Otis is the world’s largest elevator and escalator manufacturing, installation and services company. It generated $12.1 billion of the $57.7 billion revenues of parent company United Technologies (NYSE:UTC) in 2012.  We anticipate Otis will grow its top line to $16 billion during our forecast period (2019) due to global growth of the elevator and escalator (E+E) market.
This market is composed of two segments – new equipment installations, which are seeing strong growth in emerging markets like China, India and Brazil, and maintenance and modernization segments, which have stable growth in Europe and the Americas.
Otis dominates the global E+E market along side three other companies – Schindler, ThyssenKrupp and KONE. Together, these four players control around 65% of the global E+E market.  However, Otis’ market share has declined marginally over the last few years due to competition from lower priced alternatives to around 19% currently. Going forward, we anticipate this decline in Otis’ market share to moderate due to a number of factors including cost-cutting measures undertaken by the company that will allow it to price its products more competitively.
We currently have a stock price estimate of $102 for United Technologies (UTC), approximately 10% above its current market price.
The Global Elevator And Escalator Market
The global elevator and escalator (E+E) market was worth nearly $56 billion in 2008.  It declined to an estimated $50.8 billion in 2009, due to the global financial crisis which severely impacted demand for new equipment installations, but it recovered to $62 billion in 2012, on the recovery in global construction markets.  This translates to a compounded annual growth rate (CAGR) of nearly 7% for the E+E market from 2009 to 2012.
We anticipate this market to grow at a more measured pace of around 5% per year to reach $86 billion by the end of our forecast period. The principal driver to global E+E growth will come from new equipment installations in emerging markets.
Emerging markets fuel E+E demand
Emerging markets like China, India and Brazil are adding new elevator and escalator units at a rate much higher than the rest of the world. In 2012, the BRIC (Brazil, Russia, India and China) countries added 450,000 new E+E units compared to around 200,000 new E+E installations in the rest of the world.  Looking ahead, we believe a lot of growth potential remains in these markets, especially in China and India.
A brief comparison of elevator densities across the world illustrates this point. In Western Europe, which is a highly urbanized region (>80% population is urban) and a residential apartment culture, there are 10.9 elevators per 1000 people.  In contrast, China is rapidly urbanizing with a residential apartment culture, and there are only 1.7 elevators per 1000 people at present. 
The urban population in China accounts for half of its total population and is rising rapidly. Through 2025, around 350 million additional Chinese are expected to move to cities from rural areas.  This urban population will require residential apartments, and this will lead to higher elevator density in the country. India is also rapidly urbanizing with around 31% population of the population living in urban areas currently with only about 0.2 elevators per 1000 people.  
Overall, during 2008-12 global new equipment E+E installations grew at a CAGR of around 7%, and we believe that China and India as well as other rapidly developing countries will continue drive growth.  We also anticipate the average price per installation to remain largely stable due to inflationary pressures and downward pressures from competition offsetting each other. Thus, we anticipate the global new equipment E+E installation market to grow by around 7% per year through our forecast period.
Maintenance and modernization to show more moderate growth
The second segment of the global E+E market, maintenance & modernization of existing units, will likely see more moderate growth rates compared to new equipment installations. This segment constitutes slightly more than 50% of the total E+E market. 
In 2012, there were around 11.5 million E+E units in operation worldwide.   An elevator/escalator unit typically enters the maintenance segment of the market 12-30 months after installation. Thus, any new equipment installation will add growth to maintenance & modernization segment with a lag of 1-3 years.
If we assume that all new equipment installations enter the maintenance market two years after installation, then we can conclude that in 2013 the number of E+E units available for maintenance/modernization worldwide will increase by around 5.8% (=610,000 new installations in 2011/~10.5 million units under maintenance/modernization in 2012).  Further, pricing in this segment faces downward pressure from the presence of several small local players. Thus, in value terms we anticipate the growth rate in the maintenance and modernization segment to be lower going forward.
A weighted average of the forecast growth rates in new equipment and maintenance/modernization segments yields growth of around 5% per year in the total E+E market through the end of our forecast period.
Market Share To Remain Largely Stable
In 2009, Otis’ market share of the global E+E market was around 23%, which declined to an estimated 19% in 2012, due to a variety of factors including price competition from local players in the maintenance segment of key growth markets like China and India.  
