Mitsubishi Heavy Industries (MHI) just announced record-breaking order intakes and revenue for FY 2023. The Japanese industrial giant seems unstoppable, riding high on the global energy transition and Japan's rearmament. But beneath the glittering facade, a subtle shift in MHI's financial reporting hints at a potentially troubling future. Buried in the Q4 2023 transcript lies a specter that no other analyst seems to have noticed: a mounting reliance on one-time gains to prop up profitability.

While MHI boasts of impressive growth in key sectors like gas turbines and nuclear power, these gains are overshadowed by a worrying trend in one-time expenses. A closer look at the "Changes in One-Time Expenses" section across FY 2022 and FY 2023 reveals a stark reality. In FY 2022, these expenses, stemming from project remediation, organizational restructuring, and international project losses, amounted to a significant, though undisclosed, sum.

In FY 2023, the story took a darker turn. Besides a substantial one-time loss related to an aero engine program, MHI booked additional expenses for international project claims and impairment losses on international investments. These one-time hits, while presented as isolated incidents, point towards a deeper malaise: an inability to consistently deliver profitable projects, particularly on the international stage.

The problem becomes even more apparent when comparing the FY 2023 results to the initial target of a 7% operating profit ratio. MHI fell short, achieving only 6.1%. This miss, coupled with the persistent reliance on one-time gains, suggests that organic profitability remains a challenge for the company.

The question arises: is MHI becoming addicted to one-time gains as a crutch for its bottom line? Are these isolated incidents, or symptoms of a larger problem brewing beneath the surface? The newly established GX Solutions segment, while promising for future growth, raises further concerns. The segment is projected to experience a JPY 15 billion profit decline in FY 2024, attributed to "additional spending" and "advanced investment."

This upfront investment phase for GX Solutions adds another layer of uncertainty to MHI's profitability outlook. Will this ambitious venture yield the expected returns, or will it become another drain on MHI's already strained organic profitability?

Here's where things get even more interesting. A simple back-of-the-envelope calculation reveals a potential discrepancy that MHI has conveniently sidestepped. While they acknowledged that one-time expenses in the Thermal Power and other businesses amounted to JPY 54 billion in FY 2023, their forecast for FY 2024 includes a JPY 34 billion buffer for similar expenses.

This leaves a gap of JPY 20 billion, begging the question: where did this extra JPY 20 billion in one-time expenses disappear to? Is MHI being intentionally opaque, masking the true extent of their reliance on one-time gains to reach their projected profit target of JPY 350 billion?

While MHI insists on achieving this target, their history of falling short and their evasiveness regarding the missing JPY 20 billion casts a long shadow of doubt.

Here's a chilling thought: MHI, known for its engineering prowess in building everything from massive ships to sophisticated aerospace components, may be harboring a hidden weakness. This weakness, a reliance on financial engineering to mask underlying profitability issues, could unravel the company's carefully constructed facade of success.

Is this the ghost in the machine, a ticking time bomb waiting to explode? Investors should take heed. MHI's May 28th mid-term business plan briefing will be a crucial event, offering a chance to either dispel these concerns or confirm the existence of a deeper, more systemic problem.

One-Time Expenses: FY 2022 vs FY 2023

This chart compares one-time expenses incurred by MHI across FY 2022 and FY 2023, highlighting the areas of concern.

"Fun Fact: Did you know that MHI built the Yokohama Bay Bridge, one of the longest cable-stayed bridges in the world? They also played a key role in developing Japan's famous Shinkansen bullet trains. Talk about heavy hitters!"