1、GlobalResearch11 December 2019Initiation of CoverageEquitiesUS Electrical Equipment & Multi-Industry HVAC Market Two Key Themes: Construction Cycle and ConsolidationEquitiesTougher times ahead for HVAC market, Stock specific drivers more important WeexpectamorechallenginggrowthenvironmentforHVACmark

2、etsoverthenext2 years,withorganicgrowthslowingfromMSD+toLSD;detailedwithinthisreportarea plethora of macro and industry data informing our view, including UBS Evidence Lab quantitativeanalyses. Lookingatstocks,valuationsarenotcheap,withmultiplesmore resembling early/mid-cycle multiples rather than l

3、ate cycle. Given this backdrop, we favorIR(Buy,$150PT)overJCI(Sell,$40)andLII(Sell,$235)owingto:1)IRshigher growth forecast; 2) underappreciated deal value from pending GDI merger/Climate spinoff;3)PFASheadlineriskatJCI;and4)LIIsstretchedvaluationandmktshareloss challenges.WealsolikemorediversifiedU

4、TX(Buy,$157)foritsbreakupSOTPvalue and strong FCF trajectory at RTX.Growth to decelerate, but sustainable GDP+ market drivers over long-termWe forecast deceleration in NA residential owing to both softer construction activity andwaningofpeakhousingsreplacementcycle.Wealsoseeslowingcommercialas inves

5、tment shifts from private to public (infrastructure), which should have a net negativeimpactforOEMs.Still,weexpectLSDorganicgrowthonavg.in2020-21on the back of large installed base, service, and price/mix. Moreover, we do not expect thenextdownturninconstructiontobeanywherenearasbadasthepriorcycle(w

6、hich coincidedw/thelargestrecessionsincetheGreatDepression).Longerterm,wethink seculartrends(e.g.globalsustainabilitymegatrends)willremainstronggrowthdrivers.Further consolidation to be expected; See our HHI analysisTheindustryhasbeenevolving,w/majorHVACOEMs(includingJCI,IR,&UTX)moving away from the

7、 diversified industrials model. This sparks the question of whether we could see consolidation which UBS Evidence Lab Transcriptlytics shows is highly topical. WeuseHHIanalysistohelpframewhatspossible: NAresimktismoderately concentrated (1,800) while comml is more competitive (1,200); comml unitary

8、seemsmostfeasible,whilesomepotentialresiorAppliedcombinationscouldrequire concessions. Combinations would likely bring cost synergies, plus the opportunity for revenue synergies over time. Timing, including mkt cycle and deal multiple considerations,willbeanimportantfactorascompaniesevaluatepotentia

9、lM&A.Business ProfileHVAC sales %Business ProfileHVAC sales %oftotal% oftotal OP($MM, 2019e) salesOPmargin%RatingPTUBS Stock ViewThesisOEMsIR*$10,49763%61%14.4%65%Buy$150ClimateCo outperformance and deal value creationJCI$10,03142%42%13.5%50%Sell$40Slowing growth/earnings normalization + PFAS riskLI

10、I$3,26086%91%19.6%95%Sell$235Peak val multiple while growth set to decelerateSPXC$38%41%15.8%90%Buy$50Deep discount + value creation through cap. alloc.UTX*$10,22113%15%15.9%55%Buy$157Breakup SOTP values and strong RTX FCF trajectoryOtherEMR$3,27018%22%21.2%66%Neutral$78Project delays on macro press

11、ures, w/ PLC upside LTHON$1,3004%3%20.5%57%Neutral$192Limited upside w/ defensive attributes priced inMMM$1%1%25.0%40%Sell$160Outsized short cycle pressures + PFAS riskSource: UBS estimates. *Note: % of total based on current IR and UTX structures (not pro forma).Industrial, DiversifiedAmericasMarku

12、s MittermaierIndustrial, DiversifiedAmericas HYPERLINK mailto:markus.mittermaier +1-212-7132716Damian Karas, CFA HYPERLINK mailto:damian.karas +1-212-7132267Myles Walton, PhD,CFA HYPERLINK mailto:myles.walton +1-617-4398501Steven Fisher, CFA HYPERLINK mailto:steven.fisher +1-212-7138634NicholasAmicu

