Global Economics

Mitsubishi Heavy's Glowing Prospects


The Japanese industrial builder sees its stock energized after reports of closer ties with TXU and possible reactor work in Texas

Who says nuclear power isn't a growth industry? Not investors in Mitsubishi Heavy Industries (MHVYF). On Mar. 14, the Japanese company revealed Texas utility concern TXU (TXU) had signed a cooperation agreement to do on-site work at two nuclear reactors. One day later, Mitsubishi Heavy's stock shot up 9.1% and closed at $6.07. That is the biggest single-day advance in the company's stock this decade.

The $5.1 billion contract between Mitsubishi Heavy and TXU is a head-turner. Reports in the Japanese press say TXU has told the U.S. Nuclear Regulatory Commission that it will use two 1.7-million-kilowatt Mitsubishi Heavy reactors at locations outside of Dallas. The deal represents the first time a Japanese company will lead an overseas nuclear contract and the first time a Japanese-made reactor will be exported overseas. General Electric (GE) and Hitachi (HIT) are already planning to build a nuclear plant for NRG Energy (NRG) in Houston.

More deals with Japanese nuclear reactor builders are expected. While the U.S. has been reluctant to embrace nuclear power since the Three Mile Island accident in 1979, the Japanese government has been promoting nuclear power for decades. Today, 55 nuclear reactors power one-third of Japan's needs. That has enabled companies like Mitsubishi Heavy, Toshiba (TOSBF), and Hitachi to accumulate considerable knowhow. Now, they're looking to cash in on their expertise in overseas markets.

A Proposal Rebuffed

Until recently, though, Mitsubishi Heavy's nuclear prospects were looking bleak. Its strengths lie in pressurized-water reactors (PWRs), which account for 70% of the world's nuclear power plants. But when rival Toshiba spent $5.4 billion to acquire Pittsburgh's Westinghouse Electric from British Nuclear Fuels, industry watchers feared the worst (see BusinessWeek.com, 12/18/06, "Toshiba-Westinghouse Takes China Nuclear").

That deal gave Toshiba, which specializes in boiling-water reactors (BWRs), top share in PWRs via Westinghouse. It also led to Mitsubishi Heavy and Westinghouse ending a relationship that had spanned four decades. Mitsubishi subsequently withdrew from plans to jointly develop Westinghouse's AP 1000 midsize reactor. "We offered to jointly develop midsize nuclear reactors and share technology, but we didn't get a clear reply," Mitsubishi Heavy President Kazuo Tsukuda told Japanese media in January.

The same month Mitsubishi Heavy and GE signed a wide-ranging agreement to work together in the power business, which will include a joint bid for a Mexican nuclear plant. But it's the deal with TXU that really shows that Mitsubishi Heavy isn't going to be left behind, say analysts. "The market hadn't anticipated Mitsubishi Heavy could win such a big-sized order," Takeaki Ueno, an analyst at CLSA Asia-Pacific Markets, told Bloomberg News.

Laying the Groundwork

For all that, the deal with Mitsubishi Heavy isn't going to be a huge money-spinner in the near term. Nomura Securities analyst Shigeki Okazaki notes that as the deal is Mitsubishi's first in the U.S. and is the first time it will have manufactured a PWR for that market, "the company is unlikely to generate a high profit margin on the project."

Still, Mitsubishi Heavy's deal is welcome news. Amid rising energy prices, nuclear power producers look set for rapid growth. The Japanese business daily Nihon Keizai estimates that total industry revenues could reach somewhere between $255 billion and $340 billion over the next 25 years. During that period, some 100 to 150 new nuclear reactors are expected to come on stream.

Many of them will be in the fast-growing economies of India and China, but the U.S. will be a source of demand, too. TXU alone is expected to build five reactors by 2020, including the two Mitsubishi Heavy will supply. Having snared a contract with TXU, investors are gambling that Mitsubishi Heavy's prospects in the revived nuclear reactor sector are glowing.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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