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Caterpillar Inc. (CAT - Analyst Report) unveils another expansion plan for increasing it foothold in China. The company disclosed that it is adding another product line and is also expanding its wholly owned, Chinese construction equipment company, Shandong Engineering Machinery (“SEM”).  

SEM produces wheel loaders, motor graders and paving products. In addition to increasing capacity for wheel loaders, Caterpillar will add a line of SEM-branded track-type tractors. The plan is to transform SEM from a leading Chinese wheel loader manufacturer to a leading provider of construction equipment. 

Caterpillar had purchased SEM in 2008 and since then has focused on developing new and improved wheel loader models and also enhanced the production capacity.  After completion of the current expansion, likely by 2014, Caterpillar is estimated to triple its SEM wheel loader capacity.  

The company will also build a new facility at the SEM manufacturing campus to begin production of SEM-branded track-type tractors for the Chinese market.  The SEM-branded track-type tractors are expected to come on-line in late 2012, with production ramping up through 2013 and 2014.

This news comes a day after Caterpillar announced plans to expand its manufacturing facility in Xuzhou, China, which would augment hydraulic excavator production at Caterpillar Xuzhou Limited (“CXL”) by a substantial 80%.

Caterpillar sees China as a key region for growth due to its continued infrastructure development and economic growth policies.  However, rumors of an economic slowdown in China are causes for concern. Earlier this month, China cut its 2012 growth target to an eight-year low of 7.5%. A slowing Chinese economy would have a negative impact on infrastructure and construction spending.

On a positive note, despite lurking fears of an economic slowdown in China, Caterpillar’s sales in that country were higher in the fourth quarter of 2011 compared with the fourth quarter of 2010, as dealer deliveries to end users, albeit at low levels, were better than the industry overall.

Furthermore, machine production was sufficient to allow dealers to build inventory for the upcoming 2012 selling season. Caterpillar and its dealers have purposely built additional new machine inventory in China to bolster its competitive position during the critical selling season that typically follows the Chinese New Year.

Despite the lingering doubts overhanging the economy at large we believe the top line would continue to grow on the back of continuing demand for construction and mining equipment, in the long term, triggered by industrialization and urbanization in the country. The shares of Caterpillar presently retain a Zacks #2 Rank (short-term Buy recommendation).

Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base. Caterpillar operates two divisions – Machinery and Power Systems (M&PS) and Financial Products. Caterpillar competes with the likes of CNH Global NV , Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).

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