Going Down? Elevator OEMs Have Material Exposure to Chinese Property Market

The Chinese property sector is under pressure from the latest weakening land and building sales, government-directed tightened credit, and heavily indebted large developers, presenting risks to our valuations of elevator original equipment manufacturers, or OEMs, Kone, Schindler and Otis. Should Chinese new elevator equipment demand decrease by 10%-20%, we estimate 7%-18% downside risk to our current fair value estimates, or FVEs, for these three companies. China's property sector is a key driver of sector growth, accounting for around 60% of new elevator equipment demand. In the last decade, underlying demand has been supported by relatively low urbanization rates. However, China's urbanization rate is now 61%, from 51% in 2012, boosted by years of property sector growth and a narrowing gap with more mature markets.