Consumer Sector (Home appliance)

Transcription

1 China / Hong Kong Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 4 Jan 217 Headwinds well weathered HSI: 22,134 We maintain our view that bigger players could see less impacts from raw material cost pressure and the property downturn in China Recent price hikes should safeguard margins. Product replacements and home upgrading could also support sales volume of home appliances Other positive factors could include overseas contribution, product-mix enhancement and improving operating efficiency Maintain BUY on the leading brand owners: Midea (333.CH), QD Haier (669.CH) and Haier Electronics (1169.HK) ANALYST Eric YEE, CFA eric_yee@dbs.com Mavis HUI mavis_hui@dbs.com Recommendation & valuation Company Price (HK$) Target Price (HK$) Rec FY17F PE (x) FY17F Yield (%) Mkt Cap (US$m) Costs pressure and property slowdown? Not too big an issue. To mitigate margin pressure from higher raw material costs, industry leaders such as Midea and Gree have taken preemptive measures to lift product prices selectively, and we expect this to be the trend in 217. Additionally, we are not over-worried by potential negative impacts on home appliance industry from the property downturn, given a lower correlation (due to higher investment-driven purchase) than previous years, and expect replacement cycle/upgrade demand will prevail against new-home demand. Midea Group* (333 Haier Electronics* (1169 HK) Qingdao Haier* (669 GOME*^ (493 HK) GREE Electrical ( Buy , Buy , Buy , Hold , n.a. NR ,742 Overseas revenues could cushion potential domestic weakness. We noted the resilience of certain Chinese home appliance makers, given their significant portion of overseas revenues arising from exports and foreign operations. For instance, Qingdao Haier and Midea, being the largest industry leaders, have around 4% of foreign revenue contributions. Another windfall is the depreciating CNY, which has fallen by c.6.3% against USD in 216 and could devalue further into 217. This could boost translation gains for these companies for price and target price ^ Core EPS Source: Thomson Reuters, *DBS Vickers Product mix and operating efficiency enhancement. While growing its own upmarket brand "Casarte", Haier is also poised to further lift gross margin via introduction of GE products in China as its premium range by FY18. In terms of efficiency improvement, Midea's powerful T+3 operations, which are end demand-oriented manufacturing models, have also continued to lift operating margins. All these should help safeguarding profitability. We maintain BUY on leading brand manufacturers including Midea, QD Haier and Haier Electronics. ASIAN INSIGHTS VICKERS SECURITIES sa- AH

2 Price hike to mitigate rising raw material costs. According to news report, Gree and Midea had announced price increase on their air conditioner products by RMB 5-1 (ie. 1.3%-2.6% on ASP of c. RMB 4,) and RMB 5-2 (ie. 1.4%-5.6% on ASP of c. RMB 3,6) respectively in the last 2 weeks of Dec 216, in response to the rising costs of raw materials such as copper, aluminium and plastics. Other peers such as Chigo and Hitachi also implemented the same measures. Chigo has raised air conditioner product prices by 2% in Dec 216, with another 2% to follow in Jan 217; Hitachi is lifting the price of its household air conditioner products by 1% from 1st Jan 217 onwards. Our channel checks revealed that air conditioners and televisions are the 2 segments which have seen notable upward price revisions. Price adjustments on washing machines and refrigerators are relatively minor, while small household appliance prices are left untouched. It is, however, understood that a broad-based price adjustments could take place by midto late-jan 217. We are positive on these pre-emptive measures undertaken by industry players. Raw materials (including copper, steel, aluminium and plastics) are the most significant cost components for home appliance manufacturers that could make up c.8% of their Costs of Goods Sold. The home appliance brand players have been enjoying the windfall from weak commodities over the past few years, however prices seem to have bottomed out since 2Q16-3Q16 and staging a recovery. For instance, China Changjiang copper spot price has seen accelerating rebound at.4%/3%/12.5% q-o-q for 2Q/3Q/4Q to date after a 3-year downtrend since 213. We estimate every 1% increase in copper prices would reduce Midea/Qingdao Haier's earnings by 2%/4%. We opine that consumers are less sensitive to minor price changes on big-ticket items such as the large home appliances, and would focus on comparing functionalities and values between brands. As a result, big brand owners with good R&D efforts should continue to stand out, in our view. They should also be the ones that could be more capable of passing on the rising cost impacts to end customers to support profitability. Crude oil price trend USD/barrel Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 China Changjiang Copper Spot Price Trend RMB/MT 7, 6, 5, 4, 3, 2, 1, 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Sales momentum to sustain into 1H17 The PRC domestic home appliance industry had staged recovery since 2H16 following the subsiding of inventory issues. Stronger rebound trajectory was seen in 4Q16 - seeing sales of air conditioner, washing machine and refrigerator segments in Oct-Nov 216 rebounded by 32.9% y-o-y (29.7% in 3Q16), 9.6% (5.1% in 3Q16), and 6.6% (3.7% in 3Q16), respectively. We expect this uptrend to sustain until 1H17 in the least. Customer expectations of further product price adjustments could also prompt earlier purchases, thereby strengthening the outlook to some extent. Page 2

