Morningstar | Reinitiating Coverage of Asian Capital Equipment Sector; Prefer Narrow-Moat Komatsu and Kubota
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.
Kubota and subsidiaries are engaged in the manufacture of a comprehensive range of machinery and other industrial and consumer products, including farm equipment, engines, construction machinery, pipe-related products, environment-related products, and industrial castings. Farm equipment, construction machinery, ductile iron pipe, and certain other products are sold both in Japan and in overseas markets which consist mainly of North America, Europe, and Asia. Co. also provides water and sewage treatment plants, submerged membrane systems and biogas production systems for water treatment, as well as pulverizing facilities for solid waste treatment.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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