AI Data Centers Drive Power & Construction Demand; Reiterate Buy on Caterpillar et al.

Overview

This report validates HSBC’s prior positive thesis—that AI data center (AIDC) construction is boosting demand for related industrial equipment—by analyzing key messages from Cummins’ Capital Markets Day and Deere’s Q2 earnings call. The report highlights that AIDCs are not only elevating demand for backup power but also significantly stimulating construction activity in the U.S. Accordingly, HSBC reiterates Buy ratings on Caterpillar, Weichai Power, and Techtronic Industries, as these companies stand to benefit directly from the primary power shortfall and infrastructure build-out associated with AIDCs.

Core views

Demand side: AI data center power demand is strong and durable. Cummins reports that 95% of its power generation business serves behind-the-meter backup power applications, with robust demand currently observed in both the U.S. and China. It has already secured AIDC backup power orders scheduled for delivery through 2028. To meet this demand, Cummins announced a USD 450 million investment to expand large-bore engine and generator set capacity by 20 GW, targeting total capacity of 55 GW by 2030. On the primary power front, supply tightness is expected to persist at least through 2028. Cummins is developing a 4 MW natural gas engine solution based on its existing platform, slated for launch in 2028. Construction side: AIDC construction boosts U.S. building activity. Despite market concerns about high interest rates, Deere raised its FY2026 Construction & Forestry net sales growth guidance to 20% (previously 15%), with its order backlog reaching the highest level since April 2024 and over 80% of FY2026 production capacity already reserved. Deere notes that data center construction spending is expected to exceed USD 100 billion in 2026 and maintain double-digit growth in 2027, supporting equipment demand for large-scale site preparation and grid/cooling-related engineering (e.g., water and utility contractors). Stock views: HSBC favors three core beneficiaries. Caterpillar (CAT), with its engine portfolio extending up to 10 MW and leading market position, stands to gain multi-year upside in the AIDC primary power segment; Weichai Power aims to deliver 2.5–3 MW natural gas generator sets to the U.S. in Q4 2026 and possesses solid oxide fuel cell (SOFC) potential; Techtronic Industries (TTI) derives approximately 11% of its sales from tools used in AIDC construction and will benefit directly from heightened construction activity.

Analysis framework

HSBC employs a combined analytical framework of 'peer validation' and 'supply chain transmission.' First, it extracts cross-validated signals regarding AIDC power demand and construction sector strength by interpreting recent management guidance and capital expenditure plans from peers or upstream/downstream players (e.g., Cummins, Deere). Second, it maps these macro-industry trends onto the specific business structures of covered stocks, distinguishing between drivers such as 'backup power,' 'primary power,' and 'construction tools,' and assessing each company’s strategic positioning within the supply chain (e.g., power rating, delivery timelines). Finally, it maintains prior target prices and ratings using valuation models (DCF, SOTP, PE multiples), emphasizing long-term structural opportunities rather than short-term volatility.

Methodology notes

• Industry/sector analysis frameworkUpstream-midstream-downstream supply chain transmission

  Deriving performance outlook for midstream equipment suppliers (Caterpillar, Weichai, TTI) from demand signals observed at upstream/peer firms (Cummins, Deere)

  The report uses Cummins and Deere as industry barometers, logically transmitting their observed growth in power and construction demand to similarly positioned companies such as Caterpillar, thereby reflecting horizontal mapping of sector-wide momentum.

• Valuation methodologyDCF (Discounted Cash Flow)

  Absolute valuation of Caterpillar using DCF model

  For Caterpillar, HSBC applies a DCF model assuming a terminal growth rate of 3% and a WACC of 6.1%, reflecting the long-term nature of the AIDC power story, resulting in a target price of USD 1,100.

• Valuation methodologySOTP (Sum-of-the-Parts)

  Valuation of Weichai Power using sum-of-the-parts methodology

  Given Weichai’s diversified business, HSBC segments it into five parts—Heavy-Duty Truck-related, Data Center Large-Diameter Engines, SOFC, Smart Logistics (KION), and Agricultural Machinery (Lovol)—and applies appropriate PE or PS multiples to each before aggregating.

