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Company Highlight: Kone

March 2021
Headshot of Jensen employee Apurva Parikh
Apurva Parikh, CFA®
Business Analyst

Kone

Year Founded:
1910

Headquarters:
Helsinki, Finland

Jensen Strategy:
Global Quality Growth

Entered Strategy:
Q4 2020

Based in Helsinki, Finland, Kone (KNEBV.HE) is a leading manufacturer and provider of maintenance services for elevators and escalators. Kone’s revenues are geographically well-diversified, benefiting from a global installed base of more than one million.1 Notably, the Kone investment thesis is bolstered by a strong competitive position in China, where it is the market leader in new equipment and maintenance services.

Know What You Own

We added Kone to the Jensen Global Quality Growth Strategy in December 2020 due to its attractive valuation and sustainable competitive advantages. The worldwide elevator industry is an oligopoly dominated by four global original equipment manufacturers (OEMs): Otis, Kone, Schindler, and Thyssenkrupp. Industry sales are typically divided among three lines of business: new equipment, maintenance, and modernization services. As a result, entrenched competitors are buoyed by their respective installed bases of equipment, allowing them to monetize profitable recurring maintenance and modernization services, and thereby leading to more stable cash flows. For Kone, new equipment, maintenance, and modernization account for 53%, 32%, and 15% of revenue, respectively.2
Kone’s competitive advantages include its scale in manufacturing, sales and distribution, and maintenance services. The company has consistently gained market share in recent years across its key markets in Asia-Pacific, the US and Europe,3 thanks to its streamlined product portfolio and operational efficiency. We are particularly impressed by Kone’s business execution in China over the past decade, in which it overtook Otis to become the market leader in that region.

Outlook

Kone is a well-managed company operating in an attractive global industry with a good mix of defensive and growth characteristics. Due to its annuity-like stream of revenues, the maintenance business demonstrates resilience across the business cycle, and the company continues to grow its installed base through the sale of new equipment.

Looking forward, we expect the company to generate mid-single-digit revenue and high single-digit earnings growth. Our top-line forecast is based on new equipment sales in Asia-Pacific, improved maintenance attachment rates in China due to an increasing emphasis on service quality, and global elevator modernization efforts. Additionally, we expect margin gains based on growth in high profitability services, such as predictive maintenance, as well as economies of scale and normalization in
input costs.

In summary, we view Kone as a high-quality business with a robust financial profile and attractive prospects for future business value creation. We are pleased to have added the company to the Global Quality Growth portfolio.

1 “Kone as an Investment: Equity 2020,” Kone Corp., 4, 7.

2 Ibid, 3.

3 Ibid, 22.

The company discussion in this article is solely intended to illustrate the application of our investment approach and is not to be considered a recommendation by Jensen. The specific security identified is taken from a representative account of the Jensen Global Quality Growth Strategy and does not represent all of the securities purchased and sold for the Strategy. Our views expressed herein are subject to change and should not be construed as a recommendation or offer to buy or sell any security and are not designed or intended as a basis or determination for making any investment decision for any security. Our discussions should not be construed as an indication that an investment in a security has been or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of any security discussed herein.

The information contained herein represents management’s current expectation of how the Jensen Global Quality Growth Strategy will continue to be operated in the near term; however, management’s plans and policies in this respect may change in the future. In particular, (i) policies and approaches to portfolio monitoring, risk management, and asset allocation may change in the future without notice and (ii) economic, market and other conditions could cause the Strategy and accounts invested in the Strategy to deviate from stated investment objectives, guidelines, and conclusions stated herein.

Certain information contained in this material represents or is based upon forward looking statements, which can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue”, or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of a client account may differ materially from those reflected or contemplated in such forward-looking statements.

This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Jensen Investment Management, Inc. is an investment adviser registered under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Although taken from reliable sources, Jensen cannot guarantee the accuracy of the information received from third parties.

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