 Trouble in the China real estate market post Evergrande; we quantify the risks for global OEMs with sensitivities  Strong growth in the other markets, infra push and improvement in service should drive growth in the near term  Long-term growth drivers intact; adjust forecasts and TPs, no change in ratings, maintain Buy on KONE and Canny Trouble ahead: China is the world’s largest new equipment market (with a c70% share in unit terms) for elevators and escalators, with residential real estate constituting the bulk of this demand. Restrictive policy measures, credit tightening and the Evergrande situation have put pressure on this important new equipment market and we quantify the risks associated with this weakness in China real estate for our elevators coverage.

However, we believe a strong outlook in other residential and commercial real estate markets combined with an infrastructure push across economies should limit the overall impact on new equipment growth. Further, a resilient maintenance business and a recovery in repairs and modernisation should help elevator OEMs to tide this crisis in the near term. Recent share price underperformance reflects the caution related to the China market and we show sensitivities on page 5.

Long-term growth drivers intact: Rapid urbanisation, growth of vertical cities, infrastructure development and the need for modernisation of existing buildings should continue to drive demand for elevators and escalators in the medium-long term.

Further, as highlighted in our earlier report, elevator OEMs are pushing for digitalisation, connecting their existing installed base, and the pace has accelerated post COVID-19 with the need for hygiene, safety and remote connectivity. We expect this rapid digitalisation to lead to additional digital services revenues, improved conversion and retention rates, and higher service efficiencies, resulting in additional organic growth of c1% and a margin improvement of c40-60 bps pa over the next 4-5 years. Elevator OEMs stand to benefit on the ESG front from connected elevators.

We adjust forecasts and TPs, maintain Buy on KONE and Canny Elevators: In this report, we cut our estimates for KONE, Schindler and Otis, incorporating the weakness in China real estate. KONE has underperformed its elevator peers over the past six months and China risk is more than priced in, which we consider unjustified given the underlying quality of its business. We cut our TPs for the three global OEMs.