Kone's Profit Warning More Reflective of Market Challenges Than Demand Destruction

Kone's latest profit warning for 2022 reflects prolonged liquidity and supply chain challenges, which have disrupted the elevator industry, particularly in China this year. The low end of revenue guidance reflects a 4% decline in organic revenue, around 600 basis points lower than guidance at the start of the year. While that's a fairly material difference, we don't view that 600-basis-point gap as fully permanent demand destruction. The lowered outlook largely reflects the disorder in the Chinese property market currently with developers still working out their debt issues, new buyers weary of getting into a market in disarray, and the government-mandated coronavirus lockdowns intermittently freezing business activities. Supply chain issues have also hit some Europe construction and possibly fourth-quarter revenue so far, with challenges still in securing elevator components. However, we believe a less attractive China property market will sour some demand from buy-to-let or buy-to-flip investors, and therefore we lowered our forecast for new equipment revenue modestly with a cumulative impact of 2% across our group revenue and EBIT forecasts through to 2026. These changes do not have a material effect on our fair value estimate, which we maintain at EUR 56 along with our wide moat rating.