Sales recovery appears on track
- Haier’s sales rose by 6.1% yoy in 3Q23, in line with our estimate, driven by the gradual demand recovery in both domestic and overseas’ home appliance markets.
- Net profit grew by 12.9% yoy in 3Q23, slightly lower than our estimate, owing to new product launches in overseas markets leading to higher market spend.
- We think Haier’s sales are on a recovery trend, given the low base in 4Q22. We expect sales to rise by 9.7% yoy and net profit to increase by 11.5% yoy in 4Q23F.
- Reiterate Add with slightly lower DCF-based TP of Rmb31.5 (WACC: 9.1%, TG: 1%).
Domestic market sales recovery in line in 3Q23
Haier Smart Home’s sales growth slowed from 8.2% yoy in 1H23 to 6.1% yoy in 3Q23, off a slightly high base of 9.1% yoy in 3Q22. We estimate sales growth in both the domestic and overseas markets grew by c.6%-7% yoy in 3Q23, each contributing c.50% of total sales in 3Q23. According to industry data provider Chinaiol, in the domestic market, sales volume of Haier’s washing machines declined by 2% yoy in 3Q23, but sales volume of refrigerators rose by 8% yoy and air conditioners by 16% yoy. Haier had accelerated the store opening of its one-stop service brand Sanyiniao for whole house design in China; the number of Sanyiniao stores reached c.2,500 as at end-3Q23 (+1,000 new stores in 9M23). Management expects sales in Sanyiniao stores to reach c.Rmb5bn in FY23F and double to Rmb10bn in FY24F. Management said that its focus in FY23F for its high-end brand-Casarte is to expand its B2C channel and improve its product more diversified. 9M23 net profit was 80% of our full-year forecast.
Product mix upgrade trend continued in overseas markets
Among overseas market sales (51% of total sales in 1H23), 3Q23 sales from North America market grew by 5.7% yoy (+1% yoy in local currency), while 3Q23 European market sales grew by 17.6% yoy (+4.5% yoy in local currency), equivalent to 30% and 10% of total sales in 1H23. For the North America market, Haier adheres to a product mix upgrade strategy for its GE appliances brand and has launched more high-end products in its core appliance segment (e.g. stainless steel inner dishwasher, French-door refrigerator, Ultrafast combo laundry machine) in 9M23; meanwhile, the company has started to penetrate into new product segments (e.g. air conditioners and water purification solutions) since 4Q22. For the European market, the company has attempted to upgrade the product mix under its Candy brand; in Sep, it launched a compete range of products from refrigerators, washing machines and kitchen appliances (including small appliances).
NPM steadily improved yoy in 3Q23
Overall GPM expanded by 0.3% pt yoy to 31.2% in 3Q23 (+0.2% pt yoy in 9M23), owing to product mix upgrade and a lower raw material price. Sales & distribution expense (S&D) ratio declined 0.2% pt yoy to 15.5% in 3Q23, owing to: 1) overseas market S&D expense ratio increasing yoy in 3Q23, owing to intensified competition and new product launches, offset by 2) lower S&D expense ratio in China yoy, as its digital transformation has gradually improved Haier’s efficiency in marketing resource allocation, logistics distribution and warehouse operations. Admin expense ratio also declined by 0.1% pt to 4% in 3Q23. NPM improved by 0.4% pt yoy to 6.2% in 3Q23 (+0.3% pt yoy in 9M23).
Reiterate Add, with a lower DCF-based TP of Rmb31.5
We trim our EPS forecasts for FY23F-25F by 1.1-1.2% to reflect higher marketing spending on new products resulting in lower 3Q23 NPM improvement in overseas markets, which led to a lower TP. We reiterate Add, as we believe Haier’s product mix upgrade strategy suits its China and US market development in the long term. Downside risks: higher-than-expected price competition in overseas markets, which would affect its margin improvement pace. Re-rating catalysts are stronger sales growth in 4Q23F.