Wednesday, November 8, 2017

A current AIM International Fund Holding: Kone (KNYJY) by Kevin Blank "Keen on a Kone Hold"

Kone Oyj ADR (KNYJY, $26.75): “Elevating Order Growth”
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.


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