Lack Of Catalysts Ahead; Maintain MARKET WEIGHT
We maintain MARKET WEIGHT on China’s home appliance sector. The recent strong AC sales momentum was mainly due to seasonality, while home appliance demand has yet to recover, in our view. Looking ahead, we see a lack of catalysts to support the share price rally of white goods names, as distributors’ restocking will decelerate and uncertainties remain in overseas markets. We suggest investors take profit at the current stage, after the sector’s share price rally of 14% since June.
• Diverging sales momentum with AC the only white good performing well. Home appliances’ domestic sales were weak, while air conditioner (AC) was the only product type to see strong sales momentum among three major white goods ytd. According to AVC, online/offline retail sales of ACs recorded 37.9%/10.4% yoy growth ytd (during 26 Dec 22 – 25 Jun 23). Specifically, Haier’s AC segment recorded 20% yoy growth (by shipments) in June, mainly driven by distributors’ restocking demand for the upcoming hot weather, while Midea’s AC segment recorded 50% yoy growth (by installation cards) in May, off a low base. However, during the same period, online/offline retail sales of refrigerators changed +8.0%/-0.5% yoy, while that of washing machines changed -6.4%/-10.4% yoy.
In our view, the set of weak data points illustrated that demand for home appliances has yet to recover, and we believe that consumers tend to postpone their purchases of large-ticket items at the early stage of recovery.
• Low visibility on overseas markets. In 1Q23, shipments of core appliances declined by 5%/9%/18%, in the US, Western Europe and Eastern Europe, respectively, according to Statista. We attribute the weak shipments to retailers’ destocking and end-customers’ tepid consumption demand. Though inventories pressure eased slightly at the beginning of the year, end-customers’ demand turned weak again afterwards. By Apr 23, US retailers’ (furniture, electronics and appliances) inventory-to-sales ratio stood at 1.65, remaining at relatively high level since 2022.
• Expect home appliances companies’ net margin to remain stable in 2023. We expect home appliances companies’ gross margin to improve in 2023, driven by: a) easing raw material prices, b) price hikes of products, especially ACs, and c) the continued premiumisation (Haier: Casarte to record 15% revenue growth/Midea: COLMO to record 30% sales growth in 2023). However, the gross margin improvement will be partially offset by higher selling and R&D expenses, as some home appliances players plan to launch more value-for-money products this year to cater to customers’ need, while implementing their premiumisation strategy at the same time.
• Maintain MARKET WEIGHT. White goods names recorded an average 14% share price rally since June (vs.CSI300 of 2%), mainly driven by the good AC sales momentum during the summer season. However, as distributors’ inventory levels have gradually normalised at around two months, the restocking pace will decelerate, and as demand for AC has unleashed early since 2Q, we now turn more cautious on the sustainability of good sales momentum of AC. Looking ahead, we see a lack of catalysts to support the share price rally of white goods names. We suggest investors to take profits at the current stage. We prefer Haier in the home appliances sector, given its cheap valuation.
Haier Smart Home – H (6690 HK/BUY/Target: HK$28.50)
• We resume coverage on Haier Smart Home – H (Haier – H) with a BUY rating and a new target price of HK$28.50. We like Haier for: a) strong branding in home appliances sector, b) continued premiumisation strategy, and c) upside for operating efficiency improvement in the overseas market (targeting operating profit margin of 8% vs 5% currently).
• We estimate that Haier – H’s revenue will grow by 8% yoy in 2023, and gross profit margin will tick up by 0.3ppt yoy to 30.9% thanks to the easing raw material prices. Opex ratio will decline by 0.2ppt yoy to 24.5%, driven by operating efficiency improvement. Thus, net profit will increase by 14% yoy to Rmb16.7b in 2023, implying a net margin of 6.4% (vs 6.0% in 2022), per our estimates.
• Our 2023 target price of HK$28.50 is based on DCF valuation methodology, assuming a WACC of 13.5% and a terminal growth rate of 2%. Our target price implies a 14.3x FY23F PE. Haier currently trades at 12.0x FY23F PE, 1.5SD below the average PE since it was listed in Dec 20.
Midea Group (000333 CH/BUY/Target: Rmb67.30)
• We resume coverage on Midea Group (Midea) with a BUY rating and a new target price of Rmb67.30. We like Midea for: a) potential upside of the to business (ToB) segment (EBIT contribution from robots and automation segment to reach >5% in the long term), and b) further expansion in the overseas market, with original brand manufacturer (OBM) to contribute 50% of the sales in the overseas market in the medium term.
• We estimate that Midea’s revenue will grow by 9% yoy in 2023, and gross profit margin will tick up by 0.2ppt yoy to 24.9% thanks to the easing raw material prices. Opex ratio will remain flat at 15.8%, as more expenses will be incurred for promotions of value-for-money products, but offset by lower administrative costs. Thus, net profit will increase by 14% yoy to Rmb33.6b in 2023, implying a net margin of 8.9% (vs 8.5% in 2022), per our estimates.
• Our 2023 target price of Rmb67.30 is based on SOTP valuation methodology. We use DCF valuation methodology for home appliances segment, assuming a WACC of 15.0% and a terminal growth rate of 2%, and we apply a 12x 2023F EV/EBITDA to robots and automation segment. Our target price implies a 14.1x FY23F PE. Midea currently trades at 12.3x FY23F PE, 0.75SD below its five-year average PE.