On Monday, Citi reaffirmed its Neutral stance on Kawasaki Heavy Industries, Ltd (TYO:7012:JP) (OTC: KWHIY), while keeping the price target unchanged at JPY7,000.00.
The decision follows a series of events including the submission of a report by Kawasaki Heavy Industries (KHI) to Japan's Ministry of Land, Infrastructure, Transport and Tourism (MLIT) last week, addressing previously reported misconduct in marine engine testing.
Additionally, KHI released an interim report from a special investigative committee that found several instances of misconduct in submarine repairs at its Kobe Shipyard. This included about JPY 1.7 billion in fictitious transactions over a six-year period.
The issues were discussed in a meeting held by KHI after market hours on Friday, with widespread coverage by Japanese media outlets such as Nikkei, Asahi, and Yomiuri on Saturday. The news has likely contributed to a 2% decline in KHI shares on Monday. Despite this reaction, Citi analysts suggest that the majority of the negative impact from these issues may have already been absorbed by the market.
The report by Citi also highlighted the recent approval of Japan's defense budget for the fiscal year ending March 2026, which at JPY 8.7 trillion represents a 9% year-over-year increase and stands as the largest defense budget in the country's history. KHI, being the second-largest defense contractor in Japan after Mitsubishi Heavy Industries, could see this as a potential catalyst for growth.
Investors are now looking ahead to the next significant event for KHI, which will be the release of its third-quarter financial results scheduled for February 7. The outcome of this report could provide further insights into the company's financial health and operational performance amidst the recent challenges.
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