Heavy Equipment Sector Outlook, Picking up the pieces by Sarina Lesmina - CLSA

Sarina is on fire, writing yet another report. This time she gives an update on the progress in Japan post the natural disaster. Heavy equipment plants are gradually resuming operations and infrastructure reconstruction work has also started.

Worries about diverting equipment supply to Japan is unfounded as only small-medium equipment is required for reconstruction work, and Indo also manufactures these locally. Maintain OPF

Interestingly, as we pointed out in yesterday’s daily chart, Komatsu Japoan (6301 JP) share price has been strong, at a 30-month high. Signaling sooner than expected recovery in its operations?

Key points from report:
· No order cancellation from customers for United Tractors (UNTR IJ) and Hexindo (HEXA IJ). Both have 2-3 months inventory supply
· Both UNTR and HEXA imports large equipment (for mining) from Japan, while small and medium ones are mostly manufactured locally
· Komatsu plants are beginning to resume partial production in the affected area. Includes Ibaraki plant that produces large mining equipment
· Hitachi plants were worse hit, with large mining equpment plants still down. Small-midsize equipment plants have started partial production
· Export shipment at Hitachinaka port may take 1.5-2 months to resume. Reconstruction work is in progress
· Komatsu and Hitachi looking for alternative ports to redirect export. (75% of Hitachi's products are exported through Hitachinaka port)
· Might not be easy for Caterpillar to fill potential supply gap as clients tend to order in fleets
· Sarina expects softer growth of UNTR sales to 5,730 units (+6% YoY), but still believes that UNTR will be a direct beneficary of world's growing demand for energy. Maintain OutPerform on UNTR.