Company Reports

Although Hitachi Construction Machinery’s, or HCM’s, June quarter revenue growth of 2.6% year on year was largely in line with expectations, its operating margin decline of 1.9 percentage points to 9.9% was below our previous estimate. We attribute the shortfall of HCM’s profitability to a negative mix from weaker value chain sales in the Americas and a worse-than-expected impact from weak capacity utilization in Europe and Asia (excluding Japan, India, China). Based on the sluggish results, we lower our operating margin assumption for fiscal 2024 (ending March 2025) to 11.0% from 12.0%, while maintaining our 2% year-on-year revenue decline assumption, with downward sales revisions in the Americas/Asia offset by upward revisions in other regions such as Oceania. We maintain our fair value estimate for HCM at JPY 5,450 as our medium-term forecasts remain unchanged.

We slightly lower our revenue estimate for Hitachi Construction Machinery, or HCM, for fiscal-year 2024 (ending March 2025) to a 2% decline from a 0.5% decline, as the full-year guidance suggests worse-than-expected demand in Europe and Asia. We expect the high interest rate environment and weaker coal mining activity in Asia to weaken construction and small-sized mining machinery sales in these regions. However, we think this will be temporary and maintain our fair value estimate at JPY 5,450, as our projection of a medium-term recovery from fiscal 2025 remains largely unchanged. We forecast 6% growth in fiscal 2025, followed by a 4.5% CAGR between 2025 and 2028, supported by aftermarket sales (the main part of the Value Chain business) as services like preventive maintenance will increase due to a higher supply of machinery with its Internet of Things platform over the past three years. We believe this revenue growth is underestimated by the market.

We maintain our fair value estimate for Hitachi Construction Machinery, or HCM, at JPY 5,450, but slightly raise our near-term sales forecast for North America. While we assume a short-term oversupply of multifamily houses in the U.S. to lead to a slowdown in construction, we do not expect this to materially affect HCM’s sales. We expect the impact to be mitigated by its dealers stocking up from having low inventories, partly caused by a temporary year-end adjustment to withhold procurement. We revise our revenue assumptions for fiscal 2023 and 2024 (ending March 2024 and 2025, respectively) to 10% growth and 0.5% decline, up from 7% growth and 1% decline before. Despite the brief headwind in 2024, we think the strong new equipment sales over the past three years will drive value chain sales (such as service and parts) over the longer term, which the market is underestimating. With risks of near-term headwinds priced in, we believe HCM’s shares are undervalued.

As a construction/mining machinery manufacturer, Hitachi Construction Machinery’s, or HCM’s, lifeline will be from sales of its mainstay hydraulic excavators, mining dump trucks, and wheel loaders. However, the company’s core strategy will focus on growing its “value chain” business, which includes services like spare parts supply and maintenance. As its product sales increase through both direct channels and dealers, the company can provide more aftermarket services. Further, more of HCM’s machines will be included its ConSite system, which allows the monitoring of the equipment’s operational status and if issues are detected, HCM can provide preventative/corrective measures. These services provide significant value for the end-users and are highly profitable.

We initiate on Hitachi Construction Machinery, or HCM, with a narrow economic moat rating underpinned by its aftermarket support structure and an established brand from its reputation as a reliable supplier. Our fair value estimate of JPY 5,450 is based on the expectation of a near-term slowdown in demand for construction machinery amid macroeconomic headwinds, followed by a recovery from the second half of fiscal 2024, ending March 2025. We expect secular drivers like infrastructure spending and factory construction from reshoring to support further top-line growth over the medium term. Additionally, we expect strong new equipment sales over the past two years to translate into stable aftermarket sales, given the long product life of HCM’s mining/construction machines, which is overlooked by the market. We therefore believe HCM’s shares are undervalued.

As a construction/mining machinery manufacturer, Hitachi Construction Machinery’s, or HCM’s, lifeline will be from sales of its mainstay hydraulic excavators, mining dump trucks, and wheel loaders. However, the company’s core strategy will focus on growing its “value chain” business, which includes services like spare parts supply and maintenance. As its product sales increase through both direct channels and dealers, the company can provide more aftermarket services. Further, more of HCM’s machines will be included its ConSite system, which allows the monitoring of the equipment’s operational status and if issues are detected, HCM can provide preventative/corrective measures. These services provide significant value for the end-users and are highly profitable.