Analyst Note| Denise Molina, CFA |
Otis reported a solid third quarter with organic revenue up 8% and adjusted EBIT margin up 20 basis points year over year, while management increased full-year 2021 guidance. The shares however, were down 4% after management echoed peer Schindler’s view that the Chinese elevator market was likely to go through a period of short-term demand slowdown with a potentially flat or worse market in 2022, due to tightening government controls on expanding credit to the property sector. We estimate about 13% of the company’s profits come from the new installation market in China, also a feeder for its long-term service profits. The government will eventually loosen credit; however, we think there is more uncertainty in long-term underlying demand due to signs of speculative investments underpinning some of the recent robust growth, as well as a more mature urbanization rate than in previous market recoveries. We expect to make changes to our forecasts but shouldn't significantly impact our fair value estimate. Our wide moat rating remains intact.