3 Air conditioner sales growth in China - 1Q15 to Nov 216 Refrigerator sales growth in China - 1Q15 to Nov % 3% 25% 2% 15% 29.7% 32.9% 8% 6% 4% 2% 1.2% 1.9% 3.7% 6.6% 1% % 5% % -5% -1% -4.4% -6.6% -4.3% 1H15 2H15 1H16 3Q 16 Oct+Nov -2% -4% -6% -8% sales decline would've been narrower if bulk and online sales are counted -7.% 1H15 2H15 1H16 3Q 16 Oct+Nov Washing machine sales growth in China - 1Q15 to Nov % 1% 8% 6% 4% 2% % -2% -4% 6.% 3.4% -2.4% 5.1% 9.6% 1H15 2H15 1H16 3Q 16 Oct+Nov Limited impact from property downturn in 217 We believe the negative impact exerted on the home appliance industry by a property downturn in 217 could be limited. Our conversation with industry players points to a weakening correlation between property sales and home appliance sales, due to the higher averaged proportion of investment-driven property sales in 216 (18% in 9M16, against 15% in ). While better y-o-y industry sales trend in 2H16 (Jul-Nov 216), such as air conditioner (+31%), washing machine (+7%) and refrigerator (+5%) somewhat trailed the 26.7% growth in residence GFA sold during 1H16, we think that it was rather a sales rebound off the low base in 2H15, during which inventory-destocking plagued the sector. Correspondingly, we are of the view that the anticipated slowdown of property sales in 217 could see less-than-expected impact on the home appliance industry. Besides, the upcoming demand for large home appliances could be better defined by replacement cycle and upgrade demand, given high penetration rates (c. 8%-9% for washing machines and refrigerator, and c. 7% for air conditioner). With this respect, we think that the next replacement cycle could come underway after the major rural home appliance plan ( 家电下乡计划 ), which took place from 29 to 212. Page 3

4 Property sales breakdown by Vanke Sep-16 Jul-16 May-16 Mar-16 Jan % 23% 13% 23% 16% 21% 19% 2% 14% 14% 16% 15% 15% 13% 19% 13% 16% % 2% 4% 6% 8% 1% First Time FT upgrade Reupgrading Other Source: DBS Vickers Correlation between property and large home appliances sales volume The potential negative impact on home appliances industry caused by anticipated property sector downturn in 217 could be one of the recent concerns of investors. To ascertain the impact, we tried to revisit the correlation between property sales and the major large home appliances, namely air conditioner, washing machine and refrigerator. Generally, we observed 2-4 quarters of lagging impact on sales volume of large home appliances to be caused by changes in property sales. While it is of common sense to see a lagging correlation between the two, we understand that the lagging period could also be affected by seasonality (for instance, air conditioner sales peaked in 2Q each year ahead of the summer). The coefficient/ sensitivity are also subject to other factors such as replacement cycle and penetration rates. As a result, we recommend investors not to be over-worried about the short-term volatility in new-home sales, as it could be compensated by on-going upgrade/ replacement demand, which makes up a bigger portion at an estimated 6% of the home appliance industry sales. China air conditioner sales volume vs. Residence GFA sold ' units 2 quarters 2 quarters 2 quarters m sqm 6, 45 5, , 3 3, , 15 1, 1 5 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Air conditioner sales volume Source: China Market Monitor, CEIC, DBS Vickers Residence GFA sold China washing machines sales volume vs. Residence GFA sold ' units m sqm 4, 4 quarters 4 quarters 45 3,5 4 3, 35 2,5 3 2, ,5 15 1, Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Washing machine sales volume Residence GFA sold Source: China Market Monitor, CEIC, DBS Vickers Page 4

