Asian Urban Growth And Digitalization Will Fuel Sustainable Modernization

Key Takeaways

• Services and digitalization are driving much higher margin expansion and earnings outperformance than consensus expects, establishing KONE as a leader in data-driven, recurring revenue streams.
  
• Strong adoption of sustainable technologies and strategic modernization capitalize on global trends and regulations, creating new premium growth avenues and strengthening KONE's industry moat.
  
• Heavy reliance on China, market commoditization, demographic shifts, and regulatory pressures pose risks to growth, margins, and long-term profitability despite digital investments.

Catalysts

Engages in the elevator and escalator business worldwide.

• Analyst consensus expects net margin improvement via a Services and Modernization mix shift, but this notably understates the scale; with Services now KONE's largest business, structurally higher margins, pricing power, and digital efficiency gains should drive non-linear net margin upside and earnings outperformance well beyond current projections.
  
• While analysts broadly highlight digitalization and remote services as cost reducers, KONE's accelerated rollout-already connecting over a third of its base and embedding predictive maintenance-positions it as an unrivaled leader in high-margin, recurring, data-driven services, potentially setting a new industry benchmark for margin expansion and earnings stability sooner than expected.
  
• KONE's rapid penetration of energy-efficient and regenerative drive technologies, now installed in the majority of its shipments, not only ensures compliance with tightening global building standards but also opens premium pricing opportunities and builds the strongest sustainability "moat" in the category, directly accelerating long-term revenue and profit growth as green mandates mount worldwide.
  
• The company's proven ability to pivot toward partial modernization and fast installation solutions leverages the global surge in urban infrastructure upgrades and aging building stock, providing KONE with a structural tailwind for double-digit modernization growth and ongoing lift in recurring revenue streams.
  
• As industry consolidation progresses, KONE's disciplined operational execution and cash generation in core and emerging markets uniquely position it to not only weather regional demand volatility but aggressively acquire share, reinforcing its competitive moat and supporting above-trend revenue and earnings gains over the decade.

KONE Oyj Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on KONE Oyj compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming KONE Oyj's revenue will grow by 5.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.7% today to 10.8% in 3 years time.
• The bullish analysts expect earnings to reach €1.4 billion (and earnings per share of €2.78) by about August 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 bullish analyst cohort, the company would need to trade at a PE ratio of 29.2x on those 2028 earnings, up from 28.5x today. This future PE is greater than the current PE for the GB Machinery industry at 20.6x.
• 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 high exposure to China leaves it especially vulnerable to ongoing weakness in the Chinese property and new construction markets, which have seen persistent double-digit declines and margin erosion, threatening future revenue growth and the quality of its order book.
  
• The impact of global demographic trends such as aging populations and slow demographic growth in developed markets is likely to constrain new building construction and flatten elevator demand, capping long-term growth in key regions and potentially slowing order intake growth.
  
• Commoditization of elevator and escalator products, coupled with increasing price competition from both global and low-cost local players, is causing continued pricing pressure, especially in China where margins are declining, thereby risking net margin compression and reduced earnings stability over time.
  
• Although the company is investing in digital transformation and IoT services, there remains a long-term risk that KONE could fall behind competitors in successfully scaling and monetizing connected services, which would limit its ability to capture recurring revenue streams and reduce the upside for margin expansion.
  
• Heightened regulation and sustainability requirements, such as carbon neutrality mandates, are driving up R&D spend and compliance costs, and the necessity for ongoing capital expenditure may increasingly squeeze profitability and erode free cash flow in the long run.

Valuation

• The assumed bullish price target for KONE Oyj is €67.0, which is the highest price target estimate amongst analysts. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be €13.4 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 29.2x, assuming you use a discount rate of 6.7%.
• Given the current share price of €53.78, the bullish analyst price target of €67.0 is 19.7% higher.
• 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.