Caterpillar (NYSE: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 is 17,000-square-meters where hydraulic cylinders are produced for Caterpillar machines.
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We currently have a stock price estimate of $94 for the company, approximately 10% above its current market price.
Caterpillar 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 that 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 In China Present Growth Opportunities For Caterpillar
This expansionary strategy of the company in China is supported by the fact that investment in infrastructure, power, mining and construction sectors of the country 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 will 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.. Notes:
- Caterpillar Announces Grand Opening of New Facility and Completed Expansion of Another Facility in Wuxi, China, March 25 2013, www.caterpillar.com [↩]
- Caterpillar Announces Opening of Two New Facilities in Tongzhou, Jiangsu Province, January 9 2013, www.caterpillar.com [↩]
- Urbanization rates in countries, March 26 2013, www.wikipedia.com [↩]
- Electricity consumption rates per capita, March 26 2013, www.wikipedia.com [↩]