Morningstar | Kone's 2Q Results Continue the Pricing Pressure Theme With Some Relief in Sight; Shares Fully Valued
Pricing pressure in China continues to depress Kone's top-line growth, while raw material prices have been hurting margins. Kone reported 3% organic revenue, with growth in Europe offset by a decline in Asia, where the pricing environment in China remains more competitive relative to other markets. The EBIT margin declined by 150 basis points year over year to 12.9% due to raw material price pressures. This has been the theme for the past few quarters, but we expect some improvement by year-end, when orders priced at higher margins are executed and show up in revenue. However, we believe the shares are fully valued and would not be chasing them at current levels. We are maintaining our wide moat rating and EUR 42 fair value estimate.We believe that on a global basis, Kone has grown in line with to slightly better than the market, taking some share in China on volume. On a volume basis, the global market for new elevators grew in the low single digits in the second quarter, with new installation volumes flatter in China, the world's largest elevator market. As growth in China's new installations have been flatlining for a couple of years, and the age of the installed base of elevator increases, market demand for maintenance contracts has grown, with more than 10% growth in the second quarter. Elevator upgrade demand increased at a 10% pace in China. The stickiness of elevator contracts, together with the price sensitivity of the market, is the main reason why competitors like Kone are following a more aggressive pricing strategy to build their installed base of elevators to secure longer-term maintenance revenue.
Elsewhere in North America and EMEA, which are more mature markets, maintenance- and upgrade-related revenue grew in step with new installations at less than 5%. However, due to the ageing of the installed base (including the elevator in this author's office building in Amsterdam), we expect upgrade revenue to start picking up in the medium term.
KONE is an elevator and escalator industry group based in Finland. Co. is engaged in the provision of products and services for the installation, modernization and maintenance of elevators, escalators and automatic building doors. Co. provides its products and services throughout the entire lifecycle of the equipment, beginning from the installation of new equipment to the maintenance and modernization during their lifecycle and the full replacement of the equipment. Co.'s customers are active in industry segments such as residential, office, retail, public transportation, hotel, hospital, and marine.
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