations with those of Sony Corp and Toshiba Corp last year.

Hitachi said last week that it won a 4.5 billion-pound ($7-billion) contract to build intercity trains in Britain, despite the debt crisis in Europe.

The company has also invested in new segments such as cloud computing and social infrastructure systems.

Still, Hitachi's operating margin was just above 4 percent in the previous year, lagging behind global counterparts such as General Electric Co and Siemens AG whose margins were around 14 and 10 percent respectively, Thomson Reuters data shows.

Hitachi has vowed to more than double its margins through aggressive cost-cutting in all of its 900 subsidiaries and moving its focus to high-profit global infrastructure orders.

The company logged a record net profit of 347.2 billion yen in the previous year, boosted by the sale of its hard drive business to Western Digital Corp.

Hitachi's main domestic rivals Toshiba and Mitsubishi Electric are due to announce their quarterly earnings on Tuesday. Panasonic Corp also reports on the same day.

Shares of Hitachi ended up 0.4 percent at 456 yen before its results. Tokyo's benchmark Nikkei traded 0.8 percent higher.

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