• Valuation methodologyPE/PEG valuation

  Forward P/E multiple approach for Techtronic Industries

  HSBC assigns Techtronic Industries a forward P/E target of 20.5x (based on its 2024 average), applied to its 2027 EPS forecast, yielding a target price of HKD 142.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Caterpillar Inc (CAT.US)

  Benefits from rising AIDC primary power demand, with an engine product line extending up to 10 MW

  Strengths

  Leading market position, significant upside in primary power, multi-year AIDC story

  Comparison

  Compared to Cummins, CAT holds a power-range advantage in primary power applications (up to 10 MW vs. Cummins’ under-development 4 MW solution)

  Risks

  Greater-than-expected economic slowdown, slower-than-expected AIDC build-out, intensifying global competition, tariff impact on costs

• Weichai Power (2338.HK/000338.CH)

  Benefits from primary power demand and SOFC technology potential; plans U.S. delivery of natural gas generator sets

  Strengths

  Growth in primary power business, latent SOFC value, attractive valuation

  Comparison

  Competes with Cummins in natural gas generator sets; targets U.S. delivery of 2.5–3 MW units in Q4 2026

  Risks

  Unexpected slowdown in AIDC construction, weak large-engine sales, SOFC delivery delays, hawkish Fed policy

• Techtronic Industries (0669.HK)

  Benefits from construction tool demand driven by AIDC build-out; ~11% of sales linked to this segment

  Strengths

  Strong Milwaukee brand demand, accelerating margin expansion

  Comparison

  As a professional tools leader, directly benefits from data center civil works and utility engineering

  Risks

  Higher tariffs in Vietnam or Mexico pressuring margins, slowdown in data center/infrastructure construction demand, weak non-core product growth, rising SG&A expenses

Key data

• Cummins Capacity InvestmentUSD 450 millionTo expand large-bore engine and generator set capacity by 20 GW; total capacity targeted at 55 GW by 2030
• Deere FY2026 Construction Sales Guidance+20%Raised from prior +15%; order backlog at highest level since April 2024
• 2026 Data Center Construction Spending Forecast>USD 100 billionDeere expects >USD 100 billion in 2026, with double-digit growth projected for 2027
• Caterpillar Target PriceUSD 1,100Implies 25% upside, based on DCF valuation
• Weichai Power H-Share Target PriceHKD 50Implies 21.6% upside, based on SOTP valuation
• Techtronic Industries Target PriceHKD 142Implies 19.5% upside, based on 20.5x 2027e PE

Impact & implications

The report concludes that AI data center construction is not a fleeting thematic trade, but is translating into tangible industrial equipment orders. For Caterpillar, its leadership in high-power primary power solutions positions it as a core beneficiary of AIDC power shortages; Weichai Power is entering this high-growth segment via natural gas generator sets and future SOFC technology; and Techtronic Industries, as a professional tools leader, directly captures the tool consumption benefits arising from data center civil works and installation activities. The earnings growth logic for these companies is shifting from traditional cyclical recovery toward structural growth driven by technology infrastructure investment.

Risks

• Slower-than-expected AIDC construction
• Higher-than-expected interest rates
• Greater-than-expected global economic slowdown
• More intense global competition than anticipated
• Tariff-related cost pressures greater than expected
• Weak sales of large engines (particularly natural gas and diesel generator sets)
• SOFC delivery delays
• Higher tariffs in Vietnam or Mexico pressuring TTI’s margins

What to watch

• Progress of AIDC construction and sustainability of power demand
• Development progress of Cummins’ 4 MW natural gas engine solution
• Weichai Power’s U.S. delivery of natural gas generator sets
• Actual execution of U.S. data center construction spending
• Order book changes at Caterpillar, Weichai Power, and Techtronic Industries