United Technologies Reaches China

Yesterday, a unit of United Technologies Corp. (UTX - Analyst Report), UTC Fire & Security (UTCFS), increased its stake in GST Holdings Ltd. (GST), the leading fire-alarm system provider in China.

UTCFS, through its affiliate United Technologies Far East Ltd. (UTFE), first acquired 9.9% of outstanding shares of GST in 2006, and then increased it to 29% until 2008. Currently, United Technologies holds 95% of GST common shares and plans to consolidate the company with its existing operations after delisting it from the Hong Kong Stock Exchange.

The acquisition is helping United Technologies to extend its footprint to China, which has lucrative growth opportunities. With its extensive distribution network, strong brand recognition, an experienced management team and a large customer base, GST has been receptive to new technologies that will help accelerate growth in the region.

Despite being negative on the economic recovery, we believe that United Technologies’ continuous efforts to reduce costs will improve operating margins and overall results in 2009. Moreover, we are encouraged by the company’s expectation of generating free cash flow equal to or in excess of net income for 2009. So far this year, free cash flow has been 99% of net income.

United Technologies is one of the few companies that can take advantage of strategic M&A when liquidity is restored and a functioning M&A markets re-emerge, perhaps late in fiscal 2009 or more likely, sometime in fiscal 2010.

The company is likely to deliver double-digit earnings growth in fiscal 2010, given restructuring savings, growth in highly profitable aftermarket business and potential improvement in emerging markets construction activity balancing other late-cycle exposures.

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