Urbem's 'Megatrend' Series: Urbanization
Rapid urbanization has been shaping the future on this planet and restructuring our economy with emerging long-term business opportunities. According to research by BlackRock (NYSE:BLK), 68% of the global population will soon live in cities compared to 55% today, indicating growth of 2.5 billion people mostly in Asia and Africa.
At the same time, it is worth noting that people are not only flocking to cities - they are flocking to megacities, such as Lagos, Mumbai and Shanghai. This means that the number of megacities will increase dramatically over the next few decades, from 23 in 2010 to 41 in 2030, according to estimates.
The megatrend of global urbanization is generating a wide range of tailwinds in multiple sectors, from infrastructure to transportation, energy, utilities and technology. Nonetheless, we would remain selective in terms of domains and regions, and, as always, focus only on businesses seizing growth opportunities with a substantial moat.
The elevator and escalator have been one of our favorites to benefit from the increasing density of the urban population worldwide. Take a glance at KONE Oyj (OHEL:KNEBV), a pure-play in this four-company oligopoly industry. The Finland-based engineering and service business generates almost half of its annual sales from the sales of new equipment to ensure repeatable, predictable future cash flow. With a global market share of 20%, the company builds a moat through its reputed brand in the highly mission-critical niche when it comes to infrastructure for more spaces vertically. We think that KONE is well-positioned for a global urbanization opportunity, earning 30% of its revenue (as of fiscal 2019) in China and 17.5% in EMEA.
The company is currently generating a 26% return on invested capital, 30% on equity and 11% on assets, according to Morningstar. We think that such super-normal returns can likely stay as KONE helps cities around the globe grow higher and higher.
The airport is another moaty asset that demonstrates a long-term growth prospect when we think about urbanization. For instance, Shanghai International Airport Co. (SHSE:600009) operates China's most critical international airport (i.e., Shanghai Pudong Airport), which is located in the largest Chinese megacity. Over the last decade, Pudong Airport has already been one of the most rapidly growing airports in the world in terms of passenger volume and aircraft traffic. As with KONE, Shanghai International Airport earns an industry-beating return on capital, which is hopeful of lasting for the foreseeable future while the "Paris of the East" grows even bigger.
Urbanization also underpins the worldwide cosmetics market, benefiting industry leaders such as L'Oreal (XPAR:OR) as a more indirect play. The France-based beauty conglomerate refers to urban living as one critical driver to "amplify the types of external factors to which the skin is exposed," thereby contributing to consumer enthusiasm for its skincare products. Some other domains that we like in light of our increasingly dense cities include pest control, water services and waste management.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
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This article first appeared on GuruFocus.