5 China refrigerator sales volume vs. Residence GFA sold ' units m sqm 2 quarters 2 quarters 3 quarters 4, 45 3,5 4 3, 35 2, , 2 1,5 15 1, Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Refrigerator sales volume Residence GFA sold Source: China Market Monitor, CEIC, DBS Vickers Foreign revenues to be the cushion We have noted the resilience of Chinese home appliance makers amidst potential domestic weakness, given the significant portion of overseas revenues arising from exports and foreign operations. Qingdao Haier and Midea, being the largest industry leaders, have around 4% of foreign revenue contributions. For Qingdao Haier, the significant contribution is resulting from the consolidation of GE Appliance unit through acquisition in 216. As for Midea, it has always been running on such balanced revenue structure, with production bases in 6 foreign countries namely Vietnam, Belarus, Egypt, Brazil, Argentina and India. Out of nearly 4% overseas revenue, we understand that OBM (own brand manufacturing) accounts for c.4%, ODM (own design manufacturing) makes up c.3% and OEM (own equipment manufacturing) covers the remaining c.3%. Subsequent turnaround of Toshiba unit, as well as completion of the Kuka deal by January 217 should further increase overseas contributions for Midea. Another windfall attached to foreign revenues is the depreciating Chinese RMB, which had fallen by c.6.3% against USD in 216 and could see further declines this year. This could boost the companies' revenue and earnings in the form of translation gains. Every 1% USD appreciation should lift Midea/QD Haier s earnings by 2%/4%. As for concerns about the potential high import tax implemented by U.S. under Trump's administration, we currently expect limited effects to these brand manufacturers under our coverage ie. QD Haier, Haier Electronics and Midea. The Haier Group has factories in North Carolina itself and can basically satisfy the North American demand. Coupled with the acquisition of GE, QD Haier would also be able to leverage on the GE factories in Lousville of the US. As for Midea, the company would be able to fall back on its diverse production bases in case of any adverse policy on China imports. We await more information after Trump assumes the role of the US President on 2 Jan 217. Geographical revenue breakdown of Chinese listed home appliance industry players Home Appliance Names Ticker Domestic (%) Foreign (%) H-Share Chigo Holdings 449 HK 5% 5% TCL Multimedia 17 HK 64% 36% Hisense Kelon 921 HK 65% 35% Weiling Holdings 382 HK 7% 3% Skyworth Digital 751 HK 78% 22% Haier Electronics 1169 HK 9% 1% A-Share Midea Group 333 CH 58% 42%^ Qingdao Haier 669 CH 6% 4%* Sichuan Changhong 'A' 6839 CH 65% 35% Konka Group 16 CH 66% 34% Zhejiang Supor Cookware 232 CH 67% 33% Hisense Elec. 66 CH 67% 33% Wuxi Little Swan 418 CH 7% 3% GREE Electrical 651 CH 85% 15% J oyoung 'A' 2242 CH 99% 1% Shanghai Flyco Elect. Appc.'A' CH 99% 1% Hangzhou Robam 'A' 258 CH 1% % *upon full consolidation of GEA unit in 217 ^ as of June 216 Page 5

