Hitachi Construction hopes to boost earnings with wheel loaders

Hitachi Construction Machinery aims to corner more of the wheel loader market.

TOKYO — Japan’s Hitachi Construction Machinery is going on both the defensive and offensive to better cope with China’s economic slowdown. The construction machinery maker is gradually shifting its focus from the shrinking Chinese market to Europe and the U.S.

     Hitachi Construction grew significantly by increasing sales of its core hydraulic shovels in China, but demand there is expected to be one-seventh of what it was five years ago in the current fiscal year. Sales in China are forecast to account for just 6% of total sales through March 2016. There is no sign of recovery in Chinese public investment, which was a key driver of demand for hydraulic shovels.

     The company expects its net profit to decrease by half on the year to 13 billion yen ($105 million). Chinese demand for hydraulic shovels is expected to halve on the year to 15,000 units. The hydraulic shovel market in China has shrunk over the past five years after peaking at 110,000 units in fiscal 2010. China operations account for less than 10% of Hitachi Construction’s total sales, compared with nearly 30% at their peak.

     The worse-than-expected performance prompted the company to solicit applicants for early retirement for the first time in 14 years. “We strive to cut bigger fixed costs than competitors,” said Chief Financial Officer Tetsuo Katsurayama.

     The company’s operating profit margin was 4% in the April-September period of 2015, well below rival Komatsu‘s 11%. This fiscal year, the company is expected to post restructuring costs of more than 10 billion yen, including the costs of consolidating production sites.

New earnings source

In October, Hitachi Construction went on the offensive by acquiring Japanese manufacturer of wheel loaders KCM from Kawasaki Heavy Industries. Wheel loaders are four-wheeled, shovel-type construction vehicles for loading earth and sand, removing snow, and are also used in agriculture. Global annual demand for wheel loaders stands at about 200,000 units, the second highest number for a type of construction vehicle behind hydraulic shovels at about 300,000 units.

     China is the destination for about 120,000 of the 200,000 units, where there are approximately 100 local makers. Price competition is so intense that few foreign manufacturers enter the Chinese market. “We will try to win the remaining 80,000 units, which are worth as much as 1.2 trillion yen,” said Akira Tatsumi, executive vice president of KCM.

     In the previous fiscal year, KCM had a global share of 2.5% on a unit basis and its sales stood at about 26 billion yen. Hitachi Construction also makes small wheel loaders. Their combined share will be 8%, generating about 63 billion yen in sales. That represents nearly 10% of Hitachi Construction’s total sales, and “wheel loaders have high profit margins,” according to Katsurayama.

     Acquiring KCM as a subsidiary will help make production more efficient and cut costs. A further improvement in profit margin can be also expected, since it will become easier to procure components. KCM mainly operates in North America, while Hitachi Construction’s biggest market is Europe. The two companies will seek to capture a 10% share of the global market together.

Nevertheless, Hitachi Construction’s stock price has remained stagnant, with its price-to-book ratio falling below the liquidating value of 1. The company’s stock price tends to fluctuate significantly in response to the release of Chinese economic data.

     “A high dividend yield will provide a boost for Hitachi Construction’s share price,” said Taku Ouchi, an analyst at SMBC Nikko Securities. In order for stock prices to rise further, however, better earnings are needed. “We will do our best to make sure that our employees will be happy to have become part of the Hitachi Construction Machinery group,” said Tatsumi.

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