The Zhitong Finance App learned that Zheshang Securities released a research report saying that the high and stable ROE of white electricity is worth a higher valuation, and the factors that suppress valuation compared to overseas leaders may be resolved in the future. 1) Home appliance companies are actively expanding their own brands overseas, and future capital expenditure depends on future market share leadership in the local market; 2) Although demand and competition in the air conditioning industry are cyclically disrupted, in the medium to long term, the standard attributes of air conditioners themselves and the bargaining power of leaders in the industrial chain stabilize the industry pattern for a long time; 3) Under the economic growth cycle, investors' requirements for certainty increase, and the market's valuation is expected to boost when the market moves towards deterministic pricing.
Dividends are discounted for white electric faucets on the premise that ROE is relatively stable, and there is still room for improvement in the valuation of white electric faucets. 1) When market pricing shifts from three years of explosive performance growth to long-term stability and deterministic returns, the position of ROE in the pricing system will increase. The stable demand for home appliances+oligopoly pattern is bound to have a high and stable ROE in the home appliance sector. It is recommended to seize investment opportunities for the home appliance sector to rise in valuation under the ROE pricing system. 2) According to the DDM three-stage model discount, under the assumption of maintaining an ROE of around 20% and a discount rate of 8.6%, the PE valuation center of Midea Group and Haier Smart Home is 17x.
Recommended targets: Midea Group (000333.SZ), Haier Smart Home (600690.SH); it is recommended to focus on Gree Electric (000651.SZ).
The main views of Zheshang Securities are as follows:
Stability and scarcity are the foundation for leading overseas home appliances to achieve valuation premiums
Stability: The core indicator of shareholder returns is ROE, which is reflected in low profit fluctuations and steady cash returns. AO Smith has a clear valuation premium compared to comparable companies:
1) AO Smith distributes the impact of the US real estate cycle on revenue by expanding overseas markets, etc., and the correlation between the company's revenue and the US real estate cycle is low (R2 is only 0.07).
2) The price of metal raw materials has a large impact on operating costs (R2 is 0.4). AO Smith's share of water heaters in North America is close to 40%, and the impact of raw material prices on the profit side can be reduced by adjusting the product structure and average price.
3) When performance growth stalled, AO Smith strengthened shareholder returns through repurchases+dividends. Since 2013, AO Smith's dividends and repurchases have remained around 100% of net profit all year round.
Scarcity: The scarcity of business models and brand positioning helps companies form barriers that are difficult to be challenged by competitors. Companies with high barriers can better cross the cycle, but they also need long-term construction:
1) Daikin realizes real estate sales through mergers and acquisitions, and establishes a global production and service system. Daikin acquired US HVAC leader Goodman in 2014. Using its mature channels and distribution network in North America, combined with its leadership in refrigeration technology to increase its market share, Daikin's revenue CAGR in the North American market increased to 8.6% from 2014 to 2021.
2) The Daikin brand is positioned as high-end, and there is a clear brand premium in Japan and the Asia-Pacific region. Daikin has been deeply involved in the Chinese market for many years, and the accumulated reputation has formed a good brand effect. The product positioning is mid-range and high-end, the market position is stable, and the central market share in China remains around 13%.
China Home Appliance Hakuba has a high and stable ROE, and shareholder returns have the ability to cross the cycle
1) Demand in the home appliance industry is stable. Although home appliances have certain post-cycle properties of real estate and raw materials, home appliance companies reduce the relationship between revenue growth and the real estate cycle through export sales, price increases, and channel inventory adjustments. In terms of raw materials, according to data compilation, after Baidian formed an oligopoly pattern in 2015, the extent to which copper prices explained changes in the operating costs of the three major white electric faucets was drastically reduced.
2) The degree of standardization of household appliances is high, and leaders form entry barriers through scale effects in the industrial chain integration process.
Although consumers are price sensitive, it is easy for leading companies to seize share through price competition, from a longer-term perspective, the oligopoly pattern guarantees the stable profitability of home appliance leaders.
3) The home appliance sector has sufficient cash to pay dividends to maintain the ROE level. In 2022, the home appliance sector's cash assets accounted for 35% of total assets. The industry is highly mature and stable. Most of the capital expenditure comes from overseas production capacity construction and capitalization of R&D investment.
Why is there still a gap between the PE value of Chinese white electric faucets and overseas ones?
1) The overseas business of Chinese home appliance companies is in the production capacity construction cycle, and capital expenditure is still large. There is greater uncertainty about export foundry. Leading companies are increasing their overseas local production capacity layout to respond quickly to the market and develop their own brands. Therefore, in the short term, more capital expenditure is needed for early construction capacity and R&D investment.
2) The domestic ice washing pattern is relatively stable, and competition for air conditioning is changing. Domestic ice washing has formed a good market competition pattern dominated by Haier. Driven by replacement demand, the industry volume increased and price increased. The average retail price CAGR of the industry in 14-23 was 3% and 2%, respectively. The air conditioning market has a cyclical pattern of demand, inventory, and competition. The price competition in the industry is obvious. Price competition in the industry will cause the profit growth of white electric faucets to stall.
3) In the past, the A-share investment style was more oriented towards growth. When the market's requirements for deterministic returns increased, refer to the foreign capital inflow process from 2016 to 2019 and 2020 to 2021. Looking at ROE pricing, Baidian is worth the valuation premium.
Risk warning
Macroeconomic uncertainty; increased industry competition; deviation in measurement results.