Last year, Caterpillar's (
CAT
) sales growth was severely impacted from monetary tightening in
China. High interest rates in the country during the first half of
2012 significantly lowered the company's construction
equipment sales. More recently, measures from the Chinese
government to control rising real estate prices will further
suppress sales of construction equipment and machinery in the
country, and thereby impact Caterpillar.
Nonetheless, we estimate that China will drive long term growth
at Caterpillar. A rising urban population, aided by migration from
rural areas to cities and low current energy consumption levels
will ensure investments in construction, mining and power sectors
of the country for several years to come. This will drive growth in
sales of construction and mining equipment, diesel and natural gas
engines, and industrial gas turbines manufactured by
Caterpillar.
We currently have
a
stock price estimate of $94 for the company
, approximately 5% above its current market price.
See our complete analysis of Caterpillar here
Caterpillar Continues To Expand In China
Over the past decade, China has played a key role in
Caterpillar's growth. In 2003, Asia-Pacific region constituted
around 13% of the company's worldwide sales, and this share doubled
to 26% in 2012. Growth from China contributed in large measure to
this rise.
Currently, Caterpillar is continuing to expand in the country,
particularly in the mining and quarry sectors. Last year, it
completed the acquisition of ERA Mining, whose Chinese subsidiary,
Siwei, provided it with crucial share in the underground roof
support segment of China's mining equipment market. Though, a
charge of $580 million realized post acquisition, resulting from
the accounting fraud at Siwei, reduced the attractiveness of the
share gain. But, Caterpillar insists that the acquisition is well
aligned with its growth strategy in China.
Recently, the company also announced the opening of a large
wheel loader manufacturing facility in Tongzhou, Jiangsu
Province, China. This facility will manufacture CAT986 large wheel
loaders for mining and quarry applications. This is the first time
that a CAT machine has been wholly designed, validated and built in
China, for the Chinese market. This indicates that Caterpillar has
a long term view on China. Currently, the company has 23
existing manufacturing facilities, four R&D centers, three
logistics and parts centers, and four new facilities under
construction in China.
Near Term Concerns In Chinese Construction
Sector
In the near term, Caterpillar could see sales of its
construction equipment and machinery decline from the country. The
Chinese government announced last week that it will strictly
enforce 20% capital gains tax on sales of existing homes and
introduce barriers like increase in down payments and home loan
rates in purchasing property in order to control rising
property prices. This will likely lower demand for homes in the
short term and thereby impact sales of construction equipment in
the country.
Increasing Urbanization And Energy Consumption In China
Could Drive Long Term Growth
Over the long term, more homes and commercial properties will
need to be built in Chinese cities to cater to people migrating
from rural to urban areas in the country. Currently, 50% of China's
population lives in cities. This compares to an urban population of
80% in the U.K. and 82% in the U.S. Thus, sales of construction
industry related products will remain healthy in the country over
the coming years.
Additionally, sales of mining and power equipment will also
continue to grow in China, as energy consumption per person in the
country is well below that in developed countries. China consumes
around 3.5 MWh of electricity per person per year, compared to 12.5
MWh of electricity consumed per person per year in the U.S.
All in all, despite recent and near term construction sector
concerns, China will be a key growth market for Caterpillar over
the long term.
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