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  • Johnson Controls is increasing the manufacturing capacity of its heating, ventilation and air-conditioning [HVAC] plant at Guangzhou, China, by 30% to cater to the growing China building market.
  • China is expected to add 50,000 high rises through 2025 and accounts for 50% of all 10+ story buildings globally to be built through 2020.
  • In the near term, the Guangzhou expansion will help the company return its HVAC segment to growth. In fiscal 2012, revenues in this segment declined by 3% y-o-y due to weakness in the building markets of Europe.

Johnson Controls (NYSE:JCI) is expanding the manufacturing capacity of its plant at Guangzhou, China, by 30% in an attempt to target the growing building market in China [Johnson Controls Expands Guangzhou Factory to Meet Increasing Demand for Energy Efficient Building Technologies, April 3 2013,]. The expansion incorporates a fully-automated assembly line for air handling units [AHU] and four production lines for ductless air-conditioning and heating [HVAC] systems. The company aims to utilize shortened lead times and improved efficiencies to derive the said capacity gains. However, the most important aspect of this expansion is that it will allow Johnson Controls to address the growing demand for energy-efficient HVAC products from the building market in China.

Johnson Controls’ HVAC segment constituted $10.4 billion of the company’s $42 billion revenues in fiscal 2012. We currently have a stock price estimate of $34 for the company, marginally above its current market price.

Building Market In China Is Projected To Grow At Strong Rates Over The Coming Years

In fiscal 2012, Johnson Controls’ HVAC segment generated $2 billion in sales from Asia [Johnson Controls’ fiscal 2012 10-K, November 19 2012,]. More than 50% of this came from China where the company’s HVAC sales have grown at a compounded annual growth rate of 13% over the past five years.

Looking ahead, China will continue to be the most important growth market for the company. The construction of residential and commercial buildings in the country is expected to grow at strong rates over the coming years driven by a rising urban population. Through 2025, around 350 million additional Chinese are expected to move to cities from rural areas and 50,000 new high rises are expected to come up in the country, according to industry estimates cited by the company. In addition, to provide an estimate of this market’s importance relative to the rest of the world – through 2020, around 50% of all 10+ story buildings are expected to be built in China. Thus, Johnson Controls can ill afford to not expand in this critical growth market.

Overall, Johnson Controls with its advanced product portfolio, manufacturing facilities at Guangzhou and Wuxi, an engineering center at Wuxi and 37 branch offices providing servicing, is well-positioned to maintain its leadership position in the building market of China.

Increased Guangzhou Capacity Will Help Offset Impact From Slowdown In Europe

In the near term, this expansion at Guangzhou will help the company’s HVAC segment revenues to grow again after an annual decline of nearly 3% in fiscal 2012. Last year, sales at this segment were impacted from the slowdown in European building markets, which are reeling under the sovereign debt crisis. Johnson Controls currently anticipates its HVAC segment sales to grow between 2% and 4% in fiscal 2013 compared to fiscal 2012 [Johnson Controls investor presentation, February 2013,].

The expanded Guangzhou facility will also contain a test center for ductless HVAC systems and small tonnage chillers where research will be carried out to develop future energy-efficient building products.

Disclosure: No positions