Zheshang Securities(SH:601878) Zhe Shang Qi Huo·2024-04-28 12:49Summary of the Conference Call on Home Appliances Industry Industry Overview - The report focuses on the home appliances industry, particularly the valuation differences between Chinese white goods giants and overseas leaders [1] Key Points and Arguments Stability and Scarcity as Valuation Premium Foundations - Stability: The core indicator of shareholder returns is ROE, reflecting low profit volatility and stable cash returns. AO Smith shows a significant valuation premium compared to peers: - AO Smith diversifies its revenue sources by expanding overseas, resulting in a low correlation (R² = 0.07) with the U.S. real estate cycle [2] - The impact of metal raw material prices on operating costs is significant (R² = 0.4), but AO Smith, with nearly 40% market share in North American water heaters, can mitigate this through product structure adjustments [2] - AO Smith has maintained a consistent buyback and dividend ratio of around 100% of net profit since 2013, enhancing shareholder returns during performance slowdowns [2] - Scarcity: The uniqueness of business models and brand positioning creates barriers against competition, allowing high-barrier companies to better navigate cycles: - Daikin has established a global production and service system through acquisitions, such as the purchase of Goodman in 2014, leading to an 8.6% CAGR in North American revenue from 2014 to 2021 [2] - Daikin's high-end brand positioning has resulted in a strong market presence, maintaining a 13% share in the Chinese central air conditioning market [2] High and Stable ROE of Chinese Home Appliance Leaders - The home appliance industry exhibits stable demand, with companies reducing the correlation between revenue growth and real estate cycles through exports, price increases, and inventory adjustments. The influence of copper prices on the operating costs of the three major white goods leaders has significantly decreased since 2015 [3] - High standardization of home appliance products allows leading companies to create entry barriers through economies of scale. Despite price sensitivity among consumers, the oligopolistic market structure ensures stable profitability for leading firms [3] - The home appliance sector has sufficient cash to maintain ROE levels, with cash assets constituting 35% of total assets in 2022, indicating a mature and stable industry [3] Valuation Discrepancies Between Chinese and Overseas Leaders - Chinese appliance companies are in a capacity-building phase overseas, leading to higher capital expenditures. The uncertainty in export OEMs necessitates significant upfront investments for local capacity and brand development [4] - The domestic ice washing market is stable, while the air conditioning sector faces cyclical changes. The ice washing market is dominated by Haier, with a shift from volume to price growth, while the air conditioning market is characterized by price competition that can hinder profit growth [4] - A-shares have historically favored growth, but as market demands for certainty increase, the valuation of white goods may improve based on ROE [4] Investment Recommendations - The report maintains a positive outlook on the industry, suggesting that the high and stable ROE of white goods leaders justifies higher valuations. Key factors include: - Ongoing expansion of self-owned brands overseas, with future capital expenditures tied to market share leadership [7] - Despite cyclical demand and competition in the air conditioning sector, the long-term stability of the market structure supports the industry [7] - As the economy transitions, the market's focus on certainty may enhance the valuation of white goods [7] - The DDM three-stage model suggests a PE valuation midpoint of 17x for Midea Group and Haier Smart Home, with a recommendation to focus on these companies and consider Gree Electric [7] Risk Factors - Potential risks include macroeconomic uncertainties, intensified industry competition, and deviations in measurement results [8] Additional Insights - The report emphasizes the importance of ROE in determining the valuation of home appliance companies, with a stable demand and oligopolistic market structure supporting high and stable ROE [7] - The analysis indicates that the valuation of Chinese white goods may align with the PEG=1 principle, yet it remains lower than that of overseas counterparts [4]