13、cci,CFA,CPAAssociate Analyst HYPERLINK mailto:nicholas.amicucci +1-212-8825036Neal AssociateAnalyst HYPERLINK mailto:neal.burk +1-212-7134066 HYPERLINK /investmentresearch /investmentresearchThis report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON

14、PAGE 64. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making th

15、eir investment decision.ContentsTOC o 1-2 h z u HYPERLINK l _TOC_250014 ExecutiveSummary3 HYPERLINK l _TOC_250013 Valuation perspectives7 HYPERLINK l _TOC_250012 Pivotal Question: Where are we in the constructioncycle?10 HYPERLINK l _TOC_250011 ResidentialOutlook10 HYPERLINK l _TOC_250010 Non-reside

16、ntial Outlook22 HYPERLINK l _TOC_250009 GlobalPerspectives29 HYPERLINK l _TOC_250008 Scenario analysis Where could webewrong?33 HYPERLINK l _TOC_250007 Pivotal Question: Will consolidation continue inthesector?34 HYPERLINK l _TOC_250006 HHIAnalysis37 HYPERLINK l _TOC_250005 Transcriptlytics44 HYPERL

17、INK l _TOC_250004 HVACIndustryOverview48 HYPERLINK l _TOC_250003 Residentialvs.Commercial49 HYPERLINK l _TOC_250002 Product Examples53 HYPERLINK l _TOC_250001 Aftermarket vs. OE56 HYPERLINK l _TOC_250000 Appendix: Non-ResidentialConstruction58Markus Mittermaier HYPERLINK mailto:markus.mittermaier +1

18、-212-7132716Damian Karas, CFA HYPERLINK mailto:damian.karas +1-212-7132267Myles Walton, PhD,CFA HYPERLINK mailto:myles.walton +1-617-4398501Steven Fisher, CFA HYPERLINK mailto:steven.fisher +1-212-7138634NicholasAmicucci,CFA,CPAAssociate HYPERLINK mailto:nicholas.amicucci +1-212-8825036Neal Associat

19、eAnalyst HYPERLINK mailto:neal.burk +1-212-7134066Executive SummaryThe North American HVAC industry has enjoyed an overall prosperous decade coming out of the global financial crisis, with residential shipments growing 5% perannum,andmanufacturersgenerallyabletopasson1%ofannualizedprice on average.

20、On the commercial side, non-residential construction spend has increased 5 of the last 6 years (2017 the exception) and is at a high level (16% above the long-term average on a real basis), supportive of LSD/MSD organic growth. Thesefactorshavecontributedto5.5%organicgrowthCAGR(10-year) forrelevantb

21、usinessunits(IRClimate,JCIBuildings,LIIResi/Comml,UTXCCS) within the EEMI sector.Lookingatstockperformance,thepublicallytradedHVACOEMshavesignificantly outperformed industrial peers and the market. Relatively purer plays Ingersoll- RandandLennoxhavereturnedapproximately3.5xtheS&P500andXLIindices. Mo

22、rediversifiedUnitedTechnologiesandJohnsonControlshaveseenmoremuted stockperformanceastheirrespectiveportfolioshavecontinuedtoevolve.InthisnoteweexploretwoquestionsthatwethinkarepivotaltothefutureHVAC companies:Where are we in the construction cycle?Will consolidation continue in the sector?We see a

23、more challenging growth environment for HVAC markets over the next two years, with organic growth expected to slow from MSD+ to LSD; detailed within this report are a plethora of macro and industry data informing our view, includingUBSEvidenceLabquantitativeanalysis. IntheUS(wheremostoftherisk resid

24、es), we expect a deceleration in resi growth owing to the combination of softerconstructionactivityandweakerreplacementdemand. Wealsoseeslowing commercial construction activity as investment shifts from private to public (infrastructure), which should have a net negative impact, overall, for HVAC ma

