Company Reports

Kone is a global top-four elevator and escalator original equipment manufacturer. Its operations are integrated across manufacturing and installation activities, while also spanning E&E servicing for existing installations. Kone also performs elevator modernization services for elevator systems that have come to the end of their useful lives, which is typically 15-20 years. Active in all major geographies, Kone has an approximate 15% share of the estimated $80 billion global E&E market.

Investors warmed to Kone’s resilient first-quarter result, with the Kone share price responding positively to constant-currency new order growth of 1.6% in spite of challenging conditions within new elevator equipment markets globally. New equipment orders were down in the range of 0%-5%, with new elevator installation market conditions particularly challenging in North America and China where its property downturn is yet to subside. Still, first-quarter sales grew 3% in constant-currency terms, supported by strong growth in Kone’s service business and robust elevator modernization orders. Growth in elevator service markets was broad-based, but was most pronounced in Asia-Pacific, China, and the Middle East. Demand for elevator modernizations continued to grow at pace in all geographies, underscoring the significant opportunity that the aging global installed base of elevators poses to Kone and its original equipment manufacturing peers.

Wide-moat Kone delivered a resilient fourth-quarter result amid a still challenging environment for new elevator equipment demand. Indeed, fourth-quarter new orders proved stronger than we’d anticipated, rising 5% year on year to SEK 2.0 billion, marking a second quarter of sequential improvement in demand after an appreciably weakened first half of 2023. Order intake benefited from strong growth in service and modernization and buoyant new equipment orders in India and Southeast Asia that helped to partly offset weak new equipment demand in China and developed markets. Consequently, Kone’s full-year 2023 full-year 2023 order intake of SEK 8.6 billion tracked about 3% ahead of our forecast—a pleasing outcome amid macroeconomic conditions that remain unconducive to Kone’s new equipment business. Kone delivered full-year 2023 adjusted EBIT of SEK 1.25 billion, with adjusted EBIT margin firming by 1.5 percentage points to 11.4%. As anticipated, the group’s EBIT margin responded positively in 2023 to continuing sales mix shift toward high-profit margin services and modernization sales and the easing of raw materials prices.

Our estimates for Kone remain largely unchanged following delivery of its third-quarter result, which tracked our full-year expectations. Third-quarter sales growth decelerated meaningfully to negative 1.4% year on year, which was unsurprising given the weak new-equipment orders in early 2023, particularly in China and the Americas. However, third-quarter new order intake rose 0.3% year on year on a constant currency basis, breaking with the year-to-date declining trend in new equipment orders. Investors sent Kone shares higher—up around 4% at the time of writing—with the approximately flat new-order intake offering investors hope that the worst of the cyclical weakness in new equipment markets may have already come to pass. Kone shares screen attractively, trading at a 18% discount to our unchanged EUR 48 fair value estimate.

Sales growth further accelerated for wide-moat Kone in the second quarter of 2023, rising 16% year on year organically. Growth was spurred on by a combination of strong new equipment and modernization project deliveries—given a very healthy order book, which stood at a near-record high of about EUR 9.2 billion at the beginning of the quarter—and buoyant maintenance business revenue. We’ve bumped our full-year 2023 EBIT forecast by 4% to EUR 1.31 billion to account for organic growth of the maintenance business that has tracked year-to-date ahead of our prior expectations. Still, Kone’s 2023 is shaping up as a tale of two halves with challenging new equipment market conditions set to weigh appreciably on top-line growth in late 2023. New equipment demand remains significantly challenged, with new orders falling 8% organically in the second quarter, worsening from a 5% rate of decline in the prior quarter.

We’ve lifted our fair value estimate for Otis Worldwide by 30% to $95 per share following a transfer of coverage and a fresh look at our long-term thesis. We are more positive on the secular growth opportunity in elevator modernization that awaits Otis and its major original equipment manufacturer peers in the coming decade. This opportunity is immense—about half of Europe’s and North America’s elevators are more than 20 years old and therefore ripe for modernization—and offers a timely offset to the earnings headwind posed by the likely structural slowdown in new elevator installations over the coming decade. Otis is our top pick from our elevator OEM coverage, trading at a 7% discount to our revised fair value estimate. We’re attracted to Otis’ enviable elevator service portfolio, which is the industry’s largest with an installed base of 2.2 million units under maintenance globally.

Kone is a global top-four elevator and escalator original equipment manufacturer. Its operations are integrated across manufacturing and installation activities, while also spanning E&E servicing for existing installations. Kone also performs elevator modernization services for elevator systems that have come to the end of their useful lives, which is typically 15-20 years. Active in all major geographies, Kone has an approximate 15% share of the estimated $80 billion global E&E market.

Kone’s sales came in at EUR 2.55 billion in the first quarter of 2023, a 5.9% organic and 4.7% reported increase. Orders received declined by 5.1% organically year on year, as the macroeconomic uncertainty and the generalized increase in interest rates across the world have put many new real estate developments on hold, slowing demand for new installations of elevators. Similar to what Schindler reported last week, China was the main drag in Kone’s results, with new installations down by more than 10% in this geography. Although the Chinese market seems to have bottomed already in terms of floor space sold and housing inventory, it is still unclear how long the recovery will take, with management expecting some recovery in the second half of the year. The Chinese pricing environment is also competitively intense. Kone’s North American segment also saw strong declines in new installations (above 10% decline), while Europe remained flattish and Asia-Pacific (excluding China) performed very strongly, at above 10% growth. We are maintaining our EUR 56 fair value estimate.

