In 2024, the property market still hasn't picked up as much as expected. The capital market voted with its feet, and the real estate sector continues to decline. Current prices have retreated 60% from the peak in 2020. Leading company Vanke has already fallen back to ten years ago.

At the same time, the upstream and downstream sectors, which are closely related to real estate, are struggling. Among them, the cement faucet Conch Cement retracted 56% from the historical peak, the waterproof faucet Dongfang Yuhong retracted nearly 80%, and the household leader Oupai Home retracted more than 60%.

Surprisingly, however, the home appliance sector, which is also downstream of real estate, was able to buck the trend. The current price rebounded nearly 40% from the 2022 low, and less than 20% from the 2021 historical peak. Among them, Midea Group rebounded sharply by nearly 40% from December last year, Hisense Home Appliance stock prices continued to reach new highs, surging more than 270% from the low in October 2022, and Gree Electric and Haier Smart Home also rebounded quite a bit from lower levels.

So, how can home appliances buck the trend and soar?

01

In China, the home appliance market has long since completed a horse race, and the market share is mainly firmly controlled by several giants such as Midea, Gree, Haier, and Hisense. In a few years when real estate sales declined sharply, the performance fundamentals of the big four giants showed good resilience.

In 2023, the revenue scale of Midea, Haier, and Hisense all reached record highs, with cumulative increases of 30.9%, 24.7%, and 76.9% over 2020, and cumulative net profit to mother increased by 23.9%, 86.8%, and 79.7%. Gree's performance was relatively weak, and last year's revenue and profit may be difficult to break through the historical records set in 2019.

Let's look at profitability again. The latest gross sales margins of the four giants were 26.5%, 31.5%, 29.25% (2023Q3; the remaining three were at the end of 2023), and 22%. Compared with the past few years, Haier performed the best and continued to rise steadily, surpassing Gree to rank first. Gree's performance was the weakest, and the gross margin level continued to decline, falling to 24% in 2021. The remaining two companies maintained a volatile trend and performed moderately.

In terms of net sales interest rates, the latest four companies were 9%, 6.4%, 12.6%, and 5.6%, respectively, which is not much different from the past few years. Gree has the highest net profit margin, mainly because the profit margin of individual air conditioning products is higher than that of other categories.

In terms of return on net assets (ROE), Hisense ranked first with 22.6%, a sharp increase from 9.7% at the end of 2021. The main reason is that net interest rate and asset turnover ratio have increased quite a bit. Midea and Haier were 22% and 16.9% respectively, showing a slight decline. Gree Electric's ROE in 2022 was 24.5%, a sharp decrease of 13% from 2017. The main reason was that net interest rate and asset turnover ratio declined a lot, but the equity multiplier increased.

On the balance sheet, Midea's contract debt was 41.77 billion yuan last year (up 49% year on year), a sharp increase of 127% from 18.4 billion yuan in 2020, which is significantly higher than the 31% revenue growth rate during the same period. It can be seen that after years of steady operation, Midea has gradually taken a stronger and stronger voice both upstream and downstream of the industrial chain. The remaining three did not change much.

Let's look at dividends again. Midea increased its dividend ratio for two consecutive years. Last year it had already climbed to more than 60%, while it had remained around 40% for many years before. America's latest dividend ratio is 3.5%, higher than Gree's 2.5%, Haier's 1.9%, and Hisense's 1.4%.

Judging from the above core business data, Hisense home appliances are growing the fastest, followed by Midea and Haier. Gree's performance was relatively poor, but overall, they all showed a certain degree of resilience, and there were no real estate-related industries such as real estate, cement, and home furnishings where performance stalled.

In addition to fundamentals, the four major electronics giants continued to rise against the trend, which is also related to the market style of the past two years. Since February 2021, the market style has changed from growth to value due to factors such as macroeconomic pressure and torn valuations. The home appliance sector, which is growing relatively steadily, is viewed by the market as having the same dividend attributes as the banking, coal, hydropower and other industries, and underestimation is worth recovering to a large extent.

In recent years, Midea's PE dropped 10 times, and now it has risen to 14.5 times, returning to the median valuation level of the past ten years. Furthermore, Hisense's latest PE is 17.8 times, Haier 16.3 times, and Gree is only 8.6 times, all of which have been repaired to a certain extent compared to the previous one. In the long run, the market is a weighing machine. Hisense has the best growth rate and has given the highest valuation. However, Gree's performance ceiling is obvious. Growth is the weakest, and the valuation is also the lowest.

02

In the last ten years, China's real estate market has undergone drastic changes. After a new round of policy stimulus in 2015, the real estate boom was very high in 2016. In that year, the sales area of commercial housing surged by more than 22% over the same period last year.

In 2018, the real estate sales growth rate had already fallen to 1.3%. Back then, Vanke shouted the sad slogan “stay alive.”

From 2020 to 2021, although still in the midst of the pandemic, real estate sales continued to increase slightly due to various factors such as monetary policy.

