Otis' Margin Expansion Supporting Medium-Term Earnings Growth

Otis is the largest elevator original equipment manufacturer (OEM) by revenue globally and also boasts the highest operating profit margins of the three publicly listed elevator OEMs, including Kone and Schindler. It has longer-term opportunities to grow its lucrative service business. However, along with its peers, it faces a near-term slowdown in the Chinese new equipment market, which we estimate contributes just over 10% of the company's operating profits. China's property developer sector, which carries high levels of debt, will likely go through a multi-month restructuring process before normal development activity resumes. A proportionately larger revenue share from service (maintenance and spare parts) relative to competitors underpins the company's superior profitability. Close to 60% of the company's profits come from service, which delivers profit margins as much as 3 times that of new equipment and replacement ("modernization") unit EBIT margins.