Caterpillar: Short-Term Woes, But Long-Term Opportunities In China

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 About: Caterpillar Inc. (CAT), Includes: HTCMY, HYHZF, KMTUY, SNYYY

Summary

Construction equipment companies throughout China are suffering from excess capacity.
A re-balancing of China's economy towards consumption means the boom days of the construction industry are unlikely to happen again in the near future.
The supply-side pressures show signs of abating, with major players slashing operations and reducing capacity.
In the long term, the "One Belt, One Road" initiative and continuing urbanization offer growth prospects.
By positioning itself as a manufacturer of high-quality machinery, Caterpillar has been seeing encouraging results despite weakening market conditions.
Please take note, this is only one aspect in assessing the attractiveness or non-attractiveness of Caterpillar (NYSE:CAT) as an investment and should not be used independent of other factors.
Short-Term Woes: Excess Capacity And Re-balancing Of The Chinese Economy
Caterpillar's performance has been hit on multiple fronts, including low oil prices and a slowing Chinese economy which has contributed to a weak mining and construction industry. Consequently, the world's largest seller of construction and mining equipment has seen negative monthly sales growth rates for the past 39 months.
Construction equipment companies responded to China's property bubble (2005-2011) and the government's one-time 4 trillion yuan stimulus package by rapidly increasing capacity. Caterpillar, for instance, announced expansion plans in 2010 to increase Chinese excavator production capacity by 400%. The timing was unfortunate, not just for Caterpillar, but for other equipment manufacturers as well; production capacity in China, the world's largest market for mining and construction equipment, was ramped up just as the Chinese government began to tone down the pace of investment in infrastructure and property.
By 2012, construction equipment manufacturing capacity in China was double that of global sales, and the softening of the construction industry had already just begun; growth in China's construction industry was 13.5%, 9.7%, 9.3%, 9.5% and 6.5% in real terms in 2010, 2011, 2012, 2013 and 2014, respectively.