In 2022, the property market took a turn, and there was a historic inflection point. The sales area fell sharply by more than 24% in that year. Later, since the epidemic was liberalized, real estate sales have continued to fall under pressure.

From 2021 to 2023, the total sales area of commercial housing was reduced by 600 million square meters, a cumulative reduction of 35%. The scale of this reduction is not small, and real estate sales have not yet bottomed out. From selling commercial housing to generating demand for home appliances, there will be a delay of 1-2 years.

Take air conditioning, for example. In 2023, sales volume of air conditioners in China was 170 million units, up 11.2% year on year. Among them, domestic sales were 99.597 million units, a year-on-year increase of 13.8%. This impressive performance is quite different from the weak sales performance of real estate. The main reason is the time lag effect between selling homes and electricity.

However, demand for stock renewal, driven by policy, is expected to hedge against the slowdown in new demand. On February 23 of this year, the Central Committee on Finance and Economics emphasized trade-in of traditional consumer goods such as home appliances. Immediately after March 1, the Executive Meeting of the State Council deliberated and approved the “Action Plan to Promote Large-scale Equipment Renewal and Consumer Goods Trade-In”, stating that trade-in of consumer goods such as automobiles and home appliances should be actively carried out.

In 2022, domestic sales decreased in completion, and demand for refrigerator, washing machine, and color TV renewal was 30.39 million units, 29.49 million units, and 28.42 million units, accounting for 56%, 53%, and 83% of total domestic sales and shipments. The implementation of this round of trade-in policies is expected to speed up the release of renewal demand.

Looking at the domestic demand dimension, starting in 2024, several major electronics giants will have more and more obvious growth pressure compared to the past, even though demand for updates is also quite high. Gree, in particular, has a single business, and the pressure will be even greater.

Of course, more importantly, the growth curve of home appliances and overseas business can be moderately hedged against domestic business. We have a bold idea. If home appliances don't have an overseas line, I'm afraid they will lose imagination for business growth like current cement, waterproofing, building materials, and home furnishings, and valuations will become cheaper and cheaper.

Midea was the earliest global home appliance giant, accounting for 35% of overseas revenue in 2014. Since then, there has been an increase overseas, accounting for 41.6% in 2023. Haier's overseas growth is very good. In 2014, the overseas share was only 12%, and in 2023 it has increased to 51.9%. Hisense's overseas share in 2023 was 32.6%, which is not much different from the past ten years. Gree's globalization is the worst, accounting for only 12% overseas in 2022, and 15% in 2016.

With improved supply chains, technological innovation, and product iteration capabilities, Chinese home appliance giants are showing stronger and stronger comprehensive competitiveness in the global market. In 2019-2023, domestic white power continued to grow for 5 consecutive years in South Asia, Southeast Asia, and Latin America. The export value of the former increased from 24.3 billion yuan to 32.2 billion yuan, while the latter increased from 11.9 billion yuan to 20.6 billion yuan.

With the exception of a slight decline in 2022, Europe maintained its growth trend throughout the rest of the year. The US region has declined slightly in the last two years, but remains at a high level.

In addition, according to Euromonitor data, the global manufacturing share of Chinese home appliances has reached 44% in 2021, and its own brands are less than 20% (including acquisitions). It can be seen that there is still plenty of room for market share growth in the future.

In addition to this, home appliance giants also have diversified business growth logic. For example, Haier is following a diversified expansion path related to home appliances, laying out businesses such as commercial freezers and commercial refrigeration, while Hisense entered the automotive air conditioning business through mergers and acquisitions of Nippon Sandian, while Midea followed the path of diversification of non-home appliances, expanding in robots, elevators, medical equipment, and new energy components.

However, the diversified business accounts for too little compared to the main household appliance business, which has huge revenue, and it is more difficult to become the main growth engine in the future.

03

For the domestic home appliance industry, northbound capital has always been optimistic. The total amount of heavy holdings is 172.9 billion yuan, accounting for 10% of the total market value of the industry and 9.5% of the total market value of the northbound market. Among them, the market value of Midea's holdings is 99.3 billion yuan, ranking second only to Kweichow Moutai, ranking second among all heavy stocks, and accounts for more than 20% of its holdings. In addition, it also holds 25.56 billion yuan, 17.5 billion yuan, and 2.18 billion yuan for Gree, Haier, and Hisense, respectively.

Judging from the size of foreign holdings, retail investors don't need to worry too much about home appliance giants impacting the fundamentals of performance due to the continued decline in real estate, because overseas markets can also seize ground, providing a lot of room for growth.

Of course, we also need to look at home appliances differently. Gree's business is mainly domestic, and it is mainly anchored in air conditioning, so there is a lot of pressure to grow in the future. Hisense, Midea, and Haier are growing relatively slightly better.

However, realistically, domestic home appliance giants have basically moved from a growth period to a mature period, and the potential return rate should be lower in the future. Furthermore, the overall valuation has been repaired quite a bit in the past two years, so we need to be wary of the risk of retracement. (End of full text)