As the market dynamics in China and Europe shift, we think established relationships with developers and end users will protect Kone’s position as a top global elevator player. The company's success in winning contracts for new elevator and escalator installations stems from a record of delivering tailor-made solutions that can save costs by shortening a building’s construction time, lowering energy use, or improving people traffic flow. In China, now the world’s largest elevator market, Kone has the number-one share in new installations, and in Europe the company is the second-largest competitor for new equipment.

Kone's full-year 2022 results were in line with our expectations on revenue and slightly ahead on the operating income margin. Importantly, the elevator sector's largest new equipment market, China, is showing some green shoots in demand. Kone's 2022 organic revenue grew by 3% and was primarily driven by price. Management expects more of the same in 2023, flat volume, but positive pricing driving around 3% organic growth. We think that's an achievable forecast, but also one with upside, depending on the timing of the Chinese property market recovery. Kone's current backlog is roughly equal to around one year's worth of deliveries, meaning management has a high level of visibility on 2023 revenue already. We think any recovery in China would boost the outlook, but we expect the recovery to be visible mainly in the second half of 2023. We maintain our wide moat rating and EUR 56 fair value estimate.

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.

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.

The coronavirus lockdowns in China drove Kone's second-quarter sales decline for the second quarter in a row, and the company expects to have lower revenue growth and operating profit for full-year 2022 as a result. Using the midpoint of guidance, management expects revenue growth to be 250 basis points lower and operating profit 5% lower relative to previous guidance. We expect any adjustments to our forecasts to be modest as our operating profit expectations are already in line with the company's revised guidance. As the government is driving the pandemic measures, as well as the developer lending controls, we do not view Kone's profit warning as an indication of underlying weakness in the business outlook over the long term. Therefore, we are sticking to our wide moat rating and EUR 56 fair value estimate. The shares look attractive at current levels.

As the market dynamics in China and Europe shift, we think established relationships with developers and end users will protect Kone’s position as a top global elevator player. The company's success in winning contracts for new elevator and escalator installations stems from a record of delivering tailor-made solutions that can save costs by shortening a building’s construction time, lowering energy use, or improving people traffic flow. In China, now the world’s largest elevator market, Kone has the number-one share in new installations, and in Europe the company is the second-largest competitor for new equipment.

Cost inflation and a weak new equipment market in China led to a mixed first quarter and a lowering of the upper end of guidance for Kone. While the company's near-term execution is challenged by China and supply chain constraints, we think the shares offer good value at current levels. The company reported 11% order growth but a 0.4% revenue decline. Management lowered the upper end of 2022 guidance due to the weaker environment in China, which contributes 36% of revenue and is partly in lockdown. Cost inflation and continued pricing pressures in China also contributed. We maintain our wide moat rating and EUR 56 fair value estimate.

Kone's full-year results of 6% revenue growth and a 12.5% operating profit margin were in line with our expectations; however, for 2022 we're forecasting 2% revenue growth and a 150-basis-point decline in operating profit margin. These are both at the bottom end of management's range. We think, it's more likely than not that the Chinese government eases some of the lending restrictions to developers this year, which will help refuel the company's growth prospects but later in the year. Inflation pressure from a likely extra EUR 100 million-EUR 150 million raw material costs and potentially 3%+ wage increases drives our margin contraction forecast. That margin pressure will ease toward the end of the year as the company starts booking more profitable orders in fourth-quarter 2021. However, order execution can be 12-24 months, so the positive profit margin contribution from the fourth-quarter 2021 orders will be visible toward the end of 2022. Kone shares are down 20% since August 2021, pricing in a lower medium-term growth outlook in China, and now trading in line with our fair value estimate. We maintain our wide moat rating.

Wide-moat Kone reported a slowdown in third-quarter revenue sales due in part to liquidity pressure from indebted Chinese developers. We are maintaining our fair value estimate. Excluding currency effects, orders grew 10.9%, moderately above the nine-month year-to-date pace of 9.8%. However, sales in the third quarter declined by 1.3% year over year. The decline was due to a 6.5% decline in new equipment revenue, including China, which contributes roughly half of new equipment sales. Eventually, the government will loosen credit expansion for the sector again and indebted developers will have restructured their balance sheets. However, we think the property market will not be fully recovered due to some speculative investments contributing to recent growth and more mature urbanization closer to Germany than India.

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.

Should the Chinese property market spiral into lower property prices and sales and a broader developer liquidity crunch as a result of Evergrande's potential collapse, we believe the near-term credit loss risk for European capital goods suppliers will be moderate and manageable. From a valuation standpoint, the greater risk is a step down in medium-term Chinese property market growth prospects if banks tighten lending to property developers. For now, however, we are making no changes to our ratings or valuations.

Kone reported strong second-quarter results, with margin expansion of 60 basis points supported by 11% organic revenue and weak year-ago revenue comparisons. Raw material and logistic costs were higher, with the offset to those rising costs mainly coming from volume growth and to a less extent from price. In China, Kone outgrew the market with more than 10% elevator and escalator unit order growth. With high revenue visibility and with six months having passed, management tightened the full year outlook previously given in the first quarter, a pattern that management has followed in previous years. Management raised the lower end of 2021 revenue guidance by 200 basis point to a range of 4% to 6% organic growth. However, an expected inflationary impact of roughly EUR 175 million from increased electronic components and logistics costs lowered the upper end of the margin range by 20 basis points to 12.4% to 13%. We forecast 5% revenue growth and 12.9% EBIT margin, and so do not expect to make material changes to our forecasts or fair value on the back of the results. We maintain our wide moat rating.