Hitachi Construction Machinery Earnings: Low Dealer Inventories in North America Mitigate Headwinds

We maintain our fair value estimate for Hitachi Construction Machinery, or HCM, at JPY 5,450, but slightly raise our near-term sales forecast for North America. While we assume a short-term oversupply of multifamily houses in the U.S. to lead to a slowdown in construction, we do not expect this to materially affect HCM’s sales. We expect the impact to be mitigated by its dealers stocking up from having low inventories, partly caused by a temporary year-end adjustment to withhold procurement. We revise our revenue assumptions for fiscal 2023 and 2024 (ending March 2024 and 2025, respectively) to 10% growth and 0.5% decline, up from 7% growth and 1% decline before. Despite the brief headwind in 2024, we think the strong new equipment sales over the past three years will drive value chain sales (such as service and parts) over the longer term, which the market is underestimating. With risks of near-term headwinds priced in, we believe HCM’s shares are undervalued.