China Will Drive Caterpillar's Long-Term Growth Despite Recent Weakness

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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