Construction Machinery:Positive view on machinery companies

Doosan Bobcat is transferring its heavy equipment business to DoosanInfracore for KRW127.6bn. The transfer process takes effect as of 1 January 2018,so this will not influence 2017 financials. According to the announcement, bothparties are pursing the process to allow each to concentrate fully on strengtheningtheir core competencies.

    Earning estimate changes for Infracore are limited: We raise our 2017-18 salesestimates by 0.1% and 1.5% respectively as we increase our heavy machinerydivision sales estimate by 30.7% in 2017e and 94.8% in 2018e. Despite the increasein our heavy division sales numbers, our overall sales estimates do not increasemuch as we cut the contribution from Bobcat sales on the back of the transfer of theheavy equipment division to Infracore. As we transfer heavy to Infracore and cut ourexpectations for the PP division, our Bobcat sales estimates for 2017/18/19 decreaseby 9/25/25% (see page 3 for details). The increases we make to our DoosanInfracore’s heavy division estimates are mainly due to the company’s constructionequipment sales in China assumption increasing by 93% in 2017e and 109% in2018e. HSBC’s China machinery analyst raised excavator sales volume estimates inChina by 29.7% in 2017e and 34.6% in 2018e (see The going is good, 31 August2017). Our 2017-18e sales estimates are 6.4% and 9.0% above consensus,respectively.

    We rate both Bobcat and Infracore Buy, but have a preference for Infracore:1) its heavy business turnaround should continue in the China and EM (SoutheastAsia and Middle East) markets, 2) The Engine business should continue to grow asthe company supplies its G2 engine not only to Bobcat but also to external machinerycompanies such as Kion (German fork lift maker), 3) Infracore’s valuation isattractive, with the stock trading at 10.7x 2017e PE vs 14.8x 2017e PE for Bobcat.

    We cut our TPs for Infracore and Bobcat to KRW10,800 and KRW 46,000respectively, reflecting FX changes and earnings revisions that impact growth atBobcat’s PP, Compact, and Heavy divisions, resulting in lower estimates for Infracoretoo.