Nov. 28 (Bloomberg) -- Kaba Holding AG, the largest Swiss maker of locks and security doors, will boost production of digital cylinder locks in China, as demand from Asia may rise 10-fold within five years, Chief Executive Rudolf Weber said.

“We want to upgrade towards electronic, high-tech production for which some investment is needed,” Weber said in an interview at Kaba’s Ruemlang headquarters. Kaba acquired the final 20 percent of its Wah Yuet unit in China from founder Kin Shek Ng this month.

By increasing production in China, where costs are lower, Kaba may match cost-cutting plans of competitors such as Assa Abloy AB and units of Ingersoll-Rand Co. Kaba may also seek partnerships to brand its locks with other so-called original equipment manufacturers to meet demand as the Asian region switches from mechanical to digital locks.

Kaba shares added as much as 18.7 francs and closed 16 francs, or 6.9 percent, higher at 247, giving the company a market valuation of 939 million francs ($781 million).

More new products will be produced and assembled in China, while “know-how parts” such as software, chips and electronic motors will still be developed in Switzerland or Austria, Weber said. Specialization and investment in automation mean Kaba doesn’t have to move all production to counties where labor is cheaper than in Europe, he said.

Swedish rival Assa Abloy, the world’s biggest lock-maker, has announced at least 20 acquisitions since Chief Executive Officer Johan Molin took charge in December 2005. He has cut jobs and outsourced manufacturing to make savings. Assa Abloy is the biggest supplier of locks in China.

Acquisition Plans

The lock-making market is “very, very strongly fragmented” and lock-makers will continue to expand through acquisitions, Weber said. Independent lock-makers and suppliers face the challenge of adapting to electronic technology and production and sales abroad, he said.

Kaba, which bought Wah Yuet Group in 2006 and Unican Security Systems Ltd. in 2000 to enter the Chinese and North American markets, may make “small, natural” acquisitions, such as purchasing distribution businesses from current Kaba agents, Weber said.

Investment to improve distribution by online ordering for dealers and e-commerce, creates “good chances” for Kaba to grow faster than the market, Weber said. He confirmed the company’s “medium-term” target to grow more than 5 percent annually excluding acquisitions.

“It’ll be difficult to achieve that this year if the market only grows by between zero and 2 percent,” Weber said. He said the company’s reported sales in Swiss francs will also be affected by changes in currency exchange rates.

Quick Changes

Kaba reported full-year earnings before interest and taxes of 163.7 million Swiss francs in the year through June. Weber said the company will be able to keep that 12.6 percent Ebit margin, because it can make quick changes.

“If sales only grow by 2 percent instead of 5 percent we can maintain the margins very well” by cutting temporary workers or reducing working hours from one week to the next, Weber said.

Kaba maintained its Ebit margin in 2003 after a recession, even though sales excluding acquisitions were flat, Chief Financial Officer Werner Stadelmann said in an interview, as 60 percent of Kaba’s sales is based on renewals, reconfiguration and replacement keys for existing customers.

Kaba’s terms for credit lines worth 721 million Swiss francs with eight banks “haven’t changed at all,” Stadelmann said. The company has used 400 million francs of this total and doesn’t need to renegotiate loans due in 2009, he said.

To contact the reporter on this story: Joseph Heaven in Zurich at jheaven1@bloomberg.net

Last Updated: November 28, 2008 11:48 EST