6 USD/CNY cross rate GE Kitchen Appliances Set Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: Bloomberg Finance L.P. Source: Internet Product mix and operating efficiency enhancement Aside from the recent upward product price adjustments to offset pressure from higher raw material costs, major home appliance players have been working on product-mix improvements to expand margins. For example, while growing its own upmarket brand "Casarte", Haier is also poised to further lift gross margin via introduction of GE products in China as its premium range by FY18. In terms of efficiency improvement, Midea's powerful T+3 operations, which are end demand-oriented manufacturing models, have also continued to lift operating margins. All these should help safeguarding profitability. We maintain BUY on leading brand manufacturers including Midea, QD Haier and Haier Electronics. Page 6

7 Peers valuation Target Mkt 16F 17F Currency Price Price Recom Cap F iscal PE P/Sales Yield P/Bk ROE PE P/Sales Yield P/Bk ROE Company Name Code Local$ Local$ US$m Yr x x % x % x x % x % Home appliance manufacturer Chigo Holding 449 HK HKD.13 n.a. NR 112 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Haier Electronics* 1169 HK HKD BUY 4,492 Dec Hisense Kelon 921 HK HKD 6.2 n.a. NR 1,89 Dec Skyworth Digital# 751 HK HKD 4.4 n.a. NR 1,699 Mar TCL Multimedia^ 17 HK HKD 3.83 n.a. NR 857 Dec n.a n.a Welling Holding 382 HK HKD 1.5 n.a. NR 554 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. HK-listed stocks average Midea Group* 333 CH CNY BUY 27,553 Dec GREE Electrical 651 CH CNY n.a. NR 21,742 Dec Hisense Elec. 66 CH CNY n.a. NR 3,288 Dec Konka Group 16 CH CNY 4.6 n.a. NR 1,592 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Qingdao Haier* 669 CH CNY BUY 8,81 Dec Wuxi Little Swan 418 CH CNY n.a. NR 3,49 Dec Hisense Kelon 921 CH CNY 1.71 n.a. NR 2,98 Dec Sichuan Changhong 'A' 6839 CH CNY 4.27 n.a. NR 2,834 Dec n.a TCL Corp 1 CH CNY 3.42 n.a. NR 6,5 Dec Hangzhou Robam 'A' 258 CH CNY n.a. NR 3,94 Dec J oyoung 'A' 2242 CH CNY 18.5 n.a. NR 2,41 Dec Huizhou China Eagle 'A' 2579 CH CNY n.a. NR 728 Dec n.a. n.a. n.a. n.a. n.a. n.a.. n.a. n.a. n.a. V atti 'A' 235 CH CNY 26.5 n.a. NR 1,362 Dec ZJ Meida Industrial 'A' 2677 CH CNY n.a. NR 1,13 Dec GD Xinbao Elect. 'A' 275 CH CNY n.a. NR 1,441 Dec ZJ Aishida Elec. 'A' 243 CH CNY n.a. NR 751 Dec SH Flyco Elect. Appc.'A' CH CNY n.a. NR 2,964 Dec Zhejiang Supor 'A' 232 CH CNY n.a. NR 3,143 Dec ZJ Haers V acuum Ctrs.'A' 2615 CH CNY n.a. NR 72 Dec Kingclean Elec.'A' CH CNY n.a. NR 2,73 Dec A share stocks average Global Peers Philips Eltn.Koninklijke PHIA NA EUR n.a. NR 27,782 Dec De Longhi DLG IM EUR n.a. NR 3,575 Dec Electrolux 'B' ELUXB SS SEK 223 n.a. NR 7,583 Dec n.a Global Peers av erage # FY16: FY17; FY17: FY18 ^ Core EPS Source: Thomson Reuters, *DBS Vickers Page 7

8 DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>2% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >1% for large caps) HOLD (-1% to +15% total return over the next 12 months for small caps, -1% to +1% for large caps) FULLY VALUED (negative total return i.e. > -1% over the next 12 months) SELL (negative total return of > -2% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 4 Jan :5:26 (HKT) Dissemination Date: 4 Jan :52:59 (HKT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSVHK ). This report is solely intended for the clients of DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd. 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