25、nufacturers.Similarly, our overseas colleagues are also forecasting a slowdown in global constructionwouldbeimpactfultomostUSHVACplayerswhoalsocompetein Asia(notablyChina)andEurope,withtheexceptionofNAconcentratedLennox.Regarding HVAC market structure, we believe there is still room for further cons

26、olidation. Combinations would likely bring cost synergies, as well as the potential for revenue synergies over time. However, we think that any potential combinationsamongthebig3USOEMs(UTX-Carrier,IR,JCI)couldrequiresome concessions/divestitures. Moreover,wealsothinktimingincludingmarketcycle and de

27、al multiple considerations - will be an important factor as companies evaluate potential M&A. The UBS Evidence Lab Transcriptlytics analysis shows that consolidation is very topical today.Stock Implications: Despite the potential for a considerable growth slowdown, valuationsarenotcheap,withmultiple

28、smoreresemblingearly/mid-cyclemultiples ratherthanthelatecycleinwhichwebelievethemarketstands. WepreferIRover JCIandLIIowingto:1)highergrowthforecastforClimateCo/expectedmktshare gains; 2) underappreciated deal value from pending GDI merger/Climate spin; 3) PFAS headline risk at JCI; and 4) LIIs str

29、etched valuation and recent share lossWe favor IR over JCI/LII;UTX has favorable SOTP value;challenges. WealsolikecurrentlymorediversifiedUTX(coveredbyMylesWalton, UBSA&DAnalyst)foritsbreakupSOTPvalueandstrongFCFtrajectoryatRTX.Figure 1: More concentrated HVAC names have substantially outperformed t

30、he market/industrial peersStockperformance,Stockperformance,indexedtoJan-20090IR: 806%LII: 782%JCI: 318%S&P500: 232%S&P500: 232%UTX: 147% UTXJCIIRLIIS&P500Source: FactSet, UBSAsshownbelow,themajorHVACOEMssawMSDorganicgrowthorbetterover the last decade. We think LII and IR have gained market share ov

31、er this period, while JCI and Carrier (to a lesser extent) have lostshare.Figure 2: Most averaging MSD growth over last decade7.0%6.0%7.0%6.0%5.5%5.5%3.7%2.8%7.0%6.0%5.0%4.0%3.0%2.0%1.0%0.0%IR and LII have been winning market sharewhileJCIhasbeenlosingshare (although performance has improved morerec

32、ently)Organic growth CAGR since 2010IRClimateUTX- NA CommlUTX-CCSUSResiJCILIIResiLII CommlSource:Companyfilings,UBSestimatesandanalysis.Note:JCIgrowthisforlegacyBuildingEfficiencysegment 2010-2016 and current Buildings Solutions (includes TYC F&S) from2017-2019Figure 3: What overall HVAC growth do w

33、e forecast?2019e2020e2021eCommentsMarket growthHousing starts-1.6%-4.1%4.2%Non-residential put in place2.0%-0.7%-0.2%private-0.7%-1.5%-2.0%public3.7%0.4%2.5%Resi HVAC shipments5.0%3.6%0.0%New home shipments lagging starts by 6-12 months, also softening replacement demandCommercial HVAC shipments0.5%

34、-0.5%-1.0%Reflects declining private investmentCompany organic growthVaries based on product mix, geography, share gains/losses, distribution, etcIR - Climate segment JCILII - Resi/Comml segmentsUTX - Carrier7.3%5.1%4.4%0.0%4.3%3.4%7.6%0.0%3.2%1.8%0.1%3.0%Healthy backlog for 20 and expect continued

35、gains Slower growth outside of HVAC, flat backlog into 20 Higher resi exposure leads to 2021 weaknessContinued underperformance w/ deal distractionsSource: UBS estimates. Note: Company organic growth varies from market forecast owing to business and geographic mix, price, and market share assumption

36、s.ThereareseveralreasonswhytheHVACOEMsexperiencedifferentgrowthrates. Beyond the obvious variance that results from gains or losses in market share, organic growth over/underperformance is also affected by product portfolio composition/endmarketmix,geographicexposure,andsaleschannel/distribution, am