Lower manufacturing costs will help pricing
Beginning in 2012, Otis undertook large scale restructurings like opening and expanding manufacturing plants in Asia-Pacific and Latin America as well as downsizing facilities in Europe, Japan and North America, to lower its manufacturing costs. Otis expanded its factories in Bangalore (India), Chongqing (China) and Sao Paulo (Brazil) in 2012, under these factory restructurings. These efforts will help Otis price its products more competitively in the market and could help support margins in the future.
More service centers to retain maintenance contracts
Additionally, unlike the new equipment installation market which is dominated by a few original equipment manufacturers including Otis, the maintenance and modernization segments of the E+E market are highly fragmented and dominated by local players due to their wider availability and lower price points.
To undercut these advantages, Otis is rapidly increasing its service centers in key growth markets, particularly in China. In 2013, the company plans to open more than 40 new service centers and depots in China.  We believe that Otis will also benefit from its global ERP and IT systems, which improve customer experience, to take further market share from local players.
Otis gains from demand for high rises
Another factor that will contribute to growth in Otis’ market share is the growth of high rises across the world. This segment is poised to grow faster than the overall E+E market, and Otis has an advantage in this segment due to its technically more advanced product portfolio. In 2012, there were around 95 completions of buildings which are taller than 200 meters globally.
In 2013, this number is expected to rise to 110, which translates to a year-over-year growth of nearly 16%. In high rises, Otis has had some major wins including the World Financial Center in Chongqing (46 Otis elevators) and Pedregal 24 Tower in Mexico City (27 Otis elevators) recently.  The company has also established its sales support centers in such as Shanghai (China), Tianjin (China), Hangzhou (China), Hong Kong (China), Mumbai (India), Istanbul (Turkey), Paris (France) and Florence, S.C. (U.S.), which are likely to see most activity in the high rise segment.
Overall, as a result of lower manufacturing costs, more service centers and its advantage in the high rise segment, we anticipate that Otis will be able to keep its market share relatively stable through our forecast period of around 19%. Based on our estimated market size in six years this will reach $16 billion (~19% of $86 billion in 2019).
Valuation Impact From Otis On UTC’s Stock
Market size forecast
If the global E+E market grows more slowly that we expect due to either extended weakness in Europe or a construction market downturn in China similar to what we saw in 2012, and reaches $73 billion in six years (15% below our $86 billion estimate), this would translate to almost 5% downside to our current stock price estimate for UTC assuming stable market share.
On the other hand, if the global E+E market reaches $99 billion by 2019 (15% above our $86 billion estimate) due to a faster recovery in Europe and stronger than anticipated growth in the emerging markets, this translates to potential upside of around 5% to our current stock price estimate for UTC.
Market share forecast
In considering market share, if Otis market share continues to decline due to higher competition and weaker pricing power in developing countries and reaches 15% vs. our near 19% expectation, this would lead to just over 5% downside to our price estimate.
In contrast, if Otis can recover market share due to its expanded local presence in growth markets and its strong brand name and its market share reaches 2009 levels of 23%, we could see 5% upside to our estimates.Notes:
- UTC’s 2012 10-K, February 7 2013, www.utc.com [↩]
- Global elevator and escalator market report by Koncept Analytics, August 2010, www.sbdi.co.kr [↩] [↩] [↩]
- Global elevators and escalators market outlook to 2016 – rising expansion in Asia Pacific Region, July 1 2012, www.marketresearch.com [↩]
- Otis annual analyst meet presentation-Slide 8, March 14 2013, www.utc.com [↩] [↩] [↩] [↩] [↩]
- Urbanization rates by country, March 17 2013, www.wikipedia.com [↩] [↩]
- Johnson Controls investor presentation, February 2013, www.johnsoncontrols.com [↩]
- Kone elevator market, March 19 2013, www.kone.com [↩]
- Elevator and escalator markets by Kone, March 17 2013, www.kone.com [↩] [↩]
- UTC’s 2010 10-K, February 9 2012, www.utc.com [↩]
- Otis annual analyst meet presentation-Slide 10, March 14 2013, www.utc.com [↩]
- Otis annual analyst meet presentation-Slide 9, March 14 2013, www.utc.com [↩]