By:
Kevin Blank, AIM Student at Marquette University
Disclosure:
The AIM International Equity Fund currently holds this position. This article
was written by myself, and it expresses my own opinions. I am not receiving
compensation for it and I have no business relationship with any company whose
stock is mentioned in this article.
Summary
• Kone (OTC:KNYJY) is a global leader in the elevator and escalator
industry with 41% of revenue coming from the Asia-Pacific region and 33% coming
from the European market. The Americas, Africa and Middle East represent the
remaining 26%.
• The underlying
fundamentals in the Chinese real estate show a healthy market, but government
policies and restrictions will decide short-term cycles.
• Urbanization and
equipment aging in China may provide growth opportunity in new equipment sales
and management has transitioned from a cyclical business to a more defensive
business through required maintenance and servicing.
• The Americas and EMEA
have seen significant order growth and a growing market share.
Key
points:
Kone had a positive third
quarter with orders returning to growth China and continued order growth in the
Americas and EMEA. Q3 orders received grew at a comparable change of 2.1% and
sales at 4.4%. According to management, the near-term market outlook remains
mixed. The Chinese new equipment market is expected to remain stable for full
year 2017 and government restrictions in the Chinese residential market will
have a negative effect on new equipment demand for 1H2018. The outlook remains
positive for services and other new equipment markets. Kone has a proven high-quality
business model that provides reoccurring maintenance revenue and participates
in upside from new equipment orders.
Concerns on a China
slowdown, especially due to the fast price growth in the real estate market,
will impact Kone in the short term. Government restrictions in place will affect
property sales and inventory levels in China. Kone is a market leader in China
with ~30,000 customers including nine of China’s top ten developers. Real
estate investment in China has been driven by construction activity and rising
land prices. China is the world’s largest elevator and escalator market by
installed base and although new equipment orders will see pressure, the market
in China may shift more to services and maintenance.
Urbanization and aging
equipment provides an excellent growth opportunity for Kone in the future
years. The number of people living in urban areas within China continues to
increase. With the lack of space and land available, buildings will continue to
be built higher. By 2018, it is estimated that elevators over 15 years old will
increase 22% each year, showing the need for new equipment and required
maintenance.
Growth of core cities in
Europe and the need for affordable housing is driving new equipment orders in
Europe. New residential construction expanded 8.8% in 2016 and 2017 is expected
to be ~7% growth. New non-residential construction grew 2.5% in 2016 and 2017
is expected to be ~3% in 2017. The UK and Germany are Kone’s largest
modernization markets and the aging installed base provides opportunity for new
building and renovation.
What
has the stock done lately?
KNYJY has hovered around
$26 – $28, the month of October remained relatively flat posting a 0.65%
increase in share price. The market saw increased volume heading into Q3
earnings, Kone’s performance was in line with the market. In 3Q17, global new
equipment market was stable in units ordered compared to 3Q16.
Past
Year Performance:
The stock has increased
19.81% over the past year. The 52-week range is $21.29 - $28.17. Energy
efficiency has been a major trend in the industry and Kone has benefitted from
replacing hydraulic elevators with more technically advanced, space saving,
energy efficient elevators.
 |
| Source: FactSet |
My
Takeaway
Kone’s net sales are
estimated to grow by 1-3% at comparable exchange rates as compared to 2016.
Revenue from orders are back on growth track and servicing segment continues to
expand. EBIT has been impacted by FX and raw material costs. Growth in Europe
and China will be key drivers for Kone in 2018 with the aging equipment and
urbanization. Compared to their competitors, Kone has emphasized improving
customer loyalty, through fast delivery of service and improving efficiency. Kone
is a leader in the elevator and escalator industry and I believe Kone should
remain a position in the AIM International Equity Fund.
 |
| Source: FactSet |
