Kone Earnings: Demand for New Elevators Remains Weak Due to China; Strong Service Performance

Kone’s KNEBV 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 the week before, 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.

The service and modernization market, however, remains healthy, with all regions in Kone’s portfolio seeing growth. Sales for the quarter increased by 4.7% on a reported basis, mainly aided by maintenance and modernization, which grew by 9.2% and 22.8%, respectively. In service and modernization, Asia-Pacific (excluding China) was again the strongest performer. Adjusted EBIT margin stood at 9.5% compared with 8.0% one year ago thanks to lower material costs, mix changes, and operating leverage. Like Schindler also commented last week, new orders are coming in at higher margins, which should start to convert into higher EBIT margins in the latter part of the year.