Kone Earnings: Further New Order Declines Foreshadow a Decidedly Slower Finish to 2023

Sales growth further accelerated for wide-moat Kone KNEBV 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.

Kone shares eased as investors mulled the worsening conditions for the new equipment business in each of Kone’s key geographies—China and Europe, Middle East, and Africa, or EMEA. The decline in market activity in China—the world’s largest new elevator equipment market and Kone’s most important geography—continued in the second quarter in a range of 5%-10%, according to Kone, with the rate of decline easing relative to the first three months of 2023. Indications that recent Chinese policy actions aimed at reviving the Chinese property market will orchestrate a much-needed turnaround for the sector are not as yet apparent. The EMEA new equipment market also weakened significantly in the second quarter—down by 10% year on year—further adding to the cyclical challenges faced industrywide. Kone shares screen as modestly undervalued, trading at a slim 5% discount to our unchanged EUR 48 fair value estimate.