37、ong others.In the case of IR, we expect to see better growth than the overall HVAC market (consistent with its historical track record). We also think IRs product portfolio composition is favorable compared to key peers such as JCI (which also plays in historically more competitive and lower growth

38、Fire & Security and Industrial Refrigeration markets we do not expect this to change).Factors driving growth outlook (relative to group)IRFactors driving growth outlook (relative to group)IRJCILIIBacklog positionComml HVAC over/under performanceResi HVAC over/under performanceRelative exposure to NA

39、 Resi cycleFire & Security ( growth HVAC )Industrial Refrigeration ( growth HVAC )Relative exposure to Europe (growth 95%Sell$235Peak val multiple while growth set to decelerateSPXC$38%41%15.8%90%Buy$50Deep discount + value creation through cap. alloc.UTX*$10,22113%15%15.9%55%Buy$157Breakup SOTP val

40、ues and strong RTX FCF trajectoryOtherEMR$3,27018%22%21.2%66%Neutral$78Project delays on macro pressures, w/ PLC upside LTHON$1,3004%3%20.5%57%Neutral$192Limited upside w/ defensive attributes priced inMMM$1%1%25.0%40%Sell$160Outsized short cycle pressures + PFAS riskSource: Company filings and pres

41、entations, UBS estimates and analysis. *Note: % of total based on current IR and UTX corporate structures, not 2020 pro forma.Looking beyond our 12-month stock view, we believe that these are generally attractive businesses with favorable market structure and secular growth drivers. Structurally,the

42、marketisnotoverlyfragmentedandhasnotablebarrierstoentry, which include established distribution/sales channels, technology, and installed base/contractualservicearrangements.Thisisespeciallytrueforlargecommercial applications. Additionally, the market has good pricing power (net positive price/cost

43、spreads) with prices tending to be sticky even through deflationary environments.As it relates to growth, global sustainability megatrends should continue to bode wellforthemarketandactasanincreasinglyimportantgrowthcatalystforHVAC OEMsoverthenextseveralyears. Keymegatrendsincludeurbanization,resour

44、ce constraints, and climate change, with notable changes expected to play out over thenextdecade;wehighlightsomeexampleforecastsfortheyear2030.Urbanization: The UN forecasts that 60% of the worlds population (5 billionpeople)isexpectedtoresideincities. Thiscomparesto54.5%or4 billion people in 2016.R

45、esourceConstraints: TheIEAprojectsthat1billionnewairconditioners will be installed.Climate Change World Bank study suggest a 15-60% increase in CO2e emissions based on currentpractices.HVAC is an attractive market with barriers to entry, favorable price dynamics, and compelling secular growth driver

46、sMegatrends include urbanization, resource constraints, and climate changeAs such, underlying demand driven by population growth and demographics, in combination with regulatory requirements and the increasing need for energy efficiency, should support strong HVAC growth above global GDP over the me

47、dium and long term.Figure 6: Who does HVAC matter to?Expectmarketgrowthabove globalGDP%of%oftotalOPEarnings contribution100%90%80%70%100%90%80%70%60%50%40%30%20%10%0%SizeofbusinessLIIIR*SPXCIR UTX*JCIEMRUTXHONMMMHVAC sales exposure ($MM)Source: Company reports, UBS. Note: IR* and UTX* represent pro

48、forma TraneCo and CarrierCo, respectively.Valuation perspectivesWe expect there to be a good bit of debate around the appropriate valuation multiplesforpubliclytradedHVACstocks,particularlyasinvestorspositionforthe imminentspin-offsofCarrierandIngersollsClimateCointostandaloneentities.Historically,c

49、lear-cutstockcomparisonshavebeenhardertocomebyduetothe derfed buinse/portfoios hd by mot major EMs. The ceanet VAC trading comps, LII and AAON, have tended to trade at considerable premiums to themarketaswellaslargerHVACpeerswhichcanlikelybeattributabletotheir smaller size/ higher growth profiles, a

