Hitachi Construction Machinery: Initiating on Japan’s Second-Largest Construction Machinery Company

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.