UBS Evidence Lab study shows sluggish units and eroding pricing Our in-depth industry review & 4th UBS Evidence Lab global elevator survey (on 300 senior E&E decision makers, >Access Dataset) show that the Elevator and Escalator (E&E) industry (c.€75bn market according to our 2020 estimates) will face a modest installations recovery in 2021 (3% in unit terms) driven by sluggish fundamentals even prior to covid. Beyond 2021, demand and supply covid shocks, and the lackluster recovery could well be followed by further weakness in E&E demand driven by sluggish new building cycle fundamentals. We still expect global maintenance growth (at lower rates) driven by an expanding installed base.
As industry growth outlook decays, competition builds and margins abrade With soft growth trends for new installations, we expect the industry to heat up the battle for installed base wins to generate future service revenues. Together with potential pressures stemming from price competition, we believe brand innovation will be the key levers to drive market share gains. The 4th UBS Evidence Lab procurement survey and 3rd patent filing studies (> Access Dataset) confirm a weaker growth outlook for the industry and two competitive drivers of market share gains (other than price): 1) equipment procurement tied closely with "best in class perception", with Hitachi, Mitsubishi and Otis being procured the most; 2) innovation, measured as patent filing activity does prove as a consistent tool driving brand and quality perceptions.
With uneven implications for the industry, which OEMs are best positioned?
We prefer names with low exposure to China, with a bias to US/North America and services exposure (mitigating OE margin pressure). We prefer Schindler (link, with a well-diversified regional mix and attractive valuation) over Kone (link, China positive fundamentals overstated, downside to earnings and expensive valuation) and Canny (higher costs and limited upside to earnings).
E&E valuations close to all-time highs, down Kone (Sell), up Schindler (Buy) We reiterate our Sell on Kone and Buy on Schindler. Our E&E coverage trades at 1.4x EV/Sales, with pure plays trading at 15x to 18x forward EV/EBIT (40-60% premium to LTA and a >25% to the sector). The implied terminal value growth rate for the industry is 6-7% (vs. 4-5% LTA). Current industry risk reward demands a selective stance on the industry. Upside and downside risk scenarios depend on the global residential and non-residential market outlook (especially in China).
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