Jefferies downgrades Kone to “hold” on China concerns, wage pressures

Investing.com -- Jefferies has downgraded Kone (HE:KNEBV) to “hold” in a note dated Friday, a decision driven by concerns over the company’s ability to navigate challenges in China and the impact of higher wage inflation. 

This downgrade reflects a cautious outlook on Kone’s near-term performance, especially when contrasted with the more favorable view of its competitor, Schindler.  

The analysts fla that while there are signs of optimism in China’s construction market, critical indicators for elevator demand continue to decline. 

Real estate investments in China were down by 9% in January-February 2025, floor space completed decreased by 16%, and the decline in floor space started accelerated to -30% within the same period. 

These figures raise concerns about the demand for new elevators in China, a key market for Kone.  

Moreover, Jefferies anticipates that both Kone and Schindler are likely to maintain their 2025 outlooks but may adjust their expectations for Americas new elevator demand. 

The expectation for Americas new elevator demand may be reduced to flat for the fiscal year, a change from the previous expectation of slight growth. 

This potential adjustment is attributed to weak ABI prints in January/February and political uncertainty.  

In contrast, Schindler is seen as having more self-help potential this year compared to Kone. 

Both companies are expected to experience a 20% drop in China revenues in the first half of the year. However, Schindler is projected to achieve a 90bps margin development, supported by savings in SG&A and procurement.

Kone, on the other hand, is likely to see only a 30bps margin improvement, with progression constrained by pricing pressure, lack of savings in the first part of the year, and higher wage headwinds. 

The report also indicates that Jefferies is approximately 5% below consensus earnings for Kone.  

The difference in margin development and self-help potential contributes to Jefferies’ preference for Schindler. 

Jefferies now values Schindler at a premium to Kone and has raised its price target for Schindler to CHF311, while downgrading Kone with an unchanged price target. 

This reflects a shift in Jefferies’ valuation perspective, favoring Schindler’s potential for stronger performance and earnings growth.  

In terms of specific financial forecasts, Jefferies models order and revenue growth for Kone at 2% and 2.5% in local FX, respectively. 

The adjusted EBIT margin for Kone is expected to increase by only 20bps year-over-year to 10.4%. 

For Schindler, Jefferies models order and revenue growth at 2.0% and 1.1% in local FX, respectively, with a Q1 adjusted EBIT margin of 12.0%