China Slowdown And Intense Price Competition Will Squeeze Margins

Key Takeaways

• High reliance on China and a declining construction market expose KONE to ongoing revenue and margin risks, with little sign of recovery.
  
• Rising local competition, regulatory challenges, and sustainability demands threaten profitability and long-term growth due to cost pressures and eroding pricing power.
  
• Shifting toward Services and Modernization, KONE enhances earnings stability, benefits from urbanization trends, and achieves stronger margins through innovation and reduced reliance on new construction.

Catalysts

Engages in the elevator and escalator business worldwide.

• The ongoing contraction and demographic stagnation in China, combined with a sustained downturn in the new construction market-where volumes remain down double digits and no sign of stabilization is visible-will continue to erode KONE's largest source of new equipment orders, suppressing top-line growth over the medium to long term.
  
• KONE's elevated revenue dependence on China, which remains close to 20 percent of group sales and where new installations still comprise over half of its business, leaves the company disproportionately exposed to structural property sector weakness and further regulatory pressure, undermining both revenue and operating margin resilience.
  
• Intensified price competition from local elevator OEMs in emerging and Asian markets, especially in China where pricing pressure is described as very, very competitive, will force KONE to cut prices to defend share, driving margin compression and a weaker earnings outlook even as cost savings are exhausted.
  
• Rising geopolitical friction and global supply chain fragmentation are set to increase operational complexity, procurement costs, and regulatory headwinds, directly weighing on KONE's gross margins and elevating overhead costs as the company is forced to localize or restructure production networks.
  
• Accelerating regulatory and sustainability requirements may outpace KONE's current R&D and green product investments, risking loss of contracts and pricing power if customers or governments judge its credentials to lag best-in-class peers-further threatening revenue growth and the ability to sustain premium margins over the long run.

KONE Oyj Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on KONE Oyj compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming KONE Oyj's revenue will grow by 2.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.7% today to 10.7% in 3 years time.
• The bearish analysts expect earnings to reach €1.3 billion (and earnings per share of €2.38) by about September 2028, up from €976.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, down from 30.2x today. This future PE is lower than the current PE for the GB Machinery industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

KONE Oyj Future Earnings Per Share Growth

Risks

• KONE's increasing focus on Service and Modernization, which now constitute nearly 65 percent of sales, is creating more stable recurring revenues and higher margins, significantly bolstering long-term earnings resilience.
  
• The company's ongoing margin expansion, reflected in its twelfth consecutive quarter of adjusted EBIT margin improvement, shows a strong trajectory in profitability, indicating that cost disciplines and operational excellence initiatives are yielding sustainable net margin growth.
  
• Strong demand drivers from global urbanization, sustainability-focused building upgrades, and an aging installed base are fueling robust order growth in Modernization and Services across multiple regions, providing a long-term tailwind for revenue expansion.
  
• KONE's investment in digital tools and connected maintenance, along with innovation in eco-efficient and value-added solutions like regenerative drives, is strengthening competitive differentiation, attracting premium pricing and supporting long-term margin enhancement.
  
• The accelerated strategic rebalancing away from volatile new construction in China to higher-margin Service and Modernization limits downside from regional real estate weakness and should underpin steady cash flow and EBITDA growth over time.

Valuation

• The assumed bearish price target for KONE Oyj is €39.78, which represents two standard deviations below the consensus price target of €55.31. This valuation is based on what can be assumed as the expectations of KONE Oyj's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €67.0, and the most bearish reporting a price target of just €39.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €12.1 billion, earnings will come to €1.3 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 6.7%.
• Given the current share price of €57.0, the bearish analyst price target of €39.78 is 43.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.