Higher Prices in Kone's Order Book Offer Path to Margin Recovery, but Not Until Second Half of 2023

After the earlier release of high-level results, Kone's full third-quarter report contained few surprises. Orders were down 10% because of China, sales were up 6.5%, boosted by service, and EBIT margin contracted 230 basis points, hit by inflation. We maintain our wide moat rating and EUR 56 fair value estimate. The shares look attractive, in our view. Similar to its peers, Kone faced inflation headwinds and supply chain constraints as well as a weak new equipment environment in China. However, the majority of an elevator supplier's profits comes from its service business. Kone reported 8% growth in service revenue for the quarter, above the 5% reported in new equipment. Importantly, the margin on a euro of service revenue is roughly 3 times that for a euro of new equipment revenue, by our estimates.