China Home Appliances 2Q preview; overseas to outperform

While we believe the market would continue to chase A/C names in the near term, given the category might record outstanding double-digit growth y/y in 2Q and 3Q, we highlight the category’s growth may slow down from 4Q onwards, as a result of its correlation to slowing property completions. As new home sales in China remain muted, with unfinished and delayed projects gradually being completed YTD, we argue that those categories more dependent upon the property cycle would turn weaker later this year, while those more reliant on replacement demand (such as refrigerators, washing machines, etc.) would remain resilient. Meanwhile, we note that the growth of new home sales in the US has accelerated over the past few months, which should benefit appliance sales next year upon completion. Our one-year top picks are now Haier and Ecovacs, aided by their likely more resilient domestic performances and higher sales exposure to the US market. Our near-term trading ideas are Midea and Roborock, thanks to their solid performance in 2Q and 3Q to date. We also flag potential upside to sector sentiment if there are any concrete policy stimulus details, although we don’t expect a notable contribution to sector fundamentals.

We expect all the companies we cover to report sequential y/y improvement in 2Q vs 1Q, thanks to the lower base and moderating COVID impact. Most companies, based on our estimates, will print MSD to HSD sales growth y/y during the quarter (Ecovacs, Roborock and Robam may record double-digit growth y/y aided by strong overseas recovery or some delayed demand), and a solid earnings trajectory (mostly low- to mid-teens y/y growth), driven by lower costs (declining raw material prices, shipping costs, etc.) and operating leverage. However, we flag downside risk to our forecasts if A&P expenses end up higher than our expectations.

We believe the market has mounting concerns about the higher base in China during 3Q23, and that weak consumer spending appears to persist. This has driven a rising number of companies to increase promotions that would dilute their margin trends and pose downside risk to 2H earnings. Overseas operations, on the other hand, will have a lower base with likely re-stocking in 2H.

We now prefer US exposure. Our top picks have changed from China property late-cycle names in Dec 2022, to those with Europe and A/C exposure in early Mar 2023, and now we prefer the US plays.