50、nd consequently higher embedded takeout premiums (as potential candidates they would likely represent lower capital investments and cleaner transactions compared with the larger, more complex OEM competitors).Figure 7: NTM P/E multiples35.0 xLII and AAON have traded at higher multiples30.0 x25.0 x20

51、.0 x15.0 x10.0 xJCIIRLIIUTXAAONAvg.Source: FactSet, UBS. Note: avg. line represents average P/E among 5 tickers depicted in chartFigure 8: Relative P/E1.4xNTM P/E relative to S&P 5001.3xNTM P/E relative to S&P 5001.2x1.1x1.0 x0.9x0.8x0.7x0.6xJan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19JCILIIHVAC group

52、 avg. (ex AAON)Source: FactSet, UBS. Note: HVAC group includes JCI, IR, LII, UTX.Keepinmindthatlargerplayershaveoftenhadexposuretomorecyclicalmarkets, such as JCI in auto batteries, IR in industrial compressors and materialhandling, andUTXinelevatorsandhelicopters. Nottomention,theseportfolioshavebe

53、en continuously evolving.We would expect multiples for the group, on average, to trade above historic levels as Carrier and Ingersoll ClimateCo complete their spin-offs.HVAC CompsROICGrossMargin HVAC CompsROICGrossMargin EBITDA Margin Sales CAGRP/EEV / EBITDAValuation NotesOEMsLennox Intl37%45%28%14

54、%18%1.2%Ingersoll-Rand13%13%31%15%16%4.9%Johnson Controls7%4%32%12%13%2.5%FY-1CurrentLTM201820192018-20NTM2020NTM202022.1x22.1x15.7x16.5x19.1x19.0 x12.6x13.1xGDI merger + Climate spin in process16.5x16.9x10.7x10.5xSales CAGR negative due to divestituresUnited Tech.9%8%26%14%18%9.8%17.2x17.1x11.0 x11

55、.4xHighly diversified; 3-part breakup in procesDaikin11%11%34%15%15%5.3%21.3x20.6x11.5x11.5xMostly overseas (APAC) exposedAO Smith15%22%40%20%19%-1.1%19.5x19.3x12.1x10.7xSPX Corp14%11%28%10%14%1.2%16.6x16.5x10.1x13.2xHighlydiversified;smallcap($1.5BmktcapAAON25%18%24%17%20%9.8%38.4x37.5x24.8x21.9xVe

56、ry small ($500M sales, $2.3B mkt cap)Mean - All16%16%30%15%16%4.2%21.3x21.1x13.6x13.6xMedian - All14%12%30%15%17%3.7%19.3x19.1x11.8x12.3xMean - select HVAC19%21%31%14%16%3%19.3x19.3x13.0 x13.4xMedian - select HVAC13%13%31%14%16%3%19.1x19.0 x12.6x13.1xSource: FactSet, UBSPivotalQuestion:Where are we

57、in constructioncycle?Webelievethatthe#1pivotalquestiondrivingthestocknarrativeforconstruction exposed multi-industrials is where are we in the cycle? This is no different for US HVAC names.In residential, following nearly a decade of healthy growth since the bursting of themid-2000sUShousingbubblean

58、dsubsequentglobalfinancialcrisis,investors areincreasinglyaskinghowmuchsteamisleftinthehousingmarket? Admittedly, thisdebateisnotanewone(hasbeenquestionedforseveralyearsrunning),but we think its become even more pivotal each year that passes and the late 2018/early 2019 slowdown has helped to furthe

59、r stoke thedebate.Non-residentialconstructionhassurpassedpriorcyclepeaklevels,butisalready showingsignsofaslowdown,notablyontheprivateside. Increasingpublicspend is likely to partly offset lower private spend, which we would expect to be a net negative for HVAC OEMs.Our view is that HVAC businesses

60、will see more tempered organic growth over the next few years during this later stage of the cycle, but its not all doom andgloomforthesecompanies. First,wethinkHVACOEMscanstillpostpositive organicgrowthintheneartermwithreplacementdemand,price/mix,andservice all supporting the base business. Moreove