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Japan-Update

Construction machinery makers build profits on demand rally

North America, Southeast Asia contribute; China slowdown threat wanes

Improving demand in North America and Southeast Asia are lifting expectations for construction machinery makers.

TOKYO/LOS ANGELES -- Construction equipment producers look to benefit from a global recovery in demand, as Japan's Hitachi Construction Machinery and U.S.-based Caterpillar upgraded earnings estimates this week while posting strong results.

Investors snared more shares of Japanese producers on speculation that sales might beat prior guidance. The share price of Komatsu, the country's largest building equipment maker, hit a year-to-date high Wednesday.

Hitachi Construction upgraded its forecast Wednesday for the year ending in March. Japan's second-ranked producer now projects consolidated net profit to soar 270% to 30 billion yen ($263 million), up from a forecast of 120% growth to 18 billion yen. Demand is expanding in China amid lively infrastructure investment, and also in Indonesia as mine development rebounds. Hitachi Construction also anticipates profit contribution from a recently purchased subsidiary handling machinery parts repair and related services.

Hitachi Construction's consolidated net profit for the April-September half skyrocketed 11.3 times on the year to 25.5 billion yen, a record for the period.

"The company's expected exchange rate is conservative, so it is possible that earnings will be even better," said Shinji Kuroda, an analyst at Credit Suisse Securities (Japan).

A global recovery in construction machinery sales lies behind these strong corporate earnings, as demand rebounds in North America, Southeast Asia and elsewhere. The average annual operating time per construction machine is now rising in North America, Komatsu says.

Firm demand in China and North America prompted U.S.-based Caterpillar to upgrade its full-year earnings forecast when it announced June-September results Tuesday.

Caterpillar's sales are growing worldwide, even for the just-ended quarter. North American sales climbed 31%, while the Asia-Pacific region surged 57%. The company also reported a 28% gain for the Europe, Middle East, Africa and Eurasia region. Retail prices are seen trending upward on growing demand for construction sites.

"Higher sales volume and our team's focus on cost discipline resulted in improved profit margins across our three primary segments," CEO Jim Umpleby said Tuesday.

Construction machinery makers saw the risk of an economic slowdown in China as one of their largest concern.

"We are worried about falling private-sector investment" after the Communist Party National Congress, said Tetsuo Katsurayama, a director at Hitachi Construction. But expectations for a major drop in demand following the twice-a-decade political gathering, which concluded Tuesday, are becoming less widespread.

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