Elevators in China: Is a Chinese slowdown priced in?

Given that the Chinese slowdown and the prevalent problems in its banking sector has already been discussed for quite some time in the mainstream media, it is natural to assume that the market has already “discounted” a big chunk of the bad news coming out of China. Little surprise that investors are hunting for opportunities among Chinese stocks. The reasoning seems to be: if it has been in the news for quite some time, it must be in the price already.

Trying to back out implied expectations from prices of Chinese stocks or rates is fraught with problems: accounting, governance and regulatory issues influence the price of financial assets certainly in a larger way than in Europe and the US. Indeed, playing China via developed market companies that have significant exposure to China’s growth, has been the most profitable way for investors to participate in the Chinese growth miracle.

Finnish elevator maker Kone OYI (KNEBV:FH) certainly fits into this category: it is well-managed, well-financed and the stock price has returned 500 percent since May 2005 when shares cost 6 euros. The chart below shows the performance over the past five years. Mind you, this impressive growth has been achieved without leverage.



The growth in the share price is mirrored in the fundamentals as Kone has profited directly from China’s skyscraper-craze. The table below breaks down the evolution of sales per region: as expected, sales in Europe and the US have grown merely in line with inflation, whereas sales in Asia-Pacific (read: China) have grown through the roof, + 34 percent p.a. This is extraordinary growth.


The stock has rerated correspondingly: whereas the EV/sales multiple for Kone stood at 1,62 (up from 1,42 at the market’s 2007 top) it stood around 2,39 at the end of 2013 (see table below). Looking at the aggregate multiple doesn’t tell us the whole story, however, since 60 percent of Kone’s sales are generated in the stagnating European and US market for which we can assume that the market is not willing to pay extraordinary multiples.


In order to assess the market’s perception of the Chinese growth story I have tried to back out the multiple that the market is assigning to Kone’s Asian business. For this, I have used the EV/Sales Multiple (1,42) that the market put on Kone’s business at the end of 2007, i.e. before the great depression and when the Asian Business accounted for 15% of net sales. Multiplying the sales in the past 5 Years by this multiple I arrive at the market’s valuation for EMEA and US business (EV EMEA+US). This I deduct from the Kone’s EV to arrive at the valuation for the Asian stand-alone business, which, divided by sales, gives me the Asia (China) multiple.

As can be seen, the market’s current multiple of 3,92 for the Asian business ranks second highest over the past five years – a period that has been market by tremendous growth. I was only surpassed by 2011 exuberance, in the days when China seemed invincible. To make a long story short: the market is far from pricing in anything like a slowdown. China has the potential to nastily surprise the market. Stay tuned!


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s