EUR 850.00 For Business Accounts Only

Morningstar | Reinitiating Coverage of Asian Capital Equipment Sector; Prefer Narrow-Moat Komatsu and Kubota. See Updated Analyst Note from 09 Jan 2019

We are reinitiating coverage of the Asian capital equipment sector with fair value estimates of JPY 2,750 ($25) for narrow-moat Komatsu, JPY 1,750 for narrow-moat Kubota, HKD 3 (CNY 2.62) for no-moat Zoomlion, and CNY 6.40 for no-moat Sany. All four companies have a stable moat trend rating.

We see modest upside in construction and mining equipment manufacturer Komatsu, underpinned by its growth potential following the acquisition of Joy Global in 2017 and steady demand growth from China, Asia (excluding China and Japan), Europe, Oceania, and North America. In the long term, we believe Komatsu’s superior product quality, brand name, continuous investments in research and development, focus on lowering the total cost of ownership for its machinery, extensive dealership network, and after-sales service will ensure its competitiveness and support its growth.

We also see modest upside in agricultural equipment manufacturer Kubota, underpinned by agricultural machinery demand growth in Asia and North America on the back of healthy consumer sentiment, recovering crop prices, increasing demand for food as population grows, and an increase in the mechanization of the agricultural industry. In the long term, we believe that Kubota’s superior product quality, brand name, continuous investments in R&D, extensive dealership and service network, and expansion into the upland farming market will contribute to its growth.

As for the two Chinese construction machinery manufacturers, Zoomlion and Sany, we think Zoomlion’s H shares are currently fairly valued while Zoomlion’s A shares and Sany are overvalued. In the short term, demand for construction machinery in China is driven by growth from end-user demand and replacement demand. However, in the longer term, we expect infrastructure spending to slow as China transitions to a consumer-driven economy, leading to our bearish outlook for these companies.