 Elevators remain an area of relative strength with high exposure to China and resilient maintenance business  We expect elevator OEMs to benefit from strong rebound in China construction markets  We adjust forecasts and TPs, maintain Hold on KONE and Reduce on Otis, and upgrade Schindler to Buy from Hold 

Elevators – a resilient business: Q2 2020 was an unprecedented quarter with many countries announcing lockdowns, impacting demand for new elevator installation and servicing. Global elevator OEMs have proved their resilience with a mere 4% organic sales decline and 20bps margin compression. This is attributable to the strong recovery in China (the world’s largest elevator and escalator market) and a regulation-driven maintenance business. Looking ahead, as restrictions ease, and construction sites re-open, we expect demand levels to recover in H2 2020. As the dust settles, we anticipate a continued focus on technology for smart buildings, ranging from elevator route controls to more-efficient energy management systems. 

Strong rebound in China to help global OEMs: Our economists have recently revised their China GDP forecasts, now expecting 2020 GDP growth of 2.4% y-o-y vs 1.7% previously. This upward revision is driven by the growth in infrastructure investment, which could reach nearly 15% y-o-y in H2 2020e. They also expect property investment to maintain a double-digit growth rate in the rest of the year, driven by the recent bounce back in real estate transactions (see Turning more positive on mainland China 2020 growth, 24 Aug 2020). Further, total infrastructure investment increased 9.3% y-o-y in July, and July YTD was up 1.9% (see China Industrial Leading indicators, 14 Aug 2020). 

Schindler has so far significantly underperformed the elevator peers since the start of the sell-off, which we consider is unjustified given its good performance in China. We are now above consensus for Schindler and upgrade the stock to Buy from Hold. We also like KONE for the underlying quality of the business, but maintain our Hold rating due to stretched valuations. We maintain our Reduce rating on Otis due to its lower growth potential and valuation in line with peers. We include bull and bear scenario analysis for each company, which implies a range of +/- 6-12% around base case valuations. With this report we also raise our TPs for the three stocks. 

With this report, Puneet Garg assumes primary coverage of KONE and Schindler. 

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