Caterpillar's China expansion lifts outlook

It's in line with long-term growth opportunities and will help the company better serve its existing customers there.

By Trefis Mar 27, 2013 7:47PM
Workers walk past Caterpillar excavator machines at a factory in Gosselies February 28, 2013. Caterpillar, the world's largest maker of construction equipment, plans to cut 1,400 jobs at a plant near Charleroi in Belgium due to high costs and the weak European economy (© Eric Vidal/Reuters)Quick Take logo
Caterpillar on Monday opened a new power train manufacturing facility and completed the expansion of a hydraulic cylinder manufacturing facility in Wuxi, China.
The company had also opened two new manufacturing facilities in the country in January.
Caterpillar's strategy of expansion in China is supported by long term growth opportunities that exist in construction, mining and power sectors of the country.

Caterpillar (CAT) announced Monday the opening of a new power train manufacturing facility and the completed expansion of another component manufacturing facility in Wuxi, China. We believe these expansions are in line with the long term growth opportunities in China and will help Caterpillar better serve its existing customers in the country.

The power train facility is a huge, 23,000-square-meter facility which produces axles, transmissions and final drives for a range of Caterpillar earth-moving and mining machinery. The expansion at the component manufacturing facility, where hydraulic cylinders are produced for Caterpillar machines, is 17,000-square-meters.

We currently have a stock price estimate of $94 for the company, approximately 10% above its current market price.

Caterpillar Stock Break-UpCaterpillar Is Focused On Expansion In China

Caterpillar has a long term view on China, and accordingly it is continuing to expand in the country. 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 an accounting fraud at Siwei, reduced the attractiveness of the share gain. Caterpillar insists the acquisition was line with its growth strategy in China.

In January, earlier this year, the company also opened a large wheel loader manufacturing facility and proving ground in Tongzhou, Jiangsu Province, China. In all, Caterpillar now has 24 existing manufacturing facilities, four R&D centers, three logistics and parts centers and a few other facilities under construction in China.

Rising Urbanization and Energy Consumption

This expansionary strategy of the company in China is supported by the fact that the country's investment in its infrastructure, power, mining and construction sectors is likely to continue for several years to come.

Currently, 50% of China's population lives in cities, compared to an urban population of 80% in the U.K. and 82% in the U.S. The continuing migration of people from rural areas to cities will require construction of more homes, commercial buildings and related infrastructure in China over the coming years. This will promote sales of Caterpillar's construction industry products in the country.

At the same time, sales of power equipment and mining machinery arel also likely 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.

Tags: CAT


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